A company is said to be a separate legal entity. This means:

Answer: B. A separate legal entity owns assets, signs contracts and goes to court in its own name. Shareholders are liable only up to the unpaid amount on their shares, and the company has perpetual succession, so options A, C and D are wrong.

Which of the following statements about a One Person Company are correct? I. It has only one member. II. The member must be an Indian citizen resident in India. III. It can have up to 200 members, excluding employees.

Answer: B. An OPC has a single member who must be an Indian citizen resident in India. The limit of 200 members, excluding employees, belongs to a private company.

A company issues 80,000 shares of Rs 10 each. All are subscribed. Rs 8 per share has been called up, and calls of Rs 10,000 are in arrears. The paid up capital is:

Answer: A. Called up capital = 80,000 × 8 = Rs 6,40,000. Paid up capital = called up − calls in arrears = 6,40,000 − 10,000 = Rs 6,30,000. Option B ignores the arrears.

Accounting for Share Capital — CUET Accountancy Notes & MCQs

📌 Snapshot

How a company raises money from shares: issue, premium, calls, subscription, forfeiture and reissue explained.
The seven kinds of share capital, preference versus equity shares, and the rules on minimum subscription.
Journal entries with worked examples for pro rata allotment, calls in arrears, forfeiture and reissue.
Traps NTA sets on interest rates, securities premium, discount on reissue and capital reserve.

📖 Detailed Notes

Written and reviewed by Devendra Dubey, Mathematics & Commerce faculty at UniDrill (M.Sc. Mathematics, Osmania University · 10 years teaching). Based on NCERT Accountancy Class XII (Accountancy Part II), Chapter 1.

How does a snack brand raise ₹5 crore from strangers?

Aarav and his friends have built FreshBite, a small snack brand. To open a factory they need far more money than four people can lend or invest. So they form a company and invite the public to buy small pieces of ownership called shares. A person who buys a ₹10 share owns a fraction of the company and can lose, at most, the amount he agreed to pay. That is why thousands of strangers are willing to invest.

But then a lot of questions arise. What if more people apply than there are shares? What if some do not pay the second instalment? What if a shareholder disappears? Each question has a rule and a journal entry, and this chapter covers them in the order they happen to a company: application, allotment, calls, and trouble.

What makes a company different

A company is an artificial person created by law. It has its own identity, signs contracts and owns property in its own name.

Feature	What it means
Separate legal entity	The company, not its owners, owns the assets and owes the debts
Limited liability	A shareholder loses at most the unpaid amount on his shares
Perpetual succession	The company continues despite the death or exit of members
Common seal	The official signature of the company
Transferability of shares	Free in a public company, restricted in a private one
Sue and be sued	It can go to court in its own name

Beyond the textbook. For the exam: the company is a separate person from its shareholders, so their liability is limited. In reality: the courts can lift the corporate veil and look at the people behind the company where it has been used to commit fraud or avoid the law. Why it matters: the separate identity is a protection for honest shareholders and not a shield for dishonest ones.

Basis	Kinds
Liability	Limited by shares (up to the unpaid amount), limited by guarantee (up to the amount guaranteed, called on winding up), unlimited (no limit, private property can be claimed)
Members	Public company, private company, One Person Company

A private company restricts transfer of its shares, needs at least two persons and has at most 200 members, not counting employees. A One Person Company has a single member who must be an Indian citizen resident in India, with a paid up capital of up to ₹50 lakh and an average turnover of up to ₹2 crore.

Share capital is described at seven stages, each a subset of the previous one. A single example makes them stick.

Worked example: from authorised to paid up. A company is authorised to issue 1,00,000 shares of ₹10. It issues 80,000 and the public subscribes for 70,000. It calls ₹8 per share, and calls of ₹10,000 are in arrears.

Term	Meaning	Amount
Authorised capital	Maximum the memorandum allows (nominal or registered capital)	1,00,000 × 10 = ₹10,00,000
Issued capital	Part of authorised capital offered to the public	80,000 × 10 = ₹8,00,000
Subscribed capital	Part of the issue the public applied for and was allotted	70,000 × 10 = ₹7,00,000
Called up capital	Part of the subscribed capital the company has demanded	70,000 × 8 = ₹5,60,000
Uncalled capital	Subscribed but not yet demanded	70,000 × 2 = ₹1,40,000
Paid up capital	Called up less calls in arrears	5,60,000 − 10,000 = ₹5,50,000
Reserve capital	Uncalled capital reserved by special resolution to be called only on winding up, for creditors	Decided by the company

Common wrong step. Treating paid up capital as subscribed capital, or forgetting to deduct the calls in arrears. Paid up is what has actually come in.

