Accounting for Share Capital

A company is a business organisation that is separate from its owners.

In a sole proprietorship, one owner brings capital.

In a partnership, partners bring capital.

In a company, many people can invest money by buying shares.

The people who buy shares become shareholders.

Example: Accy Mobile Accessories Ltd. wants to expand its business. Instead of taking money from one owner only, it issues shares to many people.

Simple line: A company raises capital by issuing shares to shareholders.

Share capital is the money raised by a company by issuing shares.

Example: a company issues 10,000 shares of Rs.10 each.

Share capital = 10,000 x Rs.10 = Rs.1,00,000.

Simple line: Share capital is the company's capital collected from shareholders.

Riya starts a small company called Riya Stationery Ltd.

She wants to open 5 stationery stores.

She needs Rs.1,00,000.

Instead of asking one person for the full amount, the company issues shares.

The company issues 10,000 shares of Rs.10 each.

Many people buy these shares.

Now the company receives money, buyers become shareholders, and the amount received becomes share capital.

This is the beginning of share capital accounting.

Companies issue shares because they need money to start or expand business.

Many people can invest small amounts.

The company can raise large capital.

Shareholders become owners of the company.

The company does not have to repay share capital like a normal loan.

Simple line: Shares help a company collect capital from many people.

A share is a small part of the company's capital.

A shareholder is a person who owns shares of the company.

Example: if Riya buys 100 shares of Rs.10 each, she invests Rs.1,000 and becomes a shareholder.

Simple memory line: Share = small part of company capital. Shareholder = person who owns shares.

Equity shareholders are the real owners of the company.

They may receive dividend if the company earns profit and decides to distribute it.

Simple line: Equity shareholders take more risk and may get more reward.

Preference shareholders get preference in dividend and repayment of capital.

Simple line: Preference shareholders get priority over equity shareholders in some matters.

Authorised Capital is the maximum capital the company is allowed to issue.

Issued Capital is the part of authorised capital actually offered to the public.

Subscribed Capital is the part of issued capital actually taken by people.

Called-up Capital is the amount the company has asked shareholders to pay.

Paid-up Capital is the amount shareholders have actually paid.

Face Value is the value written on the share, such as Rs.10 each.

Premium is extra amount charged above face value.

Simple memory line: Face value is basic value. Premium is extra amount.

At par means shares are issued at face value.

Example: company issues 1,000 shares of Rs.10 each at Rs.10.

Amount received = 1,000 x Rs.10 = Rs.10,000.

Journal entry idea: Bank A/c Dr. Rs.10,000, To Share Capital A/c Rs.10,000.

Bank increases and share capital increases.

Simple line: At par means issue price = face value.

Premium means shares are issued above face value.

Example: company issues 1,000 shares of Rs.10 each at Rs.12.

Face value = 1,000 x Rs.10 = Rs.10,000.

Premium = 1,000 x Rs.2 = Rs.2,000.

Total received = Rs.12,000.

Journal entry idea: Bank A/c Dr. Rs.12,000, To Share Capital A/c Rs.10,000, To Securities Premium A/c Rs.2,000.

Simple line: Premium is extra money received above face value.

Sometimes a company does not collect full share money at once.

Application Money is received when people apply for shares.

Allotment Money becomes due when shares are allotted.

Call Money is money called later by the company.

Example: share value is Rs.10. The company asks application Rs.3, allotment Rs.4, and first call Rs.3.

Total collected = Rs.3 + Rs.4 + Rs.3 = Rs.10.

Simple line: Application, allotment, and calls are stages of collecting share money.

Application money received on 1,000 shares at Rs.3 each: Bank A/c Dr. Rs.3,000, To Share Application A/c Rs.3,000.

Application money transferred to capital: Share Application A/c Dr. Rs.3,000, To Share Capital A/c Rs.3,000.

Allotment money due on 1,000 shares at Rs.4 each: Share Allotment A/c Dr. Rs.4,000, To Share Capital A/c Rs.4,000.

Allotment money received: Bank A/c Dr. Rs.4,000, To Share Allotment A/c Rs.4,000.

First call due on 1,000 shares at Rs.3 each: Share First Call A/c Dr. Rs.3,000, To Share Capital A/c Rs.3,000.

First call money received: Bank A/c Dr. Rs.3,000, To Share First Call A/c Rs.3,000.

Simple line: Share money may move through application, allotment, and call accounts before becoming share capital.