Chapter - 6
Accounting for Share Capital

Meaning of company: According to section 3 (1) (I) of the companies act, 1956 defines a company as ‘’a
company formed & registered under this act or an existing company’’

Feature of company: -
1.
It is an artificial person created through a process of law.
2.
It has a separate legal entity from its shareholders.
3.
It is not affected by death, lunacy or bankrupt of its members.
4.
Liabilities of the member of the company is limited
5.
The shares of a company are transferable.
6.
A company is managed by their elected representatives.
7.
Every company it has its own common seal.

Incorporation of a Company: -
The procedure includes: -
1.
Promotion: - a person or a group of person conceive an idea of a business & agree to
start the business in the form of a company. These persons are called promoters.
2.
Incorporation or registration: -the promoters need to submit the following
documents:
I.
Memorandum of association: - it is a charter of the company that defines the
company’s relation with the outside & the business.
II.
Article of association: - it regulates the internal administration of the company.
III.
Concept to act as director
IV.
Notice of address of the registration office
V.
Declaration to the effect that all the requirements of the act in respect of incorporation
have been complied with
3.
Capital subscription: - the company issue shares to the allots
4.
Certificate to commerce business: - a public company can commence business only
after obtaining the certificate for commencement of business from register of
companies.

Share capital of a company: -
1.
Authorized share capital: - it is stated in memorandum of association & called minimum
share capital that a company can issue
2.
Issued share capital: - it is a part of authorized share capital that is issued for
subscription by the company
3.
Subscribe share capital: - it is a part of issued share capital which is applied for
subscription
4.
Called up share capital: - it is the amount of nominal value of share that has been called
up by the company for payment by the subscribers towards the shares.
5.
Paid up capital: - it is a part of called up capital that the members of the company have
paid.

Reserve capital: - it is a part of subscribe capital remaining uncalled that a company
resolves by special resolution, not to call except in the approved circumstance.
Example: - the particulars of the share capital of x LTD. Are: 1.
The authorized capital is Rs. 10, 00,000 divided into equity shares of Rs. 10 each
2.
1, 20,000 equity shares were allotted in payment of a plant purchased by the company
3.
60, 000 equity shares were allotted in payment of cash, on which Rs. 8/ share was
called up. The amount on 40, 000 equity share was received at Rs. 8 per share & 6 Rs.
Per share on 20, 000 equity share.
State the amount of different classes of share capital: -
Solution: -
SHARE CAPITAL
Authorized capital
1, 00,000 shares @ Rs. 10 each
10, 00,000
issued capital
80, 000 shared issued fully paid
for consideration
2, 00,000
60, 000 shares issued for cash
6, 00,000
8, 00,000
Called up capital
20, 000 shares of Rs. 10 each
Fully paid for consideration
2, 00,000
60, 000 shares of Rs. 10 each
4, 80,000
Rs. 8 called up; paid up
6, 80,000
Less: call in arrears on
40, 000
20, 000 shares Rs. 2/share
6, 40,000
An Extract of Balance Sheet:
Liabilities
Share capital:
Authorized capital
……… Equity share of Rs…….each
……… Preference share of Rs……...each
Rs.
Rs.
Issued capital:
…….. Equity share of Rs…….each
……… Preference share of Rs……each
Subscribed, called up capital & paid up capital:
…….. Equity shares of Rs……each,
Rs……..called up
……… Preference shares of Rs……each,
Rs…….called up
Less: calls unpaid
Add: forfeited share
Kinds of share

Preference shares: - preference shares are the shares that carry following two rights: -
1.
Right of dividend to be paid as-fixed amount
2.
Repayment of capital on winding up of company.
Classes of preference shares: -
1.
With reference to dividend: -
A.
Cumulative preference shares: - they are those shares which carry right to receive
arrears of dividend before dividend id paid to the equity share holders.
B.
Non cumulative preference shares: - they are those which do not carry right to receive
arrears of dividend
2.
With reference to participation in profits: -
A.
Participating preference shares: - they have a provision that after dividend has been
paid at the right to participate in the remaining profits.
B.
Non- participating preference share: - they do not carry right to participate in the
profits remaining.
3.
With reference to convertibility: -
A.
Convertible preference shares: - they are those shares which carry a right be converted
into equity shares.
B.
Non-convertible preference shares: - they do not carry a right to be converted into
equity shares.
4.
With preference to redemption: -
A.
Redeemable preference shares: - they are those shares, the amount of which can be
returned by the company to the holders of such shares after the time specified.
B.
Irredeemable preference shares: - they are those shares the amount of which cannot
be returned by the company to the holders.

Equity shares: - these are shares which do not enjoy any preferential rights. They may
get higher dividend if the profit are large & may no profits.
ISSUE OF SHARE

Accounting treatment: -
1.
Issue of share for cash
I.
Share payable in lump sum.

