Big picture
A company raises its capital by selling shares to the public. Unlike a partner, a shareholder's liability is limited to the unpaid amount on their shares, and the company is a separate legal person that continues even when its shareholders change.
Money for shares usually arrives in stages: application, allotment, and one or more calls. Each stage is recorded in two steps: the amount becomes due (credited to Share Capital), then it is received (debited to Bank). Most exam questions test what happens when the stages don't go to plan: too many applicants, shareholders who don't pay, and the resale of forfeited shares.
Learning goals
Explain the features of a company and the categories of share capital.
Distinguish equity and preference shares.
Journalise the issue of shares for cash at par and at a premium, payable in instalments.
Handle over-subscription with rejection and pro-rata allotment, and under-subscription.
Record calls in arrears and calls in advance, with interest.
Record shares issued for consideration other than cash.
Record forfeiture of shares issued at par and at a premium, and their reissue.
Present share capital in the balance sheet and notes to accounts.
Core ideas
1. Company and share capital
A company under the Companies Act, 2013 is an artificial person created by law, with a separate legal entity, perpetual succession, limited liability, transferable shares (for a public company) and a common seal (optional now). Its capital is divided into shares.
Categories of share capital
Category | Meaning |
|---|---|
Authorised capital | The maximum capital the company may issue, stated in its Memorandum of Association |
Issued capital | The part of authorised capital offered to the public for subscription |
Subscribed capital | The part of issued capital actually taken up by the public |
Called-up capital | The part of subscribed capital the company has asked shareholders to pay |
Paid-up capital | The part of called-up capital actually received |
Uncalled capital | Subscribed capital not yet called |
Reserve capital | Uncalled capital that, by special resolution, will be called only on winding up |
Subscribed capital is shown as subscribed and fully paid up and subscribed but not fully paid up.
2. Kinds of shares
Preference shares carry two preferential rights: a fixed rate of dividend before equity shareholders get any, and return of capital before equity shareholders on winding up. They can be cumulative or non-cumulative, participating or non-participating, convertible or non-convertible, and redeemable (all preference shares issued now must be redeemable within 20 years).
Equity shares are all shares that are not preference shares. They carry voting rights and the residual profit; dividend is not fixed.
Other terms you should know
Private placement: issue of shares to a select group of persons (not more than 200 in a financial year, excluding qualified institutional buyers), not to the public.
Employee Stock Option Plan (ESOP): an option given to employees to buy the company's shares at a future date at a pre-determined, usually lower, price.
Sweat equity shares: shares issued to employees or directors at a discount or for consideration other than cash, for know-how or intellectual property they provide.
Minimum subscription: at least 90% of the issued amount must be subscribed. If it is not received within the stipulated time, all application money must be refunded.
Issue at a discount: not allowed under Section 53, except for sweat equity shares.
3. Issue of shares for cash, at par and at a premium
At a premium means above face value. The premium is credited to Securities Premium Account, a reserve shown under Reserves and Surplus. It is usually payable with allotment.
Journal entries for an issue payable in instalments
Stage | Debit | Credit |
|---|---|---|
Application money received | Bank A/c | Share Application A/c |
Application money transferred | Share Application A/c | Share Capital A/c |
Allotment money due | Share Allotment A/c | Share Capital A/c and Securities Premium A/c |
Allotment money received | Bank A/c | Share Allotment A/c |
Call money due | Share First Call A/c | Share Capital A/c |
Call money received | Bank A/c | Share First Call A/c |
Uses of Securities Premium (Section 52): issuing fully paid bonus shares; writing off preliminary expenses; writing off expenses, commission or discount on any issue of shares or debentures; providing premium payable on redemption of preference shares or debentures; buying back the company's own shares. It cannot be used to pay dividends.
4. Over-subscription and under-subscription
Under-subscription: fewer shares are applied for than offered. If at least the minimum subscription (90%) is received, shares are allotted to all applicants.
Over-subscription: more shares are applied for than offered. The directors may:
reject some applications and refund their money (Share Application A/c Dr, To Bank A/c);
allot pro-rata, giving each applicant fewer shares than applied for, and adjusting the excess application money towards allotment (and then calls, if any is left), with any further surplus refunded;
use a combination of both.
