Class 12 Accountancy Notes Chapter 1 (Accounting for Share Capital) – Accountancy-II Book

Alright students, let's begin our focused revision on 'Accounting for Share Capital'. This is a foundational chapter for understanding company accounts and frequently tested in various government exams covering accountancy. Pay close attention to the concepts, journal entries, and presentation requirements.

Chapter 1: Accounting for Share Capital - Detailed Notes

1. Company: Meaning and Features

• A company is an artificial person created by law, having a separate legal entity distinct from its members (owners), perpetual succession (continues to exist even if members change), and a common seal (official signature).
• Liability of members is generally limited to the unpaid value of shares held by them (in case of a company limited by shares).

2. Share Capital: Meaning and Nature

• The total capital of a company is divided into small, indivisible units of a fixed amount. These units are called 'Shares'.
• The amount raised by the issue of such shares is called 'Share Capital'.
• Owners of shares are called 'Shareholders' or 'Members'.

3. Categories/Classification of Share Capital
* (a) Authorised Capital (Nominal or Registered Capital):
* Maximum amount of share capital a company is authorised to issue as per its Memorandum of Association (MoA).
* Stated in the Capital Clause of the MoA.
* Can be increased by following legal procedures.
* (b) Issued Capital:
* Part of the authorised capital which is actually offered to the public (or vendors/promoters) for subscription.
* It cannot exceed Authorised Capital. (Issued Capital ≤ Authorised Capital)
* (c) Subscribed Capital:
* Part of the issued capital which has been actually subscribed (applied for) by the public (or taken up by vendors/promoters).
* It cannot exceed Issued Capital. (Subscribed Capital ≤ Issued Capital)
* (d) Called-up Capital:
* Part of the subscribed capital which the company has asked shareholders to pay.
* Companies may call the full amount or part of the face value of the share.
* (Called-up Capital ≤ Subscribed Capital)
* (e) Paid-up Capital:
* Part of the called-up capital which the shareholders have actually paid.
* Paid-up Capital = Called-up Capital - Calls-in-Arrears.
* This is the amount that actually comes into the company's bank.
* (f) Uncalled Capital:
* Part of the subscribed capital that has not yet been called up by the company. (Uncalled Capital = Subscribed Capital - Called-up Capital)
* (g) Reserve Capital (Sec 65 of Companies Act, 2013):
* Part of the uncalled capital which the company decides (by special resolution) not to call up, except in the event of winding up of the company.
* It is different from Capital Reserve. It's not shown in the Balance Sheet until winding up.

4. Types of Shares (Sec 43 of Companies Act, 2013)
* (a) Preference Shares:
* Carry preferential rights regarding:
* Payment of dividend at a fixed rate during the company's lifetime.
* Repayment of capital in the event of winding up, before equity shareholders.
* Types: Cumulative/Non-Cumulative, Participating/Non-Participating, Convertible/Non-Convertible, Redeemable/Irredeemable (Note: Companies Act, 2013 prohibits issue of irredeemable preference shares).
* (b) Equity Shares (Ordinary Shares):
* Shares which are not preference shares.
* Dividend rate is not fixed; depends on profits and directors' recommendation. Paid after preference dividend.
* Capital repaid only after preference shareholders in case of winding up.
* Usually carry voting rights.

5. Issue of Shares
Shares can be issued:
* (a) For Cash: Money is received against shares issued.
* (b) For Consideration other than Cash: Issued to vendors for purchase of assets, or to promoters for their services.

