1. Companies — Features, Types and Share Capital
Meaning and Key Features of a Company
A company is an artificial person created by law with a separate legal existence from its members. Key features:
- Separate legal entity: Can own property, sue and be sued in its own name.
- Limited liability: Shareholders' liability is limited to the unpaid amount on their shares.
- Perpetual succession: Existence is not affected by the death or departure of members.
- Transferability of shares: Shares can be transferred freely (especially in public companies).
- Common seal: The official signature of a company on documents.
Types of Share Capital
| Type | Definition |
|---|---|
| Authorised (Registered/Nominal) Capital | Maximum capital a company is authorised to raise as per its Memorandum of Association. Upper limit — cannot be exceeded without amendment. |
| Issued Capital | Part of authorised capital which is offered to the public for subscription. Issued ≤ Authorised. |
| Subscribed Capital | Part of issued capital that has been applied for and allotted to applicants. Subscribed ≤ Issued. |
| Called-up Capital | Part of subscribed capital that has been called (demanded) by the company from shareholders. |
| Paid-up Capital | Part of called-up capital actually paid by shareholders. Paid-up = Called-up − Calls in Arrear. |
| Reserve Capital | Part of uncalled capital reserved for use only in winding up. Can only be called if company is being wound up. |
Types of Shares
| Feature | Equity Shares | Preference Shares |
|---|---|---|
| Dividend | Variable; depends on profits | Fixed rate; priority over equity |
| Repayment on winding up | After preference shares | Priority over equity |
| Voting rights | Yes — full voting rights | Limited/restricted voting rights |
| Convertibility | No | May be convertible into equity |
2. Issue of Shares — The Process
Shares are issued in stages. The company calls for money in instalments:
| Stage | Description | Account Credited |
|---|---|---|
| Application | Public applies and pays application money with Share Application form | Share Application A/c |
| Allotment | Company allots shares and calls for allotment money; application money transferred to Share Capital | Share Allotment A/c; Securities Premium (if any) |
| First Call | Company calls for first instalment after allotment | Share First Call A/c |
| Final Call | Last instalment called — completes issue price | Share Final Call A/c |
3. Journal Entries — Issue of Shares at Par (Full Subscription)
Scenario: A company issues 10,000 shares of ₹10 each at par, payable: Application ₹3; Allotment ₹4; First Call ₹2; Final Call ₹1.
| Journal Entry | Dr. ₹ | Cr. ₹ |
|---|---|---|
| On receiving application money: Bank A/c Dr To Share Application A/c |
30,000 | 30,000 |
| On allotment (transferring application money to Share Capital): Share Application A/c Dr To Share Capital A/c |
30,000 | 30,000 |
| On making allotment due: Share Allotment A/c Dr To Share Capital A/c |
40,000 | 40,000 |
| On receiving allotment money: Bank A/c Dr To Share Allotment A/c |
40,000 | 40,000 |
| On making first call due: Share First Call A/c Dr To Share Capital A/c |
20,000 | 20,000 |
| On receiving first call money: Bank A/c Dr To Share First Call A/c |
20,000 | 20,000 |
| On making final call due: Share Final Call A/c Dr To Share Capital A/c |
10,000 | 10,000 |
| On receiving final call money: Bank A/c Dr To Share Final Call A/c |
10,000 | 10,000 |
Total Share Capital raised = ₹1,00,000 (10,000 × ₹10) ✓
4. Issue of Shares at Premium
When shares are issued at a price above their face (nominal) value, the excess is called Securities Premium (formerly Securities Premium Reserve). As per the Companies Act 2013, the Securities Premium account is credited — not Share Capital.
Key rule: Securities Premium = Issue Price − Face Value.
It is recorded at allotment (most commonly) but may also be split across application.
Uses of Securities Premium (Section 52, Companies Act 2013):
- Issue of fully paid bonus shares.
- Writing off preliminary expenses of the company.
- Writing off discount/loss on issue of debentures.
- Buying back own shares (premium on buy-back).
- Paying premium on redemption of preference shares or debentures.
