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karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

Karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

Accounting Treatment

On application : The amount of money paid with various instalment 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 instalment. 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.

The journal entries with regard to allotment of shares are as follows:

  1. For Transfer of Application Money

Share Application A/c Dr.

To Share Capital A/c

(Application money on _____ Shares allotted/ transferred to Share Capital)

  1. For Money Refunded on Rejected Application

Share Application A/c Dr.

To Bank A/c

(Application money returned on rejected application for ___shares)

  1. For Amount Due on Allotment Share Allotment A/c Dr.

To Share Capital A/c

  1. For Adjustment of Excess Application Money Share Application A/c Dr.

To Share Allotment A/c

(Application Money on __Shares @ Rs__per shares adjusted to the amount due on allotment).

  1. For Receipt of Allotment Money Bank A/c Dr.

To Share Allotment A/c

(Allotment money received on ___Shares @ Rs. — per share Combined Account)

Note:- The journal entries (2) and (4) can also be combined as follows:

Share Application A/c

To Share Allotment A/c

To Bank A/c

(Excess application money adjusted to share allotment and balance refunded)

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

Sometimes a combined account for share application and share allotment called ‘Share Application and Allotment Account’ is opened in the books of a company. The combined account is based on the reasoning that allotment without application is impossible while application without allotment is meaningless. These two stages of share capital are closely inter-related. When a combined account is maintained, journal entries are recorded in the following manner: 1. For Receipt of Application and Allotment

Bank A/c Dr.

To Share Application and Allotment A/c

(Money received on applications for shares @ Rs. _____ per share).

  1. For Transfer of Application Money and Allotment Amount Due

Share Application and Allotment A/c Dr.

To Share Capital A/c

(Transfer of application money to Share Capital Account for amount due or allotment of — Share @ Rs. _____ per share)

  1. For Money Refunded on Rejected Applications

Share Application and Allotment A/c Dr.

To Bank A/c

(Application money returned on rejected application for ___ shares)

  1. On Receipt of Allotment Amount Bank A/c Dr.

To Share Application and Allotment A/c (Balance of Allotment Money Received)

On Calls : Calls play a vital role in making shares fully paid-up and for realising the full amount of shares from the shareholders. In the event of shares not being fully called up till the completion of allotment, the directors have the authority to ask for the remaining amount on shares as and when they decide about the same. It is also possible that the timing of the payment of calls by the shareholders is determined at the time of share issue itself and given in the prospectus.

Two points are important regarding the calls on shares. First, the amount on any call should not exceed 25% of the face value of shares. Second, there must be an interval of at least one month between the making of two calls unless otherwise provided by the articles of association of the company.

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

When a call is made and the amount of the same is received, the journal entries are as given below:

  1. For Call Amount Due Share Call A/c Dr.

To Share Capital A/c

(Call money due on ___Shares @ Rs. ____ per share)

  1. For Receipt of Call Amount Bank A/c Dr.

To Share Call A/c

(Call money received)

The word/words First, Second, or Third must be added between the words “Share” and ‘Call’ in the Share Call account depending upon the identity of the call made. For example, in case of first call it will be termed as ‘Share First Call Account’, in case of second call it will be ‘Share Second Call Account’ and so on.

Another point to be noted is that the words ‘and Final’ will also be added to the last call, say, if second call is the last call it will be termed as ‘Second and Final Call’ and if it is the third call which is the last call, it will be termed as ‘Third and Final Call’. It is also possible that the whole balance after allotment may be collected in one call only. In that case the first call itself, shall be termed as the ‘First and Final Call’.

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

Calls in Arrears

It may happen that shareholders do not pay the call amount on due date. When any shareholder fails to pay the amount due on allotment or on any of the calls, such amount is known as ‘Calls in Arrears’/‘Unpaid Calls’. Calls in Arrears represent the debit balance of all the calls account. Such amount shall appear as ‘Note to Accounts (Refer Chapter 3). However, where a company maintains ‘Calls in Arrears’ Account, it needs to pass the following additional journal entry:

Calls in Arrears A/c Dr.

To Share First Call Account A/c

To Share Second and Final Call Account A/c

(Calls in arrears brought into account)

The Articles of Association of a company may empower the directors to charge interest at a stipulated rate on calls in arrears. If the articles are silent in this regard, the rule contained in Table A shall be applicable which states that the interest at a rate not exceeding 5% p.a. shall have to be paid on all unpaid amounts on shares for the period intervening between the day fixed for payment and the time of actual payment thereof.

