Grade 12 Account Note

Company Accounts: Method of Raising Capital

Share capital:

The capital of the company is divided into different parts called shares. Each part of the share capital is called a share. The value, which is stated in share certificate, is called par value/face value/nominal value/stated value. Total amount of all the shares is called share capital. The shares are divided into definite value and numbers. Holders of these shares are called ‘shareholder’ or ‘member’ of the company. It is an amount invested by the shareholders towards the nominal value of shares.
In other word “share capital is the ownership capital of a company raised by the issue of its shares. It is an amount invested by the shareholders towards the nominal value of shares. A company needs share capital in order to finance its activities.

 

There are different types of share capital, which are as follows:

Authorized or registered capital:

The capital which is mentioned in the Memorandum of Association as the maximum amount of share capital is called authorized or registered capital. It is the maximum amount of capital which a company can raise. The capital is divided into definite number of shares. For example, if a company has 20,000 authorized shares at the rate of Rs. 100 each, the total authorized share capital will be Rs. 2,000,000. The authorized capital is also known as nominal capital.

Issued capital:

It is the part of the authorized capital, which is actually offered to the public for subscription. Generally, a company does not issue the entire authorized shares at a time so that the issued capital is always less than the authorized capital.(50,000 shares @ Rs.100 each).

Subscribed capital:

It is that part of the issued capital, which is actually taken up by the investors. For example, if a company issues 50,000 shares @ Rs. 100 each and the application for 45,000 shares were received, the subscribed capital is Rs.45,00,000.

Called-up capital:

The amount of share capital due on shares is normally collected from the shareholders in instalments at different intervals. The called-up capital is that part of the nominal values of shares subscribed by shareholders, which is requested by the company for payment. The uncalled capital if retained by the company to be called up for the payment of creditors on liquidation is treated as reserve capital.

Paid-up capital:

It is the part of called-up capital, which has been actually received from the company’s shareholders. If the called-up capital is 45,000 shares @Rs. 80 each and a shareholder holding 100 shares fails to pay the second instalment of Rs. 20 per share, the paid-up capital is Rs. 35,98,000 since Rs.2000 due on 100 shares at Rs. 20 per share failed to pay.

 

Meaning of share:

A share is a document that acknowledges the ownership of a company to the limit of the amount contributed. So, the share is defined as an interest in the company reflecting the ownership thereof and entitling to receive profit proportionately. The share capital of a company is divided into fixed number of units, and each such unit is called share. Therefore, a share can be defined as a unit of share capital reflecting the extent of interest of a shareholder.

 

Types of shares:

1) Equity shares:

Equity shares are those, which will get dividend and refund of capital only after preferenceshareholders are paid. Equity shares are also known as ordinary shares or common shares. There is no fixed rate of equity dividend. The dividend on these shares is paid from profits only after paying interest on debentures and dividends on preference share capital.  Equity shareholders can participate in management and enjoy the voting rights to elect some members of Board of Directors. Equity shareholders are the real owner of the business.

 

The importance of equity share capital are as follows:

i)Importance to the company
 No need to pay dividend, in case of loss of the company
No need to refund to the equity shareholders before winding-up of the company
The directors are elected from the equity shareholders for the effective management of the company
ii)Importance to the shareholders
Every shareholder has a voting right to elect the company’s BOD.
Equity shareholders can enjoy a higher  amount of dividend in case of a higher profit.
Equity  shareholders can easily sell or transfer their shares to others.

 

2)Right shares:

The shares entitling to be subscribed by the existing shareholders of the company are called right shares. These are additional equity or common shares offered by a company of its shareholders to subscribe within a specified period at a specific price.

 

3)Preference shares:

Preference shares are those shares that are entitled to certain privileges. The dividend on preference share is paid  at a fixed rate. The dividend on such shares is paid before any dividend is paid to equity shareholders. Similarly, at the time of winding-up the company, the preference capital is repaid before such a repayment is made to the equity shareholders. Preference shareholders do not have any voting rights.

 

Types of preference shares are as follows:

Cumulative preference share:

Cumulative preference shares are those shares on which the amount of unpaid dividends is accumulated and is carried forward as a liability.

Non-cumulative preference share:

They are those shares on which the arrears of dividend do not accumulate.

Redeemable preference share:

They are those shares that can be redeemed within a specific period of time. The terms and conditions for redemption of preference shares need to be specified at the time of the issue of shares.

Irredeemable preference share:
They are those, which can be redeemed only at the time of liquidation of the company.

Convertible preference share:
they are those shares, which can be converted into equity shares. The conversion becomes possible when the company provides such option.

Non-convertible preference share:
They are those shares, which can not be converted into equity shares. Preference share are non-convertible unless otherwise stated.

Participating preference share:
They are those shares, which have the right to participate in any surplus profit of the company after paying dividend on equity shareholder.

Non-participating preference share:
They are those share, which do not carry such rights. If the Article of Association of the company is silent, preference shares are assumed to be non-participating preference share.

