Class 12 Accountancy II Notes – Chapter 1: Accounting for Share Capital (CBSE)

Chapter Overview

This chapter explains:

• Meaning and features of a company
• Types of companies
• Share capital and its categories
• Types of shares
• Issue of shares
• Calls in arrears and calls in advance
• Oversubscription & undersubscription
• Issue of shares at premium
• Issue of shares for consideration other than cash

1. Company

A company is an artificial legal person formed under the Companies Act, 2013.

Definition

A company is an incorporated association having:

• Separate legal existence
• Perpetual succession
• Limited liability
• Common seal

2. Features of a Company

1. Separate Legal Entity

• Company is different from its shareholders.
• Can own property.
• Can sue and be sued.

2. Limited Liability

Members are liable only up to unpaid value of their shares.

3. Perpetual Succession

Company continues even if members change.

4. Transferability of Shares

Public company shares can be transferred freely.

5. Common Seal

Acts as the company’s official signature.

6. Body Corporate

Created by law.

3. Kinds of Companies

A. Based on Liability

(i) Company Limited by Shares

Liability limited to unpaid share amount.

(ii) Company Limited by Guarantee

Members pay only guaranteed amount during winding up.

(iii) Unlimited Company

Members have unlimited liability.

B. Based on Number of Members

Public Company

• Minimum members: 7
• No maximum limit
• Shares freely transferable

Private Company

• Minimum members: 2
• Maximum members: 200
• Restricts transfer of shares

One Person Company (OPC)

• Only one member
• Separate legal entity

4. Share Capital

Share Capital = Money contributed by shareholders.

5. Categories of Share Capital

1. Authorised Capital

Maximum capital company can issue.

Also called:

• Registered Capital
• Nominal Capital

2. Issued Capital

Part of authorised capital offered to public.

3. Subscribed Capital

Capital actually subscribed by investors.

4. Called-up Capital

Amount demanded by company.

Example

Share Value = ₹10

Company calls = ₹8

Called-up Capital = ₹8

5. Paid-up Capital

Amount actually received.

Formula

Paid-up Capital = Called-up Capital − Calls in Arrears

6. Uncalled Capital

Amount not yet demanded.

7. Reserve Capital

Part of uncalled capital reserved for winding up.

Capital Structure Diagram

Authorised Capital
│
├── Issued Capital
│
├── Subscribed Capital
│
├── Called-up Capital
│
├── Paid-up Capital
│
└── Reserve Capital

6. Types of Shares

A. Preference Shares

Preference shareholders get:

✔ Priority in dividend

✔ Priority in repayment of capital

Types

• Cumulative
• Non-cumulative
• Participating
• Non-participating
• Redeemable

B. Equity Shares

• Ordinary shares
• Dividend is not fixed.
• Voting rights available.
• Paid after preference shareholders.

Preference vs Equity Shares

7. Issue of Shares

Company generally collects money in instalments.

Stages

1. Application
2. Allotment
3. First Call
4. Second/Final Call

Share Issue Procedure

Prospectus
      ↓
Applications
      ↓
Allotment
      ↓
Calls

8. Minimum Subscription

Minimum subscription must generally be 90% of the issue before allotment can proceed (as per the provisions discussed in the chapter).

If minimum subscription is not received:

• Shares cannot be allotted.
• Application money is refunded.

9. Journal Entries for Issue of Shares

A. Application Money Received

Bank A/c Dr.
     To Share Application A/c

B. Transfer of Application Money

Share Application A/c Dr.
      To Share Capital A/c

C. Application Money Refunded

Share Application A/c Dr.
      To Bank A/c

D. Allotment Due

Share Allotment A/c Dr.
      To Share Capital A/c

E. Allotment Received

Bank A/c Dr.
      To Share Allotment A/c

F. Call Due

Share Call A/c Dr.
      To Share Capital A/c

G. Call Received

Bank A/c Dr.
      To Share Call A/c

10. Calls in Arrears

Money not received on allotment or calls.

Entry

Calls in Arrears A/c Dr.
      To Share Call A/c

11. Calls in Advance

Money received before it becomes due.

Entry

Bank A/c Dr.
      To Calls in Advance A/c

Adjustment:

Calls in Advance A/c Dr.
      To Share Call A/c

Difference: Calls in Arrears vs Calls in Advance

12. Oversubscription

Applications received exceed shares offered.

Company may:

• Reject excess applications
• Pro-rata allotment
• Combination of both

Pro-rata Allotment

Applicants receive shares in proportion.

Example:

Applied = 5 shares

Allotted = 4 shares

Ratio = 4 : 5

Excess application money is adjusted against allotment.

13. Undersubscription

Applications received are less than shares offered.

If minimum subscription is met:

• Shares allotted.

Otherwise:

• Refund application money.

14. Issue of Shares at Premium

Issue Price > Face Value

Example

Face Value = ₹10

Issue Price = ₹12

Premium = ₹2

Premium is credited to:

Securities Premium Account

Uses of Securities Premium

• Bonus shares
• Writing off preliminary expenses
• Writing off issue expenses/commission
• Premium on redemption
• Buy-back of shares

Journal Entry (Premium on Allotment)

Share Allotment A/c Dr.
      To Share Capital A/c
      To Securities Premium A/c

15. Issue of Shares at Discount

Generally not permitted except in cases such as:

• Reissue of forfeited shares
• Sweat equity shares

16. Issue of Shares for Consideration Other Than Cash

Shares may be issued to vendors instead of paying cash.

Important Formulae

Paid-up Capital

Paid-up Capital = Called-up Capital − Calls in Arrears

Uncalled Capital

Uncalled Capital = Subscribed Capital − Called-up Capital

Shares Issued to Vendor

Purchase Consideration ÷ Issue Price

Important Terms

• Company
• Shareholder
• Share Capital
• Equity Share
• Preference Share
• Authorised Capital
• Issued Capital
• Subscribed Capital
• Called-up Capital
• Paid-up Capital
• Reserve Capital
• Calls in Arrears
• Calls in Advance
• Securities Premium
• Oversubscription
• Pro-rata Allotment

Exam Tips (CBSE)

• Learn all categories of share capital in sequence.
• Practice journal entries for application, allotment, and calls.
• Memorize the treatment of Calls in Arrears, Calls in Advance, and Securities Premium.
• Be comfortable solving oversubscription and pro-rata allotment problems.
• Practice numerical questions on journal entries regularly.