1 module 3. recording financial transation dr. varadraj bapat

11

Module 3.

Recording Financial

TransationDr. Varadraj Bapat

Dr. Varadraj BapatDr. Varadraj Bapat 22

Index

Corporate AccountingShare Capital and its typesIssue of share capitalDebentures – issue and redemption and purchase of own debentures


Index

Corporate AccountingThis file discusses various entries which are peculiar to companies.


Corporate Accounting

Share Capital Total capital of the company is

divided into a number of small indivisible units of a fixed amount and each such unit is called a share.

As the total capital of the company is divided into shares, the capital of the company is called ‘share capital’.


The fixed value of a share, printed on the share certificate is called nominal/ par/ face value of a share.

A company can issue shares at a price different from the face value of a share; this is issue price of share.

Types of sharesShares issued by a company are divided into two categories:


Preference Shares:The shares which are assured of preferential dividend at a fixed rate during the life of company and carry a preferential right over other shareholders to be paid first in case of winding up of company.

Equity Shares:Equity shares are those shares, which are not preference shares. It means that they do not enjoy


any preferential rights in the matter of payment of dividend or repayment of capital.

Issue of share capital The shares can be issued by company

either for cash or for the consideration other than cash.

A public company issues a prospectus inviting general public to subscribe for its shares. On the basis of prospectus, application


are deposited in a scheduled bank by the interested parties along with the amount payable at the time of application in cash which is called as application money.

Company reserves the right to reject or accept an application fully or partially. Successful applicants become shareholders of the company and are required to pay the second installment which is known as allotment money.


Subsequent installments, if any, to be called by the company are known as calls.

Journal Entries for issues of shares for cash

1.On the receipt of the application moneyBank A/c…… Dr.To Shares Application money


2.On the allotment of shareShare Allotment A/c…..Dr.Share Application A/c…Dr.

To Share Capital A/cTo Securities Premium A/c

(if shares are issued at premium)

3.On the receipt of allotment moneyBank A/c…..Dr.

To Share Allotment A/c


4.On the call being madeShare call A/c…..Dr.

To Share Capital A/c

5. On receipt of call moneyBank A/c……Dr.

To Share Call A/c

6. If call money is received from shareholders even before making call


Bank A/c….Dr.To Calls in Advance A/c

7. If money is not received from shareholders on any call

Calls in Arrears A/c….Dr.To Share Allotment A/cTo Share Call A/c


The Articles of Association of a company usually empower the director to charge interest at a stipulated rate on calls in arrears. According to Table A of Companies Act 1956 interest at the rate of 5% p.a. is to be charged on unpaid calls from the due date of the call up to the actual payment.


JE for interest receivable on call in arrears

Shareholders A/c….Dr.To Interest on Calls in Arrears A/c

For receipt of interest Interest on Calls in Arrears A/c…Dr.

Shareholders A/c


According to Table A of Companies Act 1956 interest at the rate of 6% p.a. is to be paid on calls in advance from the actual payment up to due date of the call. JE for Interest due

Interest on Calls in Arrears A/c…Dr.To Shareholders A/c


Payment of interest Shareholders A/c …Dr.

Interest on Calls in Advance A/c


DebenturesIssuing debt instruments by offering the same for public subscription is one of the sources of financing the business activities. Debt financing does not only help in reducing the cost of the capital but also helps in designing appropriate capital structure of the company.


Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business.

A debenture/ bond is the a security issued by the company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest.


Issue of debentures can be categorized into the following:

1.Debenture issued at par and redeemable at par or at a discount

2.Debenture issued at discount and redeemable at par or at a discount

3.Debenture issued at premium and redeemable at par or at a discount

Issue of debentures


4.Debenture issued at par and redeemable at premium

5.Debenture issued at a discount and redeemable at premium


Journal Entries in each of the above cases are discussed below:1. Debenture issued at par and redeemable at par or at a discount

For receipt of application money:Bank A/c……Dr.

