ACCOUNTING OF SHARE
CAPITAL
OTHER IMPORTANT CONCEPTS RELATED
TO ISSUE OF SHARES
OTHER CONCEPTS
RELATED TO ISSUE OF
SHARES
• CALLS IN ARREARS
• CALLS IN ADVANCE
• OVER SUBSCRIPTION
OF SHARES
• FORFEITURE OF
SHARES
• REISSUE OF FORFEITED
SHARES
CALLS IN ARREARS
• It may happen that shareholders do not pay the call amount on due date. When
any shareholder fails to pay the amount due on allotment or on any of the calls,
such amount is known as ‘Calls in Arrears’/‘Unpaid Calls’.
• The unpaid or arrear amount on account of allotment or calls may or may not be
transferred to Call – in – Arrears Account.
• The company may charge interest on calls in arrears at the specified rate if AOA
of the company provides clause for it. In absence of such rules, The Companies
Act ,2013 applies , which provides for interest on Calls in Arrears to be charged
@10%p.a. However, Directors have the right to waive such interest on Calls in
Arrears.
ACCOUNTING OF CALLS IN ARREARS
Without Opening Calls – in – Arrears By Opening Calls – in- Arrears Account
Account
Under this method, the amount received Under this method, unpaid amount is
from shareholders on allotment and calls are transferred to Calls – in – Arrears account. As a
credited to relevant allotment and call result , the allotment and Share call accounts
accounts respectively resulting in debit will have nil balance.
balance in those accounts equal to total Bank a/c Dr (Amount received
unpaid amount on calls. This will be on call/allotment)
automatically credited when such arrears are Calls – in – Arrears a/c Dr (Unpaid amount of
received or such shares are forfeited. shares)
To Share Allotment / Call a/c
CALLS IN ARREARS
➔ Disclosure in Balance Sheet : Calls – in – Arrears is shown in the Notes to
Accounts on Share Capital to the Balance Sheet as a deduction from the
amount of 'Subscribed but not fully paid-up' under 'Subscribed Capital’.
ILLUSTRATIONS : ISSUE OF SHARE CAPITAL
CALLS IN ADVANCE
➔ Sometimes shareholders pay a part or the whole of the amount of the
calls not yet made. The amount so received from the shareholders is
known as “Calls in Advance”. The amount received in advance is a liability
of the company and should be credited to ‘Call in Advance Account.” The
amount received will be adjusted towards the payment of calls as and
when they becomes due.
➔ Table F of the Companies Act provides for the payment of interest on calls
in advance at a rate not exceeding 12% per annum.
JOURNAL ENTRIES :
CALLS IN
1. On Receipt of Advance amount:
ADVANCE Bank a/c Dr
To Calls – in – Advance a/c
(with the amount of call money received in advance)
Disclosure in Balance Sheet :
Calls – in – Advance is shown in
the Equity and Liabilities part of 2. Adjustment when calls are made :
the Balance Sheet under the Calls in Advance a/c Dr
head Current Liabilities and sub- To Share call a/c
head - Other Current Liabilities. (proportionate advance amount adjusted against
the call money due)
ILLUSTRATION : ISSUE OF SHARE CAPITAL
DIFFERENCE
OVERSUBSCRIPTION OF SHARES
❑ There are instances when applications for more shares of a company are received than
the number offered to the public for subscription. This usually happens in respect of
shares issue of well-managed and financially strong companies and is said to be a case
of ‘Over Subscription’.
❑ In such a condition, three alternatives are available to the directors to deal with the
situation:
(1) they can accept some applications in full and totally reject the others;
(2) they can make a pro-rata allotment to all; and
(3) they can adopt a combination of the above two alternatives which happens to be the
most common course adopted in practice.
