- Undersubscription means fewer shares are applied for than offered.
- All applicants get a full allotment of the shares they applied for.
- A minimum subscription of 90% is required as per SEBI.
- If not received, the application money must be refunded.
- Separate accounts are used for equity and preference shares.
Definitions [2]
Definition: Joint Stock Company
- “A Joint Stock Company is a voluntary association of individuals for profit having capital divided into transferable Shares, the ownership of which is the condition on membership.” – Prof. L. H. Haney.
- “A Company is a person, artificial, invisible, intangible, and existing only in the eyes of the law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.” – Chief Justice Marshal
- According to The Companies Act 2013, Section 2 (20), the term “Company” means “a Company incorporated under the Companies Act 2013 or any previous Company law.”
Definition: Share
As per Section 2(84) of the Companies Act 2013, “Share is the share in the capital of a company and includes stock as well.”
Formulae [2]
Number of Shares to be Issued
\[\text{Number of shares to be issued = } \frac{\text{Amount Payable}}{\text{Issue Price}}\]
Capital Reserve on Partial Reissue of Forfeited Shares
Capital Reserve = No. of Shares Reissued × (Amount forfeited per share on reissued shares - Discount allowed on reissue per share)
Key Points
Key Points: Joint Stock Company
- Meaning: A Joint Stock Company is a business organisation where ownership is divided into transferable shares held by shareholders.
- Origin: It emerged during the Industrial Revolution to overcome the limitations of partnerships, such as unlimited liability and limited capital, by raising funds from the public.
- Legal Status: A Joint Stock Company is an artificial legal person with a separate legal identity and perpetual succession, created under company law.
- Merits: It provides benefits like large capital, limited liability, expert management, public confidence, and better scope for expansion.
- Types: Companies can be Chartered, Statutory, or Registered, and further classified as Public, Private, Limited, or Unlimited.
Key Points: Equity Shares
- Equity shares are ordinary shares that are not preference shares.
- They receive dividends only after preference shareholders are paid.
- There is no fixed dividend rate; the dividend depends on profits.
- In case of loss, no dividend is paid; in high profit, they may get more.
- Equity shareholders have voting rights and control company decisions.
Key Points: Preference Shares
- Preference shares get fixed dividends and capital back before equity shares.
- Cumulative preference shares carry forward unpaid dividends; non-cumulative do not.
- Participating preference shares get extra profit after equity dividends; non-participating shares get only fixed dividends.
- Convertible preference shares can be changed into equity shares; non-convertible shares cannot.
- Redeemable preference shares are repaid within a set time; irredeemable shares are not allowed under law.
Difference Between Authorised Capital and Issued Capital
| Basis | Authorised Capital | Issued Capital |
|---|---|---|
| Meaning | Maximum capital a company can issue | Part of authorised capital offered to public |
| Disclosure | Stated in the Memorandum of Association | Stated in the Articles of Association |
| Limit | It is equal to or more than the issued capital. | It is equal to or less than the authorised capital. |
Key Points: Share Capital of a Company
- Share Capital is the total money raised by issuing shares, representing ownership in the company.
- Authorised Capital is the maximum amount a company can issue, as stated in its Memorandum of Association.
- Issued Capital is the part of the authorised capital offered to the public for subscription.
- Subscribed Capital is the portion of issued capital that investors agree to take.
- Called-up Capital is the amount demanded by the company, and Paid-up Capital is what shareholders actually pay; the difference is called Calls-in-Arrears.
- Reserve Capital is the part of subscribed capital to be called only during winding up.
- A Prospectus invites the public to buy shares, and the company must receive at least 90% subscription before allotting shares.
Key Points: Methods of Issue of Share Capital
- Right Issue: Shares are offered to existing shareholders at a discounted price, giving them a priority to buy more shares.
- Employee Stock Option Scheme (ESOS): Shares are offered to employees at a price lower than market value to promote ownership and motivation.
- Private Placement: Shares are offered to a selected group of people privately, avoiding the lengthy public issue process.
