A Strategic Guide to Mastering

Accounting for Share Capital: A

Comprehensive Report for T.S. Grewal's
Textbook

Executive Summary

This report provides a meticulous, expert-level guide to the Accounting for Share Capital
chapter from T.S. Grewal's Double Entry Book Keeping Accounting for Companies textbook. It
is a strategic resource designed to alleviate the overwhelming nature of the chapter's
extensive problem sets by distilling the content into its most critical components. The analysis
presented here is based on a comprehensive review of theoretical principles, common
practical errors, and the latest examination trends. The report is structured to build a strong
conceptual foundation, highlight key points of application, and provide a curated selection of
the most challenging and frequently tested problems from the textbook and recent board
exams. The information contained herein is intended to serve as a definitive roadmap for
achieving mastery of this essential subject area.

Part I: Foundational Concepts & Critical Theory

Understanding the fundamental concepts of corporate structure and capital is a prerequisite

for solving complex numerical problems. This section provides a detailed breakdown of these
foundational principles.

1. Introduction to Company Accounts

A company, or a joint-stock company, is a legally created artificial person with an existence
separate from its owners, the shareholders.1 This legal distinction grants it the capacity to own
property, enter into contracts, and sue or be sued in its own name.1 One of the most
significant characteristics of a company is its perpetual existence, meaning its continuity is
not affected by the death, insolvency, or lunacy of its members.1 Furthermore, the liability of a
company's shareholders is limited to the unpaid amount on the shares they hold, a key feature
that distinguishes it from a partnership.2 The accounting methods and rules for a company are
governed by the Companies Act, 2013, which stands in contrast to partnership firms, which
are governed by the Partnership Act of 1932.3 This legal framework is the underlying reason
for the specific, and sometimes complex, accounting treatments that are explored in this
chapter. The adherence to the Companies Act is not merely a procedural requirement but a
mechanism to protect the interests of shareholders and creditors by ensuring transparency
and stability.

2. Kinds of Share Capital

A company's share capital is not a single, monolithic figure but is categorized into a
hierarchical structure that is crucial for proper financial reporting, particularly in the Notes to
Accounts of the Balance Sheet. The primary types of share capital are:
●​ Authorised Capital: The maximum amount of share capital that a company is legally
authorized to issue to the public. It is the upper limit for the company's capital raising
activities.4
●​ Issued Capital: The portion of the authorized capital that the company has offered to
the public for subscription. It represents the value of shares that the company has put
into circulation.4
●​ Subscribed Capital: The part of the issued capital that has been subscribed for by the
public. It is the capital that shareholders have committed to buying. This figure is of
particular importance as it is the basis for calculating the final share capital balance in
the company's financial statements. Importantly, Calls-in-Arrears are deducted from the
subscribed capital, while the balance of Forfeited Shares is added to it for presentation in
the Balance Sheet.4
●​ Called-up Capital: The amount per share that the company has formally demanded
from its shareholders.
●​ Paid-up Capital: The actual amount that shareholders have paid to the company in
response to calls.

Properly identifying and accounting for each category is essential for preparing accurate
financial statements that comply with the Companies Act, 2013.5
3. The Securities Premium Account

When a company issues shares at a price higher than their nominal (par) value, the excess
amount received is credited to a separate account known as the Securities Premium Account.7
This account is not a revenue account but a statutory capital reserve. The amount
accumulated in this account is a result of a direct capital raise from shareholders and is legally
restricted from being distributed as dividends to shareholders.7

The Companies Act, 2013, provides a list of specific, permissible uses for the balance in the
Securities Premium Account.8 These include:
1.​ Issuing fully paid bonus shares to existing members.
2.​ Writing off preliminary expenses incurred during the company's formation.
3.​ Writing off expenses or commission paid on the issue of shares or debentures.
4.​ Providing for the premium payable on the redemption of redeemable preference shares
or debentures.
5.​ Financing the buyback of the company’s own shares.

The legal limitations on the use of this account are a protective measure. By preventing the
use of premium for operational expenses or dividend distribution, the law ensures that a
company's capital base remains stable and solid, safeguarding the interests of both creditors
and investors.

Part II: The Mechanics of Journalising & Common Pitfalls

This section focuses on the practical application of accounting principles through journal
entries and addresses specific areas where students frequently make errors.

