B.

9.2
1 Clhapt-to
0.4

1.5
Accounting for Share Capital
growing
Sole proprietorship and partnership forms of business organisations could not meet themanagerial
demands of avery big business, because of their limitations such as limited capital, limited
2.7
ability, unlimited liability and other drawbacks. Therefore, a Company form of business organisation
came into existence to do away with the defects of sole proprietorship and partnership forms of business
organisations.
ACompany is a voluntary association of persons formed through the process of law, for the purpose
of carrying on some business.

Definitions :
Lord Justice Lindley defines a Company as follows, "It is an association of persons who contribute
money or money's worth to a common stock and employ it for some common purpose.
ACompany is an artificial person created by law, having separate entity with a perpetual
succession and a common seal'". - Prof. Haney

Characteristics or Features of a Company :

Following are the essential characteristics of aCompany :
(1)Separate Legal Entity : ACompany is alegal person and its entity is quite distinct and separate
from its members. It can purchase and sell the properties in its own name, can open bank account in its
own name and can enter into contracts. Sincea Company has a legal personality distinct from that of itS
members, acreditor of such a Company can sue only the Company for his debts and not any of its
members.
(2) Perpetual Existence : The existence of a Company is not affected by the retirement, death,
lunacy or insolvency of its members. Shareholders may come and Shareholders may go but the
Company goes on for ever, unless wound up according to Companies Act.
(3) Limited Liability : The liability of the shareholder of aCompany is limited to the unpaid value
of his shares. For example, if the face value ofa share in a Company is 10 and a shareholder has
already paid R8per share, he can be called upon to pay not more than 2 per share.
(4) Common Seal : ACompany may or may not maintain acommon seal. If it has acommon seal,
it is affixed to all the important documents of the Company.
(5) Transferability of Shares : The Capital ofthe Company is divided into parts, called shares.
These shares are freely transferabie except in case of private companies.
 1.2 ACCOUNTING FOR SHARE CAPITAL

(6) Separation of Management from Ownership: Shareholders are the true owners of a
Company, but usually, the number of shareholders is quite large, and as such it is neither possible nor
desirable for each member to take pat in the day-to-day management of the Company. Therefore, the
Company is managed by a 'Board of Directors' elected by the shareholders. t

Kinds of a Company
Companies registered under the Companies Act, 2013, may be classified as below :
Joint Stock Company

Unlimited Company - Company Limited Company Limited

by Guarantee by Shares

(i) Private Company (ii) Public Company (iii) One Person Company (OPC)
Unlimited Company : As per Section 2 (92) of the
acompany where there is no Companies Act, 2013, Unlimited Company is
limit on the liability of its members.
and the It means, whena company
be used company's property
to meet the claims of
is not sufficient to pay off its
debts, the private property of its
suffers loss
members
creditors. the risk involved in such companies is too
found in India even though permitted As will
by the Companies Act. high, these are not (i
Company Limited by
such a company, the liabilityGuarantee: As per Section 2 (21) of the
of the members is limited Companies Act, 2013, in case of fo
to the
the company. The liability of extent of the guarantee given by them in
the event of the winding up of C
winding up of the company. its member will arise only in the
event of [S
Company
a company, the Limited by Shares : As per Section 2
(22) of the Companies Act, 2013, in
liability of the members is strictly limited
held by each of them. to the extent of the nominal case of such
If a member has already value of shares
to pay any amount. If a paid the full amount of the
member has partly paid shares, he can be forced to shares, he will not be liable
during the existénce of the pay the remaining
company as well as during the
sub-divided into private, public and one person winding up. Such companies may amount
companies : be
()) Private Company :
As per Section 2 (68) of the
of Association Companies Act, 2013, a private company is one
() restricts the right to
which by its Articles
transfer its shares;
(iî) limits the number of its
(iii) prohibits any members to two hundred (exclusive of past and
invitation to the public to present employees);
of the company. subscribe for any securities i.e. shares or debentures
The nane of every private
company must end with the words 'Private
(ii) Public Company : Limited'.
As per Section 2 (71) of
a private company. theCompanies Act, 2013, a public company means a company
which is not
the E
type:
 1.3
ACCOUNTING FOR SHARE CAPITAL

DISTINCTION BETWEEN PRIVATE COMPANY

AND PUBLIC COMPANY
nor
the Basis of Distinction Privute Conmpay Public Copany
1. Nunmber of Minimum number ofmembers is 2, and the Minimum number of members is 7 and
members maximum, exclusive of past and present there is no limit to maximum number.
employees, is 200.
public to subscribe to its
Invitation to It cannot invite the public to subscribe to It can invite the
its shares. shares.
the public
restriction on the transfer of its
Transfer of There is restriction on the trànsfer of its There is no
shares. shares.
Shares
is not mandatory.
Preparation of Preparation ofArticles is mandatory for all Preparation of Articles not registered, the
Articles private companies. In case the Articles are
provisions of Table F of Schedule I given
in Companies Act 2013 shall apply.
It must have at least three directors.
5. Number of It must have at least two directors.
DPC) Directors
Only the word Limited' is used at the end
sany is 6 Use of word It is compulsory to use the words 'Private
Limited' at the end of its name. of its name.
rs loss Limited
rs will
(iii) One Person Company OR OPC :
to the existing list i.e., apart from
Meaning: Companies Act 2013 introduces a new type oftheentity
are not

enables formation of a new entity One-person

forming a public or private limited company, the Act Company with only one person as its member
case of
Company' (OPC). An OPC means a private limited
applicable on OPC:
hem in
[Section 2 (62)]. Following rules are can
vent of
Member of OPC : Only a natural person who is an Indian Citizen and resident in India
(1) in India'" means a person who has stayed in
be a member of OPC. The term, *Resident
immediately preceding one calendar year.
of such India for a period not less than 182 days
shares OPC.
: liable (2) One person can form only one
not exceed 750 Lakhs.
Imount (3) Its paid up share capital should Crores.
three years should not exceed 2
aay be (4) Its average annual turnover of cannot
Companies (incorporation) rules 2014, an OPC
(5) Purpose : As per Rule 3 (5) of the In other words, it can be formed for business purpose
be formed for Charitable purposes.
only. unless a period
Articles itself into public or private companymandatory
(6) Conversion : An OPC cannot convert of its incorporation and conversion is when
of 2 years has expired from the date annual turnover
beyond 50 Lakh or its average
the paid-up share capital is increasedCrore.
22
oyees); during the relevant period exceeds
entures Benefits : statements.
Cash Flow Statement in its financial
() OPC is not required to include Meeting, quorum for
provisions relating to calling of AGM, Notice for General
(ii) The OPC.
meetings, Proxies etc. shall not apply to solving
relating to issue of shares have been discussed in detail. But before
Inthis chapter, problems meaning of share,
h is not
questions relating to issue of shares, it is necessary to understand the
the practical their issue.
types of shares and the method of
 1.4