 

Equity share

Preference share

Dividend on equity share is paid after the payment of preference dividend.

Dividend on preference share is paid before the payment of equity share.

Rate of dividend on equity share may vary from year to year.

Rate of dividend on preference share is fixed.

Arrears of dividend cannot be accumulated in any case.

Arrears of dividend may be accumulated in case of cumulative preference share.

In case of dissolution of the company, equity share capital is refunded after the repayment of preference share capital.

In case of dissolution of the company, preference share is refunded before the repayment of equity share capital.

It can not be convertible.

It may be convertible.

Equity shareholder enjoy voting rights.

Preference shareholders do not have voting rights.

 

 

4)Deferred share:

The share allotted to the promoters as a token of reward for the company is called deferred shares. Founders or management shares are the other terms which are used to refers such shares.
Deffered shares enjoy rights to share on profit after paying off preference dividend and equity dividend.

 

Issue of shares:

A company issues its shares to the general public through an invitation called prospectus. It issue shares to the public through the prospectus to meet present requirement of the fund. The prospectus of the company includes details about the company indicating authorized capital, the number of shares issued and the face value of share. Company can issue its share either for cash or for other than cash. However, sometimes shares are also issued for consideration other than cash, such as for the purchase of assets and for the purchase of business.

 

Issue of shares for cash:

The shares of a company can be issued either at par or at discount or at premium. The amount of shares can be collected either on lump-sum or on installment basis.

Issue of shares on Lump-sum Basis:

If the whole amount of share is collected at once, it is called issue of share on lump-sum basis.

Issue of share at par: A share issued at a price equal to its face or nominal value is called issue of share at par. For instance, if a share of Rs. 100 each is issued at Rs. 100, it is known as issue of share at par.

Issue of shares at Discount: A share issued at a price lower then its face or nominal value is called issue of share at discount. For instance, if a share of Rs.100 each is issued at Rs.90, it is issue of share at discount.

Issue of share at premium: A share issued at a price greater than its face or nominal value is called issue of share at premium. For instance, if a share of Rs.100 each is issued at Rs.110, it is issue of share at premium.

 

Issue of shares on instalment Basis:

The amount of shares may be collected in different instalments. Generally, such amount of instalments is collected in the form of application, allotment, first call and second and final call.

Share application: A prospective subscriber intending to purchase the share pays first instalment of the amount of share with an application form. The amount of first instalment paid is called share application.

Share allotment:  The Company allots the shares among different applicants after receiving their share application money. The allotment of shares implies that the company has accepted the application of the subscribers and decided to give shares to them. The company sends letters to the applicants intending for subscribing the shares, which is called ‘letter of Allotment’.

Calls on shares: The remaining amount of the shares allotted is called up by writing letters to the shareholders, which is known as calls on share. Such remaining amount is called up after receiving the allotment money.

 

Calls in Arrears:

 When a shareholders fails to pay the due amount of share allotment or calls, the unpaid amount of share is called ‘calls in arrears’. In other words, any instalment money (either allotments or calls or both) called up by the company but not paid by the shareholder within the specified time is called “calls in arrears.”

There are two alternative methods of accounting treatment for calls in arrears they are as follows:
i) showing calls in arrears account:  Under it, the amount of unpaid share amount is shown in calls in arrears account.

ii) without showing calls in arrears account:  Under it, the amount of unpaid share amount is not shown in calls in arrears account. The debit balance remaining in share allotment and calls account represents the amount of calls in arrears.

 

Interest on Calls in Arrears:

A company needs to receive interest on calls in arrears from those shareholders who fail to pay share called money within the specified period of time. The interest on calls in arrears is charged as per the provision of Article of Association.

 

Calls in advance:

The company receives the amount of share in different instalments. Sometimes, the company may receive the uncalled amount of instalments in advance as well. The amount of instalments, which have not been called up but received, is known as calls in advance. Calls in advance are liability and it is shown in liability and it is shown in liability side of balance sheet. At the time of journal entry, bank account will be debited and calls in advance account will be credited.

 

Minimum subscription:

It refers to the amount, which must be raised to meet the requirement of operation of the business. According to Nepal Company Act 2053, a company must receive subscription at least 50 per cent of its issued capital as minimum subscription. Minimum amount required for:
Acquiring properties for the company
To pay preliminary expenses and commission
Payment of money borrowed by the company
To meet required working capital
To pay other expenditures

 

Under subscription:

Sometimes, the shares offered by the company may not be subscribed fully by the public. If the shares subscribed are less than the shares offered, it is called under subscription.

 

Over subscription:

The condition where the share application received is more than the number of shares offered by the company then it is called over subscription of shares. For example, a company has issued 20,000 shares but it has received application for 30,000 shares in such condition it is called over subscription. In such case, the company cannot allot shares to all the applicants in full.

 

The allotment of the shares in case of over subscription can be made under the following alternatives:
Full rejection of excess application: under this alternative, the excess applications of shares received for the shares offered by the company are rejected. The rejected applications money is refunded along with a letter of regret.