Preference and equity shares

A company can issue only two kinds of shares.

Basis	Preference shares	Equity shares
Dividend	Fixed rate, paid before equity	Varies with profit, paid last
Repayment on winding up	Before equity shareholders	After everyone else
Voting	Limited	Full, or with differential rights
Variants	Cumulative or non cumulative, participating or non participating, redeemable or irredeemable	With voting rights or with differential rights
Risk and reward	Low risk, fixed return	Higher risk, unlimited upside

Equity shares are simply all shares that are not preference shares. The preference shareholder gets a stable return, and the equity shareholder takes the risk and the rest of the profit.

Stage	What happens	Rule to know
Prospectus	The company invites the public	Issued before applications
Application	Investors apply with application money	Deposited with a scheduled bank. At least 5% of face value
Minimum subscription	The least amount the company must receive to go ahead	90% of the issue, within 120 days. Otherwise the money is refunded, within 130 days. A delay beyond 8 days attracts interest at 15% p.a.
Allotment	Shares are allotted, creating a binding contract	Only after the minimum subscription is received
Calls	The company asks for the balance	Not more than 25% of face value per call, at least one month apart, with 14 days' notice, and uniformly on all shares of the class

Each stage has its own ledger account: Share Application A/c, Share Allotment A/c and Share First (or Final) Call A/c. They are temporary accounts that collect money due and money received, and each closes into Share Capital A/c.

Issue at par and at a premium

A share is issued at par if the price is the same as its face value, and at a premium if the price is more. The premium is not part of share capital. It is the extra price investors pay for the company's reputation, and it is credited to Securities Premium Reserve A/c, shown under Reserves and Surplus.

The securities premium can be used only for these purposes. Each one is a capital purpose, which is why it cannot be used to pay dividend.

Permitted use	Example
Issuing fully paid bonus shares	Converting reserves into free shares
Writing off preliminary expenses	Costs of setting up the company
Writing off expenses, commission or discount on the issue of shares or debentures	Underwriting commission
Paying the premium on redemption of preference shares or debentures	Redeeming at 10% premium
Buy back of the company's own shares	Under the Companies Act

Worked example: issue at a premium, fully subscribed. FreshBite issues 20,000 shares of ₹10 at a premium of ₹2 per share. The price is payable ₹3 on application, ₹5 on allotment (including the premium) and ₹4 on first and final call. All money is received.

Step	What we do	Result
1	Application: 20,000 × 3	₹60,000
2	Allotment: 20,000 × 5. Of it, ₹3 per share is capital and ₹2 is premium	₹1,00,000, of which ₹60,000 capital and ₹40,000 premium
3	First and final call: 20,000 × 4	₹80,000

Date	Particulars	Dr (₹)	Cr (₹)
Apr 1	Bank A/c ... Dr.	60,000
	To Share Application A/c		60,000
	(Being application money received on 20,000 shares)
Apr 10	Share Application A/c ... Dr.	60,000
	To Share Capital A/c		60,000
	(Being application money transferred to Share Capital)
Apr 10	Share Allotment A/c ... Dr.	1,00,000
	To Share Capital A/c		60,000
	To Securities Premium Reserve A/c		40,000
	(Being allotment money due, including premium of ₹2 per share)
Apr 20	Bank A/c ... Dr.	1,00,000
	To Share Allotment A/c		1,00,000
	(Being allotment money received)
Jun 1	Share First and Final Call A/c ... Dr.	80,000
	To Share Capital A/c		80,000
	(Being final call made)
Jun 15	Bank A/c ... Dr.	80,000
	To Share First and Final Call A/c		80,000
	(Being final call money received)

Share Capital is credited ₹2,00,000 (20,000 × 10), the face value, and the premium of ₹40,000 sits in its own reserve. Bank received ₹2,40,000 (20,000 × 12), so the books agree with the price paid. Common wrong entry. Crediting the whole ₹1,00,000 of allotment to Share Capital. That would show share capital of ₹2,40,000 on 20,000 shares of ₹10 each, which is impossible.

Beyond the textbook. For the exam: application, allotment and calls are separate instalments, each with its own entry. In reality: most public issues on the stock market today ask for the full price at application. The investor applies through ASBA or UPI, where the money stays blocked in his own bank account, and it is debited only if shares are allotted. A rejected applicant simply sees the block removed. Why it matters: the three account structure is still the way the accounts are drawn up for exams, and the same logic applies when a company collects money in stages.

