Learning Objectives

• Explain the basic nature of a joint stock company as a form of business organisation and the various kinds of companies based on liability of their members.
• Describe the types of shares issued by a company.
• Explain the accounting treatment of shares issued at par, at premium, and at discount including oversubscription.
• Outline the accounting for forfeiture of shares and reissue of forfeited shares under varying situations.
• Workout the amounts to be transferred to capital reserve when forfeited shares are reissued.
• Prepare share forfeited account.

Accounting for Share Capital

1. Introduction

• A company is an organization formed by shareholders who contribute capital.
• Shareholders elect a Board of Directors to manage the company.
• Governed by the Companies Act, 2013.

2. Features of a Company

• Artificial person with a distinct legal entity.
• Has a common seal for signature.

3. Types of Companies

• Joint Stock Company: Owned by shareholders.
• Types of Shares:
  • Equity Shares: No preferential rights.
  • Preference Shares: Preferential rights to dividends and capital repayment.

4. Share Capital

• Share Capital: Raised through issuing shares.
• Can be issued for cash or consideration other than cash.
• Stages of Share Issue:
  1. Application for shares
  2. Allotment of shares
  3. Calls on shares

5. Key Terms

• Calls in Arrears: Amount not received from shareholders.
• Calls in Advance: Amount paid by shareholders before due.
• Over Subscription: More applications than shares available.
• Under Subscription: Fewer applications than shares available.

6. Accounting Treatment

• Forfeiture of Shares: Shares can be forfeited for non-payment.
• Reissue of Forfeited Shares: Can be reissued at a discount.
• Securities Premium: Amount received over the nominal value of shares.

7. Common Mistakes

• Not maintaining a separate Calls-in-Arrears Account.
• Failing to comply with legal provisions for issuing shares at a discount.

8. Practice Questions

• Define a public company.
• Explain the process of share allotment in case of over subscription.
• Discuss the conditions for issuing shares at a discount.

Common Mistakes and Exam Tips

Common Pitfalls

• Misunderstanding Share Types: Students often confuse preference shares with equity shares. Remember, preference shares have preferential rights to dividends and capital repayment.
• Forfeiture Accounting: Failing to correctly account for forfeited shares can lead to significant errors in financial statements. Ensure you understand the treatment of amounts received prior to forfeiture.
• Discount on Shares: Students may overlook the legal restrictions on issuing shares at a discount. Only sweat equity shares can be issued at a discount under the Companies Act, 2013.
• Calls in Arrears vs. Calls in Advance: Confusion between these two terms is common. Calls in arrears refer to unpaid amounts on shares, while calls in advance are amounts paid by shareholders before they are due.
• Over Subscription Handling: Not properly adjusting for over subscription can lead to incorrect allotment entries. Always ensure the minimum subscription is met before proceeding with allotments.

Exam Tips

• Understand Key Definitions: Make sure you can define and differentiate between key terms such as share capital, issued capital, and subscribed capital.
• Practice Journal Entries: Regularly practice recording journal entries for share transactions, including forfeitures and reissues, to build confidence.
• Review Legal Provisions: Familiarize yourself with the Companies Act, 2013, especially sections related to share issuance and capital management.
• Use Examples: When studying, refer to numerical examples to understand the practical application of concepts.
• Time Management: During exams, allocate time wisely to ensure you can answer all questions, especially those requiring calculations.