Pro-rata allotment: Under this alternative, the company allots the shares to all the applicants proportionately. For example, if 5,000 applications were received for 1,000 shares issued, the pro-rata allotment would be 5000:1000 or 5:1. In this instance, an applicant who has applied for 5 shares is lloted only one share. The excess application money is utilized towards the amount due on allotment and subsequent. It is a process of allotment of shares on proportionate basis.


Mixed method: Under this alternative, some applicants are fully allotted, some are allotted proportionately and some are rejected. The application money should be refunded to the applicants to whom no shares are allotted. The excess of application money on proportionately allotted shares may be utilized towards the allotment and subsequent calls.

 

Issue of shares for Non-cash consideration:

The issue of shares for consideration rather than cash is called ‘issue of shares for non-cash consideration.’ A company may issue shares for purchasing assets and other business. It may also issue shares for paying underwriting commission and remuneration its promoters. 

 

Share underwriting:

Underwriter is a person or a company who undertakes for issuing the shares or debentures at a nominal commission. Share underwriting is an agreement between the company and underwriter under which the underwriter under takes for an agreed commission for whole or part of the shares and guarantees to sale the shares of the company.

 

Underwriting commission:

Underwriting commission is a commission paid by a company to any person or financial institutions who guarantees to take up any shares or debentures offered by the company to the public for which the application is not received.

Brokerage:  Share broker is an agent acting for the company in issuing shares. Brokerage is a commission changed by the broker for completing any negotiations. A share broker charges commission for rendering services in the issue of shares and debentures of a company.

 

 

Accounting treatment of Goodwill and Capital Reserve:

Sometimes, the amount of purchase consideration of a business purchased differs with its net worth. If the amount of purchase consideration is more than the net worth then goodwill is debited with the excess of purchase consideration over the net worth.

 

Opening balance sheet:

The balance sheet prepared by newly established company after the issue of shares and debentures is called opening balance sheet. In other word, the balance sheet of the existing company prepared after the issue of shares and debentures, purchase of assets, purchase of business and reconstruction of financial structure is known as opening balance sheet.

 

Issue of shares to promoters: Promoters are those individuals or organizations who give birth to the company. The following entry is passed for the issue of shares:

Goodwill a/c        Dr

        To share capital a/c

(Being issue of…shares of Rs….each to promoters for their services)

Forfeiture of shares:

The term “forfeiture of shares” indicates to the cancellation of shares. This happens when a shareholder fails to pay allotment or call or both within the specified date. The Board of Directors are empowered by the company’s articles of association to forfeit the default shares. Before the forfeiture of shares, the company must follow the procedure for collecting calls in arrear as amount as stand in article of association and prevailing act.
Forfeiture of shares is a process of withdrawing the shares allotted and seizing the amount already paid by the defaulters.

 

The conditions of forfeiture of shares are as follows:

Forfeiture of shares at par:

The following journal entry is passed for the Forfeiture of shares initially issued at par

 

 

Date

particulars

LF

Dr.Amt

Cr.Amt

 

Share capitals a/c……………………..Dr.

       The share allotment a/c
       The share first and final call a/c
       The share forfeiture a/c
(Being forfeiture adjusted)

 

 

XXXXX

 

XXXXX

XXXXX

XXXXX


 

 Forfeiture of shares at discount:

The following journal entry is passed for the Forfeiture of shares initially issued at discount:

Date

Particulars

LF

Dr.Amt

Cr.Amt

 

Share capitals a/c……………………..Dr.

      The discount on issue of share a/c
       The calls in arrear a/c
       The share forfeiture a/c
   (Being forfeiture adjusted)

 

XXXXX

 

XXXXX

XXXXX

XXXXX

 


 

 Forfeiture of shares at premium
i)When a shareholder fails to pay the amount of premium:

The following journal entry is passed for the When a shareholder fails to pay the amount of premium;

Date

particulars

LF

Dr.Amt

Cr.Amt

 

Share capitals a/c……………………..Dr.

Share premium a/c…………………..Dr.
       The calls in arrear a/c
       The share forfeiture a/c
(Being forfeiture adjusted)

 

 

XXXXX

XXXXX

 

 

XXXXX

XXXXX


ii) When a shareholder pay the amount of premium:

The following journal entry is passed for the When a shareholder pay the amount of premium;

Date

particulars

LF

Dr.Amt

Cr.Amt

 

Share capitals a/c……………………..Dr.

       The calls in arrear a/c
       The share forfeiture a/c
(Being forfeiture adjusted)

 

 

XXXXX

 

 

XXXXX

XXXXX


 

Reissued of forfeiture shares:

The following journal entry is passed for the Reissued of forfeiture shares;

              

Bank a/c ……………………………………….Dr.
Share forfeiture a/c………………………Dr.
           To share capital a/c
(Being……shares reissued at Rs….each)

 The following journal entry is passed for transferring the amount of net gain on capital reserve account;

Share forfeiture a/c…………………..Dr.
          To capital reserve a/c
(Being  capital reserve adjusted)


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