Unit 1-Accounting for Share Capital (3).pptx

Issue of shares at par means issue of share at face value. It means that the total amount collected for each share is equal to the nominal value or face value of shares.

1. CORPORATE ACCOUNTING – I Unit – I Accounting for Share Capital

2. MEANING OF COMPANY 2 Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession. The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws.

3. Formation of a Company 3 Promotion - Promoter Incorporation – Registration - incorporated or getting reg. under Cos. Act,1956 (currently Cos. Act 2013). Documents to be prepared and filed with registrar of companies: Memorandum of Association, Articles of Association, A Statement of Nominal Capital, List of Directors, Notice of Registered office, A statutory declaration with regard to incorporation have been duly complied with(Auditor or Director), Payment of Fees. Certificate of Incorporation. Issue of Prospectus – For Capital Subscription. Minimum Subscription – amount raised by issue of shares to meet certain expenditures like purchasing Fixed assets, preliminary expenses, Commission on issue of shares and debentures, amount for repaying any loan, working capital, and for any other expenses.

4. 4 Minimum Subscription : Based on the issue of prospectus, the sale of shares process starts and application money starts pouring in. Shares are allotted on minimum subscription within 120 days. Certificate of Commencement of Business: Public limited co. can start business on receipt of Certificate of Commencement of Business. For this, the directors have to submit a copy of prospectus, name, address and shares allotted to each share holders and a statutory declaration that all rules and regulations have been complied with. On this basis Registrar will issue certificate of commencement of business.

5. Definition of Shares Capital of a company is divided into units or parts of equal amount. Every unit/part is called a share. According to Section 2(84) of the Companies Act, a ‘share’ means a share in the share capital of a company and includes stock. It is an ownership security. 5

6. Types of Share Capital 1. Authorized Shares Capital It is the maximum capital which can be issued at any time in future to the public. The capital is to be mentioned in the capital, with which a joint stock company is registered. 2. Issued Share Capital It is the part of the Authorized shar e capital, which is offered to the pub l ic for subscription. 3. Subscribed Shares Capital It is a part of the issued capital which is actually taken up or subscribed by the public. 4. Called up share Capital It is a part of subscribed share capital, which is actually called up to pay the shareholders by means of calls or otherwise. 6

7. Types of Share Capital – Conti… 5. Paid up Share Capital It is a part of called up capital, which is actually paid by the shareholders. 6.Reserve Capital It is the capital which is not called up by the company and company has decided not to call the uncalled capital, except in case of winding up of the company. 7

8. Minimum Subscription Section [39(1)] It is the amount stated in the prospectus as the minimum amount that must be subscribed. Unless the sum payable on application for the sum so stated (minimum subscription) has been paid to and received by the company by Cheque or other instrument, security cannot be allotted. Sec.39 (2) of the Companies Act, 2013 pro v ides that amount payable on a p plication on every security shall not be les s than 5% of the nominal amount of the security or such other % or amount as may be specified by SEBI. If the minimum amount is not subscribed and the sum payable on application is not received within 30 days from the date of issue of prospectus or such other period as may be specified by SEBI. 8

9. Types of Subscription 9 Types of Subscription From the point of view of Number of shares Par Subscription Over Subscription From the point of view of Price of each share At par At discount At premium Under Subscription

10. Under the first category the company will allot full 10,000 shares to the applicants. Under the second category the company will allot only 8,000 shares to the applicants. Under the third category the company will allot only 10,000 shares although the company had received application for 12,000 shares. Now what about the excess share money (2,000) shares. 1) From the point of view of Number of shares 10 Offered Shares Applied Shares Type of Subscription 10,000 10,000 Par Subscription 10,000 8,000 Under Subscription 10,000 12,000 Over Subscription

11. The company can utilize the excess share money in the following three ways which are as follows: Reject or refund the excess share money (2,000) to the applicants. Transfer the excess share money (2,000) to the next stage. Transfer some part of share money to next stage and some part share money should be refunded. Examples: 11 Applied Allotted Excess Shares Refund 12,000 10,000 2,000 2,000 Applied Allotted Excess Shares Transfer to next Stage 12,000 10,000 2,000 2,000 Applied Allotted Excess Shares Refund Transfer to next Stage 1,000 Nil 1,000 1,000 -- 11,000 10,000 1,000 -- 1,000

12. 2) From the point of view of Price of each share Generally the price of each share is ₹10 or ₹50 or ₹100. The Face Value of each share is the original value those shares. Where as this a Payable Value of each share which shareholder has to pay. Therefore depending upon the payable value of each share we can divide the share into three categories. They are shown here : 12 Category Face Value Payable value Status 1 10 10 At par 2 10 9 At discount 3 10 12 At premium

