Chapter 1 — Accounting For Share Capital

Fig 1 — Educational Diagram: Introduction

What is a share? A share is a unit of ownership in a company. When a company is formed, its capital is divided into equal units called shares. A person who holds one or more shares is a shareholder (member) and is part-owner of the company to the extent of those shares.

Share capital is the total amount received or receivable by a company from the issue of its shares. It appears under shareholders’ funds in the balance sheet and represents the permanent capital provided by owners.

Key classes of shares:

• Equity (Ordinary) Shares – Carry voting rights, residual claim on profit and assets. Dividend is not fixed.
• Preference Shares – Carry preferential right to dividend and/or repayment of capital; dividend is usually a fixed percentage of face value.

Important capital terms:

• Authorized (Registered) Capital – Maximum capital a company is authorized to issue as per Memorandum.
• Issued Capital – Part of authorized capital actually offered to investors.
• Subscribed Capital – Portion of issued capital for which applications were received.
• Called-up Capital – Amount of subscribed capital which the company has called from shareholders (may be in installments: allotment, calls).
• Paid-up Capital – Amount actually received from shareholders (may be less than called-up if there are arrears).

Modes of issue – Shares may be issued at par (face value), at a premium (above face value), or in specific cases at a discount (discounts are regulated by company law). When shares are issued at premium, the excess goes to a Share Premium (Securities Premium) Account.

Shareholder rights and obligations: Right to dividend (if declared), voting rights (for equity), right to inspect specified documents, right to share in surplus on winding up (after creditors and preference shareholders), and obligation to pay calls on shares held.

Accounting viewpoint (brief): The principal transactions recorded under this chapter include issue and allotment of shares, receipts of calls (including calls in arrear and calls in advance), treatment of shares issued at premium/discount, oversubscription and allotment pro rata, forfeiture and reissue of shares, and buy-back. The presentation in the balance sheet shows share capital (equity and preference) and reserves (including securities premium).

Why this matters (real-life relevance): Companies raise capital by issuing shares to fund expansion, buy assets or pay liabilities. Investors buy shares to get dividends and capital gains. Market capitalisation and shareholding structure affect control, valuation and corporate decisions.

Fig 2 — Educational Diagram: Types of Shares

Definition: A share is a unit of ownership in a company. It represents the holder's proportional claim on the company’s assets and profits. Shares together make up the share capital of a company.

Main classification

• On the basis of ownership / nature
  • Equity (Ordinary) Shares – Owners (shareholders) have residual claim on profits and assets after creditors and preference shareholders. Voting rights are normally attached. Returns are dividends (variable) and capital gains.
  • Preference Shares – Preference shareholders get fixed dividend (a rate on face value) and priority over equity shareholders in payment of dividends and on winding up. Usually no voting rights except in special circumstances.
• Other important bases of classification
  • On voting rights: Voting shares vs Non-voting shares.
  • On liability: Shares with limited liability (liability limited to unpaid amount on shares). In practice shareholders’ liability is limited to unpaid calls.
  • On transferability / registration: Registered shares (recorded in company register) vs Bearer shares (historically transferable by delivery; mostly abolished in many jurisdictions).
  • On payment status: Fully paid shares vs Partly paid shares (calls may be due later).

Common sub-types and features

• Equity sub-types
  • Bonus (scrip) shares: Issued free to existing shareholders out of reserves; increases share capital but not cash.
  • Rights shares: Issued to existing shareholders at a price for raising further capital; pre-emptive right.
  • Sweat equity / ESOP: Issued to employees/management as remuneration or incentive.
  • Equity with differential rights: May carry different voting or dividend rights (allowed under some company laws).
• Preference sub-types
  • Cumulative vs Non-cumulative: Cumulative preference accrues unpaid dividends and must be paid later; non-cumulative does not accumulate.
  • Participating vs Non-participating: Participating preference shareholders share extra profits (beyond fixed rate) along with equity shareholders; non-participating do not.
  • Convertible vs Non-convertible: Convertible preference shares can be converted into equity shares after specified time/conditions.
  • Redeemable vs Irredeemable (Perpetual): Redeemable can be bought back by the company after specified period; irredeemable are perpetual (rare in practice).
  • Rated (Cumulative Redeemable Convertible etc.): Many real issues combine features (e.g., cumulative, redeemable, convertible preference shares).

Key rights of shareholders (brief)

• Equity: vote at general meetings, receive dividends (if declared), share in surplus on winding up after creditors and preference shareholders.
• Preference: fixed-rate dividend, priority in dividend and capital repayment (subject to terms), limited/no voting rights.

Accounting and practical implications:

• Share capital = number of shares issued × face (par) value.
• Issue at premium increases Securities Premium Reserve (credit). Issue at discount requires special authorization and is uncommon.
• Preference dividend is typically a fixed percentage on face value and is deducted before equity dividends when calculating distributable profits and EPS.

Concise summary: Types of shares determine rights (dividend priority vs residual claim), voting control, convertibility and redemption features. Equity = ownership + voting + variable returns; Preference = fixed return + priority + limited/no voting.