Journal Entry — Allotment at Premium
Scenario: 5,000 shares of ₹100 each issued at ₹120 (₹20 premium). Application ₹40 (including ₹20 premium); Allotment ₹50; First & Final Call ₹30.
| Journal Entry | Dr. ₹ | Cr. ₹ |
|---|---|---|
| Application received (₹40 × 5,000): Bank A/c Dr To Share Application A/c |
2,00,000 | 2,00,000 |
| Transfer on allotment (₹20 face + ₹20 premium per share × 5,000): Share Application A/c Dr To Share Capital A/c (₹20 × 5,000) To Securities Premium (₹20 × 5,000) |
2,00,000 | 1,00,000 1,00,000 |
| Allotment made due (₹50 × 5,000): Share Allotment A/c Dr To Share Capital A/c |
2,50,000 | 2,50,000 |
| Allotment money received: Bank A/c Dr To Share Allotment A/c |
2,50,000 | 2,50,000 |
| First & Final Call (₹30 × 5,000): Share First & Final Call A/c Dr To Share Capital A/c |
1,50,000 | 1,50,000 |
| Call money received: Bank A/c Dr To Share First & Final Call A/c |
1,50,000 | 1,50,000 |
Total Share Capital = ₹5,00,000; Securities Premium = ₹1,00,000; Total raised = ₹6,00,000 ✓
5. Over-Subscription and Pro-Rata Allotment
Over-subscription occurs when applications received exceed shares offered. The company must decide how to handle the excess applications. Three methods:
| Method | Treatment |
|---|---|
| Rejection of excess | All excess applications rejected outright; full application money refunded |
| Pro-rata allotment | Shares allotted proportionally. Excess application money adjusted towards allotment due; any remaining excess refunded |
| Partial rejection + pro-rata | Some applications fully rejected (refunded); remaining applications get pro-rata allotment |
Journal Entry — Over-Subscription with Refund
Scenario: 10,000 shares offered; 15,000 applied (₹3 application each). Pro-rata allotment. Excess money of ₹15,000 (5,000 shares × ₹3) refunded at allotment.
| Journal Entry | Dr. ₹ | Cr. ₹ |
|---|---|---|
| Application received (15,000 × ₹3): Bank A/c Dr To Share Application A/c |
45,000 | 45,000 |
| On allotment — transfer application of allotted shares to SC; refund rest: Share Application A/c Dr To Share Capital A/c (10,000 × ₹3) To Bank A/c (5,000 × ₹3 refunded) |
45,000 | 30,000 15,000 |
6. Calls in Arrears and Calls in Advance
Calls in Arrears
When a shareholder fails to pay a call amount due, the unpaid amount is Calls in Arrears. It is a current asset (debtor) in the Balance Sheet.
| Journal Entry | Dr. | Cr. |
|---|---|---|
| On call made but partial receipt: Bank A/c Dr (amount received) Calls in Arrears A/c Dr (amount not paid) To Share Call A/c |
XX XX |
XX |
Note: Interest on calls in arrears is excluded from the CBSE Class 12 syllabus — no need to calculate interest.
Calls in Advance
When a shareholder pays a future call before it is due, the amount is Calls in Advance. It is shown as a current liability in the Balance Sheet (not part of Share Capital) until the call is actually made.
| Journal Entry | Dr. | Cr. |
|---|---|---|
| On receipt of advance money: Bank A/c Dr To Calls in Advance A/c |
XX | XX |
| When that call becomes due: Calls in Advance A/c Dr To Share Call A/c |
XX | XX |
7. Forfeiture of Shares
Forfeiture is the cancellation of a share due to non-payment of calls. The forfeited shareholder loses all money paid and all rights. The forfeited shares become the property of the company and can be re-issued.
Journal Entry — Forfeiture of Shares
Rule: Debit Share Capital with the called-up amount per share (face value of calls made); Credit Share Forfeiture A/c with the amount actually received; the difference (calls not paid) goes to Calls in Arrears if separate, or is simply the balancing figure.