Shares : ACCOUNTING FOR SHARE CAPITAL

Meaning of Shares : Total Capital of the Company is
Each such unit is called 'share. divided
into 5,00,000 units of T10 each, For example, if the total capital of theintoCompany
units of small
denominations.
is 50,00,000, divided
each unit of T10 will be called a
Case the Company has 5,00,000 share (of 10 each). Thus in the above
identified. shares of 10 each. Shares must be
numbered so that they may be
Nature of Shares: The shares of a
provided by the of Association ofCompany are
the Company.movable
under the Sales ofArticles
Goods Act, 1930. These can be Shares property,
transferable in the manner
of a Company are
Types of Shares : Under bought. sold, hypothecated and treated as goods
of shares: Section 43 of the Companies Act, 2013, a bequeathed.
(1)Preference Shares Company may issue two types
(2) Equity Shares
(1)Preference
) They have Shares: Preference Shares are those
a right to
receive which carry the following two
equity shares. dividend at a fixed rate before any rights :
() When the dividend is paid on the
company wound up, they have a right to the
equity shares.
is
In addition to the
return of capital before that of
above, the preference shares may
participate in excess profits carry some more rights such as
receive a premium at the timewhen a specified
of redemption. dividend has been paid on the equity shares or the right to
the right to
Types of Preference Shares:
()) Cumulative
holders of which arePreference Shares : Cumulative preference
entitled recover the arrears of
to shares are those preference shares, the
on equity shares. This means that preference dividend, before
profits of the company areany dividend is paid
if in any year, the
dividend on these shares, the dividend
dividend has not been paid for the years keeps on accumulating until it is fully paid.insuficient to pay
shares and the company wants to ending31st March 2021 and 2022 on 8% For example, if
2023, a total of 24%
dividend (for
distribute dividend on equity shares for the yearcumulative preference
first paid on preference shares the years ending 31st March 2021, 2022 and ending 31st March
dividend on these shares are shown before the payment of any dividend to 2023) will have to be
and in the balance sheet as a equity shares. The arrears of
Commitments'
otherwise.
. In India, a
As per Section 47 of the
Commitment under
preference share is always cumulative unless Contingent Liabilities
in arrears for a period of 2
years
Companies Act, 2013, in case, the dividend onspecificaly
or more, holders of such these
mentioned
every resolution at any meeting of shares
shares will be entitled to take part andremains
(ii) shareholders. vote on
dividend Non-cumulative
out of the profits Preference
of each year.Shares: The holders of such shares get a
If no dividend is fixed
shareholders get nothing, nor can they declared in any year due to any amount of
case, the dividend on these shares claim unpaid dividend of any year in reason, such
any
remains in arrears for a period of 2 years or subsequent year. In
shares will be entitled to take part and more, holders of such
vote on every resolution at any
(iüi) Participating Preference meeting of the shareholders.
Shares
carry a right to participate in the surplus : Such shares, in addition to the fixed
to equity shareholders. profits, any, after dividend at a
if preference dividend,
Similarly, the event of winding up, if after paying
in stipulated rate has been paid
back both the preference
ACCOUNTING FOR SHARE CAPITAL 1.5

and equity shareholders, there is still some surplus left, such shareholders are entitled to receive a
pre-determined proportion of surplus.
() Non-participating Preference Shares : Such shares get only a fixed rate of dividend every
year and do not carry a right to participate in the surplus profits or in any surplus on winding up. Unless
expressly provided, the preference shares are usually non-participating.
(v) Redeemable Preference Shares : Such shares are those which will be repaid by the Company
within astipulated period in accordance with the terms of issue and the fulfilment of certain conditions
laid down in Section 55 of theCompanies Act 2013.
(v) Irredeemable Preference Shares : Irredeemable preference shares are those, the capital of
which cannot be refunded before winding up. According to Section 55, no company limited by shares,
shall issue any preference share, which is irredeemable or is redeemable after the expiry of 20 years
from the date of its issue.
(vi) Convertible Preference Shares : Holders of these shares have a right to get their preference
shares converted into equity shares at their option according to the terms of issue.
been
(vii) Non-Convertible Preference Shares : When the holders of preference shares have not
shares are called
conferred the right of getting their preference shares converted into equity shares, such
non-convertible preference shares.
dividends only when profits are
(2) Equity Shares : Equity shares are those shares which are paid
of dividends. In other words, there will
left after the preference shareholders have been paid fixed rate
be no fixed rate of dividend on the equity shares. If in a
particular year, there are no profits or
insufficient profits, the equity shares willreceive nothing. If the Company earns more profits, they get
capital, equity share capital is returned only when
a higher rate of dividend. As regards return of voting rights and control the affairs
preference share capital is returned in full. Equity shareholders have
of the Company.
EQUITY SHARES
DISTINCTION BETWEEN PREFERENCE SHARES AND
Preference Shares Equity Shares
Serial Basis of Distinction
No rate of dividend on equity shares
Rate of Dividend Preference Shares are paid dividend The
is not fixed. It may vary from year to
at a fixed rate.
year depending upon the availability
of profits.
Arrears of dividend In case of equity shares, dividend
If dividend is not paid on these cannot
2. accumulate.
shares in any year, the arrears of
dividend may accumulate.
of dividend on equity
Preferential right as to They have a right to receive dividend Payment of
3 is made after the payment
the payment of dividend before any dividend is paid on equity shares
preference dividend.
shares.
Preferential right as to They have a right to return of capital Equity share capital is paid only
when preference share capital is paid
in the case of windingup, before any out
the payment of capital fully.
capital is returned to equity
shareholders.
Preference Shareholders do not have Equity Shareholders enjoy voting
5.Voting ríghts any voting rights. rights.
They do not have a right to They have full right to participate in
6.Right to participate in management of the Company.
management participate in management of the
Company
 CAPITAL
ACCOUNTING FOR SHARE
1.6
SHARE CAPITAL
raised by a Company by the issue of shares. Many
Capital
Meaning: Share Capital means the varying sums to the
separate
Company's capital yet there is no Account
individuals and institutions contribute
individuals or institutions. There is one Consolidated Capital
Capital Account for each of these
called the Share Capital Account. Capital of a
Capital : The various terms used in connection with the Share
Kinds of Share
company are the following: amount which
Authorised, Registered or Nominal Capital : Authorised Capital re fers to that Company is
() Association. This is the maximum Capital for which
a
Is stated in the Memorandum of
authorised to issue shares during its lifetime. to the
: Issued Capital is that part of Authorised Capital which is actually offered
(2) Issued Capital Authorised Capital is known as the Unissued Capital
public for subscription. The remaining part of the
which can be issued later on.
part of Issued Capital which has been
(3) Subscribed Capital : Subscribed Capital is thateach are offered to the public and the public
subscribed for by the public. If, say, 13,000 shares of 10012,00,000.
applies for 12,000 shares, the Subscribed Capital will be
Subscribed capital is shown in the Balance Sheet under two heads :
(a) Subscribed and fully paid up; and
(b)Subscribed but not fully paid up.
of ashare is called by the
(a) Subscribed and fully paid up:When entire nominal (face) value paid-up' Capital.
company and also paid up by the shareholder, it is said to be 'Subscribed and fully
fully paid-up
(6) Subscribed but not fully paid up : Shares are said to be 'Subscribed but not
under the following two situations:
the shareholder has
(i) When the company has called-up the full nominal value of the share but
not paid some part of the nominal value of the share.
the share.
(i) When the company has not called-up the full nominal value of
which has
(4) Called-up Capital : Called-up Capital means such part of the subscribed capital,
been called by the directors fom shareholders for payment.
each,
For example, if the directors call at the rate of 60 per share on 12,000 shares of R100
7,20,000 will be the called up Capital. The remaining amount of 40 per share will be uncalled
Capital.
(5) Paid-up Capital : The term Paid-up" refers to that portion of called up capital which has
been actually received from the shareholders. Usually the called-up Capital and the paid-up Capital areis
the same except that some shareholders may not have paid the amount of calls. Any unpaid amount
called Calls in arrear'. If a shareholder has paid 5 against the called-up amount of 78, then 75 is
paid-up amount. Paid up Capital will be called up Capital less the amount of calls in arear.
(6) Reserve Capital :As per Section 65 of the Companies Act, 2013, only an unlimited company
having ashare capital while converting into alimited company may have reserve capital. In such acase,
the company by a resolution may
) increase the nominal amount of its share capital by increasing the nominal amount of each
of its shares, and determine that no part of the increased capital shall be called up except in
the event of winding up of the company; or
 ACCOUNTING FOR SHARE CAPITAL 17