Issue Price:
* (i) At Par: Issue price = Face Value (Nominal Value) of the share. (e.g., ₹10 share issued at ₹10).
* (ii) At Premium: Issue price > Face Value of the share. (e.g., ₹10 share issued at ₹12). The excess (₹2) is Securities Premium.
* Securities Premium Account (Sec 52 of Companies Act, 2013): The premium amount is credited to this account. It's a capital receipt.
* Utilization: Can be used only for specific purposes mentioned in Sec 52(2):
* Issuing fully paid bonus shares.
* Writing off preliminary expenses.
* Writing off expenses, commission, or discount on issue of shares/debentures.
* Providing for premium payable on redemption of preference shares or debentures.
* For buy-back of own shares (Sec 68).
* (iii) At Discount: Issue price < Face Value of the share. (e.g., ₹10 share issued at ₹9).
* Prohibition (Sec 53 of Companies Act, 2013): Issue of shares at a discount is generally prohibited, except for Sweat Equity Shares (Sec 54) or reissue of forfeited shares.

6. Accounting for Share Issue (For Cash)
Money is usually collected in instalments:
* On Application
* On Allotment
* On Calls (First Call, Second Call, Final Call etc.)

Key Journal Entries:

• (a) On Receipt of Application Money:
  • Bank A/c Dr.
  • To Share Application A/c
• (b) On Allotment of Shares (Transfer Application money):
  • Share Application A/c Dr.
  • To Share Capital A/c (Face value part)
  • To Securities Premium A/c (If allotted at premium - premium part of application money, if any, or typically adjusted at allotment stage)
  • To Bank A/c (Refund for rejected applications)
  • To Share Allotment A/c (Excess application money adjusted towards allotment - in case of pro-rata)
• (c) On Allotment Due:
  • Share Allotment A/c Dr. (With total allotment money due)
  • To Share Capital A/c (Face value part)
  • To Securities Premium A/c (If allotted at premium - premium part due on allotment)
• (d) On Receipt of Allotment Money:
  • Bank A/c Dr. (Amount actually received)
  • Calls-in-Arrears A/c Dr. (If any amount is not received - optional, can be tracked via Share Allotment A/c itself)
  • To Share Allotment A/c
• (e) On Making a Call Due:
  • Share Call A/c (e.g., Share First Call A/c) Dr.
  • To Share Capital A/c
• (f) On Receipt of Call Money:
  • Bank A/c Dr.
  • Calls-in-Arrears A/c Dr. (If any amount is not received - optional)
  • To Share Call A/c (e.g., Share First Call A/c)

7. Oversubscription

• When the number of shares applied for is more than the number of shares offered.
• Options for Directors:
  • Reject excess applications entirely.
  • Make pro-rata allotment (proportionate allotment) to all applicants.
  • Combination of both.
• Accounting: Excess application money received on shares allotted (under pro-rata) is usually adjusted towards the amount due on allotment, and sometimes towards future calls if specified and allowed by Articles. Any remaining excess after adjustment is refunded.

8. Undersubscription

• When the number of shares applied for is less than the number of shares offered.
• Accounting is done only for the number of shares subscribed.
• Minimum Subscription (Sec 39 of Companies Act, 2013): A company cannot allot shares unless the minimum subscription stated in the prospectus (must be at least 90% of the issued amount as per SEBI guidelines for public issues) is received. If not received within the specified time (usually 30 days from issue of prospectus, extendable), all application money must be refunded within the next 15 days.

9. Calls-in-Arrears

• Amount called up by the company but not paid by some shareholders on allotment or calls.
• Shown as a deduction from Called-up Capital under 'Subscribed Capital' in the Notes to Accounts for the Balance Sheet OR can be shown by opening a separate 'Calls-in-Arrears A/c' which appears as a deduction from 'Subscribed but not fully paid-up capital'.
• Company may charge interest on Calls-in-Arrears at a rate specified in the Articles of Association (AoA) or as per Table F of Companies Act, 2013 (if AoA are silent - rate is 10% p.a.). Interest charged is income for the company.

10. Calls-in-Advance

• Amount received from shareholders before it is actually called up by the company.
• It is a liability for the company. Shown under 'Other Current Liabilities' in the Balance Sheet.
• Company may pay interest on Calls-in-Advance as per AoA or Table F (if AoA silent - rate is 12% p.a.). Interest paid is an expense for the company.