On receipt of the call amount together with interest, the amount of interest shall be credited to interest account while call money shall be credited to the respective call account or to calls in arrears account. When the shareholder makes the payment of calls in arrears together with interest, the entry will be as follows:

Bank A/c Dr.

To Calls in Arrears A/c

To Interest A/c

(Calls in arrears received with interest)

Note: If nothing is specified, there is no need to take the interest on calls in arrears account and record the above entry

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

Calls in Advance

Sometimes shareholders pay a part or the whole of the amount of the calls not yet made. The amount so received from the shareholders is known as “Calls in Advance”. The amount received in advance is a liability of the company and should be credited to ‘Call in Advance Account.” The amount received will be adjusted towards the payment of calls as and when they becomes due. Table A of the Companies Act provides for the payment of interest on calls in advance at a rate not exceeding 6% per annum.

The following journal entry is recorded for the amount of calls received in advance.

Bank A/c Dr.

To Calls in Advance A/c

(Amount received on call in advance)

On the due date of the calls, the amount of ‘Calls in Advance’ is adjusted by the following entry :

Calls in Advance A/c Dr.

To Particular Call A/c

(Calls in advance adjusted with the call money due)

The balance in ‘Calls in Advance’ account is shown as a separate item under the title Equity and Liabilities in the company’s balance sheet under the head ‘current liabilities’, as sub-head ‘others current liabilities’. It is not added to the amount of paid-up capital.

As ‘Calls in Advance’ is a liability of the company, it is under obligation, if provided by the Articles, to pay interest on such amount from the date of its receipt up to the date when appropriate call is due for payment. A stipulation is generally made in the Articles regarding the rate at which interest is payable. However, if Articles are silent on this account, Table A is applicable which provides for interest on calls in advance at a rate not exceeding 6% per annum.

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

The accounting treatment of interest on Calls in Advance is as follows:

  1. For Payment of Interest

Interest on Calls in Advance A/c Dr.

To Bank A/c

(Interest paid on Calls in Advance) Or

2.(a) For Interest due

Interest on Calls in Advance A/c Dr.

To Sundry Shareholder’s A/c

(Interest paid on Calls in Advance)

2.(b) For Interest Paid

Sundry Shareholder’s A/c Dr.

To Bank A/c

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

Over Subscription There are instances when applications for more shares of a company are received than the number offered to the public for subscription. This usually happens in respect of shares issue of well-managed and financially strong companies and is said to be a case of ‘Over Subscription’.

In such a condition, three alternatives are available to the directors to deal with the situation: (1) they can accept some applications in full and totally reject the others; (2) they can make a pro-rata allotment to all; and (3) they can adopt a combination of the above two alternatives which happens to be the most common course adopted in practice.

The problem of over subscription is resolved with the allotment of shares. Therefore, from the accounting point of view, it is better to place the situation of over subscription within the total frame of application and allotment, i.e. receipt of application amount, amount due on allotment and its receipt from the shareholders, and the same has been observed in the pattern of entries. First Alternative : When the directors decide to fully accept some applications and totally reject the others, the application money received on rejected applications is fully refunded. For example, a company invited applications for 20,000 shares and received the applications for 25,000 shares. The directors rejected the applications for 5,000 shares which are in excess of the required number and refunded their application money in full.

karnataka class 12 commerce Accountancy Journal entries relating to issue of shares

Second Alternative : When the directors opt to make a proportionate allotment to all applicants (called ‘pro-rata’ allotment), the excess application money received is normally adjusted towards the amount due on allotment. In case, the excess application money received is more than the amount due on allotment of shares, such excess amount may either be refunded or credited to calls in advance.

Third Alternative : When the application for some shares are rejected outrightly; and pro-rata allotment is made to the remaining applicants, the money on rejected applications is refunded and the excess application money received from applicants to whom pro-rata allotment has been made is adjusted towards the amount due on the allotment of shares allotted.

karnataka class 12 commerce Accountancy Journal entries relating to 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

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

Karnataka class 12 commerce Accountancy Retirement of a partner

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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 Journal entries relating to issue of shares

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