(i) provide that aspecified portion of its uncalled share capital shall not be called except in the
event of winding up of the company
In such a case the increased capital in case () or specified portion of uncalled capital in case
() becomes Reserve Capital. It is available only for the creditors on the winding up of the company.

Presentation of Share Capital in Company's Balance Sheet

As per Schedule III of Companies Act, 2013, Share Capital is to be disclosed in a Company's
Balance Sheet in the following manner :
EXTRACT OF BALANCE SHEET OF.
as at

Particulats NoteAmount Amount

No. Current Previous
Year Year

I. EQUITY AND LIABILITIES:

Shareholder's Funds :
(a) Share Capital* ()
(b) Reserves and Surplus
(c) Money received against share warrants
* As per Schedule II disclosure requirements pertaining to Share Capital are to be provided in notes to
accounts.

Notes to Accounts :

(1) Share Capital

Authorised Capital:
Equity Shares of .....each
Preference Shares of .....each
Issued Capital :
Equity Shares of ...each
Preference Shares of .....each
Subscribed Capital :
Subseribed and Fully Paid Capital :
..*... Equity Shares of ..... a.ch
Preference Shares of .....each
(Of the above shares.. Shares are allotted as fully paid-up
pursuant to a contract without payments being received in cash)
Subscribed but not fully paid Capital :
.....
Shares of ....each, . . per share Called-up
Less : Calls in Arrears ....******

Forfeited sbares Account

of Capital profits.
Capital Reserves:Capital reserves are those reserves which are created out business. These
course of the
Capital profits are those profits which are not earned in the normal
 ACCOUNTING POR SHARE CAPITAL. 17
(i) provide that a specified portion of its uncalled share capital shall not be called except in the
event of winding up of the company
In such a case the increased capital in case (i) or specified portion of uncalled capital in case
()becomes Reserve Capital. It is available only for the creditors on the winding up of the company.

Presentation of Share Capital in Company's Balance Sheet

As per Schedule IIl of Companies Act, 2013, Share Capital is to be disclosed in a Company's
Balance Sheet in the following manner:
EXTRACT OF BALANCE SHEET OF.

Particulars. Note Amottnt Anmount

No. CiurentPrevions
Year Year

I. EQUITY AND LIABILITIES :

Shareholder's Funds :
(a) Share Capital* (1)
(b) Reserves and Surplus
(c) Money received against share warrants
* As per Schedule I1I disclosure requirements pertaining to Share Capital are to be provided in notes to
accounts.
Notes to Accounts :

(1) Share Capital

Authorised Capital :
Equity Shares of .......ch
......

Preference Shares of ..... each

Issued Capital :
...Equity Shares of ......ach
Preference Shares of ...... each
Subscribed Capital :
Subseribed and Fully Paid Capital :
Equity Shares of .....each
Preference Shares of ....ach
(0f the above shares.. Shares are allotted as fully paid-up
pursuat to a contract without payments being received in cash)
Subscribed but not fully paid Capital :
Shares of...each, ...per share Called-up ..

Less :Calls in Arrears

Forfeited shares Account

Capital profits.
Capital Reserves ; Capital reserves are those reserves which are created out of business.
of the These
Capital profits are those profits which are not earned in the normal course
 1,7
() provide thata specified portion of its
event of winding upofthe company uncalled share capital shall not be called except in the
ln such a case the increased capital in
) becomes Reserve Capital, It is availablecase () or specified portion of uncalled
only forthe creditorson the winding up of capital in case
the company.
Presentation of Share Capital in Comnpany's Balance Sheet
As per Schedule Il of Companies Act, 2013, Share
Balance Sheet in the following manner : Capital is to be disclosed in a Cormpany's
BXTRACT OF BALANCE SHEET OF.

Particua NoteAmotht Amount

No
CrrentPretoue
Year Yeat

I EQUITY AND LLABILITIES:

Shareholder's Funds:
(o) Share Capital* (1)
(b) Reserves and Surplus ...

(e) Money received against share warrants

*As per Sehedule Il disclosure requirements pertaining to Share Capital are to be provided in notes to
accounts.

Notes to Accounts :

()Share Capital
Authorised Capital :
Equity Shares of ....e.ach
Preference Shares of .....ach
Issued Capital :
Equity Shares of .....e.ach
Preference Shares of .....cach
Subseribed Capital:
Subscribed and Fully Paid Capital :
Equity Shares of .....ach
Preference Shares of . . . . a.ch
(Of the above shares.. Shares are allotted as fully paid-up
pursuant to a contract without paymernts being received in cash)
Subseribed but not fully paid Capital :
. . .Shares of ... each, ......per share Called-up
Less :Calls in Arrears
Forfeited shares Aceount

Capital Reserves : Capital reserves are those reserves which are created out of Capital profits.
Capital profits are those profits which are not earned in the normal course of the business. These
 ACCOUNTING FOR SHARE CAPITAL
1.8
dividends. Following are the items that give rise to
reserves cannot be utilised for the distribution of
Capital profits and hence Capital reserves :
() Gain on sale of property, plant and equipment.
(I) Gain on revaluation of property, plant and equipment.
(I) Premium on issue of shares and debentures.
(IV) Gain on redemption of debentures.
() Profit earned by a company prior to its incorporation.
(VI) Gain on forfeiture and re-issue of shares.
Sheet under the head Reserves
Capital Reserves are shown on the liabilities side of the Balance
and Surplus."
RESERVES
DISTINCTION BETWEEN RESERVE CAPITAL AND CAPITAL
Basis
of Reserve Cupital Capital Reserve
Distinction
which is
1. Meaning and It refers to that portion of uncalled share Capital Reserve is that reserve such as
Creation capital which shall not be called up, created out of Capital profits profit on
except in the event of winding up. profit on sale of fixed assets,
revaluation of fixed assets, premium on
issue of shares and debentures, profit on
redemption of debentures etc. These
profits are not earned in the normal course
of business.
It is not necessary to create Reserve It is necessary to create Capital Reserve,
2 Necessity
Capital. in case of Capital profits.
3 Resolution A resolution is required for its creation. No resolution is required for the creation
of Capital Reserves.
4
Realised or notIt refers to the amount which has not been It refers to the amount which has already
realised received. been received.

