Chapter accounting-for-share-capital: Accounting for Share Capital | Summary

Companies are classified on the basis of liability of members into three types: companies limited by shares (liability limited to unpaid share amount), companies limited by guarantee (liability limited to guaranteed contribution on winding up), and unlimited companies (no limit on liability, rare in India). On the basis of number of members, companies are classified as public companies, private companies, and One Person Companies (OPC).

A private company restricts share transfers, limits membership to 200 (excluding employees), and must have at least 2 members. An OPC, defined under Section 2(62) of Companies Act 2013, has only one member who must be an Indian citizen residing in India. Its paid-up capital cannot exceed Rs. 50 Lakhs and average annual turnover of three years must not exceed Rs. 2 Crores.

From an accounting perspective, the share capital of a company is categorised as: Authorised Capital (maximum capital a company is authorised to raise as per its Memorandum of Association, also called Nominal or Registered Capital); Issued Capital (portion of authorised capital offered for public subscription); Subscribed Capital (portion of issued capital actually subscribed by the public); Called-up Capital (portion of subscribed capital which the company has demanded shareholders to pay); and Paid-up Capital (portion of called-up capital actually received from shareholders).

Additionally, Uncalled Capital is the portion of subscribed capital not yet called up, and Reserve Capital is the portion of uncalled capital reserved to be called only during winding up. The relationship is hierarchical: Authorised > Issued > Subscribed > Called-up > Paid-up. Paid-up capital equals called-up capital minus calls in arrears. The balance sheet Note to Accounts must show all these categories separately.

Shares represent the fractional units into which the total share capital of a company is divided. They form the basis of ownership interest. As per the Companies Act, a company can issue two types of shares: preference shares and equity shares. The number and classes of shares are stated in the Memorandum and Articles of Association respectively.

Preference shares carry a preferential right to dividend (at a fixed amount or rate) before equity shareholders, and a preferential right to return of capital on winding up. They can be participating or non-participating, cumulative or non-cumulative, and redeemable or irredeemable. Equity shares do not enjoy these preferential rights; their dividend is not fixed and varies with available profits. Equity shares may carry voting rights or differential rights as per the Articles of Association.

The issue of shares for cash follows a prescribed procedure: issuing prospectus, receipt of applications (deposited with a scheduled bank), and allotment of shares after minimum subscription (at least 90% of issued amount per SEBI guidelines) is received within 120 days. If minimum subscription is not received within 130 days, the application money must be refunded. Journal entries are passed at each stage: application, allotment, and calls. Application money is initially credited to Share Application Account and later transferred to Share Capital Account.

Shares can be issued at par (issue price equals nominal value), at premium (issue price exceeds nominal value, the excess credited to Securities Premium Reserve Account), or at discount (only in specific cases like reissue of forfeited shares and sweat equity shares). Shares can also be issued for consideration other than cash, where the number of shares issued equals Amount Payable divided by Issue Price. The accounting treatment for both equity and preference shares follows the same pattern, differentiated only by the prefix 'Equity' or 'Preference'.

Calls in Arrears refers to the amount due but unpaid by shareholders on allotment or calls. Interest on calls in arrears not exceeding 10% p.a. may be charged as per Table F. Calls in Advance refers to amounts paid by shareholders before the call is made; it is a liability of the company, shown under current liabilities, and interest up to 12% p.a. must be paid on it as per Table F.

Over subscription occurs when applications for more shares are received than offered; directors may accept some in full and reject others, make pro-rata allotment, or combine both approaches. Under subscription is when fewer shares are applied for than offered; allotment is confirmed for actual applications received, provided minimum subscription is met. In pro-rata allotment, excess application money is adjusted against allotment dues, and any further excess may be credited to Calls in Advance or refunded.

Forfeiture of shares means cancelling the allotment of shares due to non-payment of calls, treating the amount already received as forfeited. The accounting entry debits Share Capital Account with the called-up amount and credits Share Forfeiture Account (with amount received) and the relevant unpaid call accounts. When shares are issued at premium, the Securities Premium Account is debited only if the premium has not been received; if premium was already received, it is not reversed on forfeiture.

Forfeited shares can be reissued at par, premium, or discount. The discount on reissue cannot exceed the amount in the Share Forfeiture Account for those shares. On reissue, Bank Account is debited (with amount received), Share Forfeiture Account is debited (with discount allowed), and Share Capital Account is credited (with full called-up value). The balance in Share Forfeiture Account relating to reissued shares, after adjusting the discount, is transferred to Capital Reserve Account. If only some forfeited shares are reissued, only the proportionate balance is transferred to Capital Reserve.

This chapter establishes the foundational accounting framework for share capital in a company. The key takeaway is that share capital is collected in stages—application, allotment, and calls—and each stage has specific journal entries. Concepts like calls in arrears, calls in advance, over subscription, securities premium, and forfeiture are all interlinked, and students must understand the logical flow from one stage to the next. The final transfer of profit on reissue of forfeited shares to Capital Reserve is a critical culminating concept.

For board examinations, this chapter is of the highest importance as it typically carries 12–16 marks in numerical problems. Students should thoroughly practise journal entries for over subscription with pro-rata allotment, forfeiture of shares issued at premium where premium has or has not been received, and calculation of Capital Reserve on reissue of forfeited shares. Accuracy in working notes, particularly for calculating excess application money, calls in arrears, and proportionate capital reserve, is essential for scoring full marks.