Fig 3 — Educational Diagram: Types of Share Capital

Overview
Share capital is the amount of money raised by a company by issuing shares to shareholders. In accounting and company law (CBSE Class 12 context), share capital is classified in two ways: (A) by legal/positional stages in the issue process and (B) by the nature/type of shares issued.

A. Classification by stage (positional types)

• Authorised (Nominal or Registered) Capital: Maximum share capital a company is authorised to issue as per its Memorandum of Association. (It is a ceiling; not necessarily issued.)
• Issued Capital: Part of the authorised capital which the company actually offers to the public. Issued capital ≤ Authorised capital.
• Subscribed Capital: Portion of issued capital that investors agree to buy. Subscribed ≤ Issued.
• Called-up Capital: Amount called up by the company from subscribers. A company may call the full nominal value or part of it (in installments). Called-up capital ≤ Subscribed capital.
• Paid-up Capital: Amount actually received by the company from shareholders in respect of the called-up amount. Paid-up ≤ Called-up (unless shareholders pay in advance).
• Uncalled Capital: The balance of subscribed capital not yet called. = Subscribed capital − Called-up capital. (Reserve capital is ordinarily a part of uncalled capital that can be called only on winding up.)
• Reserve Capital: A portion of uncalled capital that the company decides (by special resolution) to call only in the event of winding up.

Relationship flow: Authorised → Issued → Subscribed → Called-up → Paid-up (each step is equal to or less than the previous).

B. Classification by nature/type of shares

• Equity (Ordinary) Share Capital: Shares that represent ownership with residual claim on profits and assets. Equity shareholders typically have voting rights and receive dividends that vary with profits.
• Preference Share Capital: Preference shareholders get fixed (or preferential) dividend before equity shareholders and have priority in capital repayment on winding up. Preference shares may have additional features:

• Cumulative vs Non-cumulative: Cumulative preference accrues unpaid dividends to future years; non-cumulative does not.
• Participating vs Non-participating: Participating may share extra profits after a specified rate; non-participating do not.
• Convertible vs Non-convertible: Convertible preference can be converted into equity after a specified period; non-convertible cannot.
• Redeemable vs Irredeemable (Perpetual): Redeemable preference shares are repayable after a fixed period or on terms; irredeemable/perpetual are not redeemable during the lifetime of the company.

Important points for accounting

• All counts and amounts are normally stated at nominal (face) value unless otherwise specified (e.g., premium recorded separately).
• Called-up but unpaid amounts are shown as "Calls in Arrear" (a deduction from called-up capital) or as a receivable depending on presentation.
• Paid-in-advance amounts (if any) are shown as "Calls in Advance" (a liability) or adjusted against called-up capital when due.

Why these types matter
They determine how much capital is actually available to the company, what portion can be legally raised further, and the rights/priority of different investors. In bookkeeping and company reporting, correct classification ensures accurate presentation of shareholders' funds.

Fig 4 — Educational Diagram: Methods and Procedure of Issue of Shares

Definition: Issue of shares means offering and allotting new shares of a company to persons for subscription. It is a primary method by which a company raises capital from the public or existing members.

Main methods of issuing shares:

1. Public Issue (Initial Public Offering - IPO / Further Public Offer - FPO): Shares offered to the public through a prospectus or offer document.
2. Rights Issue: Shares offered to existing shareholders in proportion to their holding (right to subscribe).
3. Private Placement: Shares offered to selected persons/institutions, not to the general public.
4. Bonus Issue: Shares issued free to existing shareholders out of company reserves.
5. Preferential Allotment: Issue to a selected group at a decided price.
6. Employee Share Option / ESOP: Issue to employees as part of remuneration or incentives.
7. Issue for Consideration other than Cash: Shares issued as payment for acquisition of assets, business, or services.

Pricing types (accounting perspective):

• Issue at Par: Issue price = Face value (e.g., Rs 10 share issued at Rs 10).
• Issue at Premium: Issue price > Face value (company receives extra which goes to Securities Premium Account).
• Issue at Discount: Issue price < Face value (historically shown in textbooks for practice; note: under the Companies Act, issues at discount are generally restricted and need legal compliance).

Procedure (step-by-step):

1. Board Meeting / Decision: Board of Directors passes resolution approving issue (type, number, price, terms).
2. Regulatory Compliance and Offer Document: Prepare prospectus or letter of offer (IPO/FPO) or file required forms for private placement/rights issue. Disclosures and approvals (SEBI / stock exchanges / ROC) as applicable.
3. Opening of Subscription Lists: Receive applications and application money (specified amounts may be called on application, allotment and calls).
4. Receipt & Banking of Money: All application money must be received through banking channels and held in the Company’s bank account.
5. Allotment Decision: If subscribed fully or oversubscribed, company makes allotment. In oversubscription, allotment may be pro-rata or as per offer terms. If undersubscribed, directors may withdraw the offer or allot proportionately (subject to law).
6. Accounting Entries: Transfer application money to Share Capital or Share Application A/c → Share Capital on allotment; record forfeiture, calls, securities premium as required.
7. Refunds: Refund excess application money promptly to unsuccessful or partly allotted applicants.
8. Issue of Share Certificates: Prepare and issue share certificates to allottees within prescribed time (commonly 2 months from allotment) or provide demat credits where shares are in electronic form.
9. File Return of Allotment with ROC: File prescribed form (e.g., Form PAS-3 under Companies Act) within statutory time (usually within 30 days of allotment) and complete other statutory filings.
10. Listing & Dematerialization: Apply for listing and credit demat accounts if shares are to be traded on exchanges.