11. Forfeiture of Shares

• If a shareholder fails to pay allotment money or any call money within the specified time, the directors may cancel their shares after giving proper notice. This is called forfeiture.
• Effect: Shareholder loses membership and the amount already paid on shares. This forfeited amount is a capital gain for the company.

Accounting for Forfeiture:

• (a) Shares originally issued at Par:
  • Share Capital A/c Dr. (With Called-up amount per share on forfeited shares)
  • To Calls-in-Arrears A/c (or specific unpaid call/allotment accounts) (With total unpaid amount)
  • To Share Forfeiture A/c (With amount already received on forfeited shares)
• (b) Shares originally issued at Premium:
  • Case 1: Premium already received: Securities Premium is NOT cancelled. Entry is same as for shares issued at par.
  • Case 2: Premium due but not received: Securities Premium needs to be cancelled.
    • Share Capital A/c Dr. (Called-up face value)
    • Securities Premium A/c Dr. (Premium amount due but not received)
    • To Calls-in-Arrears A/c (or specific unpaid accounts) (Total unpaid amount including premium)
    • To Share Forfeiture A/c (Amount received - excluding premium)

12. Reissue of Forfeited Shares

• Forfeited shares become the property of the company and can be reissued by the directors.
• Reissue can be at Par, Premium, or Discount.
• Maximum Discount on Reissue: The discount allowed on reissue cannot exceed the amount credited to the Share Forfeiture Account for those specific shares. (Reissue Price + Amount Forfeited ≥ Face Value).
• Accounting for Reissue:
  • Bank A/c Dr. (With reissue price received)
  • Share Forfeiture A/c Dr. (With discount allowed on reissue, if any)
  • To Share Capital A/c (With Paid-up value of reissued shares - usually face value if reissued as fully paid)
  • To Securities Premium A/c (If reissued at premium)
• Transfer to Capital Reserve: After reissue of all forfeited shares of a particular lot, any remaining balance in the Share Forfeiture Account related to those reissued shares represents a capital profit and must be transferred to Capital Reserve Account.
  • Share Forfeiture A/c Dr.
  • To Capital Reserve A/c
  • (Amount transferred = Amount forfeited per share - Discount on reissue per share) * Number of shares reissued.

13. Issue of Shares for Consideration other than Cash

• When a company purchases assets or a business and pays the vendor by issuing shares instead of cash.
• Shares can be issued at par or premium.
• Accounting:
  • (a) On Purchase of Assets/Business:
    • Sundry Assets A/c Dr. (Value of assets)
    • Goodwill A/c Dr. (Balancing figure if Purchase Consideration > Net Assets)
    • To Sundry Liabilities A/c (Value of liabilities taken over)
    • To Vendor's A/c (Purchase Consideration)
    • To Capital Reserve A/c (Balancing figure if Purchase Consideration < Net Assets)
  • (b) On Issue of Shares to Vendor:
    • Vendor's A/c Dr. (With Purchase Consideration)
    • To Share Capital A/c (No. of shares * Face Value)
    • To Securities Premium A/c (If issued at premium: No. of shares * Premium per share)
  • Number of Shares to be Issued: Purchase Consideration / Issue Price per share.

14. Presentation in Balance Sheet (As per Schedule III, Part I, Companies Act, 2013)

• Share Capital is shown under the Major Head 'Shareholders' Funds'.
• The Sub-Head is 'Share Capital'.
• Detailed disclosure is given in the 'Notes to Accounts' for Share Capital:
  • Authorised Capital (No. of shares and amount)
  • Issued Capital (No. of shares and amount)
  • Subscribed Capital:
    • Subscribed and fully paid-up (No. of shares and amount)
    • Subscribed but not fully paid-up (No. of shares and amount)
      • Less: Calls-in-Arrears (Amount)
  • Add: Share Forfeiture Account (Amount related to shares not yet reissued) - Shown under Subscribed Capital total.
• Reconciliation of the number of shares outstanding at the beginning and end of the reporting period.
• Rights, preferences, and restrictions attached to each class of shares.
• Shares held by holding/ultimate holding company and/or their subsidiaries/associates.
• Shares reserved for issue under options and contracts/commitments for sale of shares/disinvestment.
• Details of shares allotted as fully paid up pursuant to contract(s) without payment being received in cash, bonus shares, and shares bought back during the last 5 years.