- Public Offer: Shares are issued to the general public through a stock exchange, usually via an Initial Public Offering (IPO).
- Sweat Equity Shares: Shares given to directors or employees for their contribution in the form of skills, know-how, or intellectual property, not cash.
- Bonus Issue: Fully paid shares given free to existing shareholders by converting reserves into share capital.
- Public Issue Process: Includes issuing a prospectus, receiving applications (with at least 5% of face value), allotting shares, and making calls for remaining payments (like first call, second call, etc.).
Journal Entries: Issue of Shares at Par
A. When the Issue Price is Payable in Lump Sum:
1. On Receiving Application Money:
Bank A/c ...Dr.
To Shares Application A/c / Shares Application and Allotment A/c
(Being the application money received in a lump sum)
Or if a joint account is used:
Bank A/c ...Dr.
To Shares Application and Allotment A/c
(Being the application and allotment money received in a lump sum)
2. On Allotment of Shares (Transfer of Application Money):
Shares Application A/c / Shares Application and Allotment A/c ...Dr.
To Share Capital A/c
(Being the transfer of application money to share capital on allotment)
Or (if joint account used):
Shares Application and Allotment A/c ...Dr.
To Share Capital A/c
(Being the application and allotment money transferred to share capital)
B. When Issue Price is Payable in Instalments:
1. On Receipt of Application Money:
Bank A/c ...Dr.
To Shares Application A/c
(Being the application money received)
2. On Allotment of Shares (Transfer of Application Money):
Shares Application A/c ...Dr.
To Share Capital A/c
(Being application money transferred to share capital on allotment)
3. On Amount Due on Allotment:
Shares Allotment A/c ...Dr.
To Share Capital A/c
(Being allotment money due)
4. On Receipt of Allotment Money:
Bank A/c ...Dr.
To Shares Allotment A/c
(Being the allotment money received)
5. On Amount Due on First Call:
Shares First Call A/c ...Dr.
To Share Capital A/c
(Being the amount due on the first call)
6. On Receipt of First Call Money:
Bank A/c ...Dr.
To Shares First Call A/c
(Being the amount received on the first call)
7. (Optional) On Amount Due on Second Call:
Shares Second Call A/c ...Dr.
To Shares Capital A/c
(Being the amount due on the second call)
8. Bank A/c ...Dr.
To Shares Second Call A/c
(Being the amount received on the second call)
C. Other Related Entries:
1. For Money Refunded on Rejected Application:
Share Application A/c ...Dr.
To Bank A/c
(Being refund of application money on rejected shares)
2. For Adjustment of Excess Application Money towards Allotment:
Share Application A/c ...Dr.
To Share Allotment A/c
(Being excess application money adjusted towards allotment)
3. Combined Entry (Refund + Adjustment):
Share Application A/c ...Dr.
To Share Allotment A/c
To Bank A/c
(Being excess application money adjusted and balance refunded)
Journal Entries: Issue of Shares at Premium
1. On Receipt of Application Money:
Bank A/c ...Dr.
To Shares Application A/c
(Being the total application money received, including the premium)
2. On Allotment of Shares:
Shares Application A/c ...Dr.
To Share Capital A/c
To Securities Premium A/c
(Being the transfer of application money to share capital and securities premium)
3. Amount Due on Allotment:
Shares Allotment A/c ...Dr.
To Share Capital A/c
To Securities Premium A/c
(Being allotment money due, including premium)
4. On Receipt of Allotment Money:
Bank A/c ...Dr.
Calls-in-Arrears A/c ...Dr.
To Shares Allotment A/c
(Being receipt of allotment money; balance treated as calls-in-arrears)
5. Amount Due on First Call:
Shares First Call A/c ...Dr.
To Share Capital A/c
To Securities Premium A/c
(Being first call due, including premium if any)
6. On Receipt of First Call Money:
Bank A/c ...Dr.
Calls-in-Arrears A/c ...Dr.