Key accounting points: Journal entries differ by price type. Premium received is credited to Securities Premium Account and must be used only for permitted purposes. Calls (first call, final call) are recorded when made and when received. Forfeiture and reissue have separate treatment.

Legal note: Textbook problems may include issues at discount for learning accounting treatment. In practice, issuing shares at discount is subject to strict legal conditions under company law and generally restricted.

Fig 5 — Educational Diagram: Issue of Shares at Par, Premium and Discount

Meaning (short): When a company issues equity or preference shares, the issue price may be equal to, above, or below the face (nominal) value of the share. These three situations are called issue at par, issue at premium and issue at discount respectively.

1. Issue of Shares at Par

Issue at par means shares are issued at their face (nominal) value. Example: Share with face value Rs 10 issued at Rs 10. Accounting entry (when fully paid):

Bank A/c Dr.   XXX
   To Share Capital A/c   XXX

2. Issue of Shares at Premium

Issue at premium means shares are issued above the face value. The excess over face value is credited to a separate reserve called Securities Premium Account (a capital reserve). Example: Share of Rs 10 issued at Rs 50 → premium Rs 40.

Accounting entry (when fully paid):

Bank A/c Dr.            Total amount received
   To Share Capital A/c    (face value × no. of shares)
   To Securities Premium A/c  (premium × no. of shares)

3. Issue of Shares at Discount

Issue at discount means shares are issued below face value. Discount on issue is treated as a capital loss and is debited to a separate account called Discount on Issue of Shares A/c. (Note: in many jurisdictions the issue of shares at discount is restricted or prohibited — in practice follow the applicable company law and accounting standards.)

Accounting entry (when fully paid):

Bank A/c Dr.                  Amount received
Discount on Issue of Shares A/c Dr.   Discount amount
   To Share Capital A/c              (face value × no. of shares)

Later, the Discount on Issue of Shares A/c is written off against Securities Premium Account (if balance is available) or from reserves in accordance with law and accounting rules.

Key points to remember

• Amount shown as Share Capital = face value × number of shares issued (irrespective of premium/discount).
• Securities Premium Account is treated as a capital reserve and used only for specified purposes (as per law).
• Discount on issue represents a capital loss and must be written off as required by law.
• When shares are not fully paid at issue (calls/partly paid), entries are recorded for calls and amounts received; the basic principles above still apply for face value, premium or discount on the issue price.

Practical/legal note: Always check the company law and accounting standards applicable in your jurisdiction. Some laws restrict or prohibit issuing shares at a discount; class 12 syllabus discusses the accounting mechanics for understanding purposes.

Fig 6 — Educational Diagram: Application, Allotment and Refunds

Overview
When a company issues shares to the public, the process involves three sequential steps: receipt of applications (and application money), allotment of shares to applicants, and refund of any excess application money where applications exceed the number of shares offered. These steps determine the accounting entries and cash flows between applicants and the company.

1. Receipt of Applications
- Investors send applications and pay the application money (full or part of issue price).
- Accounting entry at the time of receiving applications:
Bank A/c Dr. (with total amount received)
    To Share Application A/c (same amount)

2. Allotment of Shares
Allotment is the act of distributing shares among applicants. There are three important situations:

• (a) Exact or Under-subscription — applications received are less than or equal to shares offered. All applicants receive full allotment. On allotment the company transfers the application amounts relating to allotted shares to share capital:
  Share Application A/c Dr.
      To Share Capital A/c
• (b) Over-subscription — applications exceed shares offered. Company may allot on a pro-rata basis (most common), reserve some shares for certain applicants (e.g., promoters), or use a lottery for small lots. For pro-rata allotment the company calculates the proportion of shares each applicant gets. Amounts relating to actually allotted shares are transferred to Share Capital. The balance of application money is refunded or adjusted.
• (c) Firm allotment — if some applicants (e.g., promoters/directors) applied before public issue with guaranteed allotment, their application is treated as regular application but not refundable.

Journal entries at allotment stage (typical)
- Transfer application money for allotted shares:
Share Application A/c Dr.
    To Share Capital A/c

- If there is allotment money to be called later, entries for allotment receipts and calls follow the same pattern (Share Allotment A/c and Calls in Arrears/Advance when needed).

3. Refunds
- If applications are rejected or partly refused (in over-subscription), the excess application money is refunded.
- Accounting entry for refunds (total amount refunded):
Share Application A/c Dr.
    To Bank A/c (amount of refund)

Important Practical Points
- Calculation for pro-rata allotment must ensure whole shares; fractional shares are normally dealt with by rounding or lottery for odd lots as per the company’s policy.
- Application money is only transferred to Share Capital for those shares actually allotted. The remaining application balance is used for refunds or adjusted against allotment/calls if the company’s terms permit.
- No opposite entry to Share Application A/c is created; the account is cleared by the two transfers: amount transferred to Share Capital and amount refunded.