5 Disclosure in It is not shown in the Company's balance It is shown as the first item under the
sheet. head, Reserves and Surplus on the
Balance Sheet equity & liabilities side of the balance
sheet.

Time when it It can be used only at the time of winding|It can be used to write off Capital losses
6.
can be used up of the Company. or to declare a share bonus any time
during the life of the Company.
Issue of Shares
Shares may be issued in any of the following ways :
(i) For Cash : By Private Placement of shares
(i) For Cash : By Public Subscription of shares
(iii) For Consideration other than Cash.
) Private Placement of Shares
As per Section 42 of the Companies Act, 2013, a Company may issue shares on private placement
capital through private
basis also. Sometimes the promoters of a public company are confident of raisingsubscribe
sources and contacts. In such a case the Company does not invite the public to for its shares,
 ACCOUNTING FOR SHARE CAPITAL 1.9

of group
but make private placement of shares to promoters, their friends, relatives, shareholders Insurance
companies, Mutual Funds, Non-Resident Indians (NRIs), financial institutions like Life
Corporation of India (LIC), Unit Trust of India (UTI), Industrial Credit and Investment Corporation of
India (ICICI) etc. When the shares are not offered to the public, the Company need not issue a
prospectus. Instead of issuing a prospectus, the promoters are required to prepare a draft prospectus
known as a 'Statement in Lieu of Prospectus' and must file it with the Registrar at least 3 days before
the first allotment of either shares or debentures. The Statement in Lieu of Prospectus shall be signed by
every person who is named therein as a director or proposed director of the Company or by his agent
rves
authorised in writing.
period
In case of private placement of shares, the allottees will not sell their shares for a minimum
of three years from the date of allotment. This period is known as 'lock-in-period'.
Sweat Equity Shares:
Sweat equity shares means equity shares issued by the Company to its employees or directors ata
know-how or making available intellectual
discount or for consideration other than cash for providing
issue sweat
property rights. According to Section 54 of the Companies Act 2013, a Company maynamely:
equity shares of aclass of shares already issued, if the following conditions are fulfilled,
() the issue of sweat equity shares is authorised by a special resolution passed by the Company
in general meeting;
if any,
(i) the resolution specifies the number of shares, current market price, the consideration,
shares are proposed
and the class or classes of directors or employees to whom such equity
to be issued;
entitled to
(iii) not less than one year has elapsed since the date on which the Company was
commence business;
recognised stock
(iv) the sweat equity shares of a Company whose equity shares are listed on behalf.
exchange, are issued in accordance with the regulations made by the SEBI in this
(v) such shares cannot be resold by their holders within a period of three years, called lock-in
period.
nominal
It is to be noted that a company may issue sweat equity shares at a price lower than the
value of equity share.
The entries for issue of sweat equity shares are the same as for issue of other equity shares.
Employees Stock Option Plan (ESOP) :
Under Section 62 of the Companies Act 2013, shares may be issued under a Scheme of Employees
Stock Option, subject to special resolution passed by Company. Employees stock option means theto
option (right and not an obligation) given to the whole-time directors, officers and employees right
purchase or subscribe at a future date, the securities offered by the Company at a pre-determined price,
which usually is lower than the market price. This is a voluntary scheme on the part of the Company to
in for a
give its employees a sense of belonging. Shares allotted under this scheme shall be locked ESOP
minimum period of one year from the date of allotment. In other words, shares issued under
cannot be disposed off within l year from the date of allotment.
Objectives or Importance of ESOP:
) Its main objective is to inspire the employees to have a higher participation in the company.
(ii) Its another objective is to create long-term wealth in the hands of the employees.
(im) Also, ESOP is a means to attract, retain and motivate the good and efficient employees lor
the company.
1.10
ACCOUNTING FOR SHARE CAPITAL

(in Public Subscription of Shares

Following steps are to be taken by aPublic Company for the issue of shares to public:
(1))To lssue Prospectus.
(2) To Receive Applications.
(3) To Make
Allotments.
(4) To Make Calls.
()To Issue Prospectus: Prospectus is an
the profitability and soundness of the business ofinvitation to the public to purchase its shares. It describes
the Company to attract the investing public. It
the following contains
informations :
Name and address of the registered office of the
Objects of the Company, risks involved in the issue,Company, Names and addresses of the directors,
Board of India), Authorised and Consent from SEBI (Securities and Exchange
Issued Capital of the
issue, dates of openingcompany
for subscription, terms of present and the number of shares now offered
and closing of the issue etc.
(2) To Receive Applications : After
Company on a prescribed form. Each application reading the prospectus the public applies for shares in the
mentioned in the must accompany the application money
of each share. prospectus, but as per SEBI Guidelines it should not be less than 25% of which 1s
the issue price
The amount of share application
name of the Company's Scheduled money must be deposited by the public in a
Scheduled Bank. The
(3) To Make Allotment of Bank is: also mentioned in the prospectus.
Shares After the last date fixed for receipt of
expires, the Bank sends all applications
to allot shares unless to the Company. The directors of application money
theCompany cannot proceed
Minimum Subscription stated in the prospectus has been
Company. received by the
Minimum Subscription : Section 39 (1) of the
cannot allot any securities of the
company Companies Act,
to public unless the amount 2013 provides that a company
minimum amount has been subscribed and the sums stated in the
have been received by the company payable on application for the prospectus
amount so
as the
stated
by
Subscription means the amount which, in cheque or other instrument which has
been paid.
the issue of shares so as to provide for the the opinion of the Directors, is the minimum to be Minimum
raised by
following
(i) For the payment of purchase price of requirements :
any property purchased or agreed to be
(ii) For the payment of
preliminary expenses, including purchased;
age on issue of shares: underwriting commission and broker
(iii) For the repayment of any moneys
(iv) For Working Capital; and
borrowed by the Company for the above purposes;
(v) For any other expenditure required for
the usual
According to SEBI Guidelines minimum subscription hasconduct of business operations.
been fixed at 90% of the issued amount.
As per Section 39 (3), the company has to get
issue of the prospectus. If the company fails to minimum subscription within 30 days from the date ofthe
the company cannot proceed with the receive the minimum subscription within the said period,
allotment
returned within next 15 days. If there is a delay in of shares and the entire application money must be
Company shall be liable to repay it with interest at therefund of such amount by more than 15
rate of l15% per annum for the delayed days, the
Each allottee will be issued share period.
certificates for eligible number of shares.
 ACCOUNTING ROR SHARE CAPITAL 1.11

