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karnataka class 12 commerce Accountancy Issue of shares

Karnataka class 12 commerce Accountancy Issue of shares

karnataka class 12 commerce Accountancy Issue of shares

A salient characteristic of the capital of a company is that the amount on its shares can be gradually collected in easy instalments spread over a period of time depending upon its growing financial requirement. The first instalment is collected along with application and is thus, known as application money, the second on allotment (termed as allotment money), and the remaining instalment are termed as first call, second call and so on. The word final is suffixed to the last instalment. However, this in no way prevents a company from calling the full amount on shares right at the time of application.

The important steps in the procedure of share issue are :

  • Issue of Prospectus: The company first issues the prospectus to the public. Prospectus is an invitation to the public that a new company has come into existence and it needs funds for doing business. It contains complete information about the company and the manner in which the money is to be collected from the prospective investors.
  • Receipt of Applications: When prospectus is issued to the public, prospective investors intending to subscribe the share capital of the company would make an application along with the application money and deposit the same with a scheduled bank as specified in the prospectus. The company has to get minimum subscription within 120 days from the date of the issue of the prospectus. If the company fails to receive the same within the said period, the company cannot proceed for the allotment of shares and application money should be returned within 130 days of the date of issue of prospectus.
  • Allotment of Shares: If minimum subscription has been received, the company may proceed for the allotment of shares after fulfilling certain other legal formalities. Letters of allotment are sent to those whom the shares have been alloted, and letters of regret to those to whom no allotment has been made. When allotment is made, it results in a valid contract between the company and the applicants who now became the shareholders of the company.

karnataka class 12 commerce Accountancy Issue of shares

Shares of a company are issued either at par, at a premium or at a discount. Shares are to be issued at par when their issue price is exactly equal to their nominal value according to the terms and conditions of issue. When the shares of a company are issued more than its nominal value (face value), the excess amount is called premium . When the shares are issued at a price less than the face value of the share, it is known as shares issued at a discount.

Irrespective of the fact that shares are issued at par, premium or discount, the share capital of a company as stated earlier, may be collected in instalments payable at different stages.

karnataka class 12 commerce Accountancy Issue of shares

Issue of Shares at a Premium

It is quite common for the shares of financially strong and well-managed companies to be issued at a premium, i.e. at an amount more than the nominal or par value of shares. Thus, when a share of the nominal value of Rs. 100 is issued at Rs. 105, it is said to have been issued at a premium of 5 per cent.

When the issue of shares is at a premium, the amount of premium may technically be called at any stage of the issue of shares. However, premium is generally called with the amount due on allotment, sometimes with the application money and rarely with the call money. The premium amount is credited to a separate account called ‘Securities Premium Account’ and is shown under the title ‘Equity and Liabilities’ of the company’s balance sheet under the head ‘Reserves and Surpluses’. It can be used only for the following four purposes as laid down by Section 78 of The Companies Act 1956:

(a) to issue fully paid bonus shares to the extent not exceeding unissued share capital of the company; (b) to write-off preliminary expenses of the company;

(c) to write-off the expenses of, or commission paid, or discount allowed on any of the shares or debentures of the company; and

(d) to pay premium on the redemption of preference shares or debentures of the company.

The journal entries for shares issued at a premium are as follows:

  1. For Premium Amount called with Application money

(a) Bank A/c Dr.

To Share Application A/c

(Money received on application for — shares @ Rs. — per share including premium) 

1.b) Share Application A/c Dr.

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

(Transfer of application money to share capital and securities premium account)

2.Premium Amount called with Allotment Money

(a) Share Allotment A/c Dr.

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

(Amount due on allotment of shares @ Rs — per share including premium)

(b) Bank A/c Dr.

To Share Allotment A/c

(Allotment money received including premium)

3.Premium Amount called with Call Money

(a) Share Application A/c

To Share Capital A/c

To Securities Premium A/c

(Amount due on Ist/2nd call @Rs— per share including premium)

(b) Bank A/c Dr.