Typical sequence of entries (summary)
1) On receipt of applications: Bank A/c Dr. To Share Application A/c
2) On allotment: Share Application A/c Dr. To Share Capital A/c (for allotted amount)
3) For refunds of excess application money: Share Application A/c Dr. To Bank A/c

Exam-style tips
- Always compute total application money received first.
- Work out amount applicable to allotted shares (Allotted shares × application money per share).
- The remainder in Share Application A/c is the refund amount.
- For individual applicants, compute allotted shares = (applied shares × total shares offered) / total shares applied (for pro-rata).

Fig 7 — Educational Diagram: Calls on Shares

What are Calls on Shares?

When a company issues partly paid shares, the total nominal value (face value) of each share is received by the company in instalments. Each instalment that the company asks the shareholders to pay (after allotment) is called a call. Example of instalments: application, allotment, first call, final call.

Key points (CBSE / Class 12 level)

• Making a call: The board of directors passes a resolution to make a call for a specified amount per share. (No journal entry is needed at the moment of resolution.)
• Accounting for a call: When a call becomes due, a Call Account (e.g., First Call A/c) is prepared to show the amount due from shareholders. The usual sequence: create the Call Account when due (debit), transfer to Share Capital (credit), and when cash is received, bank is debited and Call Account is credited (or partly credited with Calls in Arrear for unpaid amounts).
• Calls in arrear: If shareholders do not pay a call fully, the unpaid amount is called calls in arrear (a receivable). It is shown by way of deduction from the called-up capital in the balance sheet.
• Calls in advance: If shareholders pay money in advance of a due call, that excess is recorded as calls in advance (a liability / credit). It is shown either as a current liability or adjusted based on presentation—commonly shown separately under shareholders' funds or current liabilities depending on presentation rules.
• Legal / practical notes: Discount on issue of shares is not permitted for issues to the public (as per company law guidance). Interest may be charged on unpaid calls if permitted by the articles or resolution.

Typical journal treatment (standard method used in CBSE textbooks)

• No entry when directors pass a call.
• When the call becomes due:
  

  First Call A/c    Dr   (Total amount of call)
      To Share Capital A/c    (Amount transferred to called-up capital)

• When cash is received in full for the call:
  

  Bank A/c    Dr
      To First Call A/c

• If only part is received (some unpaid):
  

  Bank A/c    Dr
  Calls in Arrear A/c    Dr   (unpaid portion)
      To First Call A/c

• If money is received in advance of a call:
  

  Bank A/c    Dr
      To Calls in Advance A/c

Presentation in financial statements

• Called-up share capital = Number of shares × Amount called per share.
• Paid-up capital = Called-up capital less calls in arrear (i.e., only the amounts actually received).
• Calls in arrear is usually shown as a deduction from called-up capital (so readers see net paid-up capital).
• Calls in advance is shown as a liability (or separately indicated) since it is an obligation to return or to appropriate against future calls.

When does forfeiture occur? If a shareholder fails to pay a call and the company follows the procedure in its articles, shares may be forfeited. Forfeited shares are written off from the defaulter’s capital and tracked in a Forfeited Shares A/c; such shares may be reissued later.

Why important? Calls on shares determine the company’s future cash inflows, the distinction between called-up and paid-up capital, and the rights/obligations of shareholders regarding unpaid amounts.

Fig 8 — Educational Diagram: Forfeiture and Reissue of Shares

Meaning: Forfeiture of shares is the cancellation of shares of a shareholder for non-payment of calls. The shareholder loses all rights in respect of those shares and the amount already paid on those shares is forfeited (i.e., kept by the company) and credited to the Share Forfeiture (Forfeited Shares) Account.

Why it happens: A company may forfeit shares when a shareholder fails to pay allotment, calls or any called-up amount within the time prescribed.

Consequences:

• The shares are cancelled; shareholder ceases to be member and loses all rights including claim on paid amount.
• Amount already paid is transferred to Share Forfeiture Account (a capital reserve until reissue or otherwise dealt with).
• Company may reissue forfeited shares to new/old investors. On reissue any discount is borne out of the Share Forfeiture A/c to the extent available; any remaining balance in Share Forfeiture A/c after reissue is transferred to Capital Reserve.

