accounting for share capital

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1 Accounting For Share Capital M. C. Sharma Associate Professor, Deptt. Of Commerce Shaheed Bhagat Singh Evening College (University of Delhi) Delhi Email:[email protected] Prof. M. C. Sharma M: 9717415641

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Page 1: Accounting for share capital

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Accounting For Share Capital

M. C. SharmaAssociate Professor, Deptt. Of CommerceShaheed Bhagat Singh Evening College(University of Delhi)DelhiEmail:[email protected]

Prof. M. C. Sharma M: 9717415641

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Meaning and Definition of A Company According to Section 2(20) of the Companies Act

2013:“Company” means a company incorporated under the Act (of 2013) or under any previous company law.

According to Chief Justice Marshal (USA):“A company is a person artificial, intangible and existing only in the eyes of law. Being a creature of law, it possesses only those properties which the charter of its creation confers on it either expressly or incidental to its very existence. It has no physical existence but exists only in contemplation of law.”

Prof. M. C. Sharma M: 9717415641 2

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Kinds of Companies Company limited by guarantee [Section 2(21)] Company limited by shares [Section 2(21)] Unlimited Company [Section 2(92)] Private Company [Section 2(68)] Public Company [Section 2(71)] Government Company Foreign Company Companies with Charitable objects One person company (OPC) Holding and Subsidiary Company Statutory Companies

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Shares – Meaning and Types What is a share? Capital of a company is divided into units or

parts of equal amount. Every unit/part is called a share.

According to Section 2(84) of the Companies Act, a ‘share’ means a share in the share capital of a company and includes stock.

It is an ownership security.

Prof. M. C. Sharma M: 9717415641

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Types of Shares

Preference Shares Equity Shares:

a. Equity shares issued by a Company limited by

shares to public or its members [Section 43]

b. Sweat Equity Shares [Section 2(68)]

Prof. M. C. Sharma M: 9717415641 5

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Types of Shares (Contd.)

Preference SharesPreference shares are those shares which carry the following preferential rights: 1.the right to receive divided at a specified rate before any dividend is paid on the equity shares, and 2.the right to repayment of capital before anything is paid to equity shareholders.

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Equity Shares issued by a Company limited by shares to public or its members [Section 43]Section 43 states that an equity share is a share which is

not a preference share. The main features of equity shares are:1.No preferential right as to payment of dividend and refund of capital.2.No assurance of dividend.3.Right to participate in the management of the company through voting right.4.Equity shareholders are the last claimants to their capital contribution in the event of winding up.5.Such shares cannot be issued at a discount.

Prof. M. C. Sharma M: 9717415641 7

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Sweat Equity Share According to Section 2(88), sweat equity

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

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Share CapitalMeaning and Forms

Authorised Share Capital Issued Capital Subscribed Capital Called-up Capital Paid-up Capital

= Called-up Capital – Calls in arrears Reserve Capital or Reserve Liability of Limited

Company (Omitted in the Companies Act, 2013)

Prof. M. C. Sharma M: 9717415641

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Minimum Subscription A company cannot allot any security to the

public unless the ‘minimum subscription’ stated in the prospectus, has been subscribed or raised.

The minimum subscription is the amount which in the opinion of the board of directors, must be raised by the issue of shares so that the company has necessary funds to carry out its objects.

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Terms of Issue of Shares Face Value or Nominal Value:

Nominal value of shares mentioned in the Memorandum of Association of the Company.

Issue Price : The price at which shares are issued by the company.

Issue at ParIssue Price = Face Value

Issue at PremiumIssue Price > Face Value

Issue at Discount (only for Sweat Equity Shares)Issue Price < Face Value

Prof. M. C. Sharma M: 9717415641

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Subscription of Public Issue of Shares

Full SubscriptionNo. of Shares Applied = No. of Shares issued/offered

Under SubscriptionNo. of Shares Applied < No. of Shares issued/offered

Over SubscriptionNo. of Shares Applied > No. of Shares issued/offered

Prof. M. C. Sharma M: 9717415641

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Issue of Shares for Cash at Par –a case of full subscription1. For receiving application money

Bank A/c Dr. To Eq./Pref. Share Application A/c (Being application money received on... Shares @ Rs. per share)

2. On allotment for transferring application money to share capital account Eq./Pref. Share Application A/c Dr. To Eq./Pref. Share Capital A/c (Being application money transferred to share capital A/c)

Prof. M. C. Sharma M: 9717415641

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3. On allotment-for making due allotment money Eq./Pref. Share Allotment A/c Dr.