ACCOUNTING TREATMENT IN
For Application Money Received CASE OF OVERSUBSCRIPTION
Bank a/c Dr OF SHARES
To Share Application a/c
Alternatively the following combined
entry can be made :
Application money for Share Application a/c Dr
Allotted Shares Excess Application To Share Capital a/c
Share Application a/c Dr Money To Bank a/c
To Share Capital a/c To Share Allotment a/c
To Calls-in-Advance a/c
Adjustment
Refund
Share Application a/c Dr
Share Application a/c Dr
To Share Allotment a/c
To Bank a/c
To Calls–in –Advance a/c
OVERSUBSCRIPTION OF SHARES
➔ Let us now understand through some illustration , how to calculate Calls -In –
Arrears on case of oversubscription of shares and pro – rata allotment of
shares.
ISSUE OF SHARE CAPITAL
ILLUSTRATIONS :
FORFEITURE OF SHARES
❑ It means cancelling shares for non-payment of calls due. If on allotment of
share, allottees fail to pay the amount on any call,his money is forfeited or
withheld by company. This is called forfeiture of shares. Thus, forteit means to
take away or to withdraw the rights of a person.
❑ Forfeiture of share refers to the cancellation or termination of membership of
a share holder by taking away the shares and rights of membership.
❑ Shares can be forfeited only if AOA of the company allows. The defaulting
shareholder must be given notice before forfeiture of his shares.
FORFEITURE OF SHARES
❑ On forfeiture :
1) Shares are cancelled and to that extent Share Capital is reduced.
2) The amount received till date from the defaulting shareholder is not
refunded back to him and transferred to Forfeited shares Account.
❑ Disclosure in Balance Sheet : Till the time the forfeited shares are re-issued,
balance of forfeited shares account is added to paid-up capital under
Subscribed Capital in the Notes to Accounts on 'Share Capital'.
ACCOUNTING ENTRIES ON
FORFEITURE OF SHARES
I. FORFEITURE OF SHARES ISSUED AT PAR :
Share Capital a/c (Share forfeited x Called up value per share) Dr
To Forfeited Shares (amount received on forfeited shares till date)
To Share Allotment / Share Call / Calls – in – Arrears a/c (unpaid amount
on shares )
ILLUSTRATIONS : ISSUE OF SHARE CAPITAL
ACCOUNTING ENTRIES ON
FORFEITURE OF SHARES
II. FORFEITURE OF SHARES ISSUED AT PREMIUM :
➢ Where shares are issued at premium are forfeited, two following possibilities exists:
1. Securities Premium amount has been received ; and
2. Securities Premium amount has not been received.
➢ Accounting entries under two situations differ as discussed below:
1. When Securities Premium has been Received : In such cases , amount received as
Securities Premium on shares forfeited is not cancelled.
2. When Securities Premium has not been Received : In such cases , amount credited to
Securities Premium but not received on shares forfeited is debited.
ACCOUNTING ENTRIES ON
FORFEITURE OF SHARES
II. FORFEITURE OF SHARES ISSUED AT PREMIUM :
1. When Securities Premium is Received :
Share Capital a/c Dr ( Amount called up less premium)
To Share Allotment a/c/Share Call a/c / Calls in Arrears a/c (Amount not received on calls /allotment)
To Forfeited Shares a/c (Amount received less premium)
2. When Securities Premium is not Received :
Share Capital a/c Dr (Amount called up less premium)
Securities Premium Reserve a/c Dr (Premium called up but not received)
To Share Allotment a/c/Share Call a/c /Calls in Arrears a/c (Amount not received on calls /allotment)
To Forfeited Shares a/c (Amount received less premium)
ILLLUSTRATION : ISSUE OF SHARE CAPITAL
REISSUE OF FORFEITED SHARES
➢ The directors can either cancel or re-issue the forfeited shares. Forfeited shares may
be reissued as fully paid at a par, premium, discount. In this context, it may be noted
that the amount of discount allowed cannot exceed the amount that had been
received on forfeited shares at the time of initial issue, and that the discount allowed
on reissue of forfeited shares should be debited to the ‘Forfeited Share Account’. The
balance, if any, left in the Share-Forfeited Account relating to reissued Shares, should
be treated as capital profit and transferred to Capital Reserve Account.