Pro-rata ratio = Shares applied for by the pro-rata group : Shares allotted to them.
5. Calls in arrears and calls in advance
Calls in arrears are amounts called but not paid. They may be transferred to a Calls in Arrears Account (Calls in Arrears A/c Dr, To Share Allotment/Call A/c), and are deducted from called-up capital in the notes to accounts. Under Table F, the company may charge interest on them at up to 10% p.a.
Example. A shareholder holding 500 shares does not pay a call of ₹3 per share for 4 months. Interest = 1,500 × 10% × 4/12 = ₹50.
Calls in advance are amounts received before they are called. They are credited to Calls in Advance Account, shown under Other Current Liabilities until the call is made, and carry interest at up to 12% p.a. (Table F). When the call is made: Calls in Advance A/c Dr, To Share Call A/c.
6. Shares issued for consideration other than cash
A company may buy assets from a vendor and pay by issuing shares.
Number of shares = Purchase consideration / Issue price per shareExample. Machinery is bought for ₹4,40,000, paid by issuing equity shares of ₹100 each at a premium of 10%. Issue price = ₹110, so shares = 4,40,000 ÷ 110 = 4,000 shares.
Entry | Debit | Credit |
|---|---|---|
Asset bought | Machinery A/c 4,40,000 | Vendor A/c 4,40,000 |
Shares issued | Vendor A/c 4,40,000 | Share Capital A/c 4,00,000 and Securities Premium A/c 40,000 |
Shares issued to promoters for their services are recorded as Goodwill (or Incorporation Costs) A/c Dr, To Share Capital A/c.
7. Forfeiture of shares
If a shareholder fails to pay allotment or a call, the directors may forfeit (cancel) the shares under the Articles. The money already received is not refunded; it is credited to Share Forfeiture Account.
Entry for forfeiture
Share Capital A/c Dr (amount called up on those shares) Securities Premium A/c Dr (only if the premium was due but not received) To unpaid Allotment / Call A/cs (amounts not received) To Share Forfeiture A/c (amount actually received on those shares)
Note. If the premium has already been received, do not debit Securities Premium on forfeiture. Premium that has been received stays in the Securities Premium Account.
Reissue of forfeited shares. Forfeited shares may be reissued at par, at a premium or at a discount. The discount on reissue cannot exceed the amount forfeited on those shares. Any amount left in Share Forfeiture Account on the reissued shares is a capital profit, transferred to Capital Reserve.
8. A complete share capital problem
Zenith Ltd issued 50,000 equity shares of ₹10 each at a premium of ₹2, payable ₹3 on application, ₹5 on allotment (including the premium) and ₹4 on first and final call. Applications were received for 70,000 shares. Applications for 10,000 shares were rejected and their money refunded. The remaining applicants (for 60,000 shares) were allotted 50,000 shares pro-rata, and excess application money was adjusted towards allotment.
Ravi, who had applied for 1,200 shares, failed to pay allotment and the call. His shares were forfeited. Later, 800 of these shares were reissued at ₹8 per share as fully paid.