13. Stages of Share Value/Price The Company allows the shareholders to pay total share value on their holdings in different stages which is shown below with an example: For example, if the payable value of each share is ₹ 10 payable as follows:(when shares issued at par) 13 On Application ₹.2 per share On Allotment ₹.5 per share On First Call ₹.2 per share On Final Call ₹.1 per share Total ₹.10 per share

14. Issue of Shares 14 ISSUE OF SHARES For immediate full consideration Non cash consideration For Acquisition of assets To vendors of Business To promoters for services rendered by them Cash consideration For consideration receivable in installments(Calls) Receiving application for shares Allotment of shares Calls of shaares Issue of shares without any consideration Issue of Bonus shares Through other methods Rights Issue Employee stock option scheme Sweat Equity Private Placements

15. [A] Non cash Consideration A company can issue shares for purchase of an asset or for purchase of business or as remuneration to promoters of the company. (i) Entry for acquisition of assets: Assets A/c Dr. To share capital A/c (Being allotment of shares in consideration of the purchase of fixed assets) (ii) Issue of Shares to Vendors of business: Sundry Assets A/c Dr. Goodwill A/c To Sundry Liabilities A/c To Vendor’s A/c To Capital Reserve a/c (Being business purchased) Vendor’s A/c Dr. To Share Capital A/c (Being shares issued to vendor at par) Vendor’s A/c Dr. To Share Capital A/c To Security Premium A/c (Being shares issued to Vendor at premium) Issue of shares at discount - Cannot be issued as per The Companies Act, 2013. (iii) For issue of shares to promoters, as a remuneration of their services: Goodwill A/c Dr. To Share Capital A/c (Being shares issued to promoters) 15

16. [A] Cash Consideration Shares issued at Premium of ₹.2 Shares issued at Discount of ₹.1 16 When Shares issued at Discount or Premium: Generally, in the question it self it will be mentioned that in which stage the amount of discount or premium should be taken. But if it is not mentioned, then the amount of discount or premium will be taken on Allotment stage. On Application ₹.3 On Allotment ₹.6(including ₹.2 on premium) On First Call ₹.1 On Final Call ₹.2 Total ₹.12(₹.10+2) On Application ₹.2 On Allotment ₹. 4 (including discount of ₹.1) On First Call ₹.1 On Final Call ₹.2 Total ₹.9(10-1)

17. A) On receipt of application money: Share Application A/c Dr. To Share Capital A/c Bank A/c Dr. To Share Application A/c (Being share application money received) (Being share application transferred to Share capital) B) On Allotment Money due and received: Share Allotment A/c Dr. To Share Capital A/c (Being Share allotment money due). Bank A/c Dr. To Share Allotment A/c. (Being Share allotment money received) C) Share First & Final Call amount due and received: Share first and final call a/c Dr. To Share Capital a/c Bank A/c Dr. To share first & final Call a/c (being First call money received). 17 Journal Entries

18. 18 If we see carefully to the journal entries, on each stage two entries are to be passed. one is the receipt entry and other is for transferring to capital a/c. In the first stage we receive money on applied shares & then on the second stage for allotment of shares for the applied shareholders & on the third stage the entry will be for the first call and second or final call money. On each stages, we first pass the first entry for money due & then for the receipt money. Points to be noted:

19. Utilisation of Securities Premium Reserve According to Sec. 52(2) of the Companies Act, 2013 restricts the use of the amounts received as premium on securities for the following purpose: Issuing fully-paid bonus shares to the members; Writing off preliminary expenses, discount on issue of shares or Debentures, underwriting commission or expenses on issue; Paying premium on redemption of any redeemable Preference shares or Debentures. In purchasing its own shares (buy-back) 19

20. If premium is paid with application money. Then the following entry will be passed: Share Application A/c Dr. To Share Capital A/c To Securities Premium A/c If premium is paid with allotment money. Then the following entry will be passed: Share Allotment A/c Dr. To Share Capital A/c To Securities Premium A/c 20 Journal Entry for Security Premium

21. Over Subscription of Shares When applications received exceed the number invited, those shares are said to be over-subscribed. It also means that the company received more application money than what they originally invited. If the excess amount is refunded to applicants Share Application A/c Dr. To Bank A/c If the excess amount is adjusted to Allotment Share Application A/c Dr. To Share Allotment A/c 21

22. When one or more shareholders fail to pay the amount due from them towards allotment or calls, Such dues are called as “Calls-in-Arrears”. Usually the accounts of allotment and calls debited with the amount due and credited with the actual amount received , the balance in these accounts represents the amount in arrears . If the accounts are to be closed before such arrears are settled, a separate account is opened, called ‘Calls-in-arrears account’ to transfer the amount due on all the calls. Journal Entry Calls-in-arrears a/c To Share Allotment a/c To Share 1 st call a/c To Share 2 nd Call a/c [Being transfer of amounts due on all the calls] “Calls-in-arrear” is a Nominal a/c in nature because it is a loss to the company when any shareholder is unable to pay his due amount on any stage. Therefore it should be Debited in the journal entry. The directors of a company may forfeit shares on which there are calls-in-arrears, after giving due notice. CALLS-IN-ARREARS