➢ Maximum Permissible Discount on Re-issue of forfeited Shares : The discount amount
cannot exceed the amount credited to the forfeited account w.r.t the forfeited
shares. Reissue price cannot be less than the amount not received by the company
on forfeited shares.
CASE 1 : REISSUE AT PAR
REISSUE OF FORFEITED Bank a/c Dr (10 x 10)
To Share Capital a/c (10 x 10)
SHARES
CASE 2 : REISSUE AT PREMIUM
Bank a/c Dr (10 x 12)
JOURNAL ENTRIES To Share Capital a/c (10 x 10)
To Securities Premium Reserve (10 x 2)
CASE 1 : REISSUE AT PAR :
REISSUE OF 1000 SHARES @10 (Par) CASE 3 : REISSUE AT DISCOUNT
Bank a/c Dr (10 x 8)
CASE 2 : REISSUE AT PREMIUM : Forfeited Shares Dr (10 x 2)
REISSUE OF 1000 SHARES @10+2(Premium) To Share Capital a/c (10 x 10)
CASE 2 : REISSUE AT DISCOUNT : TRANSFER BALANCE IN FORFEITED ACCOUNT
REISSUE OF 1000 SHARES @8(Discount -₹2) Forfeited Shares Dr
To Capital Reserve a/c
(being gain on re-issue of shares t/fd to CR)
REISSUE OF FORFEITED SHARES
➢ Transfer of Balance in Forfeited Shares :
▪ When forfeited shares are re-issued, one of the following two situations arise :
1. All Forfeited shares are reissued ; or
2. A portion of forfeited shares are reissued.
▪ Where all forfeited shares are reissued , the entire amount left in Forfeited
account ( balance left after adjusting discount on reissue of shares) are
transferred to Capital Reserve a/c.
REISSUE OF FORFEITED SHARES
➢ Transfer of Balance in Forfeited Shares :
▪ Where some of the forfeited shares are reissued, gain on reissued shares are
only transferred to Capital Reserve. The amount on forfeited shares not
reissued remains in Forfeited account and is shown in Balance sheet in the
Notes to Accounts on Share Capital.
▪ Gain on reissue of forfeited shares is calculated as follows :
Total Amount Forfeited
No. Of Shares Forfeited x No. Of share reissued Discount on Forfeited shares reissued
REISSUE OF FORFEITED SHARES
ILLUSTRATION : ISSUE OF SHARE CAPITAL
➢ PREFERENTIAL ALLOTMENT : Preferential allotment means allotment of
shares at predetermined price to the pre-identified people who are interested
to take strategic stake in the company such as the promoters, venture
capitalists, financial institutions, buyers of company’s products or its suppliers.
The company needs to pass a special resolution in the meeting of
shareholders before proceeding with preferential allotment.
PREFERENTIAL ALLOTMENT
➢ Any offer of securities to selected group of persons by a company (other than
public offer), is done by issuing private placement offer is known as the Private
Placement of Shares.
➢ Accounting entries under private placement same as issue of shares to public.
EMPLOYEES STOCK OPTION
SCHEME (ESOP)
➢ An option granted by the company to its employees and employee directors to
subscribe the share at price that is lower than the market price, ie., the fair
value. The employees are at a liberty to exercise the option or not.
➢ It is a category of Sweat Equity (However, Sweat equity also includes issue of
shares to promoters as remuneration for incorporating company or for their
services).
EMPLOYEES STOCK OPTION
SCHEME (ESOP)
➢ A company can issue stock options fulfilling the following conditions:
1. These shares are of the same class of shares already issued;
2. Authorised by special resolution passed by the company;
3. The resolution should specify the number of shares issued, the current market price,
consideration (if any), the class or classes of directors or employees to whom the equity
shares are to be issued.
4. Not less than one year has, at the date of issue, elapsed since the date on which the
company had commenced business; and
5. These shares are issued in accordance with SEBI guidelines, if the shares are listed.