4. Step-by-Step Journal Entries for Share Issue

The process of issuing shares is recorded in a series of journal entries corresponding to the
different stages of payment: application, allotment, and calls.
1.​ On Application:
○​ Money Received:
 ■​ Bank A/c Dr.
■​ To Share Application A/c
○​ Money Transferred to Capital:
■​ Share Application A/c Dr.
■​ To Share Capital A/c 5
2.​ On Allotment:
○​ Money Due:
■​ Share Allotment A/c Dr.
■​ To Share Capital A/c
■​ To Securities Premium A/c (if issued at a premium) 5
○​ Money Received:
■​ Bank A/c Dr.
■​ To Share Allotment A/c 5
3.​ On First, Second, and Final Calls:
○​ Money Due:
■​ Share First Call A/c Dr.
■​ To Share Capital A/c
○​ Money Received:
■​ Bank A/c Dr.
■​ To Share First Call A/c 5

This sequential debit and credit process accurately reflects the flow of money and the change
in liability. The "Due" entry establishes a receivable from the shareholder, which is a key
component of accrual accounting, while the "Received" entry records the settlement of that
receivable through a cash inflow.

5. Navigating Common Mistakes: Critical Points to Remember

The most significant errors often arise not from a lack of knowledge but from failing to apply
specific nuances in accounting treatment.

The Distinction Between Underwriter's Commission and Expenses

A common point of confusion arises from the terms underwriter's commission and
underwriting expenses. While both are costs associated with issuing shares, they are not
interchangeable. Underwriting expenses is a general term for a wide range of costs, including
legal fees, accounting fees, and due diligence.13

Underwriting commission, on the other hand, is a specific fee paid to an underwriter who
guarantees the subscription of a certain number of shares.14 This distinction is crucial
because the Companies Act, 2013, allows for the

commission paid on the issue of shares to be written off against the Securities Premium
Account.8 This is a unique and specific accounting treatment that is not applicable to general
expenses. Therefore, using the precise term,

underwriter's commission, is necessary for correct journal entries and for leveraging the
statutory benefits of the Securities Premium Account.

Treatment of Securities Premium

A common misconception is that the Securities Premium Account should be debited in the
cashbook when premium is received. This is a fundamental misunderstanding of accounting
records. The cashbook is a subsidiary book that only records cash and bank transactions. The
premium amount, being a capital reserve, is credited to the Securities Premium Account in the
general journal at the time the allotment money is due.5 When the cash is received, the

Bank A/c is debited in the cashbook, and the Share Allotment A/c is credited in the journal to
clear the receivable. The premium itself is not a direct cash transaction to be recorded in the
cashbook. The user's observation of Securities Premium being debited likely pertains to the
complex scenario of share forfeiture where the premium due but not received is reversed by a
debit entry.4

Calls-in-Arrears and Calls-in-Advance

Calls-in-Arrears represents the amount of money that has been called up by the company but
has not been paid by the shareholders.2 This amount is considered a receivable from the
shareholders and is shown in the

Notes to Accounts as a deduction from the Subscribed Capital.4

Calls-in-Advance, conversely, is the amount received from shareholders before the company
has officially made the call.2 It represents a liability to the company and is a distinct account
that must be properly handled to ensure the correct calculation of capital.

The Challenge of Oversubscription and Pro-Rata Allotment

Oversubscription occurs when the number of shares applied for exceeds the number of
shares issued.10 The most complex scenario is

pro-rata allotment, where the excess application money is adjusted towards the amount due
on allotment and subsequent calls.4 To accurately manage this, a methodical working table is
indispensable. This table, which tracks applications, shares allotted, and the movement of
money from application to allotment and calls, eliminates the risk of calculation errors.

Table 1: Pro-Rata Allotment Working Table

Categor Applica Money Shares Money Money Money Money

y tions Receive Allotted to to to Calls Refund
Receive d ($) (shares Capital Allotme ($) ed ($)
d ) ($) nt ($)
(shares
)

A Total (Col 2) Allotme (Col 4) (Col 3) (Col 5) Remaini

applicat x App. nt in x App. - (Col - ng
ions in Rate this Rate 4) Allotme Surplus
a categor nt Due
categor y
y

B ... ... ... ... ... ... ...