23. Continued… If the company has adopted Table F of Companies Act 2013 as its articles provide for it, 5% P.a. interest can be charged on calls-in-arrears from the date the amount was due till the date of the amount is collected. Journal Entry Bank a/c Dr. To Interest on Calls-in-arrears a/c [Being interest collected on calls-in-arrears] 23

24. When a company accepts money from the shareholders against the calls not yet made, the amount received in advance is known as ‘Calls-in-Advance’. It may also happen in case of partial or pro rata allotment of shares when the company retains excess amount received on application of shares. Calls-in-advance may be generated in two ways: If the shareholder paid cash towards calls not yet made at the time of allotment or later date and If the company may transfer excess application money of pro-rata allotees on allotment and calls-in-advance. Journal Entry Bank a/c Dr. To Calls-in-advance a/c [Being the amount received in advance towards calls not yet made] Share application a/c Dr. To Calls-in-advance a/c [Being transfer of excess application money towards calls-in-advance] 24 CALLS-IN-ADVANCE

25. Continued…. The following journal entry is passed on the due date of each call: Calls-in-advance a/c To Share Call a/c [Being adjustment of calls-in-advance towards call] The Company pays interest at the rate stated in its Articles of Association. In the absence of the interest clause in the Articles of Association, provisions of Table F of the Companies Act, 2013 shall apply and the company is liable to pay interest @ 12% p.a. on Calls-in-Advance. Journal Entry for Interest Payment: Interest on calls-in-advance a/c To Bank a/c [Being payment of interest on calls-in- advance] The amount received that is not yet due is a liability of the company. It is shown in the Equity and Liabilities part of the Balance Sheet under the head Current Liabilities and sub-head Other Current Liabilities. 25

26. Sometimes some shareholders were not able to pay on their share holdings on certain stage. Then after giving proper notice to the shareholder, the company has full right to cancel their holdings. In other words, the termination of membership and taking away of the shares of a shareholder because of default in the payment of allotment and/or call money is called ‘Forfeiture of shares’. When shares are forfeited, 1.ceases to be a member, 2. name is removed from the register of members of the company, 3. Forfeited shares becomes the property of the company and the amount already collected on them is gain to the company. FORFEITURE OF SHARES

27. a) Forfeiture of Shares issued at par: Share Capital A/c (Amt. called on forfeited shares) Dr. To Share Allotment A/c (Arrears on Allotment) To Share ….. Call A/c (Arrears on calls) To Share Forfeited A/c (Amount received) (Being ….. shares forfeited due to non-payment of allotment and call money) b) Forfeiture of Shares originally issued at premium: If share premium is not received: Share Capital A/c ( Amt. called up, less premium ) Dr. Security Premium A/c ( Premium called but not received ) Dr. To Share Allotment A/c ( Arrears on allotment ) To Share Call A/c ( Arrears on call ) To Share Forfeiture A/c ( Amt. received, excluding premium ) (Being shares forfeited due to non-payment of allotment and call money including premium) c) Shares originally issued at discount: Share Capital A/c (Amt. called on forfeited shares) Dr. To Discount on issue of Shares A/c (for cancelling discount) To Share ….. Call A/c (Arrears on calls) To Share Forfeited A/c (Amount received) (Being ….. shares forfeited due to non-payment of allotment and call money) 27 JOURNAL ENTRIES FOR FORFEITURE OF SHARES

28. Effect of Prorata Allotment When an issue of shares is over subscribed highly, pro-rata allotment may be made by the company. Share holders may receive allotment of a portion of shares they have applied for. The company may transfer their excess application money towards the amount due on allotment or even calls. Such transfer of the excess application money affects the unpaid calls. The exact amount to be forfeited has to be computed carefully, particularly when some pro-rata allottees fail to pay the allotment money. 28

29. Return of shares to the company by the share holders by themselves is called Surrender of shares. The return does not involve any payment by the company. Surrender of shares take place in two situations: A share holder may not be able to pay the calls on shares after receiving allotment. He may return the shares to the company voluntarily for cancellation. In fact, surrender of shares is a shortcut for ‘forfeiture of shares’ without involving the lengthy legal procedure of such forfeiture. Surrendered shares can be reissued by the company like the forfeited shares. Shareholders may surrender a part of their holdings to the company as a part of capital reduction scheme. In this case, a separate a/c is opened called ‘Surrender of shares a/c’. The shares surrendered may be reissued or cancelled and transferred to capital reduction account. SURRENDER OF SHARES

30. 30 THANKS! Any questions?