Main journal entries (standard CBSE approach):

• On forfeiture (when some calls remain unpaid):
  Share Capital A/c Dr. (called-up value of forfeited shares)
  To Calls in Arrear A/c (unpaid portion)
  To Share Forfeiture A/c (amount actually paid on those shares)
• On reissue of forfeited shares (general form):
  • If reissued at par or discount:
    Bank A/c Dr. (cash received)
    Share Forfeiture A/c Dr. (amount of forfeited money used to meet discount, if any)
    To Share Capital A/c (called-up value of reissued shares)
  • If reissued at premium:
    Bank A/c Dr. (cash received)
    To Share Capital A/c (called-up value) To Securities Premium A/c (premium on reissue)
    (Any remaining balance in Share Forfeiture A/c after reissue is transferred to Capital Reserve.)
• Transfer of balance (after reissue):
  Share Forfeiture A/c Dr.
  To Capital Reserve A/c (balance)

Rules / Practical points:

• Forfeited amount is treated as a capital receipt; ultimately it becomes a capital reserve when not needed to meet discount on reissue.
• Discount allowed on reissue is debited to Share Forfeiture A/c (so far as available). Text problems usually ensure discount does not exceed forfeited balance.
• If some forfeited shares are not reissued, the balance in Share Forfeiture A/c may remain until company decides its appropriation (often transferred to Capital Reserve if no future use).
• Rights, if any, of the original shareholder are lost on forfeiture; company may reissue without original shareholder's consent (subject to law and articles).

Worked flow (short):

Shareholder fails to pay call → Company forfeits shares → Amount already paid moved to Share Forfeiture A/c → Company reissues shares → Cash + use of Forfeiture funds meets Share Capital on reissue → Remaining Forfeiture balance (if any) → Capital Reserve.

Fig 9 — Educational Diagram: Issue of Shares for Consideration Other Than Cash

Meaning
Issue of shares for consideration other than cash means allotting shares in exchange for non‑cash assets or services instead of money. Typical consideration includes assets (land, building, plant), business purchase, conversion of debt, goodwill, or payment to promoters and vendors.

Basic principles
1. The company must be authorised (by its Articles and shareholders) to issue shares for non‑cash consideration and must follow statutory requirements (valuation, approval and disclosure).
2. The amount at which the asset/service is taken into the books is the agreed/valued consideration (normally the fair value accepted by parties).
3. Accounting reflects no cash movement: the asset or expense account is debited and Share Capital (and Securities Premium, if any) is credited.

Accounting treatment (patterns of journal entries)
a) When shares are issued at par (no premium):
Dr Asset / Goodwill / Purchases / Creditor (as applicable) — for agreed value
Cr Share Capital — (Number of shares × Face value)
b) When shares are issued at a premium:
Dr Asset / Goodwill / Creditor — for total agreed value
Cr Share Capital — (Number of shares × Face value)
Cr Securities Premium — (Total value − Share Capital)
c) When shares are issued to settle a creditor or convert debt:
Dr Creditor / Loan account — full amount of debt
Cr Share Capital and (if any) Securities Premium — as per values above

Key points for students
• The asset or service is recorded at the agreed value taken as consideration.
• If shares are issued as fully paid for non‑cash consideration, they are treated as fully paid — no calls are made.
• Securities Premium Account arises only when total consideration per share exceeds face value.
• All statutory disclosures and approvals (board/shareholder/valuation) must be complied with before allotment.

Fig 10 — Educational Diagram: Presentation and Disclosure in Financial Statements

Meaning & objective
Presentation and disclosure in financial statements means the proper classification, aggregation and clear reporting of share capital and related items (calls in arrears/advance, forfeited shares, securities premium, reserves) in the Balance Sheet and the Notes to Accounts so that users (shareholders, investors, creditors) can understand the company’s capital structure and rights of different classes of shareholders.

What must be presented/disclosed

• Types of share capital separately: Equity share capital and Preference share capital.
• Details for each class: authorised (registered) capital, issued capital, subscribed capital, called-up capital and paid-up capital shown both as number of shares and amount (face value).
• Securities premium (share premium) and other reserves (capital reserve, revenue reserves) separately under "Reserves and Surplus."
• Calls in arrears and calls in advance: amounts and explanatory note showing number of shares and per-share amounts (usually disclosed in Notes to Accounts).
• Forfeited shares: balance in forfeited shares account and treatment (generally disclosed as part of reserves / capital reserves) and details of re-issue if any.
• Rights, bonus issues, buy-back, treasury shares (if applicable) and dividend proposed or recommended for the year.
• Reconciliation schedule: movement in number of shares outstanding during the year (opening, issued, cancelled/forfeited, bought back, closing).

Where shown in the financial statements
In the Balance Sheet (Shareholders’ funds section) companies normally display:

• Equity share capital: number of shares and amount (face value × number of shares).
• Preference share capital: similarly shown separately.
• Reserves and surplus: securities premium, capital reserves (including forfeiture credit), general reserves, retained earnings.

Detailed explanatory notes (Notes to Accounts) provide the breakup (authorised, issued, subscribed, called-up, paid-up), details of calls in arrears/advance (number of shares and amount), terms of preference shares (dividend rate, redemption), details of bonus/rights issues and movement of share capital during the year.

Practical presentation tips (CBSE / Schedule III style)

• Show number of shares and amount side by side (e.g., Equity share capital: 1,00,000 shares of Rs 10 each — Rs 10,00,000).
• Deduct calls in arrears from subscribed/called-up capital (note the amount and number of shares in the notes).
• Show calls in advance separately in the notes (and in liabilities if material) with reason/terms.
• Present forfeited shares balance as a part of reserves (capital reserve) with explanation of re-issue, if any.

