Share capital:
The capital of the
company is divided into different parts called shares. Each part of the share
capital is called a share. The value, which is stated in the share certificate,
is called par value/face value/nominal value/stated value. The total amount of all
the shares is called share capital. The shares are divided into definite values
and numbers. Holders of these shares are called ‘shareholders’ or ‘members’ of
the company. It is an amount invested by the shareholders towards the nominal
value of shares.
In other words “share capital is the ownership capital of a company raised by
the issue of its shares. It is an amount invested by the shareholders towards
the nominal value of shares. A company needs to share capital in order to
finance its activities.
There are different
types of share capital, which are as follows:
Authorized or
registered capital:
The capital which is
mentioned in the Memorandum of Association as the maximum amount of share
capital is called authorized or registered capital. It is the maximum amount of
capital that a company can raise. The capital is divided into a definite number
of shares. For example, if a company has 20,000 authorized shares at the rate
of Rs. 100 each, the total authorized share capital will be Rs. 2,000,000. The
authorized capital is also known as nominal capital.
Issued capital:
It is the part of the
authorized capital, which is actually offered to the public for subscription.
Generally, a company does not issue the entire authorized shares at a time so
that the issued capital is always less than the authorized capital. (50,000
shares @ Rs.100 each).
Subscribed capital:
It is that part of the
issued capital, which is actually taken up by the investors. For example, if a
company issues 50,000 shares @ Rs. 100 each and the application for 45,000
shares were received, the subscribed capital is Rs.45,00,000.
Called-up capital:
The amount of share
capital due to shares is normally collected from the shareholders in installments
at different intervals. The called-up capital is that part of the nominal
values of shares subscribed by shareholders, which is requested by the company
for payment. The uncalled capital if retained by the company to be called up
for the payment of creditors on liquidation is treated as reserve capital.
Paid-up capital:
It is the part of
called-up capital, which has been actually received from the company’s
shareholders. If the called-up capital is 45,000 shares @Rs. 80 each and a
shareholder holding 100 shares fail to pay the second installment of Rs. 20 per
share, the paid-up capital is Rs. 35,98,000 since Rs.2000 due on 100 shares at
Rs. 20 per share failed to pay.
Meaning of share:
A share is a document
that acknowledges the ownership of a company to the limit of the amount
contributed. So, the share is defined as an interest in the company reflecting
the ownership thereof and entitling to receive profit proportionately. The
share capital of a company is divided into a fixed number of units, and each
such unit is called a share. Therefore, a share can be defined as a unit of
share capital reflecting the extent of the interest of a shareholder.
Types of shares:
1) Equity shares:
Equity shares are
those, which will get dividends and refunds of capital only after preference shareholders
are paid. Equity shares are also known as ordinary shares or common shares.
There is no fixed rate of equity dividend. The dividend on these shares is paid
from profits only after paying interest on debentures and dividends on
preference share capital. Equity shareholders can participate in the management
and enjoy the voting rights to elect some members of the Board of Directors.
Equity shareholders are the real owner of the business.
The importance of
equity share capital is as follows:
i) Importance to the
company
o No need to pay a dividend,
in case of loss of the company
o No need to refund to
the equity shareholders before the winding-up of the company
o The directors are
elected from the equity shareholders for the effective management of the
company
ii) Importance to the
shareholders
o Every shareholder has
a voting right to elect the company’s BOD.
o Equity shareholders
can enjoy a higher amount of dividend in case of a higher profit.
o Equity shareholders
can easily sell or transfer their shares to others.
2) Right shares:
The shares entitling
to be subscribed by the existing shareholders of the company are called right
shares. These are additional equity or common shares offered by a company of
its shareholders to subscribe within a specified period at a specific price.
3) Preference shares:
Preference shares are
those shares that are entitled to certain privileges. The dividend on
preference share is paid at a fixed rate. The dividend on such shares is paid
before any dividend is paid to equity shareholders. Similarly, at the time of
winding-up the company, the preference capital is repaid before such repayment
is made to the equity shareholders. Preference shareholders do not have any
voting rights.
