Accounting for Share Capital

Definition

A Share is the smallest unit into which the total capital of a company is divided. Share Capital refers to the total amount of money raised by the company by issuing these shares.

Simple Explanation

Think of a giant pizza. The whole pizza is the "Share Capital," and each individual slice is a "Share." If you own a slice, you own a piece of the company.

Key Types of Share Capital

• Authorized Capital: Maximum amount a company is legally allowed to raise (per Memorandum of Association).
• Issued Capital: Part of authorized capital offered to the public.
• Subscribed Capital: Portion of issued capital the public agrees to buy.
• Called-up Capital: Part of subscribed capital the company has asked shareholders to pay.
• Paid-up Capital: Actual money received from shareholders.
• Reserve Capital: Uncalled capital decided to be called only during liquidation.

Examples

• A company is authorized to issue 1,00,000 shares (Authorized), but it only offers 80,000 shares to the public (Issued).
• Out of 80,000 shares offered, people applied for 70,000 shares (Subscribed).

Real-Life Use

When reviewing financial statements of companies like Reliance or Tata Motors, the "Equity Share Capital" section tells investors how much owners invested and if there is room to raise more money without changing legal documents.

The Three-Step Process

1. Share Application: Investors apply for shares and send an initial amount.
2. Share Allotment: Company decides who gets shares and asks for the second installment.
3. Share Calls: Remaining balance is collected via "calls" (e.g., First Call, Final Call).

Key Terms

• Calls in Arrears: When a shareholder fails to pay the installment on time.
• Calls in Advance: When a shareholder pays a future installment early.

Examples

• A share of ₹10 is issued as: ₹3 on Application, ₹4 on Allotment, and ₹3 on First & Final Call.
• An investor forgets to pay the ₹3 final call; this is "Calls in Arrears."

Real-Life Use

During an IPO (like Zomato or LIC), the Application and Allotment process is used to filter millions of applicants and refund those who were not allotted shares.

Meaning

• Issue at Par: Issued at face value (₹10 share sold for ₹10).
• Issue at Premium: Issued higher than face value (₹10 share sold for ₹12). Extra goes to "Securities Premium Account."
• Issue at Discount: Issued lower than face value (₹10 share sold for ₹9). (Restricted under Companies Act 2013, except Sweat Equity).

Key Points

• Securities Premium is "Capital Profit" and cannot be used for dividends.
• It can be used for writing off preliminary expenses or issuing bonus shares.

Examples

• A high-brand value company issues shares at ₹15 when the face value is ₹10 (Premium of ₹5).
• A new company issues shares at ₹10 exactly (At Par).

Real-Life Use

Like "Limited Edition" sneakers, high-demand companies (Apple, Google) have market prices (premiums) far above their original face value.

Meaning

Forfeiture: When a shareholder fails to pay allotment/call money, the company cancels shares and keeps money already paid.
Reissue: Selling those forfeited shares to a new buyer.

Simple Explanation

Like an EMI penalty: If you stop paying for a phone, the company takes it back (forfeits) and sells it to another customer (reissue).

Key Points

• Forfeited amounts go to the "Forfeited Shares Account."
• Profit on reissue is transferred to the "Capital Reserve."

Examples

• Rahul failed to pay the final call of ₹2 on 100 shares. The company forfeits his shares; the ₹8 he already paid is kept.
• The company reissues Rahul's 100 shares to Priya at ₹7 per share.

Real-Life Use

This maintains financial discipline, ensuring only reliable investors remain part of the company's capital structure.

A. Sweat Equity Shares

Shares issued to employees/directors for hard work, intellectual property, or know-how.

Example: A startup gives 1% ownership to a lead coder who built the app for free.

B. Consideration other than Cash

Issuing shares instead of cash when buying an asset (land/machinery).

Example: Company A buys a building worth ₹50 Lakhs and issues 50,000 shares of ₹100 each to the seller.

Real-Life Use

Tech startups use ESOPs (Employee Stock Option Plans) to attract talent when they cannot afford huge cash salaries.

Journal Entries Solution:

1. Application: $10,000 \times 3 = 30,000$

   Bank A/c Dr. 30,000 $\rightarrow$ Share Application A/c 30,000
   Share Application A/c Dr. 30,000 $\rightarrow$ Share Capital A/c 30,000

2. Allotment: $10,000 \times 4 = 40,000$

   Share Allotment A/c Dr. 40,000 $\rightarrow$ Share Capital A/c 40,000
   Bank A/c Dr. 38,000
   Calls in Arrears A/c Dr. 2,000 $\rightarrow$ Share Allotment A/c 40,000

3. Final Call: $10,000 \times 3 = 30,000$

   Share First & Final Call A/c Dr. 30,000 $\rightarrow$ Share Capital A/c 30,000
   Bank A/c Dr. 28,500
   Calls in Arrears A/c Dr. 1,500 $\rightarrow$ Share First & Final Call A/c 30,000