In case of oversubscription of shares, the allotment shall be ona proportionate basis according to
the number of shares applied for.
For example, if a company issues a prospectus inviting applications for 1,00,000 shares and if
applications are received for 4,00,000 shares, the issue has been over subscribed by 4 times. In such a
case, an applicant in the category of 500 shares is entitled to the proportionate allotment of 500
4 =125
shares
As a result of over subscription, some applications may be rejected in full. Others may be partially
accepted and still others may be accepted in full. Those who are allotted shares are sent 'Letters of
Allotment" indicating the number of shares allotted and the amount now due on allotment. Those who
are not allotted shares are sent Letters of Regret ' alongwith a cheque for the refund of application
money.
(4) To Make Calls : The amounts paid on application and allotment are not calls but subsequent
instalments, as and when demanded, are calls. A Company may demand the whole amount of a share on
application in one instalment. If the whole of the amount of share is not paid on application and
allotment, the unpaid amount may be called by the directors in one or more instalments. Each instalment
is named as First Call, Second Call etc. Calls must be made strictly in accordance with the provisions of
the Articles of Association. In the absence of the Articles of Association, the provisions of Table Fof
Schedule I of the Companies Act, 2013 shall apply. These provisions are :
1. The amount to be called up either on application, or on allotment, or on any one call shallnot
exceed 25% of the total quantum of the issue.
2. All amount on shares should be fully called up within a period of 12 months from the date of
allotment. However, this guideline do not apply to issues of?500 crores or above.
3. There must be an interval of atleast one month between the making of two calls.
4. Atleast fourteen days notice must be given to the shareholders to pay the amount of call.
5. Calls must be made on a uniform basis on all the shares within the same class of shares.
A Call letter must specify the amount of the call, mode of remitting money, address to which call
money is required to be sent and the last date for sending the money.

Preliminary Expenses
Expenses incurred on the formation of a Company are termed as 'Preliminary Expenses'. These
include the following :
I Expenses incurred on the preparation and printing of various documents needed for the
registration of a Company.
II Stamp duty and registration fees on these documents.
III. Duty payable on Authorised Capital.
IV. Cost of preliminary books.
V. In case the Company has been formed to purchase a running business, the fees charged by
Accountant or Valuer valuing the assets and liabilities of that business.
As per AS-26, Preliminary expenses must be written off first from Securities Premium Account or
in its absence from Statement of Profit & Loss in the same year in which they are incurred.
 CAPITAL
ACCOUNIING FOR SHARE
L12

Book Building
the book building process for marketing a public offer of
using
Nowadays a lot of companies are practice in most developed countries but it is of recentorigin
equityshares, Book building is acommon
for the Indian Capital Market. and supply
determined by the demand
Under book building process the issue price of ashare is their bids at different
lorces in the capital market. Herein, bids are invited from investors who place the
prices. The issue price is determined by the issuing company on the basis of bids received and
Careful evaluation of demand and various level of prices. The issue price is fixed after bid closing date.
Once the price is fixed, the applicants who have applied at that price or ahigher price are allotted shares
at that fixed price.
The prospectus does not mention the issue price because the price is ixed after the bid closing date.
However, Companies can now mention the floor price i.e., minimum price below which bids will not be
accepted.
As per SEBI Guidelines 2000, shares may be issued under book building process in any
of the
following two manners :
() 100% of the net offer to public through book
building process, or
() 75% of the net offer through book building and 25% at the price determined through book
building.
Steps in Book Building Process:
The steps which are usually followed in the
book building process are as follows :
) The issuer company appoints a
lead
(i) Adraft prospectus is prepared in manager known as "Book Runner".
the issue price but includes otherconsultation with the book runner, which does not mention
particulars such as size of the issue, past history of the
company and floor price or price band,
The band cannot exceed 20%o of the i.e., a range within which bids would be accepted.
(iii) The draft prospectus is filed withfloor price.
(i) Bid period is SEBI.
determined and the
advertisements and road shows etc.awareness campaign is conducted by book runner through
(v) An underwriter is
(vi) Copies of the draft appointed to underwrite the issue to the extent of net
investors like UTI, LICI,prospectus are circulated by the Book Runner offer to the
to the public.
(vii) Book Runner GICI, etc. institutional
applied by
maintains a record book to
record the bid price and the
(viii) After closurevarious investors.
of the bid period, the
quantity of shares
price on the basis of which book runner and the issuing
(ix) Once the price is shares are allocated by the Book company determine the issue
determined,
are allotted shares at the the applicants who have Runner.
applied at that price or a higher price
Advantages of Book Building: fixed price only.
() Issue price of the
supply forces and notshares is realistic and fair
(ii) It helps in fast and by issuing company alone. because it is
determined by the demand and
(üii) It helps in assured collection of funds.
considerable
(iv) There is no risk of saving in issue
expenses.
if there is not failure of the issue because the company can
enough demand for its withdraw from the
securities. market
 1.13
ACCOUNTING FOR SHARE CAPITAL

Limitations of Book Building :

() Itis suitable for mega issues only.
known to the investors.
(7) Issuing company must be reputed and weil
a price band of 400 to 440 and it
Example :X Ltd. wants to offer 5,00,000 equity shares at
receives the following bids from five bidders :
Conntatisve Quonity Subseription Percentage
Bid Quanti Bid Price
Nuniber of Shores)
Number gfshares) 20%
440 1,00,000
L.00,000 45%
1,25,000 430 2,25,000
3,60,000 72%
1,35,000 420
5,00,000 100%
1,40,000 415
6,60,000 132%
1,60,000 400
price is 440 but at that price there is a
It will be observed from the above bids that the highest bid
the bid price by 10 but the demand
demand for only 1,00,000 shares. Hence the company has to reduce
has increased only by 1,25,000 shares at 430 and the
company shall be able to sell only 2,25,000 shares
at 430.
and the demand goes up by
Hence, the Company will have to scale down the price further by 10 420.
shares at
1,35,000 shares and the company shall be able to sell only 3,60,000
further reduce the price by ?5
Still the Company is unable to achieve the target and it will have to company will be able to
with the result that the demand goes up by 1,40,000 shares. At this stage, the
sell 5,00,000 shares at 415. This price of 415 becomes the cut offhigher price and the company will make
allotment of shares at 7415 or at lower price but in no case at a price than 415. It means that the
bids received at 440, 7430 and 420 will also be allotted shares at 415.

Entries on Issue of Shares

Entries on Receiving Applications :

be kept in a scheduled bank, til!
() As discussed earlier, the amount received on applications has toNormally,
the Company receives the Certificate of Commencement of business. the applicants deposit
application forms to the office of the
the application money directly in the bank. Bank itself sends the
Company. The following entry is made by the Company on receiving the applications :
Bank A/c Dr.
To Share Application Alc
(Application money received on shares at the rate of ........ per share)

Entries on Allotment :
(2) Application money is a part of the share capital of the Company, and as such, when the directors
allot the shares, the share application money is transferred to Share Capital Account. For this the
following journal entry is passed:
I. Share Application Ale Dr.
To Share Capital A/c
(Application money on allotted shares transferred to Share Capital Alc)
 1.14 ACCOUNTING FOR SHARE CAPITAL

I1. Sometimes, the directors do not allot any shares to some of the applicants. The application
money of such applicants is retumed to them. The entry willbe:
Share Application A/c Dr.
To Bank A/e
(Application money returned on un-allotted shares)
O) 1hose applicants who are allotted shares are sent letters of allotment in which the number of
shares allotted and the amount due on allotnent is mentioned. As soon as theallotment letters are 1Ssued,
the allotment money becomes due and becomes a part of Share Capital. The
Share Allotment A/c
entry required is :
Dr.
To Share Capital Alc
(Amount due on allotment on .... shares at the rate of ....... per share)
(4) On receipt of Allotment Money :
Bank Ae Dr.
To Share Allotment A/c
(Amount received on allotment on........ shares at the rate of
........ per share)
Entries on First Call :
(5) When Shareholders are informed to pay the First Call:
Share First Call A/c
Dr.
To Share Capital A/c
(First call due on shares at the rate of ..... per share)
(6) On receipt of First Call Money :
Bank Ae
Dr.
To Share First Call A/
(First Call money received on ............s.hares at the rate of
.......... per share)
Entries on Second Call :
(7) When shareholders are informed to pay the
Second Call :
Share Second Call A/c Dr.
To Share Capital A/c
(Second Call due on shares at the rate of ......... per share)
(8)On receipt of Second Call Money :
Bank Ac
Dr.
To Share Second Call A/c
(Second Call money received on shares at the rate of .........per share)
Similarly, entries for other calls may be prepared.