Types of preference
shares are as follows:
I. Cumulative preference
share:
Cumulative
preference shares are those shares on which the amount of unpaid dividends is
accumulated and is carried forward as a liability.
II. Non-cumulative
preference share:
They
are those shares on which the arrears of dividends do not accumulate.
III. Redeemable preference
share:
They
are those shares that can be redeemed within a specific period of time. The
terms and conditions for redemption of preference shares need to be specified
at the time of the issue of shares.
IV. Irredeemable
preference share:
They
are those, which can be redeemed only at the time of liquidation of the
company.
V. Convertible preference
share:
They
are those shares, which can be converted into equity shares. The conversion
becomes possible when the company provides such an option.
VI. Non-convertible
preference share:
They
are those shares, which can not be converted into equity shares. Preference
share are non-convertible unless otherwise stated.
VII. Participating
preference share:
They
are those shares, which have the right to participate in any surplus profit of
the company after paying a dividend on equity shareholders.
VIII. Non-participating
preference share:
They
are those shares, which do not carry such rights. If the Article of Association
of the company is silent, preference shares are assumed to be non-participating
preference share.
|
Equity
share |
Preference
share |
|
Dividend
on equity share is paid after the payment of preference dividend. |
Dividend
on preference share is paid before the payment of equity share. |
|
Rate of dividend on equity share
may vary from year to year. |
Rate of dividend on preference
share is fixed. |
|
Arrears
of dividend cannot be accumulated in any case. |
Arrears
of dividend may be accumulated in case of cumulative preference share. |
|
In case of dissolution of the company,
equity share capital is refunded after the repayment of preference share
capital. |
In case of dissolution of the
company, preference share is refunded before the repayment of equity share
capital. |
|
It
can not be convertible. |
It
may be convertible. |
|
Equity shareholder enjoy voting
rights. |
Preference shareholders do not
have voting rights. |
4) Deferred share:
The share allotted to
the promoters as a token of reward for the company is called deferred shares.
Founders or management shares are the other terms that are used to refers to such
shares.
Deferred shares enjoy the rights to share on profit after paying off preference
dividend and equity dividend.
Issue of shares:
A company issues its
shares to the general public through an invitation called a prospectus. It
issues shares to the public through the prospectus to meet the present
requirement of the fund. The prospectus of the company includes details about
the company indicating authorized capital, the number of shares issued, and the
face value of the share. The company can issue its share either for cash or for
other than cash. However, sometimes shares are also issued for consideration
other than cash, such as for the purchase of assets and for the purchase of the
business.
Issue of shares for
cash:
The shares of a
company can be issued either at par or at discount or at premium. The amount of
shares can be collected either on lump-sum or on installment basis.
Issue of shares on
Lump-sum Basis:
If the whole amount of
share is collected at once, it is called issue of share on lump-sum basis.
Issue of share at par:
A share issued at a
price equal to its face or nominal value is called issue of share at par. For
instance, if a share of Rs. 100 each is issued at Rs. 100, it is known as issue
of share at par.
Issue of shares at
Discount:
A share issued at a
price lower then its face or nominal value is called issue of share at
discount. For instance, if a share of Rs.100 each is issued at Rs.90, it is
issue of share at discount.
Issue of share at
premium:
A share issued at a
price greater than its face or nominal value is called issue of share at
premium. For instance, if a share of Rs.100 each is issued at Rs.110, it is
issue of share at premium.
Issue of shares on
instalment Basis:
The amount of shares
may be collected in different installments. Generally, such an amount of installments
is collected in the form of application, allotment, first call, and second and
final call.
Share application:
A prospective
subscriber intending to purchase the share pays the first installment of the
amount of share with an application form. The amount of the first installment
paid is called share application.
