CH – ACCOUNTING FOR SHARE CAPITAL

Issue of Shares

Shares can be issued:

(i) for cash; or
(ii) for consideration other than cash (to vendors, promoters, underwriters etc)

Further, shares may be issued:

(i) at par – i.e. Issue Price = Face Value
(ii) at premium – i.e. Issue Price > Face Value
(iii) at discount – i.e. Issue Price < Face Value – prohibited as per Sec. 53 of the
Companies Act, 2013, except if issued as “Sweat Equity Shares” under Sec. 54.

Issue of Shares for Cash

When shares are issued for cash, issue price (consideration) may be received:
(i) in lumpsum i.e. along with application; or
(ii) in instalments i.e. at different stages – Application, Allotment & Calls (1st, 2nd ….final)

Accounting Treatment

Case (A) – Issue Price is Received in Lump Sum

(1) Bank A/c Dr. [Application & allotment

To Equity Share Application & Allotment A/c money received]

(2) Equity Share Application & Allotment A/c Dr. [Application & allotment]
To Equity Share Capital [₹ received towards capital]
To Securities Premium Reserve [₹ received towards premium]

Case (B) – Issue Price is Receivable in Instalments at Different Stages

(1) Bank A/c Dr. [Application money

To Equity Share Application A/c received]
[Application money received]

(2) Equity Share Application A/c Dr. [Application money received]

To Equity Share Capital [₹ received towards capital]
To Securities Premium Reserve [₹ received towards premium]
[Application money transferred on allotment]
(3) Equity Share Allotment A/c Dr. [₹ due on Allotment]
To Equity Share Capital [₹ due towards capital]
To Securities Premium Reserve [₹ due towards premium]
[Allotment money due]

(4) Bank A/c Dr. [₹ received]

Calls-in-Arrears A/c Dr. [₹ not received]
To Equity Share Allotment A/c [₹ due on allotment]
[Allotment money received]

(5) Equity Share First Call A/c Dr. [₹ due on 1st Call]
To Equity Share Capital [₹ due towards capital]
To Securities Premium Reserve [₹ due towards premium]
[First call due]

(6) Bank A/c Dr. [₹ received]

Calls-in-Arrears A/c Dr. [₹ not received]
To Equity First Call A/c [₹ due on 1st Call]
[1st Call received]

(7) Equity Share Second & Final Call A/c Dr. [₹ due on 2nd Call]
To Equity Share Capital [₹ due towards capital]
To Securities Premium Reserve [₹ due towards premium]
[Second & final call due]

(8) Bank A/c Dr. [₹ received]

Calls-in-Arrears A/c Dr. [₹ not received]
To Equity Second & Final Call A/c [₹ due on 2nd Call]
nd
[2 Call received]

* Assuming 2nd Call is the final call.

Note: If Q is silent on when premium is to be received, it is assumed that premium is

receivable along with allotment money.

Note: If cash book is to be prepared, then all Bank transactions in the above entries will be
recorded in cash book.

Issue of Shares for Consideration Other Than Cash

(i) Purchase of Asset

Sundry Asset A/c Dr. [Agreed Value or

To Vendor’s A/c Purchase Consideration]
 OR

Purchase of Business

Sundry Assets A/c (Individually) Dr. [Agreed Value]

Goodwill A/c Dr. [Balancing fig.]
To Sundry Liabilities A/c [Agreed Value]
To Vendor’s A/c [Purchase Consideration]
To Capital Reserve A/c [Balancing Fig.]

* If Agreed PC > Net Asset Purchased => Goodwill

* If Agreed PC < Net Asset Purchased => Capital Reserve
* Net Asset Purchased = Agreed Value of Asset (-) Agreed Value of Liabilities

(ii) Issue of Shares

Vendor A/c Dr. [Purchase Consideration]

To Equity Share Capital A/c [No. of shares x F.V. per share]
To Securities Premium Reserve A/c [No. of shares x Prem. per share]
To Bank A/c (if any) [Part of PC Paid in Cash]
To Bills Payable A/c [Accepted, if any]

Note:
No. of shares = [Agreed PC to be Paid by Issue of Shares ÷ Issue Price per share]
Issue price per share = F.V. per share + premium per share (if any)

Accounting Treatment of Calls-in-Arrears

Any of the following 2 methods may be followed:

Method 1 – By Opening Calls-in-Arrears A/c (Refer journal entries discussed above)

Method 2 – Without Opening Calls-in-Arrears A/c i.e. no separate account is opened for the
unpaid amount. It remains as balance in the relevant call A/c.

Interest rate on Calls-in-Arrears as per Table F – 10% p.a.

Accounting Treatment of Calls-in-Advance

Following accounting entries are relevant:

(i) Bank A/c Dr. [Call received
To Calls-in-Advance A/c in Advance]

(ii) Calls-in-Advance A/c Dr. [Calls-in-Advance

To Relevant Call A/c adjusted]
Interest rate on Calls-in-Advance as per Table F – 12% p.a.

Oversubscription of Shares

It means => No. of shares subscribed (applied) > No. of shares issued

Allotment & Accounting Treatment

Any of the 3 alternatives may be followed:

Alternative 1 – Reject the excess application & refund the application money, & accept the
remaining applications fully. Following accounting entry is relevant:

Equity Share Application A/c Dr. [Total Application money received]

To Equity Share Capital A/c [No. of shares allotted x F.V per share]
To Securities Premium Reserve [if any]
To Bank A/c [Application money refunded]

Alternative 2 – Pro-rata Allotment i.e. proportionate allotment [Eg: 2 shares allotted for
every 5 shares applied]

Alternative 3 – Combination of Alternative 1 & 2.