Total ΣApplic ΣMoney ΣShare ΣMoney ΣMoney ΣMoney ΣMoney

ations Rec'd s to to to Calls Refund
Allotted Capital Allotme ed
nt

The successful application of this table is a hallmark of a robust understanding of the subject,
as it forces a systematic and accurate accounting of funds from initial receipt to final
appropriation.
Part III: Advanced Topics & Problem-Solving Strategies

This section covers the most intricate topics that are guaranteed to appear in board
examinations due to their comprehensive nature.

6. Forfeiture of Shares

The forfeiture of shares is the cancellation of a shareholder's ownership and the confiscation
of money already paid, due to a failure to pay calls.2 The journal entry for forfeiture is one of
the most complex, as it requires the reversal of past transactions while recognizing the
forfeited amount as a gain.

The forfeiture journal entry follows a precise structure:

●​ Share Capital A/c is debited with the amount called up on the forfeited shares.5
●​ Securities Premium A/c is debited only if the premium on the forfeited shares has not
been received. If the premium has already been received, it cannot be canceled and is
therefore not debited.4 This distinction is critical and is a common point of examination.
●​ Share Forfeiture A/c is credited with the amount of money already received from the
shareholder.4
●​ Calls-in-Arrears A/c is credited with the total unpaid amount on the shares.

7. Reissue of Forfeited Shares

Reissue is the process of selling the forfeited shares to a new shareholder. The amount of
discount on reissue is legally restricted and cannot exceed the amount that was forfeited on
those specific shares.16 This rule is in place to ensure that the company does not lose money
on the combined forfeiture and reissue transaction.

The final, and mandatory, step after the reissue is the transfer of the balance in the Share
Forfeiture Account to the Capital Reserve Account.4 The amount transferred is the surplus
from the forfeited shares after deducting any discount allowed on their reissue. This transfer
is necessary because the gain from forfeited shares is a capital gain, and as per accounting
principles, all realized capital gains must be transferred to a capital reserve.

Table 2: Summary of Journal Entries for Forfeiture & Reissue

Scenario Accounts to Debit Accounts to Credit Rationale & Amount

Forfeiture (at Par) Share Capital A/c Share Forfeiture Capital called up is
A/c, reversed; amount
Calls-in-Arrears A/c received is
credited; amount
unpaid is credited.

Forfeiture Share Capital A/c, Share Forfeiture Capital called up is

(Premium Not Securities Premium A/c, reversed; premium
Rec'd) A/c Calls-in-Arrears A/c due but not
received is
reversed; amount
received is
credited.

Forfeiture Share Capital A/c Share Forfeiture Capital called up is

(Premium A/c, reversed; premium
Received) Calls-in-Arrears A/c is not touched as it
has been received;
amount received is
credited.

Reissue at Bank A/c, Share Share Capital A/c Cash received;

Discount Forfeiture A/c discount is borne
by the forfeited
shares account;
Share Capital A/c is
credited with the
"paid-up" value.

Reissue at Bank A/c Share Capital A/c, Cash received;

Premium Securities Premium Share Capital A/c is
A/c credited with the
"paid-up" value,
and the excess is
credited to
 Securities Premium.

Capital Reserve Share Forfeiture Capital Reserve A/c Surplus on reissued

Transfer A/c shares is
transferred as a
capital gain.

8. Issue of Shares for Consideration Other than Cash

This is a distinct problem type where shares are issued to a vendor or promoter to pay for
assets or services instead of for cash.4 The journal entries for this are straightforward:
●​ For Purchase of Asset:
○​ Asset A/c Dr.
○​ To Vendor's A/c
●​ For Issuing Shares to Vendor:
○​ Vendor's A/c Dr. (with the purchase consideration)
○​ To Share Capital A/c (with the nominal value of shares)
○​ To Securities Premium A/c (if issued at a premium) 4

The number of shares to be issued is calculated by dividing the purchase consideration by the
issue price per share.

Part IV: Curated Practice Questions & Board Exam Focus

This section provides a highly focused list of problems that test the most important and
challenging concepts.

9. Hardest and Most Frequently Asked Questions from T.S. Grewal

The following is a curated list of problems that are particularly important for thorough
preparation, as they often combine multiple concepts and require a strong understanding of
the principles outlined in this report.19

Table 3: Curated Problem List from T.S. Grewal

Question Type Question Numbers Key Concepts Tested

Illustrations 2, 6, 8, 14, 16, 17, 18, 22, 23, Oversubscription, Pro-rata

26, 27, 28, 32, 33, 35, 37, 39, Allotment, Forfeiture,
43, 47, 49, 50, 52, 57, 61, 63 Reissue, Calls-in-Arrears,
Forfeiture of Premium
shares, Issue other than
cash.