For receiving share application money
Sr.
Particulars
no.
Amount
L.F
Bank a/c
Dr.
……..
To share application a/c

Cr.
………..
For allotment of shares
Sr.
Particulars
n
o
.
Amount
L.F
Dr.
Cr.
Share application a/c
……..
To share capital a/c
II.
1.
………..
Share payable in installment.
Application money
Bank a/c
To share application a/c
2.
Allotment of shares
Share application a/c
To share capital a/c
3.
Amount due on allotment
Share allotment a/c
To share capital a/c
4.
Receipt of allotment money
Bank a/c
To share allotment a/c
5.
First call bring due
Share first call a/c
To share capital a/c
6.
Receipt of first call
Bank a/c
To share first call a/c

Terms of Issue of Shares: -
1.
Issue of share at par: - shares are said to have been issued at par when an applicant has
to pay sum equal to the face value of share
I.e. issue price Rs. 10 & face value is also Rs. 10
2.
Issue of share at premium (section 78): - here shares are issued at an amount more
than the face value
Example a Rs. 10 share may be issued at Rs. 15
Utilization of securities premium: - section 77A & 78 of the companies act restrict the use of
the amount collected as premium on securities a following propose:
I.
Issuing fully paid bonus shares to the members
II.
Writing off preliminary expenses of company
III.
Writing off the expenses of or the communication paid or discount allowed on any issue
of securities or debentures of the company
IV.
Providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company
V.
In purchasing its own shares [section 77A]
3.
issue of shares at a discount: - when shares are issued at a price less than its face value
For Ex. 10 Rs. Share is issued for Rs. 9
Sr.
Particulars
n
Amount
L.F
Dr.
o
.
Share allotment a/c
……..
Discount on issue of share a/c
……..
Cr.
To share capital a/c
……….
OVER SUBSCRIPTION OF SHARES
When number of shares applied for is more than the number of shares offered for
subscription, it is called over subscription of shares
Three alternatives are available: -
I.
Rejection of application: - for Ex. Application is invited for 50, 000 shares & application
received are for 70, 000 shares I.e. 20, 000 are in excess are not accepted & their
application money is refunded.
II.
Application may be allotted shares in fixed proportion called prorate allotment
III.
A combination of I & II alternatives
Example: ABC co. was registered with an authorized capital of Rs. 10, 00,000 dividend into 1,
00,000 shares of Rs. 10 each. The company offered 60, 000 shares to the public which
were payable Rs. 2/ share on applications, Rs. 4 per share on allotment & the balance
when required application for Rs. 92, 000 shares were received on the directors
allotted as:
Applicant for 40, 000
share—full
Applicant for 50, 000
share—40%
Applicant for 2, 000
share—NIL
Rs. 1, 72,000 was realized on a/c of allotment money (excluding the amount carried
from application money)
Show the journal entries recording the above.
Journal
Sr.
Amount
n
Particulars
o
Dr.
Cr.
L.F
.
Bank a/c (9200 x 2)
1, 84,000
To share application a/c
1, 84,000
1.
Share application a/c
2.
3.
4.
1, 84,000
To share capital a/c (60000 x 2)
1, 20,000
To bank a/c (2000 x 2)
4, 000
To share allotment a/c
6, 000
Share allotment a/c
2, 40,000
To share capital a/c
Bank a/c
2, 40,000
1, 72,000
To share allotment a/c
1, 72,000
Working notes: 
Application received
On 50, 000 shares @ 2/shares
Less: application money due on
1, 00,000
Share allotted [40% of 0, 000] x 2
40, 000
Excess amount adjusted towards allotments

60, 000
Calculation of amount received an allotment later
Total allotment money due (60, 000 x 4)
Less: allotment money received earlier
2, 40,000
60,000
1, 80,000
Less: allotment money not received on
2000 shares @ 4% share
8,000
Allotment money received
1, 72,000
UNDER SUBSCRIPTION OF SHARES

