Accounting for Share Capital — Notes

A company is an artificial person created by law, with a separate legal entity, limited liability of members, perpetual succession, transferable shares (public company) and separation of ownership from management.

Kinds: by liability (limited by shares, by guarantee, unlimited); by members (one person company; private: 2 to 200 members; public: 7 or more); by control (holding, subsidiary); by ownership (government company: at least 51% of paid-up capital held by government); listed and unlisted.

Categories of share capital

• Authorised (registered, nominal): maximum capital per the memorandum.
• Issued: part offered to the public. Unissued: the rest.
• Subscribed: part applied for and allotted (fully paid, or not fully paid).
• Called-up: part of subscribed capital asked for. Uncalled: the rest; reserve capital is uncalled capital to be called only on winding up (special resolution).
• Paid-up = called-up − calls in arrears.

Kinds of shares: preference shares (fixed dividend paid first; capital repaid first on winding up; limited voting; must be redeemable under the Companies Act 2013) and equity shares (all other shares; varying dividend; full voting rights).

Entries (each instalment: one entry when due, one when received)

1. Bank A/c Dr, To Share Application A/c.
2. Share Application A/c Dr, To Share Capital A/c (and To Securities Premium A/c if premium is with application).
3. Share Allotment A/c Dr, To Share Capital A/c, To Securities Premium A/c (premium with allotment).
4. Bank A/c Dr, To Share Allotment A/c.
5. Share First Call A/c Dr, To Share Capital A/c; Bank A/c Dr, To Share First Call A/c.

Securities premium is a capital receipt shown under Reserves and Surplus; Section 52 lists its uses (bonus shares, writing off preliminary expenses and issue expenses, premium on redemption, buy-back) and dividend is not one of them. Section 53: no issue at a discount, except sweat equity shares (Section 54).

Over-subscription: applications for more shares than offered. The directors may (i) reject some applications and refund the money, (ii) allot in full to some and reject the rest, or (iii) allot pro-rata.

Pro-rata allotment: shares allotted = shares applied × allotted ÷ applied in that category. Excess application money = (shares applied − shares allotted) × application money per share; it is adjusted towards allotment (and calls, if the terms allow), and any surplus refunded.

Transfer entry: Share Application A/c Dr, To Share Capital A/c, To Securities Premium A/c (if any), To Share Allotment A/c (adjusted), To Calls in Advance A/c (surplus kept), To Bank A/c (refunds).

Under-subscription: applications for fewer shares than offered; shares applied for may be allotted only if the minimum subscription (90% of the issue) is received; otherwise all application money is refunded.

Calls in arrears: amount called but unpaid. With a Calls in Arrears Account: Bank A/c Dr, Calls in Arrears A/c Dr, To Share Call A/c. Without one, the unpaid amount stays as a debit balance of the allotment or call account. Shown as a deduction from called-up capital in the note on share capital.

Calls in advance: money received before a call is made. Bank A/c Dr, To Calls in Advance A/c; when the call is made, Calls in Advance A/c Dr, To Share Call A/c. Shown under Other Current Liabilities.

Interest on calls in arrears and in advance is not computed in this chapter.

Shares to vendors: Assets A/c Dr, To Vendor A/c (liabilities taken over are credited; goodwill debited if the price exceeds net assets, capital reserve credited if it is less). Then Vendor A/c Dr, To Share Capital A/c, To Securities Premium A/c. Number of shares = amount payable ÷ issue price.

Shares to promoters for their services: Incorporation Costs A/c Dr, To Share Capital A/c.

Private placement (Section 42): offer to a select group of persons through a private placement offer letter. Employee Stock Option Plan: option to employees and whole-time directors to buy shares at a future date at a predetermined price (minimum vesting period one year). Sweat equity shares (Section 54): issued to employees or directors at a discount or for consideration other than cash, for know-how or value additions.

Forfeiture (if the articles allow): Share Capital A/c Dr (called-up amount), Securities Premium A/c Dr (premium due but not received), To Share Allotment / Calls / Calls in Arrears A/c (unpaid), To Share Forfeiture A/c (amount received, excluding premium received). For a pro-rata allottee, the amount received includes the excess application money adjusted.

Re-issue: Bank A/c Dr (price), Share Forfeiture A/c Dr (discount), To Share Capital A/c (paid-up value credited), To Securities Premium A/c (price above the paid-up value). Discount on re-issue ≤ amount forfeited on those shares.

Capital Reserve: Share Forfeiture A/c Dr, To Capital Reserve A/c, with the forfeited amount on re-issued shares less the discount. The balance on shares not re-issued stays in Share Forfeiture.

Balance sheet: Equity and Liabilities → 1. Shareholders' Funds → (a) Share Capital, (b) Reserves and Surplus; Current Liabilities → Other Current Liabilities (calls in advance).

Note on Share Capital: Authorised capital; Issued capital; Subscribed capital split into (i) subscribed and fully paid and (ii) subscribed but not fully paid, less calls in arrears; add Share Forfeiture (shares not re-issued).

Reserves and Surplus: Securities Premium; Capital Reserve.

Check: note total = Share Capital balance − calls in arrears + Share Forfeiture balance.