To Shares First Call A/c
(Being first call money received; balance treated as calls-in-arrears)
Key Points: Issue of Shares at Premium
- Meaning: Shares issued above face value; excess is called securities premium.
- Nature: Securities premium is a capital receipt.
- Accounting: Credited to Securities Premium Account as per the Companies Act, 2013.
- Use: Can be used only for specific purposes, such as bonus shares, issue expenses, or redemption.
- Collection: Usually collected with allotment; credited only after shares are allotted.
Journal Entry: Issue of Shares at Discount
Share Allotment A/c ...Dr.
Discount on Issue of Shares A/c ...Dr.
To Share Capital A/c
Journal Entries: Over Subscription of Shares
A. Over-Subscription of Shares:
1. When application money is refunded for rejected shares:
Share Application A/c ...Dr.
To Bank A/c
(Being refund of application money for rejected applications)
2. When excess application money is adjusted towards allotment:
Share Application A/c ...Dr.
To Share Allotment A/c
(Being excess application money adjusted against allotment)
3. When excess application money is adjusted towards allotment and calls:
Share Application A/c ...Dr.
To Share Allotment A/c
To Calls-in-Advance A/c
(Being excess application money adjusted towards allotment and calls)
B. Joint Application and Allotment Account
1. On receipt of application money:
Bank A/c ...Dr.
To Share Application and Allotment A/c
(Being application money received)
2. On transfer of application money and allotment due:
Share Application and Allotment A/c ...Dr.
To Share Capital A/c
(Being the transfer of application and allotment money to the share capital)
3. On refund of money for rejected applications:
Share Application and Allotment A/c ...Dr.
To Bank A/c
(Being refund of application money on rejected shares)
4. On receipt of the balance allotment money:
Bank A/c ...Dr.
To Share Application and Allotment A/c
(Being receipt of balance allotment money)
Format: Calculation of Amount Received on Allotment
Calculation of Amount Received on Allotment
| Particulars | ₹ |
|---|---|
| Total Amount Due on Allotment | xxx |
| (Total No. of Shares Allotted × Allotment money per share) | |
| Less: | |
| (i) Excess Application Money adjusted against Allotment Money | xxx |
| (ii) Allotment money not received from Shareholders | xxx |
| Amount Received on Allotment | xxx |
Key Points: Over Subscription of Shares
- Oversubscription means more shares are applied for than offered.
- It can be handled by rejecting extra applications, pro rata allotment, or both.
- In rejection, extra applications are refused, and money is refunded.
- In pro rata, shares are allotted in a fixed ratio and excess money is adjusted or refunded.
- In the combined method, some applications are fully accepted, some partially, and some rejected.
Journal Entries: Pro-rata Allotment
1. Share Application A/c ...Dr.
To Share Allotment A/c
(Being excess application money adjusted with allotment money)
Or
Share Application A/c ...Dr.
To Share Capital A/c
To Share Allotment A/c
(Being excess application money adjusted with share capital and allotment money)
Key Points: Under Subscription of Shares
Journal Entries: Calls-In-Arrears
A. For Calls-in-Arrears:
1. Without Opening Calls-in-Arrears Account:
(Amount not received is simply left unpaid in the relevant call account)
No separate entry is passed. The unpaid amount is shown as a balance in the relevant call account (e.g., Shares Allotment A/c or Call A/c).
2. With Opening Calls-in-Arrears Account:
(i) On non-receipt of call amount on the due date:
Calls-in-Arrears A/c ...Dr.
To Relevant Call A/c
(e.g., To Shares Allotment A/c or Shares First Call A/c)
(Being the amount not received on call, transferred to Calls-in-Arrears)
(ii) On receipt of the amount later:
Bank A/c ...Dr.
To Calls-in-Arrears A/c
(Being the amount received on Calls-in-Arrears)
Key Points: Calls-In-Arrears
- Calls-in-arrears refers to the unpaid amount of allotment or call money by shareholders.
- It arises when shares are issued on an instalment basis, and payments are missed.