Share allotment:
The Company allots the
shares among different applicants after receiving their share application
money. The allotment of shares implies that the company has accepted the
application of the subscribers and decided to give shares to them. The company
sends letters to the applicants intending for subscribing to the shares, which
is called ‘letter of Allotment’.
Calls on shares:
The remaining amount
of the shares allotted is called up by writing letters to the shareholders,
which is known as calls on share. Such remaining amount is called up after
receiving the allotment money.
Calls in Arrears:
When a shareholder
fails to pay the due amount of share allotment or calls, the unpaid amount of
share is called ‘calls in arrears’. In other words, any installment money
(either allotments or calls or both) called up by the company but not paid by
the shareholder within the specified time is called “calls in arrears.”
There are two
alternative methods of the accounting treatment for calls in arrears they are
as follows:
i) Showing calls in
arrears account: Under it, the amount of unpaid share amount is shown in
calls in arrears account.
ii) Without showing
calls in arrears account: Under it, the amount of unpaid share amount is not shown
in calls in arrears account. The debit balance remaining in share allotment and
calls account represents the amount of calls in arrears.
Interest on Calls in
Arrears:
A company needs to
receive interest on calls in arrears from those shareholders who fail to pay
share called money within the specified period of time. The interest on calls
in arrears is charged as per the provision of the Article of Association.
Calls in advance:
The company receives
the amount of shares in different installments. Sometimes, the company may
receive the uncalled amount of installments in advance as well. The amount of
installments, which have not been called up but received, is known as calls in
advance. Calls in advance are liability and it is shown in liability and it is
shown in the liability side of the balance sheet. At the time of journal entry,
the bank account will be debited and calls in the advance account will be credited.
Minimum subscription:
It refers to the
amount, which must be raised to meet the requirement of operation of the
business. According to the Nepal Company Act 2053, a company must receive
subscription at least 50 percent of its issued capital as a minimum
subscription. The minimum amount required for:
o Acquiring properties
for the company
o To pay preliminary
expenses and commission
o Payment of money
borrowed by the company
o To meet required
working capital
o To pay other
expenditures
Under subscription:
Sometimes, the shares
offered by the company may not be subscribed fully by the public. If the shares
subscribed are less than the shares offered, it is called under subscription.
Oversubscription:
The condition where
the share application received is more than the number of shares offered by the
company then it is called oversubscription of shares. For example, a company
has issued 20,000 shares but it has received an application for 30,000 shares
in such condition it is called oversubscription. In such a case, the company
cannot allot shares to all the applicants in full.
The allotment of the
shares in case of oversubscription can be made under the following
alternatives:
Full rejection of excess application:
Under this alternative,
the excess applications of shares received for the shares offered by the
company are rejected. The rejected applications money is refunded along with a
letter of regret.
Pro-rata allotment:
Under this
alternative, the company allots the shares to all the applicants proportionately.
For example, if 5,000 applications were received for 1,000 shares issued, the
pro-rata allotment would be 5000:1000 or 5:1. In this instance, an applicant
who has applied for 5 shares is alloted only one share. The excess application
money is utilized towards the amount due on the allotment and subsequent. It is
a process of allotment of shares on a proportionate basis.
Mixed method:
Under this
alternative, some applicants are fully allotted, some are allotted proportionately
and some are rejected. The application money should be refunded to the
applicants to whom no shares are allotted. The excess of application money on
proportionately allotted shares may be utilized towards the allotment and
subsequent calls.
Issue of shares for
Non-cash consideration:
The issue of shares
for consideration rather than cash is called ‘issue of shares for non-cash
consideration.’ A company may issue shares for purchasing assets and other
businesses. It may also issue shares for paying underwriting commission and
remuneration of its promoters.
Share underwriting:
Underwriter is a
person or a company that undertakes for issuing the shares or debentures at a
nominal commission. Share underwriting is an agreement between the company and
underwriter under which the underwriter undertakes for an agreed commission for
whole or part of the shares and guarantees to sale the shares of the company.
