Join Your Exam WhatsApp group to get regular news, updates & study materials HOW TO JOIN

karnataka class 12 commerce Accountancy Share Capital of a Company

karnataka class 12 commerce Accountancy Share Capital of a Company

karnataka class 12 commerce Accountancy Share Capital of a 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 Share Capital of a Company

Categories of Share Capital From accounting point of view the share capital of the company can be classified as follows:

• Authorized Capital: Authorized capital is the amount of share capital which a company is authorized to issue by its Memorandum of Association. The company cannot raise more than the amount of capital as specified in the Memorandum of Association. It is also called Nominal or Registered capital. The authorized capital can be increased or decreased as per the procedure laid down in the Companies Act. It should be noted that the company need not issue the entire authorized capital for public subscription at a time. Depending upon its requirement, it may issue share capital but in any case, it should not be more than the amount of authorized capital.

• Issued Capital: It is that part of the authorized capital which is actually issued to the public for subscription including the shares allotted to vendors and the signatories to the company’s memorandum. The authorized capital which is not offered for public subscription is known as ‘unissued capital’. Unissued capital may be offered for public subscription at a later date.

• Subscribed Capital: It is that part of the issued capital which has been actually subscribed by the public. When the shares offered for public subscription are subscribed fully by the public the issued capital and subscribed capital would be the same. It may be noted that ultimately, the subscribed capital and issued capital are the same because if the number of share, subscribed is less than what is offered, the company allot only the number of shares for which subscription has been received. In case it is higher than what is offered, the allotment will be equal to the offer. In other words, the fact of over subscription is not reflected in the books.

• Called up Capital: It is that part of the subscribed capital which has been called up on the shares. The company may decide to call the entire amount or part of the face value of the shares. For example, if the face value (also called nominal value) of a share allotted is Rs. 10 and the company has called up only Rs. 7 per share, in that scenario, the called up capital is Rs. 7 per share. The remaining Rs. 3 may be collected from its shareholders as and when needed.

• Paid up Capital: It is that portion of the called up capital which has been actually received from the shareholders. When the shareholders have paid all the call amount, the called up capital is the same to the paid up capital. If any of the shareholders has not paid amount on calls, such an amount may be called as ‘calls in arrears’. Therefore, paid up capital is equal to the called-up capital minus call in arrears.

• Uncalled Capital: That portion of the subscribed capital which has not yet been called up. As stated earlier, the company may collect this amount any time when it needs further funds

• Reserve Capital: A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such uncalled amount is called ‘Reserve Capital’ of the company. It is available only for the creditors on winding up of the company.

karnataka class 12 commerce Accountancy Share Capital of a Company

Let us take the following example and show how the share capital will be shown in the balance sheet. Sunrise Company Ltd., New Delhi, has registered its capital as Rs. 40,00,000, divided into 4,00,000 shares of Rs. 10 each. The company offered to the public for subscription of 2,00,000 shares of Rs. 10 each, as Rs. 2 on application, Rs.3 on allotment, Rs.3 on first call and the balance on final call. The company received applications for 2,50,000 shares. The company finalised the allotment on 2,00,000 shares and rejected applications for 50,000 shares. The company did not make the final call. The company received all the amount except on 2,000 shares where call money has not been received. The above amounts will be shown in the Notes to Accounts of the balance sheet of Sunrise Company Ltd. as follows:

karnataka class 12 commerce Accountancy Share Capital of a Company

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 Share Capital of a Company

Preference Shares According to Section 85 of The Companies Act, 1956, a preference share is one, which fulfils the following conditions :

(a) That it carries a preferential right to dividend to be paid either as a fixed amount payable to preference shareholders or an amount calculated by a fixed rate of the nominal value of each share before any dividend is paid to the equity shareholders.

(b) That with respect to capital it carries or will carry, on the winding up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders.

However, notwithstanding the above two conditions, a holder of the preference share may have a right to participate fully or to a limited extent in the surpluses of the company as specified in the Memorandum or Articles of the company. Thus, the preference shares can be participating and non-participating. Similarly, these shares can be cumulative or non-cumulative, and redeemable or irredeemable.

karnataka class 12 commerce Accountancy Share Capital of a Company

Equity Shares According to Section 85 of The Companies Act, 1956, an equity share is a share which is not a preference share. In other words, shares which do not enjoy any preferential right in the payment of dividend or repayment of capital, are termed as equity/ordinary shares. The equity shareholders are entitled to share the distributable profits of the company after satisfying the dividend rights of the preference share holders. The dividend on equity shares is not fixed and it may vary from year to year depending upon the amount of profits available for distribution. The equity share capital may be (i) with voting rights; or (ii) with differential rights as to voting, dividend or otherwise in accordance with such rules and subject to such conditions as may be prescribed.

karnataka class 12 commerce Accountancy Share Capital of a Company

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 installments spread over a period of time depending upon its growing financial requirement. The first installment is collected along with application and is thus, known as application money, the second on allotment (termed as allotment money), and the remaining installment are termed as first call, second call and so on. The word final is suffixed to the last installment. 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 allotted, 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.

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 installments payable at different stages.

karnataka class 12 commerce Accountancy Share Capital of a Company

Must read:

  • 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 CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

karnataka class 12 commerce Accountancy Share Capital of a Company

CAKART provides India’s top class XII commerce  faculty video classes – online Classes – at very cost effective rates. Get class XII commerce Video classes from CAKART.in to do a great preparation for your exam.

Watch class XII commerce sample video lectures Visit cakart.in
Watch class XII commerce Articles Here
Watch class XII commerce free downloads 

For any questions chat with us by clicking on the chat button below or give a missed call at 9980100288

Leave a comment

Your email address will not be published. Required fields are marked *