Scenario: 100 shares of ₹10 each issued at par. Calls made: Application ₹3, Allotment ₹4, First Call ₹3. A shareholder did not pay the first call of ₹3 × 100 = ₹300. Shares forfeited.
| Journal Entry | Dr. ₹ | Cr. ₹ |
|---|---|---|
| Share Capital A/c Dr (100 × ₹10 called up) Calls in Arrears A/c (100 × ₹3 unpaid first call) To Share Forfeiture A/c (100 × ₹7 received) |
1,000 —— |
300 700 |
Note: Share Capital is debited with the called-up amount (₹10 per share = ₹3 app + ₹4 allot + ₹3 call = ₹10). Share Forfeiture is credited with money received (₹7 per share). Calls in Arrears is credited with unpaid amount (₹3 per share).
Forfeiture of Shares Issued at Premium
Important rule: If premium has already been received — Securities Premium A/c is NOT debited on forfeiture. Only if premium has not been received — debit Securities Premium A/c.
8. Re-issue of Forfeited Shares
Forfeited shares can be re-issued at any price, but the total amount received from the original shareholder plus the re-issue price must be at least equal to the face value.
Minimum re-issue price = Face Value − Amount received on forfeiture (per share)
Journal Entry — Re-issue of Forfeited Shares
Continuing the above scenario: 100 forfeited shares re-issued at ₹8 each (₹7 was received on forfeiture; minimum re-issue = ₹10 − ₹7 = ₹3; ₹8 ≥ ₹3 ✓)
| Journal Entry | Dr. ₹ | Cr. ₹ |
|---|---|---|
| On re-issue (at ₹8 per share): Bank A/c Dr (100 × ₹8) Share Forfeiture A/c Dr (discount on re-issue: 100 × ₹2) To Share Capital A/c (100 × ₹10) |
800 200 |
1,000 |
| Transfer balance of Share Forfeiture to Capital Reserve: Share Forfeiture A/c Dr To Capital Reserve A/c |
500 | 500 |
Capital Reserve Calculation
Capital Reserve = Share Forfeiture balance after re-issue.
Share Forfeiture A/c: Credited ₹700 (on forfeiture) − Debited ₹200 (discount on re-issue) = ₹500 transferred to Capital Reserve.
Verification: Capital Reserve per share = Amount received on forfeiture − Discount allowed on re-issue = ₹7 − ₹2 = ₹5 per share × 100 = ₹500 ✓
9. Issue of Shares for Consideration Other Than Cash & ESOP
Issue for Consideration Other Than Cash
When a company issues shares in exchange for assets, services, or in settlement of liabilities (no cash changes hands):
| Scenario | Journal Entry |
|---|---|
| Purchase of assets against shares | Sundry Assets A/c Dr To Share Capital A/c To Securities Premium (if issued at premium) |
| Purchase of a business (taking over net assets) | Individual Assets A/c Dr (each asset) Goodwill A/c Dr (if purchase consideration > net assets) To Individual Liabilities A/c To Vendor/Sundry A/c (purchase consideration) Then: Vendor A/c Dr → To Share Capital + Premium |
ESOP (Employee Stock Option Plan) and Sweat Equity
- ESOP: Company grants employees the option to buy shares at a predetermined price at a future date. Accounting involves crediting Employee Stock Option Outstanding A/c at the time of granting and transferring to Share Capital + Securities Premium when options are exercised.
- Sweat Equity: Shares issued to employees/directors at a discount or for non-cash consideration (e.g., intellectual property, know-how). Treatment: Debit relevant asset/expense account; Credit Share Capital + Securities Premium (or debit Discount on Issue which is written off).
- Note: For CBSE Class 12, detailed accounting treatment of ESOP and Sweat Equity is conceptual — know definitions and distinguish from ordinary shares.
10. Disclosure of Share Capital in the Balance Sheet
As per Schedule III of the Companies Act 2013, Share Capital is shown under Shareholders' Funds in the Balance Sheet:
| Particulars | ₹ |
|---|---|
| Share Capital | |
| Authorised: __ equity shares of ₹__ each | XX |
| Issued: __ equity shares of ₹__ each | XX |
| Subscribed and Called-up: __ shares of ₹__ each | XX |
| Less: Calls in Arrears | (XX) |
| Paid-up Capital | XX |
| Add: Calls in Advance (shown separately under Current Liabilities) | — |
Securities Premium is shown under Reserves and Surplus (not under Share Capital).
Capital Reserve is also shown under Reserves and Surplus.