Working for Ravi
Pro-rata ratio = 60,000 : 50,000 = 6 : 5
Shares allotted to Ravi = 1,200 x 5/6 = 1,000
Application money paid = 1,200 x 3 = 3,600
Needed on application = 1,000 x 3 = 3,000
Excess adjusted to allotment = 600
Allotment due (1,000 x 5) = 5,000
Allotment unpaid = 5,000 - 600 = 4,400
Call unpaid (1,000 x 4) = 4,000Journal entries (₹)
Particulars | Debit | Credit |
|---|---|---|
Bank A/c Dr (70,000 × 3) | 2,10,000 | |
To Share Application A/c | 2,10,000 | |
Share Application A/c Dr | 2,10,000 | |
To Share Capital A/c (50,000 × 3) | 1,50,000 | |
To Share Allotment A/c (excess adjusted) | 30,000 | |
To Bank A/c (10,000 × 3 refunded) | 30,000 | |
Share Allotment A/c Dr (50,000 × 5) | 2,50,000 | |
To Share Capital A/c (50,000 × 3) | 1,50,000 | |
To Securities Premium A/c (50,000 × 2) | 1,00,000 | |
Bank A/c Dr (2,50,000 − 30,000 − 4,400) | 2,15,600 | |
To Share Allotment A/c | 2,15,600 | |
Share First and Final Call A/c Dr (50,000 × 4) | 2,00,000 | |
To Share Capital A/c | 2,00,000 | |
Bank A/c Dr (2,00,000 − 4,000) | 1,96,000 | |
To Share First and Final Call A/c | 1,96,000 | |
Share Capital A/c Dr (1,000 × 10) | 10,000 | |
Securities Premium A/c Dr (1,000 × 2) | 2,000 | |
To Share Allotment A/c | 4,400 | |
To Share First and Final Call A/c | 4,000 | |
To Share Forfeiture A/c | 3,600 | |
Bank A/c Dr (800 × 8) | 6,400 | |
Share Forfeiture A/c Dr (800 × 2) | 1,600 | |
To Share Capital A/c (800 × 10) | 8,000 | |
Share Forfeiture A/c Dr | 1,280 | |
To Capital Reserve A/c | 1,280 |
Capital reserve working. Amount forfeited on 800 shares = 3,600 × 800/1,000 = ₹2,880. Discount allowed on reissue = ₹1,600. Capital reserve = 2,880 − 1,600 = ₹1,280. The balance left in Share Forfeiture Account, ₹720, relates to the 200 shares not yet reissued (200 × 3.60).
The premium was debited on forfeiture because Ravi did not pay allotment, which included the premium.
9. Share capital in the balance sheet
Under Schedule III, share capital appears in the Balance Sheet under Equity and Liabilities → Shareholders' Funds → Share Capital, with details in the Notes to Accounts.
Note: Share Capital (Zenith Ltd after reissue)
Particulars | ₹ |
|---|---|
Authorised capital: (say) 1,00,000 equity shares of ₹10 each | 10,00,000 |
Issued capital: 50,000 equity shares of ₹10 each | 5,00,000 |
Subscribed and fully paid up: 49,800 equity shares of ₹10 each | 4,98,000 |
Add: Share Forfeiture Account | 720 |
Total | 4,98,720 |
Securities Premium (1,00,000 − 2,000 = ₹98,000) and Capital Reserve (₹1,280) appear in the note on Reserves and Surplus. If there were calls in arrears without forfeiture, they would be deducted under "Subscribed but not fully paid up".
A reliable problem-solving routine
Write the amount per share due at each stage, separating capital and premium.
For over-subscription, find the pro-rata ratio and the excess application money for each group.
Journalise each stage as "due" then "received", deducting adjustments and unpaid amounts.
For a defaulting shareholder, work out shares allotted, money paid, excess adjusted and amounts unpaid.
On forfeiture, debit capital called up and any unreceived premium; credit unpaid calls and Share Forfeiture with the money received.
On reissue, debit Share Forfeiture with the discount; transfer the balance on reissued shares to Capital Reserve.
Prepare the share capital note and check that the forfeiture balance relates to unissued shares.
Connections that matter
Debentures use the same application-allotment pattern, but debentures are borrowed money, not capital.
Financial statement analysis uses shareholders' funds from the balance sheet you prepare here.
Partnership capital accounts belong to known partners; share capital belongs to a changing body of shareholders, which is why companies need forfeiture and reissue rules.
Common mistakes
Crediting premium to Share Capital. It goes to Securities Premium Account.
Forgetting the excess application money in pro-rata problems when calculating what a defaulter actually paid or owes.
Debiting Securities Premium on forfeiture when the premium had been received.
Using the amount paid instead of the amount called up when debiting Share Capital on forfeiture.
Allowing a reissue discount larger than the forfeited amount.
Transferring the whole forfeiture balance to Capital Reserve when only some shares were reissued.
Showing calls in advance as part of share capital. They are a current liability.
Revision checklist
I can define the categories of share capital and the kinds of shares.
I can journalise an issue at par or at a premium in instalments.
I can handle rejection and pro-rata allotment, and adjust excess application money.
I can calculate interest on calls in arrears and calls in advance.
I can record shares issued to vendors.
I can record forfeiture and reissue of shares, including capital reserve.
I can prepare the share capital note under Schedule III.