Accounting for Share Capital

2.1 Core concepts

• A company is "a person, artificial, invisible, intangible and existing only in the eyes of law" (Chief Justice Marshal). A company is incorporated/registered under the Companies Act, 2013 or earlier Companies Acts. (NCERT §1.1, p. 1–2)
• Features of a company: Body Corporate, Separate Legal Entity, Limited Liability (limited to unpaid amount on shares), Perpetual Succession, Common Seal (official signature), Transferability of Shares (free in public company), and May Sue or Be Sued. (NCERT §1.1, p. 2)
• On the basis of liability companies are of three kinds — (i) Limited by Shares (liability limited to nominal value of shares held), (ii) Limited by Guarantee (liability limited to the amount guaranteed, arises only on winding up), and (iii) Unlimited Companies (no limit; private property can be claimed). (NCERT §1.2, p. 2–3)
• On the basis of members: (i) Public Company, (ii) Private Company — restricts transfer of shares, requires at least 2 persons (except OPC), and caps members at 200 excluding employees, and (iii) One Person Company (OPC) under Sec 2(62) — only one member, must be an Indian citizen resident in India, cannot do non-banking financial investment, paid-up capital not more than Rs. 50 lakh, average annual turnover of three years not exceeding Rs. 2 crore. (NCERT §1.2, p. 3)
• Categories of share capital — Authorised (also called Nominal/Registered, fixed by Memorandum), Issued (part of authorised offered for subscription), Subscribed (part actually subscribed by public), Called-up (portion of subscribed which company has called), Paid-up (called-up minus calls in arrears), Uncalled (subscribed but not yet called), and Reserve Capital (uncalled portion reserved by a special resolution to be called only on winding up, available solely for creditors). (NCERT §1.3.1, p. 4–5)
• Shares are the units into which the total share capital is divided. As per the Companies Act, a company can issue only two types of shares — (1) Preference shares (Sec 43), which carry preferential right both to dividend and to repayment of capital on winding up; preference shares may be cumulative/non-cumulative, participating/non-participating, redeemable/irredeemable, and (2) Equity (ordinary) shares — any share which is not a preference share; dividend is not fixed and varies with profits. Equity capital may be with voting rights or with differential rights. (NCERT §1.4–1.4.2, p. 6–7)
• Procedure of share issue — Issue of Prospectus, Receipt of Applications (deposited with a scheduled bank, minimum subscription must be received within 120 days; else refund within 130 days), and Allotment of Shares (only after minimum subscription, results in a valid contract). (NCERT §1.5, p. 7–8)
• Minimum subscription cannot be less than 90% of the issued amount per SEBI (DIP) Guidelines, 2000; if not met, the entire subscription must be refunded, with interest @ 15% p.a. [Sec 73(2)] for any delay beyond 8 days. (NCERT §1.5 box, p. 8)
• Application money must be at least 5% of the face value of the share. Calls must not exceed 25% of face value, with at least one month between two calls (Table A), 14 days' notice to shareholders, and made uniformly on all shares of the same class. (NCERT §1.6 box, p. 12)
• Calls in Arrears — unpaid amount on allotment/calls; Table F permits interest at a rate not exceeding 10% p.a. on calls in arrears. (NCERT §1.6.1, p. 16)
• Calls in Advance — amount received before being called; it is a liability of the company shown under "Other current liabilities", not added to paid-up capital. Table F provides interest on calls in advance at a rate not exceeding 12% p.a. (NCERT §1.6.2, p. 18)
• Over Subscription — applications exceed shares offered. Three options: (i) reject excess applications outright, (ii) make pro-rata allotment to all (excess application money adjusted to allotment), or (iii) combination — reject some outright and pro-rata for the rest. Excess application money on pro-rata allottees is adjusted first to allotment, then to calls in advance, balance refunded. (NCERT §1.6.3, p. 24–26)
• Under Subscription — applications received are less than shares offered; allotment is restricted to applications received, provided minimum subscription is met. (NCERT §1.6.4, p. 30)
• Issue at Premium — when issue price exceeds face value. The excess is credited to Securities Premium Reserve A/c, shown under "Reserves and Surplus". It can be used only for (a) issuing fully paid bonus shares, (b) writing off preliminary expenses, (c) writing off expenses/commission/discount on securities issue, (d) paying premium on redemption of preference shares/debentures, and (e) buy-back of shares. (NCERT §1.6.5, p. 30–31)
• Issue at Discount — a company cannot ordinarily issue shares at a discount. It can do so only in the case of reissue of forfeited shares and issue of sweat equity shares. (NCERT §1.6.6, p. 33)
• Issue of Shares for Consideration other than Cash — number of shares = Amount Payable ÷ Issue Price; may be issued at par, at premium or at discount to vendors of assets. (NCERT §1.6.7, p. 33–34)
• Forfeiture of Shares — for non-payment of allotment money and/or calls, the company cancels the allotment and treats amount already received as forfeited. On forfeiture, Share Capital A/c is debited with the called-up amount; Share Forfeiture A/c is credited with paid-up amount; unpaid calls/allotment are credited. If premium has not been received, Securities Premium Reserve A/c is also debited. Balance of Share Forfeiture A/c is added to paid-up capital under "Share Capital" until shares are reissued. (NCERT §1.7, p. 37–40)
• Reissue of Forfeited Shares — may be reissued at par, premium or discount. Maximum discount on reissue cannot exceed the amount forfeited (already received). Discount on reissue is debited to Share Forfeiture A/c; the balance left in Share Forfeiture A/c relating to reissued shares is capital profit and is transferred to Capital Reserve. Only the proportionate balance relating to shares actually reissued is transferred. (NCERT §1.7.1, p. 49–50)
• ESOP — option granted to employees/employee directors to subscribe to shares at lower than market/fair value at a future date; falls under sweat equity; requires special resolution, completion of at least one year since commencement of business and SEBI compliance if listed. Key terms — Grant, Grant Date, Vesting, Vesting Period, Exercise Price, Value of Option. (NCERT §1.6.7 box, p. 36–37)
• Buy-back of Shares — Sec 68 of Companies Act, 2013 permits a company to buy back its own shares (from existing shareholders proportionately/open market/odd-lot/employees) out of free reserves, securities premium or proceeds of any shares; must not exceed 25% of paid-up capital and free reserves; debt-equity ratio not more than 2:1 after buy-back; shares bought back must be fully paid; completed within 12 months of special resolution. (NCERT §1.7.1 box, p. 55)