Why this matters (users’ view)
Clear presentation allows assessment of: ownership dilution (issued vs authorised), the cash actually received by the company (paid-up capital), the margin of unused authority (authorised minus issued), financial strength (equity vs borrowings), and potential liabilities (calls in advance, unpaid calls).

Fig 11 — Educational Diagram: Accounting Records and Ledger Treatment

Overview

Accounting Records and Ledger Treatment for share capital explains how transactions connected with issuing, receiving money on, calling, non-payment, forfeiture and reissue of shares are recorded in the books of a company and how those journal entries are posted to ledger accounts. Key ledger accounts: Share Capital A/c, Securities Premium A/c, Share Application/Allotment/Calls A/cs, Calls in Arrears A/c, Calls in Advance A/c, Forfeited Shares A/c and Bank A/c.

Basic sequence of records (issue → receipts → allotment → calls → defaults → forfeiture → reissue)

• Receipt on application: debit Bank A/c; credit Share Application A/c.
• On allotment: transfer application to capital — debit Share Application A/c; credit Share Capital A/c (and Securities Premium A/c if premium relates to allotment).
• When allotment amount is due: debit Share Allotment A/c; credit Share Capital A/c (and Securities Premium A/c if applicable).
• When allotment money received: debit Bank A/c; credit Share Allotment A/c. If some shareholders do not pay in full, record the unpaid portion in Calls in Arrears A/c: debit Calls in Arrears A/c for the unpaid amount (so that Bank + Calls in Arrears = amount due).
• When a call is made: create a Call A/c (e.g., First Call A/c) by debiting that nominal account when amount is due and crediting Share Capital A/c for called-up capital. On receipt, debit Bank and credit the Call A/c; unpaid portion goes to Calls in Arrears A/c.
• If subscribers pay more than is due, record the excess in Calls in Advance A/c (credit when received). When future call is made this account is debited and Share Capital credited to adjust.
• Forfeiture: if a shareholder fails to pay called amounts and shares are forfeited, remove the called-up capital by debiting Share Capital A/c and crediting Calls in Arrears for unpaid portion and crediting Forfeited Shares A/c for amount already paid.
• Reissue of forfeited shares: on reissue, debit Bank A/c for cash received; debit Forfeited Shares A/c if a discount is given (to the extent forfeited amount is used to cover discount); credit Share Capital A/c for nominal value reissued. Excess balance in Forfeited Shares A/c after reissue is retained as capital reserve.

Typical journal entries (short form)

• On application: Bank A/c Dr; To Share Application A/c.
• On allotment (transfer): Share Application A/c Dr; To Share Capital A/c; To Securities Premium A/c (if any).
• Allotment due: Share Allotment A/c Dr; To Share Capital A/c; To Securities Premium A/c (if any).
• Receipt of allotment (partly unpaid): Bank A/c Dr; Calls in Arrears A/c Dr; To Share Allotment A/c.
• Call made: Share First Call A/c Dr; To Share Capital A/c.
• Call received (partly unpaid): Bank A/c Dr; Calls in Arrears A/c Dr; To Share First Call A/c.
• Call in advance received: Bank A/c Dr; To Calls in Advance A/c.
• Adjust call in advance when call is made: Calls in Advance A/c Dr; To Share Capital A/c.
• Forfeiture (on unpaid calls): Share Capital A/c Dr (called up on shares forfeited); To Calls in Arrears A/c (unpaid); To Forfeited Shares A/c (amount paid).
• Reissue of forfeited shares at lower price: Bank A/c Dr; Forfeited Shares A/c Dr (discount part); To Share Capital A/c.
• Reissue at premium: Bank A/c Dr; To Share Capital A/c; To Securities Premium A/c; adjust Forfeited Shares A/c if used.

Ledger treatment & presentation in financial statements

• Share Capital A/c (credit balance) shows nominal (called-up) capital. When calls are made, the Share Capital A/c is credited (called-up portion). When money is received, the relevant Call A/c is cleared by crediting it. On forfeiture, Share Capital A/c is debited to remove the called-up capital on those shares.
• Calls in Arrears A/c generally carries a debit balance (receipt outstanding) and is shown as a deduction from called-up share capital in the equity section for reporting called-up but unpaid capital.
• Calls in Advance A/c carries a credit balance and is disclosed separately (or adjusted when calls are made) — effectively representing liability/advance from shareholders until applied to calls.
• Forfeited Shares A/c carries a credit balance (capital reserve). On reissue this account is debited to the extent required to cover any discount. Any remaining balance stays as a capital reserve (shown under reserves).
• Securities Premium A/c is a reserve (credit) created when shares are issued above face value; it is used only for specified purposes as per law.

Important points (CBSE focus)

• Always show called-up capital and then deduct Calls in Arrears to present paid-up capital.
• Forfeiture entry must remove called-up capital and allocate amounts between Forfeited Shares (paid amount) and Calls in Arrears (unpaid).
• When reissuing forfeited shares, use the Forfeited Shares A/c to cover discount; any surplus remains as a reserve.
• Discount on issue of shares is illegal except in specified cases and requires special permission — generally not recorded under normal transactions.