To Debenture ApplicationMoney A/c


For transfer of application money to debenture account:

Debenture Application A/cTo Debenture A/c



To Debenture Application Money A/c



Debenture Application A/cDiscount on issue of debenture A/c

To Debenture A/c

4.Debenture issued at premium and redeemable at par or at a discount





Debenture Application A/cTo Debenture A/c To Securities premium A/c

5.Debenture issued at par and redeemable at premium





Debenture Application A/c To Debenture A/cCall made consequent upon

allotment:Debenture Allotment A/cLoss on issue of Debenture A/c

To Debenture A/cTo Debenture redemption Premium A/c


6.Debenture issued at a discount and redeemable at premium






Call made consequent upon allotment:

Debenture Allotment A/cDiscount /Loss on issue of Debenture A/c(Discount + premium on

redemption)To Debenture A/cTo Debenture redemption Premium A/c


7.Debenture issued at a premium and redeemable at premium

For receipt of application money:Bank A/c……Dr. To Debenture Application

Money A/cFor transfer of application money to

debenture account: Debenture Application A/c

To Debenture A/c


Call made consequent upon allotment:

Debenture Allotment A/cLoss on issue of Debenture A/c(amount equal to premium on

redemption)To Debenture A/cTo Debenture redemption

Premium A/c


Redemption of debentures can be categorized into the following:

1. Debenture issued at par and redeemable at par

2. Debenture issued at discount and redeemable at par

Redemption of debentures


3. Debenture issued at premium and redeemable at par

4. Debenture issued at par and redeemable at premium

5. Debenture issued at a discount and redeemable at premium

6. Debenture issued at a premium and redeemable at premium


Journal Entries in each of the above cases are discussed below:

1. Debenture issued at par and redeemable at par

-Closing debenture accountDebenture A/c……Dr.

To Debenture holders A/c


-For payment of money to debenture holders:

Debenture holders A/cTo Bank A/c

2.Debenture issued at discount and redeemable at par-For transfer of loss of discount to profit & loss account:

Profit & Loss A/c……Dr.To Discount on issue of debenture A/c


the above entry may be repeated during the tenure of the debenture for writing off proportionate discount every year. -Closing debenture account

Debenture A/c……Dr.To Debenture holders A/c




3. Debenture issued at premium and redeemable at par-Closing debenture account

Debenture A/c……Dr.To Debenture holders A/c




4. Debenture issued at par and redeemable at premium-For transfer of loss of premium to profit & loss account:


Profit & Loss A/c……Dr.To Loss on issue of debenture A/c

the above entry may be repeated during the tenure of the debenture for writing off proportionate premium to be paid on redemption every year.


-Closing debenture and premium account

Debenture A/c……Dr.Debenture redemption Premium

A/c……Dr. To Debenture holders A/c-For payment of money to debenture holders:



5. Debenture issued at a discount and redeemable at premium-For transfer of loss of discount and premium to profit & loss account:

Profit & Loss A/c……Dr.To Discount / Loss on issue of debenture A/c

(Discount + Premium)


6. Debenture issued at a premium and redeemable at premium-For transfer of loss of discount to profit & loss account:

Profit & Loss A/c……Dr.To Loss on issue of debenture A/c

(Premium on redemption)


Debentures sometime are purchased in an open market and then cancelled on due date.

Example,Company has issued 1000 9 % debentures for Rs. 100000. interest being payable half yearly. The company purchases

Purchase of debenture


100 debentures at Rs. 98 per debenture cum interest (interest for 6 months).

Journal Entries:Own Debenture A/c….Dr. 9350Interest A/c….Dr. 450

To Bank 9800


Suppose out of these debentures 40 debentures sold at Rs. 102 ex interest and remaining are cancelled at the end of 6 months from date of purchase.

Journal EntriesBank A/c…DR. 4080

To Own Debentures 4080To Interest A/c 60


Own Debentures A/c…DR. 340To Profit & Loss 340

(Profit on sale transferred to P & L A/c)At the end of 6 months9% debentures A/c….Dr. 6000

To Own Debenture 5610To Capital Reserve 390

(Profit on cancellation transferred)

1 module 3. recording financial transation dr. varadraj bapat

Documents

varadraj bapatdr

price of share

share application acdr

share certificate

allotment acto share

equity shares

preference shares

public company