If the number of shares applied for is less than the number of shares offered
Example: ABC Ltd. Invited application for issuing 40, 000 equity shares of Rs. 10 each. The
amount was payable as follow: On application Rs. 3 per share
On allotment Rs. 4 per share
On 1st and final call Rs. 3 per share
Applications were received for 35, 000 shares and allotment was made to all Ashok to
whom 1000 share were allotted failed to pay the allotment money and final call.
Journal
Amount
Date
Particulars
L.F.
Dr.
Bank a/c
Cr.
1,05,000
1,05,000
To equity share application a/c
Equity share application a/c
1,05,000
1,05,000
To equity share capital a/c
Equity share allotment a/c
1,40,000
1,40,000
To equity share capital a/c
Bank a/c
1,36,000
1,36,000
To equity a/c
Equity share 1st & final call a/c
1,05,000
1,05,000
To equity share capital a/c
Bank a/c
1,00,500
1,00,500
To equity share capital a/c
Working notes: 1.
Amount due on allotment
1, 40,000
Less: allotment money not paid by Ashok (1000 x 4)
4,000
1, 36,000
2.
Amount due on 1st & final call
Less: first call money not paid by Ashok & Sohan
1, 05,000
On 1500 shares (1000+500) @ 3/share
4,500
1, 00,500
CALLS IN ARREAR
If a shareholder makes a default in depositing the call amount due on allotment the
amount not so deposited is called calls in arrear
Table A shall apply which provides for interested at 5 % p.a.
Accounting treatment of calls inn arrear: -
I.
Without opening calls in arrear account: - the amount received from the shareholders
is created to the relevant call amount & the various call account will show debit balance
equal to the total unpaid amount of each call
Example: if first call money at Rs. 2per share on 10, 000 shares is called but out of this first
call money on 900 shares is only received, then under this method
Sr.
Particulars
Amount
n
L.F
Dr.
Cr.
o
.
Share first call a/c
1.
To share capital a/c
2.
Bank a/c
20, 000
20, 000
19, 000
To share first call a/c
19, 000
Share first call a/c
Date
Particulars
J.F.
To Share Capital
Rs.
20, 000
Date
Particulars
J.F.
By Bank
19, 000
By Balance C/D
1, 000
20, 000
II.
Rs.
20, 000
by opening calls in arrear account
In same example as in case (I)
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Calls in arrear a/c
To share first call a/c
1, 000
1, 000
The debit balance of calls in arrear a/c is shown as deduction form called up capital on
liabilities side of balance sheet
Accounting entries: 1.
On non-receipt of call till the day:
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Calls in arrear a/c
…….
To relevant call a/c
2.
……..
On receipt of calls in arrear:
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Bank a/c
…….
To calls in arrear a/c
3.
……..
On making due the interest
Sr.
Particulars
n
o
.
Amount
L.F
Dr.
Cr.
Bank a/c
…….
To sundry member a/c
……..
CALLS IN ADVANCE:
When allotter pay money before call is due
Table A apply and the company is liable to pay interest @ 6% on calls in advance.
1.
Accounting entries: -
A.
When interest is paid in cash:
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Interest on calls in advance a/c
…….
To bank a/c
B.
……..
When interest is o/s
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Interest on calls in advance a/c
To o/s interest a/c
2.
Share issued for consideration other than cash:
…….
……..
Journal
I.
On purchase of assets:
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Sundry assets a/c
…….
To vendors a/c
II.
……..
On purchase of business:
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Sundry assets a/c
III.
…….
To liabilities a/c
……..
To vendors a/c
……..
To capital reserve a/c
………
On issue of share
A.
If share are issued at par
Sr.
Particulars
n
o
.
Amount
L.F
Dr.
Cr.
Vendors a/c
…….
To share capital a/c
B.
……..
If share are issued at premium:
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Vendors a/c
…….
To share capital a/c
……..
To securities premium a/c
C.
If shares are issued at discount:
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Vendors a/c
…….
Discount on issue of share a/c
…….
To share capital a/c
……..
FORFEITURE OF SHARES
Forfeiture of shares means cancelling the shares for non-payment of calls due as a final
action against the defaulting shareholders
Accounting entry:
Sr.
Particulars
Amount
n
L.F
Dr.
Cr.
o
.
Share capital a/c
…….
To forfeited shares a/c
……..
To various unpaid call a/c
………
Or
Calls in arrear
Example: suppose 1000 equity shares of Rs. 10 each are to be forfeited for non- payment of
the first call. The amounts payable were Rs. 3 on application, Rs. 3 on allotment, Rs. 2
on first call & balance on second & final call.
Journal
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Equity share capital a/c (1000 x 8)
8, 000
To forfeiture shares a/c
6, 000
To calls in arrear a/c
2, 000
Case I forfeiture of shares issued at par
The above illustration is an example of it
Case II forfeiture of shares issued at premium
Journal
a.
If premium has been received
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Share capital a/c
b.
…….
To share allotment a/c
……..
To share call a/c
………
To share forfeited a/c
………
If premium had not been received
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Share capital a/c
Security premium a/c
…….
……..
To share allotment a/c
……..
To share call a/c
……..
To forfeited shares
……..
Example: ABC Ltd. Issued 10, 000 equity shares of Rs. 10 each at Rs. 12 per equity share. The
amount was payable as
Rs. 3 on application
Rs. 4 on allotment (including premium)
Rs. 3 on first call
Rs. 2 on final call
The company did not make the final call, Mohan, holder of 250 equity shares failed to
pay allotment & first call money. Directors forfeited his shares.
Give journal entry:
Journal
Sr.
Particulars
Amount
n
L.F
Dr.
Cr.
o
.
Share capital a/c (250 x 8)
…….
Securities premium a/c (250 x 2)
……..
To forfeited shares a/c (250 x 3)
…….
To share allotment a/c (250 x 4)
…….
To share first call a/c (250 x 3)
…….
Case III forfeiture of shares issued at discount
Journal
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Share capital a/c
…….
To discount on issue of shares a/c
……..
To various call a/c
……..
Forfeited share a/c
……..
Example: X Ltd. Invite applications for 10, 000 equity shares of Rs. 100 each at a discount of
10 % payable as follow:
Rs. 25 on application
Rs. 30 on allotment
Rs. 35 on first & final call
Whole of the issue was subscribed & paid for except the final call on 100 shares which
were forfeiture by the company.
Journal
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Share capital a/c
…….
To forfeited shares a/c
……..
To discount on issue of shares a/c
……..
To share first & final calls a/c
………
Reissue Of Forfeited