Exercise Problems 34, 35, 40, 42, 43, 44, 46, Oversubscription, Pro-rata
55, 57, 58, 63, 67, 69, 72, 76, Allotment, Forfeiture,
83, 85, 86, 92, 102, 109, 110 Reissue, Calls-in-Arrears,
Forfeiture of Premium
shares, Balance Sheet
Presentation.

Solution to a Key Problem: T.S. Grewal Q. 109

Question 109 is a recurring and highly important problem that tests the complete
understanding of share issue, forfeiture, and the final balance sheet presentation. The
question typically involves an issue of shares with calls-in-arrears, followed by forfeiture and
the requirement to prepare the Share Capital section of the Balance Sheet and Notes to
Accounts.20

A full solution to a problem of this type requires a systematic approach:

1.​ Pass all relevant journal entries for the issue of shares, including the receipt of
application, allotment, and call money.
2.​ Record the non-payment by debiting Calls-in-Arrears A/c.
3.​ Pass the journal entry for the forfeiture of shares, debiting Share Capital A/c with the
called-up amount and crediting Calls-in-Arrears A/c and Share Forfeiture A/c.
4.​ Prepare the Notes to Accounts. This is the most crucial step, as it requires a breakdown
of Authorised, Issued, and Subscribed Capital. The Subscribed Capital must be shown
Subscribed and Fully Paid-up and Subscribed but Not Fully Paid-up. Forfeited Shares are
added to the paid-up value, while Calls-in-Arrears are deducted from the called-up
value.5
5.​ Finally, present the Share Capital figure on the Balance Sheet using the total from the
Notes to Accounts.6
A thorough understanding of this problem demonstrates a complete grasp of the entire
chapter's concepts.

10. Solutions to Key Board Exam Questions

Board exam questions often combine the most challenging concepts into a single,
comprehensive problem.17 For example, a single question may involve an oversubscription with
a pro-rata allotment, followed by the forfeiture of shares from a defaulter, and the subsequent
reissue of a portion of those shares.

Example from CBSE 2023:

A question involving Pushkar Limited 17 tested pro-rata allotment, immediate forfeiture after
allotment (a tricky timing point), and journal entries for all stages of the transaction. The
problem's complexity lies in calculating the exact amount of allotment money due but not
received from the defaulting shareholder, which requires first determining the number of
shares allotted to them under the pro-rata scheme.
Example from CBSE 2025 Sample Paper:
A question on Pali Limited 22 requires calculating the
Capital Reserve after the forfeiture and reissue of shares. This type of multiple-choice
question tests the final outcome of the entire process, where a student must correctly
calculate the forfeited amount and then apply the discount on reissue to determine the final
gain. The question on Sapphire Ltd. 22 further tests the ability to present the

Share Capital in the Balance Sheet with accompanying Notes to Accounts, a format that is
consistently tested in board examinations.

Conclusions and Recommendations

The Accounting for Share Capital chapter is a cornerstone of Class 12 Accountancy and a
critical component of board examinations. Based on the analysis, the following conclusions
and recommendations are provided:
1.​ Prioritize Conceptual Understanding: The distinction between similar-sounding terms
(e.g., commission vs. expenses) and the precise treatment of accounts (e.g., Securities
Premium) are rooted in legal provisions. A deeper understanding of the Companies Act,
2013, is essential for avoiding common errors.
2.​ Master the Working Table: The pro-rata allotment working table is the single most
 important tool for solving complex oversubscription problems. A student's ability to
create and use this table accurately is a strong predictor of success in these questions.
3.​ Systematic Problem-Solving: Board exam questions are often long and multi-step. A
systematic approach—starting with journal entries, moving to notes, and then to the final
balance sheet—is far more effective than attempting to solve the problem in a single,
unorganized pass.
4.​ Focus on Curated Problems: Given the vast number of problems in the textbook,
prioritizing the curated list of questions from Part IV will allow for a highly efficient and
effective study strategy. These problems are designed to test the most challenging and
frequently examined concepts, ensuring that a student is well-prepared for any
permutation of questions they may encounter.

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