4. Forfeiture:

   Share Capital A/c Dr. (500 $\times$ 10) = 5,000
   $\quad$ To Calls in Arrears (2,000 + 1,500) = 3,500
   $\quad$ To Forfeited Shares A/c (500 $\times$ 3) = 1,500

5. Reissue:

   Bank A/c Dr. (500 $\times$ 8) = 4,000
   Forfeited Shares A/c Dr. (500 $\times$ 2) = 1,000
   $\quad$ To Share Capital A/c 5,000

6. Transfer to Capital Reserve:

   Forfeited Shares A/c Dr. (1,500 - 1,000) = 500
   $\quad$ To Capital Reserve A/c 500

• Paid-up Capital = $\text{Subscribed Capital} - \text{Calls in Arrears}$
• Capital Reserve = $(\text{Amount forfeited on reissued shares}) - (\text{Discount allowed on reissue})$
• Shares for Asset = $\frac{\text{Value of Asset acquired}}{\text{Issue Price per share}}$

• Online IPO Platforms: Zerodha/Groww automate the "Application" phase.
• Digital Share Registry: NSDL/CDSL track "Subscribed" and "Paid-up" capital electronically.
• Equity Financing: Pitch Decks used by startups to secure VC investment.

The Scenario: EcoCharge Ltd. needs ₹5 Crores for solar charging stations.

1. Capitalization: Authorized ₹10Cr $\rightarrow$ Issued 50 Lakh shares.
2. Response: Over-subscription (55 Lakh shares applied). Pro-rata allotment used.
3. Collection: ₹3 App, ₹4 Allot (₹1 Premium), ₹3 Call.
4. Conflict: 1,000 shareholders defaulted. Company Forfeited shares.
5. Growth: Forfeited shares Reissued to a green-energy fund at ₹9. Profit to Capital Reserve.
6. Strategy: Issued Sweat Equity to lead engineer and acquired warehouse via Consideration other than cash.

1. Which capital is the maximum amount a company can raise?
   Answer: b) Authorized Capital
2. Securities Premium can be used for:
   Answer: b) Writing off Preliminary Expenses
3. When shares are forfeited, the Share Capital account is:
   Answer: b) Debited
4. Shares issued to employees for their hard work are called:
   Answer: c) Sweat Equity Shares
5. Calls in Arrears means:
   Answer: c) Amount not paid by shareholder
6. Profit on reissue of forfeited shares is transferred to:
   Answer: b) Capital Reserve
7. If a share of ₹10 is issued at ₹12, the ₹2 is called:
   Answer: c) Premium
8. Which of these is NOT a part of share capital?
   Answer: c) Loan Capital
9. Payment for assets other than cash is done by issuing:
   Answer: b) Shares
10. Reserve Capital is called only at the time of:
    Answer: b) Company liquidation

1. Q: Distinguish between Reserved Capital and Capital Reserve.
   Ans: Reserved Capital is uncalled capital kept for liquidation. Capital Reserve is created from capital profits (like reissue profit) and is already part of company funds.
2. Q: What happens when a company over-subscribes shares?
   Ans: Company can: (1) Reject and refund, (2) Allot pro-rata, or (3) Use a combination of both.
3. Q: Can a company issue shares at a discount? Explain.
   Ans: Generally prohibited by Companies Act 2013. Exception: Sweat Equity Shares.
4. Q: What is the journal entry for forfeiture of shares?
   Ans: Share Capital A/c Dr. (Called-up) $\rightarrow$ To Share Forfeiture A/c (Paid) $\rightarrow$ To Calls in Arrears A/c (Unpaid).
5. Q: Explain 'Consideration other than cash' with an example.
   Ans: Acquiring an asset and paying via shares. E.g., Buying ₹1 Lakh machinery by issuing 1,000 shares of ₹100 each.
6. Q: What is the purpose of the Securities Premium Account?
   Ans: Used for issuing bonus shares, writing off preliminary expenses, or premium on redemption of debentures.
7. Q: Define 'Paid-up Capital'.
   Ans: Actual money received: $\text{Called-up Capital} - \text{Calls in Arrears}$.
8. Q: What is a 'Pro-rata Allotment'?
   Ans: Proportionate allotment during over-subscription (e.g., 1 share given for every 2 applied).
9. Q: How is 'Capital Reserve' different from 'General Reserve'?
   Ans: Capital Reserve is from non-trading profits (no dividends). General Reserve is from normal profits (dividends allowed).
10. Q: What are the conditions for issuing Sweat Equity shares?
    Ans: Issued for know-how/IPR. Usually involves a "lock-in period" where shares cannot be sold.

• Capital Hierarchy: Authorized $\rightarrow$ Issued $\rightarrow$ Subscribed $\rightarrow$ Called $\rightarrow$ Paid
• Mnemonic: "All Investors Should Count Profits" (A-I-S-C-P)
• Forfeiture Logic: Capital $\downarrow$ (Debit), Arrears $\downarrow$ (Credit), Forfeiture $\uparrow$ (Credit).

Authority: Guidelines based on Companies Act, 2013 (India) and IFRS/GAAP standards.