To Eq./Pref. Share Capital A/c (Being allotment money made due on ... share @

Rs. ..per share)

4. For receiving allotment moneyBank A/c Dr.

To Eq./Pref. Share Allotment A/c (Being allotment money received)

Prof. M. C. Sharma M: 9717415641

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5. For making due call money Eq./Pref. Share .......... Call A/c Dr.

To Eq./Pref. Share Capital A/c (Being call money made due on... Share @ Rs... per share)6. For receiving call moneyBank A/c Dr.

To Eq./Pref. Share .......... Call A/c (Being call money received)

Prof. M. C. Sharma M: 9717415641

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Notes: If type of share is specified, equity share or

preference share - then various accounts should be named accordingly, like Equity Share Capital A/c, Equity Share Application A/c, Equity Share Allotment A/c and so on.

When there is only one call, it should be named as ‘Final Call.’ When there are two or more calls, these should be named as ‘First Call’, ‘Second Call’ and so on. The last call is named as ‘Final Call’. When first call is final call, then it may be named as ‘Share First & Final Call A/c’.

Prof. M. C. Sharma M: 9717415641

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

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

Prof. M. C. Sharma M: 9717415641

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Issue of Shares at Premium(ii) If the premium is called along with

allotment money, then entry for making due allotment money will be:Share Allotment A/c Dr.

To Share Capital A/c To Securities Premium A/c

(Being allotment money, including premium made due)

Prof. M. C. Sharma M: 9717415641

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Issue of Shares at Premium(iii) If the premium is demanded along with call money,

the entry for making due call money will be:Share Call A/c Dr. To Share Capital A/c To Securities Premium A/c(Being call money including premium made due)

Note:Normally, it is mentioned in the question as to when premium is receivable - on application or on allotment or on calls. In the absence of any information, it is assumed that the premium is due along with allotment money.

Prof. M. C. Sharma M: 9717415641

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Issue of Shares at Discount*

* Only for issue of Sweat Equity SharesThe amount of discount is recorded at the time of allotment, therefore the following entries should be passed for making allotment money due: Share Allotment A/c Dr. Discount on Issue of Shares A/c Dr.

To Share Capital A/c (Being amount made due on allotment and adjusted discount)

Prof. M. C. Sharma M: 9717415641

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When issue is under-subscribed If the issue is under-subscribed, it may be

assumed that minimum subscription has been received and the shares are allotted to all the applicants in full.

Entries will be passed for actual number of shares applied and allotted.

Prof. M. C. Sharma M: 9717415641

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When issue is over-subscribed(1) First alternative-Rejecting excess

applications. Under this alternative, excess applications are out rightly rejected and their application money is refunded. Following entry is passed to refund the excess application money:Share Application A/c Dr.

To Bank A/c (Being excess application returned on rejected applications)

Prof. M. C. Sharma M: 9717415641

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When issue is over-subscribed(2) Second alternative-Proportionate allotment.

When issue is over subscribed, applicants may be allotted shares in a fixed proportion. This is called proportionate or pro-rata allotment. The proportion depends upon the shares offered and share applied. In this case surplus application money is adjusted towards sum due on allotment. Following entry is passed for the same :Share Application A/c Dr.

To Share Allotment A/c (Being surplus application money transferred to share allotment account)

Prof. M. C. Sharma M: 9717415641

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When issue is over-subscribed Sometimes the surplus application money exceeds

even the money due on allotment. Such amount has to be returned. However it can be retained by the company for utilisation towards the future calls, if the articles of association so authorise. Share Application A/c Dr.