Key Distinctions:

• Reserve Capital vs. Capital Reserve: Reserve Capital is uncalled capital reserved for winding up (not shown in B/S). Capital Reserve is created out of capital profits (like profit on reissue of forfeited shares, profit prior to incorporation) and shown under 'Reserves and Surplus'.
• Oversubscription vs. Undersubscription: Applications > Shares Offered vs. Applications < Shares Offered.
• Calls-in-Arrears vs. Calls-in-Advance: Unpaid calls vs. Calls paid before due date.

Multiple Choice Questions (MCQs)

1. The maximum amount of share capital that a company is authorized to issue according to its Memorandum of Association is called:
   a) Issued Capital
   b) Subscribed Capital
   c) Authorised Capital
   d) Paid-up Capital

2. Securities Premium collected by the company can be utilized for:
   a) Paying dividends to shareholders
   b) Writing off capital losses
   c) Issuing fully paid bonus shares
   d) Paying salaries to employees

3. When shares are issued 'for consideration other than cash', such as purchase of assets, the account credited along with Share Capital (if issued at par) is:
   a) Bank Account
   b) Vendor's Account
   c) Asset Account
   d) Purchases Account

4. In case of oversubscription, if the company decides on pro-rata allotment, the excess application money is usually:
   a) Refunded immediately
   b) Adjusted towards allotment money due
   c) Transferred to General Reserve
   d) Forfeited by the company

5. When shares are forfeited, the Share Capital account is debited with:
   a) The nominal value of forfeited shares
   b) The called-up amount on forfeited shares
   c) The amount paid by the defaulting shareholder
   d) The amount unpaid by the defaulting shareholder

6. The maximum discount that can be allowed on the reissue of forfeited shares is:
   a) 10% of the face value
   b) The amount called up on those shares
   c) The amount credited to the Share Forfeiture account for those shares
   d) No discount is allowed on reissue

7. The balance remaining in the Share Forfeiture account after all the forfeited shares have been reissued is transferred to:
   a) General Reserve
   b) Profit & Loss Account
   c) Capital Redemption Reserve
   d) Capital Reserve

8. Interest charged by the company on Calls-in-Arrears, if the Articles are silent, is typically charged as per Table F at:
   a) 5% p.a.
   b) 6% p.a.
   c) 10% p.a.
   d) 12% p.a.

9. In the company's Balance Sheet (as per Schedule III), 'Calls-in-Arrears' is shown:
   a) As a current asset
   b) As a deduction from Called-up Capital in Notes to Accounts under Share Capital
   c) Under 'Other Current Liabilities'
   d) Under 'Reserves and Surplus'

10. A company offered 50,000 shares of ₹10 each. Applications were received for 60,000 shares. If allotment was made pro-rata, an applicant for 120 shares was allotted:
    a) 120 shares
    b) 100 shares
    c) 144 shares
    d) 60 shares

Answer Key for MCQs:

1. c) Authorised Capital
2. c) Issuing fully paid bonus shares
3. b) Vendor's Account (Initially, Asset Dr. To Vendor; then Vendor Dr. To Share Capital)
4. b) Adjusted towards allotment money due
5. b) The called-up amount on forfeited shares
6. c) The amount credited to the Share Forfeiture account for those shares
7. d) Capital Reserve
8. c) 10% p.a.
9. b) As a deduction from Called-up Capital in Notes to Accounts under Share Capital
10. b) 100 shares (Allotment Ratio = Shares Offered / Shares Applied = 50,000 / 60,000 = 5/6. Allotted shares = 120 * 5/6 = 100)

Make sure you understand the 'why' behind each journal entry and the presentation format. Practice numerical problems involving oversubscription, forfeiture, and reissue extensively. Good luck with your preparation!