shares, loan shares

1. Accounting for issue of
shares and loan notes

2. Meaning of share
 A company raises capital by the issue of shares.
 The total capital of the company is divided into smaller
denominations - each part is known as a “share”.
 These shares are issued for subscription.
 The persons who contribute to the shares are called the
“Shareholders”
 A share is evidenced by a share certificate which is issued by the
company under its common seal.
 Each share has a distinct number.

3. SHARE CAPITALTYPES

4. SHARE CAPITALTYPES EXPLAINED
 Authorized or Registered Share Capital
• Maximum amount of capital, which a company is allowed to raise
during its lifetime
• Based on the amount mentioned in the MoA
 Issued Capital
• The portion of authorized capital, which has been issued to all the
investors including public
• The amount of issued capital is taken in the balance sheet only if the
total amount of issued capital is subscribed, called up by the company
and paid by the share holders. Otherwise, its presentation is similar to
authorized capital

5. SHARE CAPITALTYPES EXPLAINED
 Subscribed Capital
• The portion of the issued capital, which has been subscribed by all the investors
including the public
 Called up Capital
• The portion of the subscribed capital that has been called up by the company
for payments is the called up capital
 Paid-up Capital
• That part of called up capital, which has been paid up by the subscribers of
share capital
• The amount, which is due but yet to be received, is known as calls in arrears

6. ISSUE OF SHARES
 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 8 Accountancy : Company Accounts and
Analysis of Financial Statements 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 alloted, 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.

7. NATURE AND CLASSES OF SHARES
 Preference Shares
According to Section 85 ofThe CompaniesAct, 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.

8.  Equity shares
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 Accounting for Share Capital 7
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.

9. JOURNAL ENTRIES
1.When application money is received:
 Dr. Bank A/c xxx
 Cr. share ApplicationA/c xxx
 (Being application money received)
2. For the allotment money due on the shares:
 Dr. Share allotment A/c xxx
 Cr. Share Capital A/c xxx

10. 3.. On allotment of shares:
 a)The application money on allotted shares is transferred
from share
application account to share capital A/c with the following entry.
 Dr. Share Application A/c xxx
 Cr. Share Capital A/c xxx
 (Being application money transferred to share capital A/c)

11.  • b) If any applications are totally rejected the application
money should
 be refunded to the applicants.The following entry is passed
for the refund.
 Dr. Share Application A/c xxx
 Cr.To BankA/c xxx
 (Being Application money refunded)

12. 4.When allotment money is received:
 Dr. Bank A/c xxx
 Cr. Share Allotment A/c xxx
 • (Being the allotment money received)
 • It should be noted that the above entry should be passed
with the actual
 amount received towards allotment money.

13. 5.When the company makes the first call:
 Dr. Share First Call A/c xxx
 Cr. Share Capital A/c xxx
 (Being the first call money due)This entry should be passed
with the amount called up on first call.

14. 6.When first call money is received:
 Dr. BankA/c xxx
 Cr. Share first callA/c xxx
 (Being first call received)
 •This entry is passed with the actual amount received on first call.
 • Similar entries are made for every call.The last call is called the
final call.
 If there is only one call, it is known as first and final call.

15. ILLUSTRATION 1

17. ILLUSTRATION 2

19. ILLUSTRATION 3