Calls in arrears and calls in advance

Not every shareholder pays on time, and some pay early. The Model Articles (Table F) allow interest on both.

Basis	Calls in arrears	Calls in advance
Meaning	Amount due on allotment or calls but not paid	Amount received before it is called
Interest rate	Charged by the company, up to 10% p.a.	Paid by the company, up to 12% p.a.
Nature	Deducted from called up capital to reach paid up	A liability, shown under other current liabilities
Part of paid up capital?	No	No

Worked example: a late payment and an early one. A holder of 200 shares of ₹10 pays the final call of ₹3 per share three months late. Another shareholder pays ₹1,000 on 1 January, towards a call due on 1 April.

Step	What we do	Result
1	Late payer owes 200 × 3	₹600
2	Interest on arrears = 600 × 10% × 3/12	₹15
3	Entry when he pays: Bank A/c Dr ₹615, To Calls in Arrears A/c ₹600, To Interest A/c ₹15	Both sides ₹615
4	Early payer on 1 Jan: Bank A/c Dr ₹1,000, To Calls in Advance A/c ₹1,000	Both sides ₹1,000
5	Interest company pays = 1,000 × 12% × 3/12	₹30
6	On 1 April: Calls in Advance A/c Dr ₹1,000, To Share Final Call A/c ₹1,000	The advance is adjusted against the call

Pause and predict: Which rate is higher, the one the company charges on calls in arrears or the one it pays on calls in advance?

Check your answer: The advance rate, 12% against 10%. The company pays more to borrow early than it charges for late payment. NTA often swaps the two figures.

Over subscription and under subscription

If more shares are demanded than offered (over subscription), the company has three options. If fewer are demanded (under subscription), it allots what is applied for, provided the minimum subscription is met.

Option for over subscription	Treatment of the money
Reject some applications outright	Refund their application money in full
Allot pro rata to everyone	Excess application money is adjusted against allotment, then calls in advance, and any balance is refunded
A combination of both	Refund rejected applicants, and adjust the excess of the pro rata applicants

$$\text{Shares allotted to an applicant} = \text{Shares applied for} \times \dfrac{\text{Shares offered}}{\text{Total shares applied for}}$$

Worked example: pro rata allotment. A company offers 10,000 shares of ₹10, payable ₹2 on application, ₹3 on allotment and ₹5 on call. Applications are received for 15,000 shares and the allotment is pro rata (so an applicant for 150 shares gets 100).

Step	What we do	Result
1	Application money received = 15,000 × 2	₹30,000
2	Kept for allotted shares = 10,000 × 2	₹20,000 credited to Share Capital
3	Excess = 30,000 − 20,000. It is adjusted against allotment due	₹10,000
4	Allotment due = 10,000 × 3	₹30,000
5	Cash still to be received = 30,000 − 10,000	₹20,000

Date	Particulars	Dr (₹)	Cr (₹)
Apr 1	Bank A/c ... Dr.	30,000
	To Share Application A/c		30,000
	(Being application money on 15,000 shares)
Apr 10	Share Application A/c ... Dr.	30,000
	To Share Capital A/c		20,000
	To Share Allotment A/c		10,000
	(Being application money on 10,000 shares transferred, excess adjusted)
Apr 10	Share Allotment A/c ... Dr.	30,000
	To Share Capital A/c		30,000
	(Being allotment money due on 10,000 shares)
Apr 20	Bank A/c ... Dr.	20,000
	To Share Allotment A/c		20,000
	(Being the balance of allotment money received)

The Share Allotment A/c now balances (debit ₹30,000, credit ₹10,000 + ₹20,000), and Share Capital has ₹50,000, which is 10,000 × (2 + 3). Common wrong step. Refunding the ₹10,000 excess at once. A pro rata applicant's excess is adjusted first against allotment, and only what remains after allotment is refunded.

Shares for something other than cash

A company may buy machinery from a vendor and pay by issuing shares instead of cash. The number of shares is found from the issue price, not the face value.

$$\text{Number of shares} = \dfrac{\text{Purchase consideration}}{\text{Issue price per share}}$$

Worked example. A company buys machinery for ₹3,00,000 and issues shares of ₹100 at a premium of 25% to the vendor.

