Accounting for Share Capital is one of the most important chapters in Accountancy because it explains how companies raise funds and record transactions related to shares. The uploaded PDF is a detailed question-and-answer based document that covers almost every practical and theoretical aspect of share capital. It explains concepts such as issue of shares, calls in advance and arrears, forfeiture and reissue of shares, reserve capital, securities premium, and capital reduction, all with reference to the Companies Act, 2013. Accounting For Share Capital Ans
I am writing about this topic because students often struggle to connect journal entries with legal concepts. This PDF bridges that gap by repeatedly testing the same ideas in different ways. Understanding accounting for share capital is not just about passing exams; it helps students understand how real companies raise money, protect investors, and comply with legal requirements. This chapter builds a strong base for corporate accounting and financial reporting.
Meaning of Share Capital
Share capital refers to the total amount of money raised by a company by issuing shares to the public. A company’s capital is divided into small equal units called shares, and the persons who hold these shares are known as shareholders. Shareholders are the owners of the company, and their liability is limited to the face value of the shares held by them.
Types of Share Capital Explained
The PDF explains different forms of share capital that appear in a company’s balance sheet.
Authorised capital is the maximum amount of capital a company is allowed to issue as per its Memorandum of Association.
Issued capital is the part of authorised capital offered to the public.
Subscribed capital is the portion of issued capital actually taken up by the public.
Called-up capital is the amount demanded by the company from shareholders.
Paid-up capital is the amount actually received by the company after deducting calls in arrears.
Issue of Shares and Minimum Subscription
Shares can be issued at par, at premium, or at discount, subject to conditions laid down in the Companies Act. The PDF highlights that there is no maximum limit on issue of shares at premium, but shares issued at discount cannot exceed 10% of face value and must belong to an existing class.
The minimum amount payable on share application must not be less than 5% of the nominal value of the share.
Calls in Advance and Calls in Arrears
Calls in advance refer to the amount received by a company from shareholders before it is actually called. This amount is not part of share capital and is shown as a separate liability. Interest is paid on calls in advance from the date of receipt to the date of appropriation.
Calls in arrears represent unpaid call money. Calls in arrears are deducted from called-up capital to calculate paid-up capital.
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Forfeiture of Shares
Forfeiture of shares occurs when a shareholder fails to pay allotment or call money. On forfeiture, the membership of the shareholder is compulsorily terminated.
At the time of forfeiture:
- Share Capital Account is debited with the called-up amount
- Share Forfeiture Account is credited with the amount already received
The balance in the Share Forfeiture Account is shown under Share Capital in the balance sheet.
Reissue of Forfeited Shares
Forfeited shares may be reissued at par, premium, or discount. However, the discount on reissue cannot exceed the amount forfeited earlier.
If there is a profit on reissue, it is transferred to Capital Reserve, as it is a capital gain for the company. Any balance left in Share Forfeiture Account after all reissues is also transferred to Capital Reserve.
Reserve Capital and Its Importance
Reserve capital is that portion of uncalled capital which can be called only at the time of winding up of the company. It cannot be used during the lifetime of the company and is not shown as part of subscribed capital.
The PDF clearly distinguishes reserve capital from other forms of capital and repeatedly tests this concept.
Securities Premium Account
When shares are issued at a premium, the excess amount is credited to Securities Premium Account. This amount can be used only for specific purposes such as:
- Issue of fully paid bonus shares
- Writing off preliminary expenses
- Writing off discount on issue of shares or debentures
- Providing premium on redemption of preference shares or debentures
It cannot be used to write off losses on sale of assets.
Preference Shares and Equity Shares
The PDF explains that equity shares and preference shares are the two main types of shares. Equity shareholders do not receive dividend at a fixed rate and bear higher risk. Preference shareholders enjoy preference in dividend and repayment of capital but usually have limited voting rights.
Irredeemable preference shares cannot be issued under the Companies Act, 2013.
Capital Reduction and Internal Reconstruction
Capital reduction is the process of reducing paid-up share capital to write off accumulated losses or overvalued assets. The Capital Reduction Account represents the sacrifice made by shareholders and creditors and is used only for internal reconstruction.