Issue of Shares at Par

Shares are issued at par when they are issued at a price equal to
share of?10 is issued at 10, it is said that the share has been the face value. For example, if a
issued at par.
 L15
ACCOUNTING FOR SHARE CAPITAL

ILLUSTRATION1.
4,00,000 shares of Z10 each. Payments were to be made as follows
XLtd. invited applications for call.
Allotment: 3 on First call and 2on Final
3on Application; 2 on
required to prepare Journal Entries, Ledger Accounts and
You are been
All theshares were applied.
company assuming that all sums due on Allotrment and Calls have
to
Opening Balance Sheet of the amounted to 60,000. 20,000 fully paid shares were also issued
received. Share Issue expenses
Promoters for their services.

SOLUTION: JOURNAL ENTRIES

SCr
Date
Parteulars

On date of Receipt : Dr. 12,00,000

Bank A/c 12,00,000
To Equity Share Application A/c
4,00,000shares @3 per share)
(Money received on application for
On date of Allotment : 12,00,000
Dr.
Equity Share Application Alc 12,00,000
To Equity Share Capital Alc
(Transfer of application money to Share Capital A/c)
On date of Allotment :
Dr. 8,00,000
Equity Share Allotment A/c 8,00,000
To Equity Share Capital A/c
(Allotment money due on 4,00,000 shares @2 per share)
On date of Receipt : 8,00,000
Bank A/c
Dr.
8,00,000
To Equity Share Alotment A/c
(Allotment money received)
On date of Call :
Equity Share First Call A/c Dr. 12,00,000
12,00,000
To Equity Share Capital A/c
(First call due on 4.00,000 Shares @3 per share )
On date of Receipt :
Bank A/c Dr. 12,00,000
To Equity Share First Call A/c
12,00,000
(Amount received on first call)
On date of Call :
Equity Share Final Call A/c Dr. 8,00,000
To Equity Share Capital A/c 8,00,000
(Final calldue on 4,00,000 shares (@ 2 per share)
On date of Receipt :
Bank Alc Dr. 8,00,000
To Equity Share Final Call Alc 8,00,000
(Amount received on final call)
 ACCOUNTING FORRSHARE
1.16
Dr. 60,000 CAPT AL
Share Issue Expenses A/c
To Bank A/c 60,000
(Expenses incurred on issue of shares) Dr. 2,00,000
Incorporation Costs AVc 2,00,000
To Equity Share Capital A/c
(20,000 fully paid shares issued to promotersfor theirservices) transferring the
entry for receiving Share Application money is passed first and the entry for
received first and
) The nassed thereafter. This is done, because Cash is
l n money to Share Capital A/c is
allotment is made afterwards.
and Second Call. the entry for transferring the same to Share Capital A/c is
case of Allotment, First Call
the resolution is passed and the entry for receiving money from shareholders is made afterwards
st when
as money from shareholders is received önly afterwards.
shares issued, they are always treated as equity shares.
(o) in case nothing is mentioned regarding the class of
Ledger Accounts
Cr.
Dr. BANK ACCOUNT
Particntars
Particulars
60,000
To Equity Share Application A/c 12,00,000 By Share Issue Expenses A/c
8,00,000 By Balance cld 39,40,000
To Equity Share Allotment A/c
To Equity Share First Call Alc |12,00,000
To Equity Share Final Call A/c 8,00,000|
40,00,000
40,00,000

EQUITY SHARE APPLICATION ACCOUNT Cr.

Dr.
Particulars Partieulars
To Equity Share Capital A/c 12,00,000|By Bank Ac 12,00,000
12,00,000 12,00,000

EQUITY SHARE ALLOTMENT ACCOUNT Cr.

Dr.
Particulars Particulars
8,00,000|By Bank Alc 8,00,000
To Equity Share Capital Ale
8,00,000| 8,00,000

EOUITY SHARE FIRST CALL ACCOUNT Cr.

Dr.
Particulars Particular's
A/c 12,00,000By Bank A/e 12,00,000
To Equity Share Capital
|12,00,000 12,00,000

EQUITY SHARE FINAL CALL ACCOUNT Cr.

Dr.
Particuars Particutars

To Equity Share
Capital A/c 8,00,000|By Bank A/e 8,00,000
8,00,000 8,00,000
ACCOUNTING
De.
ROR SHARE CAPNTAL
EQUITY SHARE CAPTAL ACCOUNT
To BalanNe cd Partielars Portiendars
42,00,000 By Equity Share Application Ac 12,00,000
By Equity Share Allotment Ae 8,00,000
By Equity Share First Call Ac |12,00,000
By Equity Share Final Call A/e 8,00,000
By Incorporation Costs A/e 2,00,000
Dr.
42,00,000 42,00,000
SHARE ISSUE EXIPENSES
Paticulars ACCOUNT Cr.
To Bank AC
Particulars
60,000| By Balance cld
60,000 60,000
Dr. 60,000

Particnlars INCORPORATION COSTS ACCOUNT Cr.

To Equity Share
Capital Ale 2,00,000 By Balance cd Particulrs
2,00,000
2,00,000
2,00,000
BALANCE SHEET OF XLTD.
as at

Note Current Previous

Particulars No. vear veur
1. EQUITÝ AND
LIABILITIES :
Shareholder's Funds :
(a) Share Capital
42,00,000
IL. ASSETS :
Other Current/Non-Current Assets*:
Unamortized Expenses 2 2,60,000
Current Assets :
Cash and Cash Equivalents 3 39,40,000
42,00,000

*Amount to be armortized in the next 12 months willbe shown under the head 'Other Current Assets" and the
amount to be amortized after 12 months will be shown under "Other Non-Current Assets."
Notes to Aceounts :

(1) Share Capital

Authorised
Shares of ......a.ch
Issued. subscribed and fully paid capital :
4.20,000Equity Shares of ? 10 each
 1.18 ACCOUNIINGTOR SIIARECAPITAL
(of the above shares, 20,000 shares are allotted as fully
pursuant to contracts without payments being received inpaid-up
cash)
42,00,000
(2) Unamortized Expenses
Share Issue Expenses 60,000
Incorporation Costs 200000
260,000
(3)Cash and Cash
Cash at Bank Equivalents :
3940,000