Treatment of Excess Application Money in Case of Pro-rata Allotment

Excess Application Money =

[No. of shares applied (-) No. of shares allotted] x Application (₹) per share

Case (1) – If excess is to be adjusted against allotment only (assume if Q is silent):

Adjust against money due on allotment & any surplus remaining will be refunded.
Equity Share Application A/c Dr. [Total Application money received]
To Equity Share Capital A/c [No. of shares allotted x F.V per share]
To Securities Premium Reserve [if any]
To Equity Share Allotment A/c [₹ to be adjusted against allotment]
To Bank A/c [Application money refunded]

Case (2) - If excess is to be adjusted against allotment & future calls (only if Q specifies)

Equity Share Application A/c Dr. [Total Application money received]

To Equity Share Capital A/c [No. of shares allotted x F.V per share]
To Securities Premium Reserve [if any]
To Equity Share Allotment A/c [₹ to be adjusted against allotment]
To Calls-in-Advance A/c [₹ to be adjusted against calls]
Note: Where excess application money is to be adjusted against allotment, and premium is
payable along with allotment, then excess money will be first adjusted towards Share
Capital. Any amount left is then adjusted towards premium due on allotment.

Calculation of No. of Shares Allotted / Applied in case of Pro-rata Allotment (say for Mr. X)

When no. of shares applied by Mr. X is given:

No. of Shares Allotted to Mr. X =
[Total No. of Shares Allotted / Total No. of Shares Applied]* x No. of shares applied by Mr. X

When no. of shares allotted to Mr. X is given:

No. of Shares Applied by Mr. X =
[Total No. of Shares Applied / Total No. of Shares Allotted]* x No. of shares allotted to Mr. X

* In the relevant category of Pro-rata allotment

Calculation of Amt due but not Paid by Defaulting Shareholder on Allotment in Case of
Pro-Rata Allotment:

₹
Amt due on Allotment [No. of shares allotted x Allotment (₹) per share] xxx
Less: Excess application money adjusted against allotment* (xxx)
Amt due but unpaid on allotment xxx

* [No. of shares applied (-) No. of shares allotted] x Application (₹) per share

Undersubscription of Shares

It means => No. of shares subscribed (applied) < No. of shares issued.

Allotment is made to all the applicants (provided minimum subscription is received). Hence,
no special accounting treatment is required.

Forfeiture of Shares

➢ It means cancellation of shares for non-payment of called amount. A notice is

required to be given to the defaulting shareholder before such cancellation.

➢ Amount received on forfeited shares is not refunded, but is transferred to “Forfeited

Share A/c”.

➢ Balance of “Forfeited Share A/c” is added to paid-up capital under Subscribed Capital
in the Notes to Accounts on Share Capital, till the time these forfeited shares are
reissued.
Accounting Treatment

(A) Forfeiture of Shares Issued at Par

Equity Share Capital A/c Dr. [No. of Shares Forfeited x FV Called up per share]
To Forfeited Shares A/c [Amt received on forfeited shares]
To Equity Share Relevant Call A/c / [Amt due but not received]
Calls-in-Arrears A/c

(B) Forfeiture of Shares Issued at Premium

(i) When premium has been received on forfeited shares

Securities Premium Reserve A/c will NOT be debited in the forfeiture entry, since once
Securities Premium has been received, it can be utilised only for the purpose specified in Sec
52(2) of Companies Act, 2013.

Equity Share Capital A/c Dr. [No. of Shares Forfeited x FV Called up per share]
To Forfeited Shares A/c [FV received on forfeited shares]
To Equity Share Relevant Call A/c / [Amt due but not received]
Calls-in-Arrears A/c

(ii) When premium has not been received on forfeited shares

Securities Premium Reserve will be debited in the forfeiture entry:

Equity Share Capital A/c Dr. [No. of Shares Forfeited x FV Called up per share]
Securities Premium Reserve A/c Dr. [Premium Called but not received]
To Forfeited Shares A/c [FV received on forfeited shares]
To Equity Share Relevant Call A/c / [Amt due but not received incl. premium]
Calls-in-Arrears A/c

Reissue of Forfeited Shares

➢ It means reissuing the shares that were forfeited (cancelled) by the company.

➢ Forfeited shares may be reissued at :

(i) at Par – when Reissue Price = Paid-up value of reissued shares

(ii) at Premium - when Reissue Price > Paid-up value of reissued shares
(iii) at Discount - when Reissue Price < Paid-up value of reissued shares
Maximum Permissible Discount on Reissue & Minimum Reissue Price

Maximum Permissible Discount per share = Amt forfeited (i.e. FV received) per share
Minimum Reissue Price = Paid-up Value of Reissued Shares (-) Maximum Discount

Accounting Entries for Reissue

(i) Reissue at Par

Bank A/c Dr. [Amt received]

To Equity Share Capital A/c [Paid-up Value]

(ii) Reissue at Premium

Bank A/c Dr. [Amt Received]

To Equity Share Capital [Paid-up Value]
To Securities Premium Reserve A/c [Premium on Reissue]

(iii) Reissue at Discount

Bank A/c Dr. [Amt Received]

Forfeited Shares A/c Dr. [Discount on Reissue]
To Equity Share Capital A/c [Paid-up Value]

Calculation of Gain on Reissue of Forfeited Shares to be T/f to Capital Reserve

Following cases are relevant

Case (1) – When all the forfeited shares are reissued

Capital Reserve = Balancing fig. of “Forfeited Shares A/c”

Case (2) – When all the forfeited shares are not reissued

Capital Reserve =
{[Amt Forfeited ÷ No. of shares forfeited] x No. of shares reissued} (-) Discount on Reissue

Accounting Entry for Transfer to Capital Reserve:

Forfeited Shares A/c Dr. xxx

To Capital Reserve A/c xxx