The accounting of share capital—that is, the financial operations about the issuing, forfeiture, and administration of company shares—is fundamental in corporate finance. This process of accounting for share capital provides a clear view of the ownership structure and financial situation of the business at any point in time. This helps to monitor who owns what and at what value in the company.
Meaning of Share Capital
Share capital refers to the amount of money a company raises by issuing shares to investors. Share capital forms the financial basis of a company. In other words, share capital is the part of a company’s equity that comes from selling shares to shareholders for cash. Share capital is important as it funds a company’s operations and activities and can be used to purchase assets or settle liabilities.
Kinds of Share Capital
Authorized Share Capital
Authorized share capital is the highest amount of money a company can raise by issuing shares, as mentioned in its founding documents. This is the total amount a company is permitted to collect from the public by issuing shares. The founding documents of a company set a specific limit for the authorized share capital.
Issued Share Capital
Issued share capital is the sum of money a company has raised by issuing shares to shareholders. It’s important to know that a company doesn’t have to issue all of its registered capital at once. This type of share capital is part of the authorized shareholders’ capital that the company has issued.
Unissued Share Capital
Unissued capital refers to the portion of a firm’s total capital that has yet to be allocated to shareholders. Put another way, it is the difference between the firm’s total capital and the capital that has been issued. This unissued share capital is generally held in treasury.
Subscribed Share Capital
This term refers to the portion of a company’s issued capital that investors have agreed to buy or that shareholders have committed to taking up. These are the shares that shareholders have promised to purchase. A company’s authorized share capital is the same as its registered capital. A part of the issued capital is called subscribed capital.
Called-up Share Capital
Called-up capital refers to the sum of money that a company’s shareholders have to pay for their shares, but they haven’t paid the amount yet. This is an important part of a company’s financial planning because it helps make sure that money is available when the company needs it to run its business and grow. It is part of the subscribed capital, which the company can ask for or buy back.
Paid-up Share Capital
This refers to the actual amount of money received by a company from its members. However, if some members have not made payments to the amounts requested, the unpaid monies will be considered as calls in arrears. This is the investment made to the company from the issuance and sale of shares to members. The Companies Act 2013 requires Rs. 1 lakh as the minimum paid-up capital in the company.
Reserve Share Capital
Reserve capital is a portion of the uncalled capital that a company sets aside. It is only used when the company needs to close down or sell off its assets. This is done to make sure the company has extra money available during the liquidation process. Reserve capital refers to share capital that a company can only access if it goes bankrupt.
Classification of Shares
Shares show ownership in a company and are how companies get money from public or private investors. Shares are mainly divided into Equity Shares and Preference Shares, each with its own special features and benefits for the people who own them.
- Equity shares, referred to as common stock, are the most frequent type of shares issued by any company. These equity shares represent ownership of a portion of the company and provide the shareholder the right to vote on specific matters. Equity shareholders can vote on important matters related to the company such as the election of members of the board of directors, the approval of mergers, and constitutional changes to the company.
- Preference Shares also referred to as preferred stock, represent a more specialized type of share class that extends holders several advantages concerning dividend payments and outcomes related to company liquidation. But, preference shareholders usually don’t have voting rights. They receive a set amount of dividends, which makes them a more stable investment than regular shares. This dividend must be paid to preference shareholders before any dividends are paid to regular shareholders.
Importance of Accounting for Share Capital
- Transparency: It makes sure that the company presents a clear image of its capital structure and shareholder equity.
- Legal Compliance: It ensures corporate compliance with laws.
- Financial Reporting: Provides accurate information for financial statements, such as the amount of capital raised and the status of share transactions.
- Dividend Payout: Aids in calculating and paying dividends based on whether shares are common or preferred.
- Fundraising: helps inform decisions to raise capital through issuing shares or generating funds for company expansion.
- Investor Trust: Gives investors a clear view of the company’s financial status and ownership details.
- Share Forfeiture and Reissue: Manages the tracking of shares that are forfeited and reissued, ensuring proper accounting practices are followed.
Issue and Treatment of Shares
Companies can issue shares to the public and investors to raise money. These shares are issued transparently and accounted for as follows:
Issuing Shares
There are several ways in which a company can issue its shares. They are mentioned below:
- Public Issue (IPO/FPO): Issue of shares to the general public in the first time (IPO) or as fresh issues (FPO).
- Private Placement: Issue of shares to a group of selected parties. It is not accessed in NSE or BSE.
- Rights Issue: Issue of shares to the existing shareholders at a fixed discount.
- Bonus Issue: Additional shares issued to shareholders without any cost.
Accounting Treatment of Share Capital
When a company issues shares, the transactions are recorded as follows:
At Par (Face Value): When shares are issued at their nominal or face value, the proceeds are credited to the Share Capital Account.
Journal Entry:
Bank A/c Dr. xxx
To Share Capital A/c xxx
At Premium: If shares are issued at a price above face value, the excess amount (premium) is credited to the Securities Premium Account as well as the Share Capital Account.
Journal Entry:
Bank A/c Dr. xxx
To Share Capital A/cTo Securities Premium A/c xxx
At Discount: Issue of share at a price that is less than the face value per share. Normally, shares are not issued at a discount, except for some special reasons like sweat equity shares.Â
Calls in Arrears: If shareholders fail to pay the full amount of their shares, then the calls unpaid are termed as calls in arrears.
Forfeiture & Reissue: When the calls are made, and amounts are not paid up, then the shares can be forfeited and reissued. The amount which was not collected during the call or calls is reversed, and the forfeited shares are taken up for reissue at a fully paid rate.Â
Conclusion
For commerce students, understanding how to account for share capital is important because it requires a systematic way of recording the sale, cancellation, and reissue of shares. Accounting for share capital is a critical component in the management of a company’s financial affairs, enabling the company to have an efficient tracking of funds it receives from its investors and to maintain a proper relationship in raising capital to meet its ongoing commitments to its shareholders.
Accounting for Share Capital FAQs
1. What is the Issuance of Shares?
Issuing shares refers to the process by which a company offers ownership in the form of equity shares to investors. By purchasing shares, investors become part-owners of the company and, in return, can receive dividends based on the company’s profits. Issuing shares is a key way for companies to raise capital without taking on debt.
2. How shares can be issued?
Shares can be issued in several ways, depending on the company’s needs and the legal framework under which it operates.
Public Issue (IPO & FPO): Shares can be issued to the general public.
Private Placement: Shares can be issued privately.
Rights Issue: Shares can be issued when existing shareholders are offered additional shares at a discount.
Bonus Issue: Shares can be issued for free as a reward to existing shareholders.
3. What is the difference between the issued at par, issued at premium, and issued at discount?
Issued at Par: The shares are sold at their original (face) value.
Issued at Premium: The shares are sold for more than their original value. This excess amount is to be credited to the Securities Premium A/c.
Issued at Discount: The shares are issued at a price that is less than their nominal value. Normally, this is prohibited, although it is permissible to issue shares under certain circumstances, such as a sweat equity issue.