Fig 12 — Educational Diagram: Practical Problems and Numerical Types

Overview
Practical problems on Accounting for Share Capital test a student’s ability to record the issue of shares, deal with oversubscription, pro-rata allotment, calls-in-arrears and calls-in-advance, forfeiture and reissue, issue at premium or discount, minimum subscription and related ledger/journal entries. The usual structure of a numerical question: identify the type of issue, calculate quantities and amounts due/received, pass journal entries and prepare ledger balances or a statement of share capital.

Common numerical types

• Issue at par, at premium or at discount — calculate amounts for application, allotment and calls and record entries.
• Oversubscription and pro-rata allotment — determine number of shares allotted, refunds and entries.
• Minimum subscription not received — refund or return of application money.
• Calls-in-arrears and calls-in-advance — adjust called up and paid-up capital and record special accounts.
• Forfeiture and reissue of shares — compute forfeited amount, loss or gain on reissue and transfer to capital reserve.
• Issue for consideration other than cash — record at agreed valuation.

Problem-solving approach (stepwise)

1. Read carefully: note number of shares issued, face value, terms (application/allotment/calls), premium/discount, and special conditions (oversubscription, minimum subscription).
2. Compute total applications received and check minimum subscription requirement.
3. If oversubscribed, compute pro-rata allotment: shares allotted = (shares offered / total applications) × shares applied for.
4. Calculate money due on each stage (application, allotment, calls) per share and in total.
5. Record journal entries stagewise: Receipt of application money, transfer on allotment, calls receivable/paid, forfeiture, reissue, etc.
6. Prepare ledger balances: Called-up capital, Paid-up capital, Calls-in-arrears, Calls-in-advance, Forfeited Shares account and any Transfer to Capital Reserve.

Template journal entries (frequently used)

• On receipt of application money: Bank A/c Dr; To Share Application A/c
• On transfer of application to capital (on allotment): Share Application A/c Dr; To Share Capital A/c (for allotted shares) ; To Securities Premium A/c (if premium)
• On allotment due: Share Allotment A/c Dr; To Share Capital A/c; To Securities Premium A/c (if any)
• On receipt of allotment: Bank A/c Dr; To Share Allotment A/c
• On calls made: Share Call A/c Dr; To Share Capital A/c
• On receipt of calls: Bank A/c Dr; Calls in Arrears A/c Dr (if part); To Share Call A/c
• Forfeiture: Share Capital A/c Dr (called up amount on forfeited shares); To Share Forfeited A/c (amount paid); To Calls in Arrears (if unpaid portion remains)
• On reissue of forfeited shares: Bank A/c Dr; Share Forfeited A/c Dr (to extent used); To Share Capital A/c

Key points to remember

• Called-up capital = Face value × Number of shares on which calls have been made.
• Paid-up capital = Sum actually received (application/allotment/calls received) = face value × shares fully/partly paid (according to amounts received).
• Forfeited Amount = Amount actually received on forfeited shares (credited to Share Forfeited A/c).
• If reissue price < amount paid on forfeited shares, difference is written off from Forfeited account; if reissue price > paid amount, excess may be transferred to Capital Reserve.

Fig 13 — Educational Diagram: Legal and Regulatory Aspects

What this topic covers
Legal and regulatory aspects govern how a company issues, records, transfers and reduces share capital, and how it protects shareholders and creditors. For Class 12 Accountancy (Accounting for Share Capital) this means understanding the rules that determine:

• types of capital (authorised, issued, subscribed, called-up, paid-up),
• legal requirements for issuing shares (including premiums and prohibition of discount),
• rights and formalities for share certificates, transfers and transmission,
• treatment of calls, calls-in-arrears and calls-in-advance,
• forfeiture and reissue of shares,
• bonus issues, buy-backs and reduction of capital,
• compliance, filings and consequences of non-compliance.

Key legal principles and practical rules

• Authority and documentation: A company can issue shares only within its authorised capital. Issues must follow the company’s Memorandum & Articles of Association and statutory requirements (prospectus or private placement documentation, board resolutions, shareholder approvals where needed).
• Types and hierarchy of capital: Authorised (maximum) > Issued > Subscribed > Called-up > Paid-up. These are defined quantities and must be disclosed in financial statements.
• Issue at premium / discount: Issuing shares at a premium is allowed — premium goes to a Securities Premium Account and may be used only for legally permitted purposes. Issue at discount is generally prohibited (except under specific statutory exceptions).
• Minimum subscription & allotment: In public issues there is usually a minimum subscription requirement. Allotment must follow legal/commercial terms and, on oversubscription, companies use methods such as pro-rata allotment (or other prescribed methods).
• Share certificates and dematerialisation: Share certificates are legal proof of title and must be issued within the prescribed period after allotment (companies also issue shares in demat form for listed companies). Companies must maintain statutory registers (members, transfers, charges, etc.).
• Transfer and transmission: Transfer requires a valid executed transfer deed, stamping, and board approval (subject to Articles). Transmission (on death, insolvency) requires proof and is not a transfer. Restrictions (e.g., pre-emption rights, lock-ins) may apply per Articles or regulatory rules.
• Calls, calls-in-arrears and calls-in-advance: When the full nominal value is not paid on allotment, the company can make calls. Unpaid calls (calls-in-arrears) are recoverable and may attract interest; calls-in-advance (payments before call) may earn or be required to earn interest as per law/policy.
• Forfeiture and reissue: If shareholders fail to meet calls, the company may forfeit shares after following prescribed notices and procedures; on reissue any gain or loss is accounted for in shareholders’ funds (Forfeited Shares A/c etc.).
• Bonus shares and capital maintenance: Bonus shares (capitalisation of free reserves) require availability of free reserves and compliance with conditions (no reduction of capital except under statutory procedure). Bonus share rules protect creditors by ensuring only certain reserves can be capitalised.
• Buy-back and reduction of capital: Buy-back of shares and reduction of capital are allowed but subject to conditions (sources of funds, solvency tests, shareholder/board approvals and regulatory filings) to protect creditors and minority shareholders.
• Dividend distribution: Dividends can be declared only out of profits or as permitted by law; companies must follow prescribed rules for dividend declaration, transfer to reserves and timing.
• Regulatory compliance & penalties: Listed companies must comply with securities regulator (e.g., listing obligations), periodic filings with the registrar and keep statutory books up to date. Non-compliance attracts penalties and legal consequences.