To Share Call A/c

(Call money received including premium)

karnataka class 12 commerce Accountancy Issue of shares

Features of a Company A company may be viewed as an association of person who contribute money or money’s worth to a common inventory and use it for a common purpose. It is an artificial person having corporate legal entity distinct from its members (shareholders) and has a common seal used for its signature. Thus,it has certain special features which distinguish it from the other forms of organisation.

These are as follows:

  • Body Corporate: A company is formed according to the provisions of Law enforced from time to time. Generally, in India, the companies are formed and registered under Companies Law except in the case of Banking and Insurance companies for which a separate Law is provided for.
  • Separate Legal Entity: A company has a separate legal entity which is distinct and separate from its members. It can hold and deal with any type of property. It can enter into contracts and even open a bank account in its own name.
  • Limited Liability: The liability of the members of the company is limited to the extent of unpaid amount of the shares held by them. In the case of the companies limited by guarantee, the liability of its members is limited to the extent of the guarantee given by them in the event of the company being wound up.
  • Perpetual Succession: The company being an artificial person created by law continues to exist irrespective of the changes in its membership. A company can be terminated only through law. The death or insanity or insolvency of any member of the company in no way affects the existence of the company. Members may come and go but the company continues.
  • Common Seal: The company being an artificial person, cannot sign its name by itself. Therefore, every company is required to have its own seal which acts as official signatures of the company. Any document which does not carry the common seal of the company is not binding on the company.
  • Transferability of Shares: The shares of a public limited company are freely transferable. The permission of the company or the consent of any member of the company is not necessary for the transfer of shares. But the Articles of the company can prescribe the manner in which the transfer of shares will be made.
  • May Sue or be Sued: A company being a legal person can enter into contracts and can enforce the contractual rights against others. It can sue and be sued in its name if there is a breach of contract by the company.

Share Capital of a Company A company, being an artificial person, cannot generate its own capital which has necessarily to be collected from several persons. These persons are known as shareholders and the amount contributed by them is called share capital. Since the number of shareholders is very very large, a separate capital account cannot be opened for each one of them. Hence, innumerable streams of capital contribution merge their identities in a common capital account called as ‘Share Capital Account’.

karnataka class 12 commerce Accountancy Issue of shares

Nature and Classes of Shares Shares, refer to the units into which the total share capital of a company is divided. Thus, a share is a fractional part of the share capital and forms the basis of ownership interest in a company. The persons who contribute money through shares are called shareholders.

The amount of authorised capital, together with the number of shares in which it is divided, is stated in the Memorandum of Association but the classes of shares in which the company’s capital is to be divided, along with their respective rights and obligations, are prescribed by the Articles of Association of the company. As per Section 86 of The Companies Act, a company can issue two types of shares (1) preference shares, and (2) equity shares (also called ordinary shares).

karnataka class 12 commerce Accountancy Issue of shares

Accounting Treatment

On application : The amount of money paid with various installment represents the contribution to share capital and should ultimately be credited to share capital. However, for the sake of convenience, initially individual accounts are opened for each installment. All money received along with application is deposited with a scheduled bank in a separate account opened for the purpose.

The journal entry is as follows:

Bank A/c Dr.

To Share Application A/c (Amount received on application for — shares @ Rs. ______ per share)

On allotment : When minimum subscription has been received and certain legal formalities on the allotment of shares have been duly compiled with, the directors of the company proceed to make the allotment of shares. The allotment of shares implies a contract between the company and the applicants who now become the allottees and assume the status of shareholders or members.

karnataka class 12 commerce Accountancy Issue of shares

Must read:

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

karnataka class 12 commerce Accountancy CH3 PARTNERSHIP ACCOUNTS ADMISSION OF A PARTNER

karnataka class 12 commerce Accountancy Preparation of Revaluation account

Karnataka class 12 commerce Accountancy Adjustments in connection with admission of a partner

Karnataka class 12 commerce Accountancy Retirement of a partner

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Karnataka class 12 commerce Accountancy CH4 PARTNERSHIP ACCOUNTS RETIREMENT AND DEATH OF A partner

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

karnataka class 12 commerce Accountancy Issue of shares

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