To Share Allotment A/c To Calls-in-Advance A/cTo Bank A/c (Refund)

(Being excess application money transferred to share allotment and calls-in-advance account and balance refunded)

Prof. M. C. Sharma M: 9717415641

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When issue is over-subscribed Third alternative - A combination of the

above two alternatives. The directors may adopt a combination of the above two alternatives. Some applications may be accepted in full. Some applications are rejected, and Proportionate allotment is made to the remaining

applicants.

Prof. M. C. Sharma M: 9717415641

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Calculation of Arrears in case of Pro-rata allotment Allotment Money Due on Prorata Allottee

XXXLess: Surplus Application Money (No. of Shares Applied - No. of Shares Allotted)

X Application Money per Share (xx)Arrears on Allotment XXX

Allotment Money Received= Total Allotment Money Due – Surplus Application

Money – Arrears on Allotment

Prof. M. C. Sharma M: 9717415641

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Right Issue of Shares The concept of rights shares is related to the

further issue of shares to the existing shareholders in the proportion of their holding. Accounting treatment is the same as for the public issue.

Issue of Two Types of Shares A company may issue two types of shares at a

time. These are equity shares and preference shares. When two types of shares are issued simultaneously, separate accounts are opened for each type of shares for capital, application money, allotment money and call money.

Prof. M. C. Sharma M: 9717415641

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Preparing A Cash Book Cash Book with bank column may be prepared, if

you are asked to prepare the same. In that case all bank transactions shall be

recorded in Cash Book. Journal entries will be passed only for non-

banking transactions.

Prof. M. C. Sharma M: 9717415641

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Maintaining a Combined Account of Application and Allotment Money A company may maintain only one account for

application and allotment money. In such a case, all entries relating to application

and allotment are passed through an account called ‘Share Application and Allotment A/c.

In this method only one entry is passed for making due application and allotment money.

There is no need to pass an entry for surplus application money transferred to allotment A/c.

Prof. M. C. Sharma M: 9717415641

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Calls-in-Arrear It is the amount called by the company on allotment

or on calls but not paid by the shareholders. Accounting for calls-in-arrear

(1) First Method. When no separate account is maintained for calls-in-arrears. When allotment or call money is received, the entry is passed for actual amount received. The debit balance on the allotment and/or calls account represents the calls-in-arrears.

(2) Second Method. When a separate account is maintained for ‘Calls-in-Arrears’. The amount not received on allotment and/or on calls is debited to Calls-in-Arrears A/c.

Prof. M. C. Sharma M: 9717415641

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The journal entry will be passed as follows: Bank Account Dr.Calls-in-Arrears A/c Dr. To Share Allotment A/c OR To Share ... Call A/c (Being amount received and calls in arrears brought into account)

Interest on Calls in Arrears When arrears are received, the company charges interest at a

given rate, not exceeding 10% p.a. as per Table F of Schedule I of Companies Act, 2013

Entry for receiving interest on calls-in-arrears. Bank A/c Dr. To Interest on Calls-in-Arrears A/c (Being interest received on calls-in-arrear)

Prof. M. C. Sharma M: 9717415641

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Calls-in-Advance Amount paid by the shareholders before the due date

or call becomes due. Accounting for Calls-in-Advance

(a) For receiving calls in advance:Bank A/c Dr. To Calls-in-Advance A/c (Being amount received in advance) (b) For adjusting calls in advance: Calls in Advance A/c Dr. To Share …. Call A/c

(Being calls-in-advance adjusted with the call money due)

Prof. M. C. Sharma M: 9717415641

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Interest on Calls in Advance The company has to pay interest on the amount of calls-

in-advance from the date of its receipt to the date of adjustment.

Rate of interest, if not specified in the Articles, will not exceed 12% p.a. as per Table F of Schedule I of Companies Act, 2013.

Following entry is passed for payment of interest on calls-in-advance :

Interest on Calls-in-Advance A/c Dr. To Bank A/c (Being interest paid on calls-in-advance)

Prof. M. C. Sharma M: 9717415641

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Issue of shares for consideration other than cash A company can issue shares for purchase of an asset or

for purchase of business or as remuneration to promoters of the company.