Issue of Shares at Premium

When a Company issues ashare at a price which is above its face value, it is said to be issued at
premiumn, For example, if ashare of the
the share. There is no legal face value of 10is issued at 12, 2 will be the premium on
The premium on issue of
restriction on issue of shares at a premium.
credited to a separate account shares is a Capital profit and not arevenue profit and as such, must be
called'Securities Premium Account'. It must be shown separately in the
Balance Sheet on the equity and liabilities side under the head 'Reserves and Surplus'.
Under section 52 (2) of the
only for the following Companies Act, 2013, the amount of securities premium may be used
purposes:
(1) In writing off the preliminary
expenses the Company;
of
(2) For writing off the expenses, Commission paid or discount
of the Company; allowed on issue of debentures
(3) For issuing fully paid bonus shares to the
shareholders of the
(4) For providing for the premium payable on redemption of Company;
debentures of the Company. redeemable preference shares or
(5) For Buy back of its own shares or other
securities under section 68.
Accounting Entries for the Amount of Premium :
The amount of premium may be charged by the
with the calls. Following entries will be passed, if Company on application or on allotment or even
the amount of premium is received
application money : alongwith
I. Bank Alc Dr.
To Share Application Alc
(Application money received including premium)
II. Share Application A/c Dr.
To Share Capital A/c
To Securities Premium A/c
(Application money transferred to Share Capital Alc and Securities Premium Ale)
If the amount of premium is received alongwith allotment
money, the following entries will be
passed :
1. Share Allotment Alc Dr.
To Share Capital Alc
 L.19
ACCOUNTING ROR SHARE CAPITAL

To Securities Premium Ac
(Allotment money due, including premium)
IL When allotment money is received:
Dr.
Bank Alc
To Share Allotment A/c
(Allotment money received, including premium)
premium is receivable, ie, either it is
Normally, it is mentioned in the question as to when the
application or on allotment or on calls. In the absence of any information, it is assumed that
payable on
the premium is due alongwith allotment money.
ILLUSTRATION 2.
authorised capital of 750,00,000 divided in 5,00,000
Spencer Paints Ltd. was registered with an share,
2,00,000 equity shares at a premium of 3perand
equity shares of 10 each. Company issued Allotment 2
(including premium); 2 on First Call
payable as follows :4 on Application: 5 on
on Second and Final Call. amounted to
was duly received. Share issue expenses
All shares were subscribed and all the money
Premium.
75,000 which were fully written off against Securities
and opening Balance Sheet.
Prepare necessary Journal Entries and Bank Account
SOLUTION :
JOURNAL
LEDr. Cr. R)
Date
Particulars
Dr. 8,00,000
Bank A/c 8,00,000
To Equity Share Application A/c
(Money received on application)
Dr. 8,00,000
Equity Share Application Alc 8,00,000
To Equity Share Capital Ale
(Application money transferred to Share Capital A/c) 10,00,000
Dr.
Equity Share Allotment A/c 4,00,000
To Equity Share Capital Alc 6,00,000
To Securities Premium A/c
(Allotment, including premium due) 10,00,000
Dr.
Bank A/c 10,00,000
To Equity Share Allotment A/c
(Allotment money received including premium) Dr. 4,00,000
Equity Share First Call Alc 4,00,000
To Equity Share Capital A/c
(Money due on first call) Dr. 4,00,000
Bank A/c
4,00,000
To Equity Share First Call A/c
(Money received on first call) 4,00,000
Dr.
Equity Share Second & Final Call A/c 4,00,000
To Equity Share Capital Alc
(Money due on second & final call)
 1.20
ACCOLUNTING FOR SHARE CAPITAL

Dr. 4,00,000
Bank AC
To Equity Share Second & Final Call A/e 4,00,000
(Money received on second & final call)
Share Issue Expenses A/c Dr. 75,000
To Bank A/c 75,000
(Expenses incurred on issue of shares)
Securities Premium Ac Dr 75,000
To Share Issue Expenses A/e 75,000
|(Share issue expenses written of against Securities
Premium Reserve A/c)
Dr. BANK ACCOUNT Cr.

Rartieilars Particitars
To Equity Share Application Ac 8,00,000|By Share Issue Expenses A/c 75,000
To Equity Share Allotment A/c 10,00,000 By Balance c/d 25,25,000
To Equity Share First Call Ac 4,00,000
To Equity Share Second & Final Call A/e 4,00,000
26,00,000 26,00,000

BALANCE SHEET OF SPENCER PAINTS LTD.

as at

Particulkrs Note Current Previous

No. year year
I. EQUITY AND LIABILITIES:
Shareholder's Funds :
(a) Share Capital 20,00,000
(b) Reserve and Surplus 2 5,25,000
25,25,000
II. ASSETS :
Current Assets :
Cash and Cash Equivalents 3 25,25,000

Notes to Accounts:

() ShareCapital
Authorised :
5,00,000 Equity Shares of 10 each 50,00,000
Issued. Subscribed & Fully Paid Capital :
2,00,000 Equity Shares of ?10 cach 20,00,000
(2) Reserve and Surplus :
Securities Premium
5,25,000
(3) Cash and Cash Equivalents :
Cash at Bank
25,25,000
 1.21
ACCOUNTING FOR SHARE CAPITAL
Issue of Shares at Discount
been issued at
When a share is issued at a price which is less than its face value, it is said that it has
adiscount. For example, if ashare of the nominal value of 7100 is issued at
Z95, it is saidto have been
issued at a discount of 5%.

Prohibition on issue of shares at a discount:

Asper Section 53 of Companies Act 2013,Companies would no longer be permitted to issue shares
sweat equity wherein shares are
are
at a discount. The only shares that could be issued at a discount
2013Act.
issued to employees or directors in lieu of their services under section 54 of

Important Note : Schedule IIldoes not contain the head 'Miscellaneous Expenditure' in the
they
Balance Sheet. As per AS-26, Preliminary Expenses are to be written off in the year in which
on
are incurred. However, share issue expenses, underwTiting commission, discounttpremium
borowing etc., being special nature items are excluded from the scope of AS-26 (Intangible Assets).
These items can be amortized over the period of benefit, i.e. normally 3 to 5 years.
Guidance notes on Schedule III issued by The Institute of Chartered Accountants of India'
suggests that unamortized portion of above mentioned expenses be shown on the Assets side of the
Balance Sheet as, Unamortized Expenses' under the head Other CurrentNon-Current Assets'
depending on whether the amount will be amortized in the next 12 months or thereafter. Amount to
be amortizedin the next 12 months will be shown under the head Other Current Assets' and the
amount to be amortized after 12 months will be shown under the head 'Other Non-Current Assets'.

Under-subscription of Shares
Sometimes, number of shares applied for by the public is less than the number of shares offered by
the Company. Such an issue is said to be under-subscribed. In such a case the accounting entries are
made on the basis of the number of shares applied for.