- The company may charge interest on calls-in-arrears, usually at 10% per annum if not specified in the Articles.
- It can be recorded either by opening a separate Calls-in-Arrear Account or without it.
- The interest collected on calls-in-arrears is treated as income in the Profit and Loss Statement.
Journal Entries: Calls-In-Advance
1. When excess application money is retained (oversubscription):
Shares Application A/c ...Dr.
To Calls-in-Advance A/c
(Being excess application money transferred to Calls-in-Advance A/c)
2. When shareholders pay the call amount in advance:
Bank A/c ...Dr.
To Calls-in-Advance A/c
(Being the call amount received in advance)
3. When the call becomes due (call made by the company):
Shares First Call A/c (or relevant Call A/c) ...Dr.
To Share Capital A/c
(Being call money due on shares)
4. Adjustment of Calls‑in‑Advance when the call becomes due:
Calls‑in‑Advance A/c ...Dr.
To Shares First Call A/c
(Being calls‑in‑advance adjusted against call due)
5. Receipt of balance call money (if any):
Bank A/c ...Dr.
To Shares First Call A/c
(Being balance call money received)
Key Points: Calls-In-Advance
- Calls-in-advance means the amount of share capital or premium received before it is called by the company.
- It arises when excess application money is adjusted against future calls or when shareholders pay calls in advance.
- The amount received is credited to the Calls-in-Advance Account and adjusted when the call becomes due.
- Calls-in-advance are shown as Other Current Liabilities under Current Liabilities in the Balance Sheet.
- As per Section 50 of the Companies Act, 2013, calls-in-advance can be accepted only if permitted by the Articles of Association.
Journal Entries: Issue of Shares for Consideration other than Cash
A. On Purchase of Assets:
Sundry Assets A/cs (Individually) ...Dr.
To Vendor A/c
(Being assets purchased and vendor credited with the purchase price)
B. On Purchase of Business:
1. When Purchase Consideration > Net Assets (Goodwill arises):
Sundry Assets A/cs (Individually) ...Dr.
Goodwill A/c ...Dr.
To Sundry Liabilities A/cs (Individually)
To Vendor A/c
(Being business purchased and excess amount treated as goodwill)
2. When Purchase Consideration < Net Assets (Capital Reserve arises):
Sundry Assets A/cs (Individually) ...Dr.
To Sundry Liabilities A/cs (Individually)
To Vendor A/c
To Capital Reserve A/c
(Being business purchased and difference treated as capital reserve)
C. On the Issue of Shares to Vendor:
1. If Shares Are Issued at Par:
Vendor A/c ...Dr.
To Share Capital A/c
(Being shares issued at par to the vendor)
2. If Shares Are Issued at Premium:
Vendor A/c ...Dr.
To Share Capital A/c
To Securities Premium A/c
(Being shares issued at a premium to the vendor)
D. Issue of Shares to Promoters for Services:
1. Expense Accounted as Goodwill or Incorporation Cost:
Goodwill A/c or Incorporation Cost A/c ...Dr.
To Promoters’ A/c
(Being services received from promoters)
2. Issuing Shares to Promoters
(i) If Shares Are Issued at Par:
Promoters’ A/c ...Dr.
To Share Capital A/c
(Being shares issued to promoters at par)
(ii) If Shares Are Issued at Premium:
Promoters’ A/c ...Dr.
To Share Capital A/c
To Securities Premium A/c
(Being shares issued to promoters at a premium)
E. Issue of Shares to Underwriters (Underwriting Commission):
1. For Underwriting Commission Due:
Underwriting Commission A/c Dr.
To Underwriters’ A/c
(Being commission payable to underwriters)
2. Discharge of Commission via Shares
(i) If Shares Are Issued at Par:
Underwriters’ A/c ...Dr.
To Share Capital A/c
(Being shares issued to underwriters at par)
(ii) If Shares Are Issued at Premium:
Underwriters’ A/c ...Dr.
