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COMPANY ACCOUNTShare Capital of a Company

Capital:Generally capital means a particular amount of money used in business for the purpose of earning revenue.

In the context of the company law, this term is used in the following senses:

Nominal Capital or Authorized Capital:It means the nominal value of the shares which a company is authorized to issue by its memorandum. Example: P Ltd. Has been incorporated with an Authorized capital of tk.10,00,000 divided into 1,00,000 shares of tk. 10 each.

(ii) Issued Capital:

It is that part of authorized capital which is issued to the public for subscription and allotmentExample: 60,000 shares of tk10 each.(iii) Subscribed Capital:It is that part of the issued capital which has been subscribed by the public, Example : 50,000 shares of tk10 each.

(iv) Called-up CapitalIt is that part of the subscribed capital which the directors have called up in order to carry on the business of the company.Example: Tk.5 per share has been called-up, i.e 60,000xtk 5= tk3,00,000

(v) Paid-up CapitalIt is that part of called up capital which is actually received in cash by the company.Example: Tk.2,90,000(one shareholder 5,ooo shares failed to pay the call@2/- per share)

(vi) Uncalled Capital It is that part of subscribed capital which has not been called by the directors. The difference between the subscribed capital and called up capital is represented by the uncalled capital.

SHARE

The Act defines a share as a share in the share capital of the company. Each share in a company is distinguished by its appropriate number. Shares are classified as movable property, transferable in the manner specified by the articles.

Under the Companies Act 1956, the shares of a company can be of two classes only

i)Preference shares

ii)Equity shares

Preference shares:

Preference are those which satisfy the following two conditions:-

As regards dividends, it must carry a preferential right to a fixed amount, and

2) As regards capital, in the event of winding up, there must be a preferential right to be repaid for the amount of capital paid on such shares.

Preference share can be subdivided in different classes:

(a) cumulative and non-cumulative preference shares(b) redeemable and non-redeemable preference shares

Cumulative and Non-cumulative Preference Shares

Cumulative Preference Share:

In case of cumulative preference shares, if the profits of the firm in any year are not sufficient to pay dividend on such shares, the deficiency accumulates, to be paid out of the profits of subsequent years.

Non-cumulative preference share:

In case non-cumulative preference shares, dividend is only payable out of the net profit of each year and the shares do not have the privilege of accumulation of the amount unpaid dividends.

It should be noted that if the preference shares are not described in the articles as being of either kind, they should be treated as being cumulative.Redeemable and non redeemable preference shares:

Redeemable preference shares:

Redeemable preference are those, the capital of which may be refunded by the company after a specified time.

Non-redeemable preference share :

Non-redeemable preference share are those, the capital of which cannot be refunded before winding-up.

Equity share

Equity shares are those , which are not preference share.THE ISSUE OF SHARES:

Share may be issued at a price which is termed as:i) at parii) at a premiumiii) at a discount

AT PAR: If the price required to be paid to the company for the share is equal to the nominal value of that share, is called at par.Example: tk.10 equity share issued at a price of tk.10.

AT PREMIUM: If the price required to be paid to the company for the share is more than the nominal value of that share, is called at premium.Example: tk.10 equity share issued at a price of tk.12.

AT DISCOUNT: If the price required to be paid to the company for the share is less than the nominal value of that share, is called at discount.Example: tk.10 equity share issued at a price of tk.9.The procedure of issuing shares consists of the following steps

i) Issue of prospectus;ii) Receipt by the company of applications for shares;iii) Allotment of shares to applicants; andiv) Issue of share certificates.

Share payable by installment

Where a company does not require the immediate use of all the proceeds from share issue, the request to have share payable by installments is sensible.