Underwriting
commission:
Underwriting
commission is a commission paid by a company to any person or financial
institution that guarantees to take up any shares or debentures offered by the
company to the public for which the application is not received.
Brokerage:
Share broker is an
agent acting for the company in issuing shares. Brokerage is a commission charged
by the broker for completing any negotiations. A share broker charges a commission
for rendering services in the issue of shares and debentures of a company.
Accounting treatment
of Goodwill and Capital Reserve:
Sometimes, the amount
of purchase consideration of a business purchased differs from its net worth.
If the amount of purchase consideration is more than the net worth then
goodwill is debited with the excess of purchase consideration over the net
worth.
Opening balance sheet:
The balance sheet
prepared by a newly established company after the issue of shares and
debentures is called opening balance sheet. In other words, the balance sheet
of the existing company prepared after the issue of shares and debentures,
purchase of assets, purchase of business, and reconstruction of financial
structure is known as opening balance sheet.
Issue of shares to promoters:
Promoters are those
individuals or organizations that give birth to the company. The following
entry is passed for the issue of shares:
Date | Particulars | LF | Dr.Amt | Cr.Amt |
| Goodwill a/c Dr To share capital a/c (Being issue of…shares of Rs….each to promoters for their services) | | XXXXX | XXXXX |
Forfeiture of shares:
The term “forfeiture
of shares” indicates to the cancellation of shares. This happens when a
shareholder fails to pay allotment or call or both within the specified date.
The Board of Directors is empowered by the company’s articles of association to
forfeit the default shares. Before the forfeiture of shares, the company must
follow the procedure for collecting calls in arrear as amount as a stand in the
article of association and prevailing act.
Forfeiture of shares is a process of withdrawing the shares allotted and
seizing the amount already paid by the defaulters.
The conditions of
forfeiture of shares are as follows:
Forfeiture of shares
at par:
The following journal
entry is passed for the Forfeiture of shares initially issued at par
|
Date |
Particulars |
LF |
Dr.Amt |
Cr.Amt |
|
|
Share capitals a/c……………………..Dr.
The share allotment a/c |
|
XXXXX |
XXXXX XXXXX XXXXX |
Forfeiture of
shares at discount:
The following journal
entry is passed for the Forfeiture of shares initially issued at discount:
|
Date |
Particulars |
LF |
Dr.Amt |
Cr.Amt |
|
|
Share capitals a/c……………………..Dr. The
discount on issue of share a/c |
|
XXXXX |
XXXXX XXXXX XXXXX |
Forfeiture of shares
at a premium
i) When a shareholder
fails to pay the amount of premium:
The following journal
entry is passed for the When a shareholder fails to pay the amount of premium;
|
Date |
particulars |
LF |
Dr.Amt |
Cr.Amt |
|
|
Share capitals a/c……………………..Dr. Share premium a/c…………………..Dr. |
|
XXXXX XXXXX |
XXXXX XXXXX |
ii) When a shareholder pay the amount
of premium:
The following journal
entry is passed for the When a shareholder pay the amount of premium;
|
Date |
particulars |
LF |
Dr.Amt |
Cr.Amt |
|
|
Share capitals a/c……………………..Dr. The calls in arrear a/c
The share forfeiture a/c |
|
XXXXX |
XXXXX XXXXX |
Reissued of forfeiture
shares:
The following journal
entry is passed for the Reissued of forfeiture shares;
Date | particulars | LF | Dr.Amt | Cr.Amt |
| Bank a/c ……………………………………….Dr. Share forfeiture a/c………………………Dr. To share capital a/c (Being……shares reissued at Rs….each) | | XXXXX XXXXX | XXXXX |
The following journal
entry is passed for transferring the amount of net gain on capital reserve
account;
Date | particulars | LF | Dr.Amt | Cr.Amt |
| Share forfeiture a/c…………………..Dr. To capital reserve a/c (Being capital reserve adjusted) | | XXXXX | XXXXX |
Reviewed by Bijay Munikar
on
October 23, 2020
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