To Share Capital A/c
To Securities Premium A/c
(Being shares issued to underwriters at a premium)
Format: Notes to Accounts of Forfeiture of Shares
Note to Accounts
| Particulars | ₹ |
|---|---|
| Authorised Capital | |
| ... Equity Shares of ₹ 10 each | ... |
| Issued Capital | |
| ... Equity Shares of ₹ 10 each | ... |
| Subscribed Capital | |
| Subscribed and fully paid-up: | |
| ... Equity Shares of ₹ 10 each | ... |
| Subscribed but not fully paid-up: | |
| ... Equity Shares of ₹ 10 each | ... |
| Less: Calls-in-Arrears | ( ... ) |
| Forfeited Shares A/c | ... |
Journal Entries: Forfeiture of Shares
A. Forfeiture of Shares (Issued at Par):
Share Capital A/c ...Dr. [With called-up amount till the stage of forfeiture]
To Forfeited Shares A/c [With the amount received on forfeited shares]
To Calls-in-Arrears A/c [With the amount not received on forfeited shares]
(Being forfeiture of shares for non-payment of call money)
Journal Entries: When Shares were Issued at a Premium
1. When Premium Amount Has Been Received:
Share Capital A/c ...Dr. [Amount called-up less premium]
To Calls-in-Arrears A/c [Amount not received on allotment and calls]
To Forfeited Shares A/c [Amount received less amount of Securities Premium]
(Being forfeiture of shares where a premium has already been received)
2. When Premium Amount Has Not Been Received:
Share Capital A/c ...Dr.
Securities Premium A/c ...Dr.
To Calls-in-Arrears A/c
To Forfeited Shares A/c
(Being forfeiture of shares where a premium has not been received)
Journal Entries: When Shares were Issued at Discount
Share Capital A/c ...Dr.
To Calls in Arrears A/c
To Discount on Issue of Shares A/c
To Share forfeiture A/c
Format: Calculation of Gain on Reissued Shares
Calculation of Gain (Profit) on Reissued Shares
| Particulars | ₹ |
|---|---|
| A. Amount forfeited on reissued shares | xxx |
| (Total amount forfeited / No. of shares forfeited) × No. of shares reissued | |
| B. Less: Reissue discount | xxx |
| C. Gain on reissue to be transferred to Capital Reserve (A – B) | xxx |
Journal Entries: Reissue of Forfeited Shares
1. When Reissued at Par:
Bank A/c ...Dr.
Forfeited Shares A/c ..Dr.
To Share Capital A/c
(Being forfeited shares reissued at par)
2. When Reissued at Premium (above paid-up value):
Bank A/c ...Dr.
To Share Capital A/c
To Securities Premium A/c
(Being forfeited shares reissued at a premium)
3. When Reissued at Discount (below paid-up value):
Bank A/c ...Dr.
Forfeited Shares A/c ...Dr.
To Share Capital A/c
(Being forfeited shares reissued at a discount)
4. On Transfer of Gain (Balance) in Forfeited Shares A/c to Capital Reserve:
(When all forfeited shares are reissued)
Forfeited Shares A/c ...Dr.
To Capital Reserve A/c
(Being gain on reissue of forfeited shares transferred to Capital Reserve)
Concepts [20]
- Joint Stock Company
- Concept of Shares
- Kinds of Shares> Equity Shares
- Kinds of Shares> Preference Shares
- Shareholder's Fund> Share Capital of a Company
- Treatment of Share Capital in Balance Sheet
- Methods of Issue of Share Capital
- Terms of Issue of Shares> Issue of Shares at Par
- Terms of Issue of Shares> Issue of Shares at Premium
- Terms of Issue of Shares> Issue Shares at Discount
- Over Subscription of Shares
- Pro-rata Allotment
- Under Subscription of Shares
- Calls-In-Arrears
- Calls-In-Advance
- Issue of Shares for Consideration other than Cash
- Forfeiture of Shares
- When Shares Were Originally Issued at a Premium
- When Shares Were Originally Issued at Discount
- Reissue of Forfeited Shares