(a) Entry for purchase of a fixed asset

Fixed Assets A/c Dr.To Vendor’s A/c

(Being fixed assets purchased from vendor)Notes: Vendor’s A/c is credited with the amount of

Purchase consideration.

Prof. M. C. Sharma M: 9717415641

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(b) For purchase of business:Sundry Assets A/c Dr.Goodwill A/c (ii) Dr.To Sundry Liabilities A/cTo Vendor’s A/c (i)To Capital Reserve A/c (iii)(Being business purchased)

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Notes: Vendor’s A/c is credited by purchase consideration. Purchase consideration, if not given in the question, it will be

equal to net assets, i.e., Assets minus Liabilities. If purchase consideration is given and it is more than net assets,

then the difference shall be debited to Goodwill A/c. If purchase consideration is given and it is less than net assets,

then the difference shall be credited to Capital Reserve A/c.

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For issue of shares to vendors (a) Issue of shares at par:

Vendor’s A/c Dr.To Share Capital A/c

(Being shares issued to vendor at par) (b) Issue of shares at premium -

Vendor’s A/c Dr.To Share Capital A/cTo Security Premium A/c

(Being shares issued to Vendor at premium) (c) Issue of shares at discount -

Cannot be issued as per The Companies Act, 2013.

Prof. M. C. Sharma M: 9717415641

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Note : A working note should be prepared to calculate number of shares to be issued.

Number of shares to be issued

For issue of shares to promoters, as a remuneration of their services:

Goodwill A/c Dr.To Share Capital A/c

(Being shares issued to promoters)

Price IssuePayableAmount

Prof. M. C. Sharma M: 9717415641

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Forfeiture of Shares

Forfeiture of Shares issued originally issued at parShare Capital A/c (Amt. called on forfeited shares) Dr.

To Share Allotment A/c (Arrears on Allotment)To Share ….. Call A/c (Arrears on calls)To Share Forfeited A/c (Amount received)

(Being ….. shares forfeited due to non-payment of allotment and call money)

Prof. M. C. Sharma M: 9717415641

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Forfeiture of Shares originally issued at premiumShare Capital A/c Dr. (Amt. called up,

less premium)Security Premium A/c Dr. (Premium

called but not received)

To Share Allotment A/c (Arrears on allotment)To Share Call A/c (Arrears on call)To Share Forfeiture A/c (Amt. received,

excluding premium)

(Being ... shares forfeited due to non-payment of allotment and call money)

Prof. M. C. Sharma M: 9717415641

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Forfeiture of Shares originally issued at discount This topic is irrelevant now. Section 53 of The Companies Act, 2013 prohibits issue of equity

shares at a discount.

Prof. M. C. Sharma M: 9717415641

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Reissue of Forfeited Shares(a) Reissue at par :

Bank A/c Dr.To Share Capital A/c

(Being forfeited shares reissued at par)(b) Reissue at premium:

Bank A/c Dr.To Share Capital A/cTo Security Premium A/c

(Being forfeited shares reissued at premium)

Prof. M. C. Sharma M: 9717415641

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(c) Reissue at Discount :Bank A/c Dr.Share Forfeited A/c Dr. (Discount on reissue)

To Share Capital A/c(Being forfeited shares reissued at discount)

Re-issue (of shares originally issued at discount) at a discount This topic is irrelevant now. Section 53 of The Companies Act, 2013 prohibits issue

of equity shares at a discount.

Prof. M. C. Sharma M: 9717415641

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Profit on Reissue of Shares or Capital Reserve

Share Forfeited A/c Dr.To Capital Reserve A/c

(Being profit on reissued shares transferred to Capital Reserve A/c)

(1) Capital Reserve = Amount forfeited on re-issued shares - Discount on re-issue

(2) Capital Reserve, When shares originally issued at discount are re-issued at discount:

Capital Reserve = Amount forfeited on reissued shares – Excess Discount on re-issue

Prof. M. C. Sharma M: 9717415641