Step	What we do	Result
1	Issue price = 100 + 25	₹125
2	Number of shares = 3,00,000 ÷ 125	2,400 shares
3	Share Capital = 2,400 × 100 and premium = 2,400 × 25	₹2,40,000 and ₹60,000

The entry is Machinery A/c Dr ₹3,00,000, To Vendor A/c ₹3,00,000. Then Vendor A/c Dr ₹3,00,000, To Share Capital A/c ₹2,40,000, To Securities Premium Reserve A/c ₹60,000. Common wrong step. Dividing by the face value, which gives 3,000 shares and an overstated issue of capital.

A company cannot ordinarily issue shares at a discount. The exceptions are reissue of forfeited shares and issue of sweat equity shares to directors or employees.

Forfeiture of shares

A shareholder who does not pay allotment or call money, even after notice, loses his shares. The company cancels the allotment and keeps what he has already paid. That is forfeiture, and it exists to protect other shareholders and the company from a defaulter.

On forfeiture, Share Capital is debited with the amount called up on those shares. The unpaid calls are credited, and the amount received is credited to Share Forfeiture A/c. If the premium on those shares was never received, Securities Premium Reserve is debited too, to cancel the premium that was credited when the allotment became due.

Worked example: forfeiture, premium not received. Shares of ₹10 are issued at a premium of ₹2. The terms are ₹3 on application, ₹5 on allotment (including the ₹2 premium) and ₹4 on the final call. A holder of 100 shares paid only the application money. The final call has not yet been made. The shares are forfeited.

Step	What we do	Result
1	Called up per share = 3 (application) + 3 (capital part of allotment)	₹6, so Share Capital Dr ₹600
2	Premium never received = 100 × 2	Securities Premium Reserve Dr ₹200
3	Allotment money unpaid = 100 × 5	Share Allotment A/c Cr ₹500
4	Amount received = 100 × 3	Share Forfeiture A/c Cr ₹300

Date	Particulars	Dr (₹)	Cr (₹)
Jul 1	Share Capital A/c ... Dr.	600
	Securities Premium Reserve A/c ... Dr.	200
	To Share Allotment A/c		500
	To Share Forfeiture A/c		300
	(Being 100 shares forfeited for non payment of allotment money)

Debit total ₹800 equals credit total ₹800. Common wrong step. Debiting Share Capital with ₹1,000 (the full face value). Only the called up part has been recorded in the books, so only that part can be debited. If the premium had been received, Securities Premium Reserve would not be debited, as the premium stays with the company.

Reissue of forfeited shares

Forfeited shares may be sold again. The new buyer pays a price, and the shares are shown as fully paid. The company can reissue at par, at a premium or at a discount, but the discount is limited.

The rule. The discount on reissue cannot exceed the amount forfeited on those shares. The balance in Share Forfeiture A/c on shares actually reissued is a capital profit and goes to Capital Reserve.

Worked example: forfeiture, reissue and capital reserve. A company issued shares of ₹10 payable ₹2 on application, ₹3 on allotment and ₹5 on first and final call. Rohan holds 100 shares. He pays application and allotment but not the call. The shares are forfeited and later reissued at ₹8 per share as fully paid.

Step	What we do	Result
1	Called up = 100 × 10	₹1,000
2	Unpaid call = 100 × 5. Amount received = 100 × 5	₹500 and ₹500
3	Discount on reissue = 100 × (10 − 8)	₹200
4	Maximum discount allowed = amount forfeited	₹500, so ₹200 is within it
5	Share Forfeiture balance after reissue = 500 − 200	₹300, transferred to Capital Reserve

Date	Particulars	Dr (₹)	Cr (₹)
Jul 1	Share Capital A/c ... Dr.	1,000
	To Calls in Arrears A/c		500
	To Share Forfeiture A/c		500
	(Being 100 shares forfeited)
Aug 1	Bank A/c ... Dr.	800
	Share Forfeiture A/c ... Dr.	200
	To Share Capital A/c		1,000
	(Being 100 shares reissued at ₹8 as fully paid)
Aug 1	Share Forfeiture A/c ... Dr.	300
	To Capital Reserve A/c		300
	(Being the gain on reissue transferred to Capital Reserve)

Check each entry: 1,000 = 500 + 500, then 800 + 200 = 1,000, then 300 = 300. Common wrong steps. Reissuing at ₹4, which needs a discount of ₹6 per share, more than the ₹5 forfeited, and is not allowed. Transferring all ₹500 to Capital Reserve without first debiting the discount.

