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CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital Notes

CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital : Here we provides all CBSE Class 12 Accountancy best books, video classes and CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital  free download study materials. Here we gave direct download links for CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital in pdf format. Download this CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital  in PDF Format and Read Well.

CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital Notes

CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital : A company form of organisation is the third stage in the evolution of forms of organisation. Its capital is contributed by a large number of persons called shareholders who are the real owners of the company. But neither it is possible for all of them to participate in the management of the company nor considered desirable. Therefore, they elect a Board of Directors as their representative to manage the affairs of the company. In fact, all the affairs of the company are governed by the provisions of the Companies Act, 1956. A company means a company incorporated or registered under the Companies Act, 1956 or under any other earlier Companies Acts. According to Chief Justice Marshal, “a company is a person, artificial, invisible, intangible and existing only in the eyes of law. Being a mere creation 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”. A company usually raises its capital in the form of shares (called share capital) and debentures (debt capital.) This chapter deals with the accounting for share capital of companies.

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CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital Notes

CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital :  Share capital consists of all funds raised by a company in exchange for shares of either common or preferred shares of stock. The amount of share capital or equity financing a company has can change over time. A company that wishes to raise more equity can obtain authorization to issue and sell additional shares, thereby increasing its share capital.

BREAKING DOWN ‘Share Capital’

The amount of share capital a company reports on its balance sheet only accounts for the total amount initial paid by shareholders. If those shareholders later resell their shares on the secondary market, any difference between the initial and subsequent sales prices does not impact the company’s share capital.

The term “share capital” is often used to mean slightly different things, depending on the context. When discussing the amount of money a company can legally raise through the sale of stock, there are actually several categories of share capital. Accountants have a much narrower definition.

Authorized, Issued and Paid Share Capital

Before a company can raise equity capital, it must obtain permission to execute the sale of stock. The company must specify the total amount of equity it wants to raise and the base value of its shares, called the par value. The total par value of all the shares a company is permitted to sell is called its authorized share capital. While a company may elect not to sell all its shares of stock during its initial public offering (IPO), it cannot generate more than its authorized amount. If a company obtains authorization to raise $5 million and its stock has a par value of $1, for example, it may issue and sell up to 5 million shares of stock.

The total value of the shares the company elects to sell is called its issued share capital. Not all these shares may sell right away, and the par value of the issued capital cannot exceed the value of the authorized capital. The total par value of the shares that the company sells is called its paid share capital. This is what most people refer to when speaking about share capital.

Share Capital in Accounting

The technical accounting definition of share capital is the par value of all equity securities – either common or preferred stock – sold to shareholders. Lay people, however, often include the price of the stock above par value in the calculation of share capital. The par value of stock is typically $1 or less, so the difference between the par and sale price of stock, called the share premium, may be considerable, but oy is not technically included in share capital or capped by authorized capital limits.

Assume company ABC issues and sells 1,000 shares. Each share has a par value of $1 but sells for $25. The company accountant logs $1,000 raised as paid share capital and the remaining $24,000, attributed to share premium, as additional paid in capital.

CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital Notes

CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital :  Ordinary Share Capital represents equity of a company and therefore its issuance is recorded as part of the equity reserves in the balance sheet. Ordinary Shares are also known as common stock and equity shares.

Initial Issue

Issue of ordinary shares is accounted for by allocating the proceeds between the following accounts:

•   Share Capital Account To account for the proceeds from the issue of shares up to their nominal value (face value).
•   Share Premium Account To account for the proceeds from the issue of shares over and above their nominal value (face value).
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Following journal entries need to be recorded to account for the issue of ordinary shares for cash:

Debit Bank The total amount of cash received.
Credit Share Capital Account Amount up to nominal value
Credit Share Premium Account Amount in exccess of nominal value

Example 1

ABC PLC issued 1 million ordinary shares on 1 January 20X4 having face value of $1 each at an issue price of $1.5 per share.