(iii) Issue of Shares for Consideration other than Cash

It is not necessary to issue the shares only for cash. ACompany may issue fully paid shares for
consideration other than cash, in the following circumstances :
(1) Issue of Shares to Promoters :
Promoters of a Company may be issued shares in the Company for the services rendered by them.
Entries will be :
(i) Incorporation Costs or Preliminary Expenses A/c Dr.
To Promoter's A/c
(Cost of Company's incorporation payable
topromoters)
(i) Promoter's A/c Dr.
To Share Capital A/e
(Issue of..... shares of. each as
fully paid to promoters)
 1.76
ACCOUNTING FOR SHARE CAPITAI
Less : Excess received from Anilon application 400
Amount not received fronm him on allotment
1400
(c) Total amount due on allotment of 40,000 shares x {4.50
1,80,000
Less : Excess received on application
1,03,000
Less Not
77,000
received from Anil on allotment
1,400
(6) 75,600
Calculation of anmount transferred to Capital Reserve :
1.000re-issued shares include 400 shares of Anil
and
Forfeited Amount on 400 shares ofAnil : (Since he has600 shares of Shyam.
Forfeited Amount on forfeiture of his shares will be: 500applied for 500 shares,
Forfeited Amount on 600 shares of Shyam shares x 4 2,000
600 shares @R4 on application
and @2on allotment 2,400
(excluding premium) 1,200 3,600
Less : Loss on re-issue of 1.000 5,600
shares @leach
1,000
(7) Balance in Share Forfeiture Account : 4,600
Forfeited amount on 200 un-issued shares of
200 shares
@74 on application Shyam:
and @ 2 on allotment 800
(excluding premium) 400 1,200

Issue of
When a Company which has already issued Right Shares
shares, it is under a legal obligation to first offershares wants to raise capital through the further
the fresh shares to its existing issue of
Company has resolved otherwise by a special resolution.
to apply for the shares on priority basis, Because of the right ofshareholders
existing
unless the
shareholders
the issue is known as right issue.
Section 62 of the Companies Act, 2013
increase its subscribed capital at any time after provides that where a public limited company
the expiry of two years of the proposes to
after the expiry of one year from the first formation or at any time
further shares, then : allotment of shares, whichever is earlier, by allotment of
(a) Such further shares shall be
offered to the existing shareholders of the
proportion their equity holding on that date. If, for example, a
to Company, in
already issued 3,00,000 shares wants to make a further issue of Company which has
to offer the existing shareholders a right to 1,00,000 shares, it shall have
held. subscribe for l new share for every 3 old shares
(b) The offer shall be made by a notice
specifying the number of
time not being less than 15 days but not more than 30days fromshares offered and limiting a
the date of the ofler, within
which the offer, if not accepted, will be deemed to have been
(c) The offer should specify that the concerned person can declined.
or any of them in favour of another renounce the shares offered to him
person.
The Company is at liberty to determine the size and the issue price of the
right issue i.e., the shares
may be issued at par or at a premium determined by the Company. Also, the full
amount of share price
 1.77
ACCOUNTING FOR SHARE CAPITA
instalments. Minimum subscription clause of
may be called upon application or may be divided into
90% is applicable to the right issue of shares als0.
passing the resolution.
Allotment of securities must be completed within 12 months of
Accounting for right issue : public issue.
made in the same manner as in case ol
Jourmal entries in case of right shares are allotment, first calletc.
DirectorS may callthe amount of right shares in one or more instalments i.e., on
Advantages of right issue: main
advantageous toboth the Company as wellas itsshareholders. Following are the
Rightissue is
advantages of rights issue:
Usually a Company offers rights issue at a price which is lower than the market price of the
1. benefit of being associated with
shares. As such, the existing shareholders get the monetary the offered shares can make
purchase
the Company. Those shareholders who do not want to
a profit by selling (renouncing) their right to some other persons.
Company in the hands of the existing
2. Right issue helps in preserving the control of the shareholders in
shareholders. This is so because the right shares are offered to the existing
proportion of their present holding.
3. Raising of capital is more certain incase of right issue than the public issue.
4. Rights issue improves the image of the Company because it shows the management's
concern towards sharing the prosperity of the Company with the shareholders.
5. Expenses of issue are lower in case of rights issue as compared to the public issue.
6. It provides an opportunity to theexisting shareholders to invest in that Company with which
they are well conversant.
7. Itensures that the directors do not misuse their position toissue new shares to their friends
£nd relatives at lower prices.

ILLUSTRATION 29.
The issued share capital of Kuber Ltd. consists of 2,00,000equity shares of 10 each fully paid. The
company offers newequity shares to its existing shareholders on rights basis of !:1; the equity shares
of 10each being offered at a premium of 10 each which are payable as foliows:
On Application On Allotment
Share Capital 5
Securities Premium
10 10
All theshareholders accepted the offer. One shareholder holding 600
on application. Another shareholder holding 400 shares failed to pay the shares paid the full ofter price
were subsequently forfeited. The forfeited shares were reissued as fuliyallotment monev and his shares
Journalise the transactions. paid for 8.000 in cash.
SOLUTION : Kuber Ltd.
JOURNAL ENTRIES
Dafe
Particulors
(i)Bank A/c
To Share Dr
Dr)
20,06,000
Application A/c
20,00,000
1.78 ACCOUNTING FOR SHARE CAPITAL
To Allotment MoneY in Advance A/c
6,000
(Receint of application money on 2,00,000 cquitv shares (a, 10 cach and
alloment money in advance on 600shares () 10 per share)
(i) Share Application A/c Dr. 20,00,000
lo Fquity Share Capital A/c
lo Securities Premium A/c 10,00,000
(Application money transterredtoequity share capital account and 10,00,000
securities premium account)
( ) Share Allotment Ac
Dr. 20,00,000
To Equity Share Capital Ac
To Securities Premium A/c 10,00,000
(Allotment money due on 2,00,000 shares (@ 10 per share 10,00,000
per share for premium) including 5
(iv) Bank A/e
Dr. 19,90,000
Allotment Money in Advance Alc
To Share Dr. 6,000
Allotment Alc
(Receipt of allotment money on 1,99,600 shares (@ 10 per 19,96,000
|adjustmentof allotment advance account of 6,000 (i.e. share after
6,000) 19,96,000
()Equity Share Capital A/c Dr.
Securities Premium Ale 4,000
To Share Dr.
Allotment A/c 2,000
To Share Forfeited Ac 4,000
(Forfeiture of 400 shares for non-payment of 2,000
(vi) Bank Alc allotment money)
To Equity Share Capital A/c Dr, 8,000
ToSecurities Prenium Ac
4,000
(Re-issue of 400 equity shares) 4,000
(vii) Share Forfeited A/c
ToCapital Reserve Ajc Dr.
2,000
(Transfer of balance in the share forfeited 2,000
account) account to capital reserve

1. What is
Book-Building? THEORETICAL QUESTIONS
What steps are taken for issuing
Also give its advantages. shares under a
2. What is the concept of Book-Building process?
Book-Building? Explain with the help of an example.
3. Explain the provisions of the Indian J,

Securities Premium (Sec. 52). Companies Act, 2013 regarding the utilisation of the
4. Under what circumstances can a
adiscount? Ifso, 1o company forfeit its
what extent? What entries are shares? Can forfeited shares be re-issued at
shares? passed before and after the reissue of
5. What
foríeited
entries are made for the forfeiture of
slhares and their re-issue?