Part reissue. If only 60 of the 100 shares are reissued at ₹8, the discount is 60 × 2 = ₹120. Share Forfeiture A/c had 500 (₹5 per share). The balance related to the 60 shares is 60 × 5 − 120 = ₹180, and only that goes to Capital Reserve. The ₹200 belonging to the remaining 40 shares stays in Share Forfeiture A/c until they are reissued.

Pause and predict: A company forfeits shares on which ₹6 per share was received and reissues them at ₹7 for a ₹10 paid up share. What happens to the amount left in Share Forfeiture A/c?

Check your answer: The discount is ₹3 per share. The balance is 6 − 3 = ₹3 per share, and that goes to Capital Reserve, because it is a profit arising from capital transactions.

ESOP and buy back

An Employee Stock Option Plan gives employees the right, not the duty, to buy shares at a fixed price later, usually below the market price. Learn the order: grant (the offer), vesting (when the option becomes exercisable, after the vesting period), and exercise (the actual purchase at the exercise price).

A company may also buy back its own shares, under the Companies Act, out of its free reserves, securities premium, or the proceeds of an issue of shares or other securities.

Condition for buy back	Rule
Quantum	Not more than 25% of the paid up capital and free reserves
Debt equity ratio after buy back	Not more than 2:1
Shares bought back	Must be fully paid
Time	Completed within 12 months of the special resolution

Exam traps

Trap	Why it tempts	The truth
Reserve capital and Capital Reserve are the same	The names are alike	Reserve capital is uncalled capital reserved for winding up. Capital Reserve is a profit on capital transactions, such as gain on reissue
Interest on arrears 12% and on advance 10%	The numbers are known, the order is not	Arrears: up to 10% p.a. Advance: up to 12% p.a.
Premium credited to Share Capital	It was paid with the share	It goes to Securities Premium Reserve, and Share Capital stays at face value
Securities Premium debited on every forfeiture	It looks like a reversal	It is debited only if the premium was not received
Forfeiture debits Share Capital with the amount paid	Paid is the amount in the news	It is debited with the called up amount
Capital Reserve gets the whole forfeiture balance	The shares are reissued	Only the balance on the shares reissued, after the discount
Excess application money is refunded at once	It is more than needed	Pro rata excess is adjusted to allotment first. Refund only what remains.
Shares at a discount are always allowed	A discount is a price cut	Not allowed, except for reissue of forfeited shares and sweat equity

Formula and format sheet

Item	Formula or entry	When to use
Pro rata allotment	$\text{Shares applied for} \times \dfrac{\text{Shares offered}}{\text{Total applied}}$	Over subscription
Interest on arrears or advance	$\text{Amount} \times \dfrac{\text{Rate}}{100} \times \dfrac{\text{Months}}{12}$	Calls in arrears (10%), calls in advance (12%)
Number of shares for non cash	$\dfrac{\text{Purchase consideration}}{\text{Issue price}}$	Shares issued to a vendor
Paid up capital	$\text{Called up capital} - \text{Calls in arrears}$	Classifying capital
Forfeiture entry	Share Capital Dr (called up), SPR Dr (premium not received), Cr unpaid calls, Cr Share Forfeiture (received)	Forfeiting shares
Capital Reserve after reissue	$\text{Forfeited amount on reissued shares} - \text{Discount on reissue}$	After reissuing
Maximum discount	Not more than the amount forfeited on those shares	Reissue price

60-second revision

Topic	Remember
Company	Separate entity, limited liability, perpetual succession
Capital terms	Authorised > issued > subscribed > called up > paid up
Paid up capital	Called up − calls in arrears
Reserve capital	Uncalled capital reserved for winding up
Shares	Only two kinds: preference and equity
Rules	Application at least 5%, calls at most 25%, minimum subscription 90%
Premium	Cr Securities Premium Reserve, never Share Capital
Arrears and advance	Arrears 10% (charged), advance 12% (paid), advance is a liability
Over subscription	Reject, pro rata, or both. Excess goes to allotment
Forfeiture	Dr Share Capital (called up), Cr Share Forfeiture (received)
Reissue	Discount at most the forfeited amount, balance to Capital Reserve
Buy back	At most 25% of capital and free reserves, debt equity 2:1

Where this chapter connects

The shares you have issued here are one of the two sources of company funds. The other is borrowing, covered in Issue and Redemption of Debentures, where premium and discount work in a similar way. Share capital, reserves and securities premium all appear in the balance sheet format in Financial Statements of a Company. Buy back, dividend and share issue are visible as financing flows in the Cash Flow Statement. The partnership chapters that come before this one, ending with Dissolution of a Partnership Firm, deal with unincorporated firms.

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