2.2 Definitions to memorise

2.3 Diagrams / processes to remember

• Exhibit 1.1 — pyramid showing Authorised Capital → Issued + Unissued → Subscribed → Subscribed and Fully Paid up + Subscribed but not Fully Paid up. (p. 5)
• Three-alternative scheme for handling over-subscription: outright rejection / pro-rata / combination (refer journal entries in Illustration 7). (p. 24–29)
• Step diagram for share issue: Prospectus → Application + Application Money to Scheduled Bank → Minimum Subscription within 120 days → Allotment → Calls (interval 1 month, ≤ 25% face value). (p. 7–8, 12)
• Forfeiture entry skeleton: Share Capital A/c Dr. (called-up) [+ Securities Premium Reserve Dr. if not received] / To Calls in Arrears (or Allotment + Call A/cs) / To Share Forfeiture A/c (amount received). (p. 37–40)
• Reissue entry skeleton: Bank A/c Dr. + Share Forfeiture A/c Dr. (discount) / To Share Capital A/c; then Share Forfeiture A/c Dr. / To Capital Reserve A/c (residual proportional gain). (p. 49–50)

2.4 Common confusions / NTA trap points

• Reserve Capital vs Capital Reserve — Reserve Capital is uncalled capital callable only on winding up; Capital Reserve is created from capital profits (e.g. gain on reissue of forfeited shares). Distractors swap the two.
• Interest rates under Table F — 10% p.a. on Calls in Arrears, 12% p.a. on Calls in Advance. NTA loves to flip these.
• Application money on rejected applications is fully refunded; excess money under pro-rata allotment is adjusted to allotment / calls in advance (not refunded immediately).
• On forfeiture of shares originally issued at a premium, Securities Premium Reserve A/c is debited only if the premium has NOT been received; if already received, it is not reversed.
• Maximum discount on reissue of forfeited shares = amount already forfeited (per share). The residual gain on reissued shares only (not all forfeited shares) goes to Capital Reserve.
• Issue of shares at a discount is generally NOT allowed under the Companies Act; permitted only for reissue of forfeited shares and sweat equity.
• Forfeiture vs Surrender — Forfeiture is initiated by the company; Surrender is by the shareholder. NCERT focuses only on forfeiture (NCERT §1.7, p. 37).
• Pro-rata applicants vs all applicants — Excess application money on rejected applications is refunded; on pro-rata applicants it is adjusted to allotment / calls in advance (NCERT §1.6.3, p. 26).
• ESOP grant vs vesting — Grant is the offer; Vesting is the date the option becomes exercisable; Exercise is when the employee actually buys (NCERT box, p. 36-37).

2.5 Journal entry templates

The full life cycle of an equity share issue requires roughly fifteen distinct journal entries. The templates below cover the most-tested patterns.

(a) Receipt of application money (NCERT §1.5)

(b) Transfer of application money on allotted shares to Share Capital (NCERT §1.5)

(c) Allotment money due, with premium (NCERT §1.6.5, p. 30)

(d) Calls in Advance — Table F @ 12% p.a. (NCERT §1.6.2, p. 18)

(e) Forfeiture of shares — premium not received (NCERT §1.7, p. 39)

(f) Forfeiture of shares — premium already received (NCERT Illus. 11, p. 40)

(g) Reissue of forfeited shares at a discount (NCERT §1.7.1, p. 49)

(h) Transfer of residual Share Forfeiture balance to Capital Reserve (NCERT §1.7.1, p. 50)