Accounting implications (summary)
All legal actions have specific accounting consequences: creation of Securities Premium Account on premium received; recording calls and calls-in-arrears; crediting Forfeited Shares A/c at the amount retained; transfer of premium to permitted heads when used; and reduction of capital entries when buy-back or reduction is effected.

Practical tips for accountants and students

• Always reconcile the quantities: authorised > issued > subscribed > called-up > paid-up.
• When shares are issued at premium, create/credit Securities Premium Account and show permitted utilization only.
• Follow prescribed order of notices and approvals before forfeiture or buy-back — wrong procedure invalidates action.
• For listed entities, incorporate SEBI/stock exchange rules (lock-in periods, disclosures) in addition to company law requirements.

Fig 14 — Educational Diagram: Related Concepts and Terminology

Overview: In Accounting for Share Capital (Class 12 CBSE), several inter-related terms describe the stages and attributes of company shares — from the maximum a company may issue to the amounts actually received from shareholders. Understanding these terms helps record share transactions correctly and prepare related financial statements.

• Authorized (Registered/Capital): The maximum amount of share capital a company is legally allowed to issue as stated in the Memorandum of Association. (Also called nominal capital.)
• Issued Capital: The part of the authorized capital that the company actually issues to investors.
• Subscribed Capital: The portion of issued capital which investors agree to buy (i.e., applications received and allotments made). If applications exceed issued, shares may be allotted proportionately.
• Called-up Capital: The part of the subscribed capital on which the company has made calls (asked shareholders to pay). For partly paid shares, not all the face value may be called at once.
• Paid-up Capital: The actual amount received from the shareholders on the shares. Paid-up ≤ Called-up.
• Par/Face Value: The nominal value printed on the share certificate (e.g., ₹10 per share). Transactions often reference face value.
• Share Premium: Amount received over and above face value when shares are issued at a premium. Accounted in Securities Premium Reserve.
• Issue at Discount: When shares are issued below face value. (Allowed under specific legal conditions.) The discount is debited to a separate account and treated per law.
• Calls in Arrears: Amounts not paid by shareholders despite being called. Treated as receivable and recorded separately.
• Calls in Advance: Amounts paid by shareholders before the company makes a call. Treated as a current liability (or adjusted) and sometimes interest is payable to shareholders.
• Forfeiture and Re-issue: If a shareholder fails to pay calls, shares may be forfeited (cancelled) and later reissued. Forfeited amounts normally go to a Forfeiture Account, which is used when reissuing shares.
• Preference Shares: Shares with preferential rights — generally priority in dividend and capital repayment but limited or no voting rights.
• Equity/Ordinary Shares: Shares carrying voting rights and residual claim on profits (dividends). Dividend amount not guaranteed.
• Rights Issue: Offer to existing shareholders to buy additional shares in proportion to their holding, often at a discount.
• Bonus Issue (Capitalisation of Reserves): Free issue of additional shares to existing shareholders by converting reserves into share capital (e.g., 1:5 means one bonus share for every five held).
• ESOP, Sweat Equity: Methods to issue shares to employees — ESOP gives options, sweat equity issues shares for non-monetary contribution.
• Share Certificate: Evidence of ownership issued to allotted shareholders; important in transfer and transmission of shares.
• Underwriting: Arrangement where underwriters guarantee subscription of shares; they subscribe to unsubscribed portion for a fee.

Key relationships to remember:

• Authorized Capital ≥ Issued Capital ≥ Subscribed Capital ≥ Called-up Capital ≥ Paid-up Capital
• Paid-up Capital = Number of shares actually paid for × Amount paid per share

Why these matter (practical impact): These distinctions determine how much capital the company can legally raise, how much money it actually receives, how to present capital in the balance sheet, how dividend rights and voting power are allocated, and how to account for defaults (arrears/forfeiture) and special issues (bonus, rights, ESOP).