In case of shares reissued at pat
Sr.
Particulars
n
o
Amount
L.F
Dr.
Cr.
.
Bank a/c
…….
To share capital a/c

……..
In case they are issued at a discount the discount cannot excess the amount that has
been received & forfeited
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Bank a/c
…….
To share capital a/c

……..
If forfeited shares are issued at premium
Sr.
Particulars
n
Amount
L.F
Dr.
Cr.
o
.
Bank a/c

…….
To share capital a/c
……..
To securities premium a/c
……..
When share belonging to pro-rata category are forfeited: In determining the amount in arrears on allotment, follow the steps: -
1.
Calculate total shares applied for by the shareholder whole shares are being forfeited
Total share applied x share allotted by the company to the shareholders
Total shares allotted
2.
Multiply the number of shares as calculated in (I) with the amount due of application
money
3.
Deduct from the application money received the amount due on application with the
help of shares allotted.
4.
Calculated the amount due on allotment & deduct from it the amount sent in advance
with application
Example: a company offered 10, 000 shares Rs. 10 each payable as Rs. 2 on application, Rs. 3
on allotment, Rs.3 on first call and Rs. 2 on the final call.
The public applied for 15, 000 shares. The shares were allotted in a pro-rata basis to
the application of 12000 shares. All shareholders paid the allotment money except
one shareholder. Who was allotted 200 shares? These shares were forfeited. The first
call was made thereafter. The forfeited shares were reissued @ Rs. 9 per share Rs. 8
paid up. The final call was not yet made.
You are required to prepare the cash book & pass the journal entries.
Journal
Date
Particulars
L.F.
Amount
Dr.
Share application a/c
Cr.
24, 000
20, 000
To share capital a/c
4, 000
To share allotment a/c
Share application a/c
30, 000
30, ,000
To share capital a/c
Share capital a/c
1, 000
520
To share allotment a/c
480
To forfeited shares a/c
Share first call a/c
29, 400
29, 400
To share capital a/c
Forfeited share a/c
480
480
To capital reserve a/c
CASH BOOK (Bank Column Only)
Dr.
Cr.
To share application
30, 000
By share application (3000 x 2)
6, 000
To share allotment
25, 480
By balance c/d
80, 680
To share first call
29, 400
To share capital
1, 600
To securities premium
200
86, 680
86, 680
Working notes: 1.
10, 000 shares were issued to the applications for 12, 000 shares
∴ Ratio of allotment = 5: 6
One who has allotted 5 shares had applied for = 6 shares
∴ A shareholder who was allotted 200 shares had applied for
6/5 x 200 = 240 shares
Total application money paid by shareholders
On 240 shares applied for @ Rs. 2 per share
480
Less: application money on 200 shares allotted
Transferred to share capital
Advance to be adjusted against share capital
Allotment money due on 200 shares @ 3 per share
Less: advance adjusted
Allotted money in arrears (600 – 80)
2.
400
80
600
80
520
Calculation of allotment money received later on: Allotment money due (gross)
Less: advance adjusted (2000 x 2)
30, 000
4, 000
26, 000
Less: allotment money in arrears (W.N.1)
Amount received on allotment
520
25, 480

Private placement of shares: - it implies issues & allotment of shares to a selected group
of persons privately & not to public in general.

Preferential allotment: - it is one that is made at a pre-identified people such as
promoters, venture capitalist.

Sweat equity shares: - it means equity shares issued by a company to its employees of
directors at a discount or for consideration other than cash for providing know how or
making available nights in the nature of intelligent property.

Employee stock option scheme: - it means a scheme under which the company grants
option to an employee to apply for share of the company at a predetermined price.

Buy-back of shares: - it means purchasing of own share s by the company.

Sources of funds for buy-back: -
1.
Free resources
2.
Securities premium a/c
3.
The proceeds of any shares or other specified securities.