As per the terms of the issue, $1.25 per share had been received by the Company on 1 January 20X4 while the remaining amount was received in full on 30 June 20X4.

State the journal entries required to account for the above transactions.

Solution

1 Jan 20X4 Debit Bank $1,250,000 ($1.25 x 1 million)
Credit Share Capital $1,000,000 ($1.00 x 1 million)
Credit Share Premium $250,000 ($0.25 x 1 million)
30 June 20X4 Debit Bank $250,000 ($0.25 x 1 million)
Credit Share Premium $250,000 ($0.25 x 1 million)

Note

The total amount recognized in the share capital account is $1 million which equates to the nominal value of the issued shares (i.e. $1 per share) whereas the cash proceeds over and above the nominal value amounting $500,000 (i.e. $0.5 per share) has been credited to the share premium account.

Subscription Account

Company law of many jurisdictions such as USA and UK prohibit public companies from issuing shares to investors before all legal requirements for the issuance of shares have been met (e.g. minimum amount of subscription mentioned in the prospectus must be received). If the requirements for the issue of shares are not met, companies are obliged to return the subscription money received from applicants (subscribers).

To account for the shares issue in such cases, it will be necessary to create a temporary liability account (e.g. Subscription Account) in addition to the 2 accounts discussed above in order to account for the cash advanced in respect of the subscription of shares until the date of issuance of shares or the return of subscription money to applicants.

Following journal entries shall be recorded to account for the issue of ordinary shares involving subscription account:

Debit Bank The total amount of cash received.
Credit Subscription Account The total amount of cash received temporarily recognized as liability.
Liability is recognized because the company is obliged to issue shares to applicants or, if the shares are not to be issued, to return the subscription money to applicants.
Debit Subscription Account Amount of cash inflow in respect of shares which have either been issued or whose amount has been returned to subscribers (due to for example unsuccessful applications, excess subscription, non-fulfillment of legal requirements for issue of shares, etc).
Credit Bank Amount returned to subscribers
Credit Share Capital Account Nominal value of shares issued
Credit Share Premium Account Amount in exccess of nominal value of the shares issued

Example 2

ABC PLC offered 1 million ordinary shares for issue to public on 1 January 20X4 having face value of $1 each at an issue price of $1.5 per share.

ABC PLC requires the equity injection to finance a new project. The minimum amount of subscription necessary for the project is $1,250,000.

As per the terms of the issue of shares, $1.5 per share was to be received in full from the applicants on 30 November 20X3.

A total amount of $3,000,000 was received. The oversubscription of $1,500,000 was returned to unsuccessful applicants on 20 December 20X3.

State the journal entries required to account for the above transactions.

Solution

30 Nov 20X3 Debit Bank $3,000,000 Total amount received
Credit Subscription Account $3,000,000 (Amount recognized as a temporary liability until issuance of shares or refund to applicants)
20 Dec 20X3 Debit Subscription Account $1,500,000 Amount of oversubscription returned to unsuccessful applicants)
Credit Bank $1,500,000
30 June 20X4 Debit Subscription Account $1,500,000 (This represents subscription proceeds in respect of which shares have been alloted to succesful applicants.)
Credit Share capital $1,000,000 (Nominal value of issued shares $1 x 1 million)
Credit Share Premium $500,000 (Proceeds from issue of shares in excess of their face value $0.5 x 1 million)

Note:

As with Example 1, $1 million has been recognized in the share capital account which equals to the face value of issued shares (i.e. $1 per share) whereas the excess over the face value amounting $500,000 (i.e. $0.5 per share) has been credited to the share premium account. Both equity accounts have been credited on the date of issuance of shares (i.e. 1 Jan 20X4). The subscription advance received on 30 Nov 20X4 had not been credited directly to equity reserves until the actual issuance of shares.

CBSE Class 12 Commerce Accounting For Companies Accounting For Share Capital Notes

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