Accounting for share capital

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  • *Accounting For Share CapitalM. C. SharmaAssociate Professor, Deptt. Of CommerceShaheed Bhagat Singh Evening College(University of Delhi)DelhiEmail:m_c_sharma@yahoo.comProf. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • Meaning and Definition of A CompanyAccording to Section 2(20) of the Companies Act 2013:

    Company means a company incorporated under the Act (of 2013) or under any previous company law.According to Chief Justice Marshal (USA):

    A company is a person artificial, intangible and existing only in the eyes of law. Being a creature of law, it possesses only those properties which the charter of its creation confers on it either expressly or incidental to its very existence. It has no physical existence but exists only in contemplation of law.Prof. M. C. Sharma M: 9717415641*

    Prof. M. C. Sharma M: 9717415641

  • Kinds of CompaniesCompany limited by guarantee [Section 2(21)]Company limited by shares [Section 2(21)]Unlimited Company [Section 2(92)]Private Company [Section 2(68)]Public Company [Section 2(71)]Government CompanyForeign CompanyCompanies with Charitable objectsOne person company (OPC)Holding and Subsidiary CompanyStatutory Companies

    Prof. M. C. Sharma M: 9717415641*

    Prof. M. C. Sharma M: 9717415641

  • *Shares Meaning and TypesWhat is a share?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.

    Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • Types of SharesPreference SharesEquity Shares:

    Equity shares issued by a Company limited by shares to public or its members [Section 43]Sweat Equity Shares [Section 2(68)]Prof. M. C. Sharma M: 9717415641*

    Prof. M. C. Sharma M: 9717415641

  • Types of Shares (Contd.)Preference SharesPreference shares are those shares which carry the following preferential rights: the right to receive divided at a specified rate before any dividend is paid on the equity shares, and the right to repayment of capital before anything is paid to equity shareholders. Prof. M. C. Sharma M: 9717415641*

    Prof. M. C. Sharma M: 9717415641

  • Equity Shares issued by a Company limited by shares to public or its members [Section 43]Section 43 states that an equity share is a share which is not a preference share. The main features of equity shares are:No preferential right as to payment of dividend and refund of capital.No assurance of dividend.Right to participate in the management of the company through voting right.Equity shareholders are the last claimants to their capital contribution in the event of winding up.Such shares cannot be issued at a discount.Prof. M. C. Sharma M: 9717415641*

    Prof. M. C. Sharma M: 9717415641

  • Sweat Equity ShareAccording to Section 2(88), sweat equity shares are those equity shares which are issued by a company to its directors or employees at a discount or for a consideration other that cash, for providing their know-how or making available rights in the nature of intellectual property rights or value addition by whatever name called.

    Prof. M. C. Sharma M: 9717415641*

    Prof. M. C. Sharma M: 9717415641

  • *Share CapitalMeaning and FormsAuthorised Share CapitalIssued CapitalSubscribed CapitalCalled-up CapitalPaid-up Capital

    = Called-up Capital Calls in arrearsReserve Capital or Reserve Liability of Limited Company (Omitted in the Companies Act, 2013)

    Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • Minimum SubscriptionA company cannot allot any security to the public unless the minimum subscription stated in the prospectus, has been subscribed or raised. The minimum subscription is the amount which in the opinion of the board of directors, must be raised by the issue of shares so that the company has necessary funds to carry out its objects.

    Prof. M. C. Sharma M: 9717415641*

    Prof. M. C. Sharma M: 9717415641

  • *Terms of Issue of SharesFace Value or Nominal Value:

    Nominal value of shares mentioned in the Memorandum of Association of the Company.Issue Price : The price at which shares are issued by the company.Issue at Par

    Issue Price = Face ValueIssue at Premium

    Issue Price > Face ValueIssue at Discount (only for Sweat Equity Shares)

    Issue Price < Face Value

    Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *Subscription of Public Issue of SharesFull Subscription

    No. of Shares Applied = No. of Shares issued/offeredUnder Subscription

    No. of Shares Applied < No. of Shares issued/offeredOver Subscription

    No. of Shares Applied > No. of Shares issued/offeredProf. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *Issue of Shares for Cash at Par a case of full subscription1. For receiving application moneyBank A/c Dr. To Eq./Pref. Share Application A/c (Being application money received on... Shares @ Rs. per share)2. On allotment for transferring application money to share capital account Eq./Pref. Share Application A/c Dr. To Eq./Pref. Share Capital A/c (Being application money transferred to share capital A/c)Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *3. On allotment-for making due allotment money Eq./Pref. Share Allotment A/c Dr. To Eq./Pref. Share Capital A/c (Being allotment money made due on ... share @ Rs. ..per share)4. For receiving allotment moneyBank A/cDr. To Eq./Pref. Share Allotment A/c (Being allotment money received) Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *5. For making due call money Eq./Pref. Share .......... Call A/c Dr.To Eq./Pref. Share Capital A/c (Being call money made due on... Share @ Rs... per share)6. For receiving call moneyBank A/c Dr.To Eq./Pref. Share .......... Call A/c (Being call money received)Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *Notes: If type of share is specified, equity share or preference share - then various accounts should be named accordingly, like Equity Share Capital A/c, Equity Share Application A/c, Equity Share Allotment A/c and so on.When there is only one call, it should be named as Final Call. When there are two or more calls, these should be named as First Call, Second Call and so on. The last call is named as Final Call. When first call is final call, then it may be named as Share First & Final Call A/c.

    Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • * Issue of Shares at Premium(i) When premium has been called on application

    the application money will consist of capital and premium. The amount received as premium should be credited to Security Premium Account. On allotment application money will be transferred accordingly:Share Application A/c Dr. To Share Capital A/c To Securities Premium A/c (Being application money transferred to share capital and security premium A/c)Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *Issue of Shares at Premium(ii) If the premium is called along with allotment money, then entry for making due allotment money will be:Share Allotment A/c Dr. To Share Capital A/c To Securities Premium A/c (Being allotment money, including premium made due)Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *Issue of Shares at Premium(iii) If the premium is demanded along with call money, the entry for making due call money will be:Share Call A/c Dr. To Share Capital A/c To Securities Premium A/c(Being call money including premium made due) Note:Normally, it is mentioned in the question as to when premium is receivable - on application or on allotment or on calls. In the absence of any information, it is assumed that the premium is due along with allotment money.Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *Issue of Shares at Discount** Only for issue of Sweat Equity SharesThe amount of discount is recorded at the time of allotment, therefore the following entries should be passed for making allotment money due: Share Allotment A/c Dr. Discount on Issue of Shares A/c Dr. To Share Capital A/c (Being amount made due on allotment and adjusted discount) Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *When issue is under-subscribedIf the issue is under-subscribed, it may be assumed that minimum subscription has been received and the shares are allotted to all the applicants in full.Entries will be passed for actual number of shares applied and allotted.

    Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *When issue is over-subscribed(1) First alternative-Rejecting excess applications. Under this alternative, excess applications are out rightly rejected and their application money is refunded. Following entry is passed to refund the excess application money:Share Application A/c Dr. To Bank A/c (Being excess application returned on rejected applications)Prof. M. C. Sharma M: 9717415641

    Prof. M. C. Sharma M: 9717415641

  • *When issue is ove