In this case, the following are the various stages in share accounting:

Collection of application money.Allotment of sharesReceipt of allotment moneyShare callReceipt of share call money.Issues of shares at par

Accounting Entries

On receipt of application moneyBank Share Application(Being application money received for . Shares @ tk each.)On allotment of share

(a) Share Application Share Capital(Being application money on .. Shares @ . each transferred to share capital as per Boards Resolution No. dated)

Once allotment is made, the applicants will be treated as shareholders and they are legally liable to pay all monies due on shares allotted to them. Dues on account of share allotment and calls are accounted for on an accrual basis. The entry is:

Share AllotmentShare Capital(Being allotment money on share @ . Each as per Boards Resolution No dated)3. When share are oversubscribed, some applications may be rejected by the Board of Directors and application money will be refunded to the applicants along with a letter of regret.Share ApplicationBank(Being application money on ..shares@ .. Refunded as per Boards Resolution No dated)

4. When shares are oversubscribed, in some cases, the board of directors may prefer to allot less number of shares than applied for, the excess application money is adjusted against monies due on allotment.Share ApplicationShare AllotmentCalls-in AdvancedBank[Being excess application money adjusted against allotment and surplus after adjustment transferred to calls-in-advance ( or refunded) as per Boards Resolution No dated]

5. On receipts of allotment money BankShare Allotment (Being allotment money received on shares @ .. Each.)

6. If some shareholders fail to pay allotment money, Allotment Account will show a debit balance. Calls-in-ArrearShare Allotment(Being allotment money not paid transferred to Calls-in Arrear)

7. Making calls:

Share callShare Capital(Being call money due on. Shares @ each as per Boards Resolution No.. dated..)

8. On receipt of call money

Bank Share call(Being call money received on share @ each)

9. non-payment of call money

Calls-in-ArrearShare Call(Being call money on share @...each transferred to Calls-in Arrear for non payment)

10. On adjustment of Calls-in-Advance, if anyCalls-in-AdvanceShare Call(Being the adjustment for calls-in-Advance)Example -1

A limited company issued 10,000 share of tk.100 each payable as tk.20 on application; tk.30 on allotment; and tk.50 on final call. The public applied for 9,000 shares, which were allotted. All the monies due on shares were received except the final call on 400 shares. Pass necessary journal entries(including cash) and show the Balance Sheet.

Example : 2Aftab AutoLtd. made as issue of 30,000 shares of tk.10 each payable as tk.3 on application; tk.5 on allotment; and tk.2 on call. 93,200 shares were applied for and owing to this heavy over-subscription, allotment were made as under: Applicants for 21,500 shares( in respect of applications for 2,000 shares or more) received 10,200 shares, Applicants for 50,600 shares (in respect of applications for 1,000 shares or more but less than 2,000 shares ) received 12,600 shares.Applicants for 21,100 shares (in respect of applications for less than 1,ooo shares) received 7,200 shares. Cash received after satisfying the amount due on application was applied towards allotment and call money and any balance was then returned. All monies due on allotment and calls were received. Pass journal entries.Share Applied Share AllottedShare Appl. money ReceivedShare Appl. Money RequiredExcessAdjust with AllotmentAdjust with Call-in AdvanceReturn21,50010,20064,50030,60033,90033,900--50,60012,6001,51,80037,8001,14,00063,00025,20025,80021,1007,20063,30021,60041,70036,0005,700-93,20030,0002.79,60090,0001,89,6001,32,90030,90025,800Workings:Issue of shares at a premium

Share premium amount cannot be distributed as dividend in cashThe annual Balance Sheet must disclose the amount of share premium as a separate itemMoney in share premium account cannot be treated as free reserve, as they are in the nature of capital reserve.Accounting Entries

When premium is collected along with application money(a) Bank share application(the amount received on application)(being application money received on shares @ tk.. Each including premium of tk.) (b) Share Application Share Capital Share Premium(being application money on .shares @ tk per share transferred to share capital Account and Share Premium Account as per Boards Resolution No. dated)

[ All other entries in respect of allotment and calls are same as shares issued at par] (ii) When premium is collected along with allotment money:(a) BankShare Application(Being application money received on .shares @ tk. each.)

(b) Share ApplicationShare Capital(Being application money transferred to Share capital account on ..shares @ tk. . Each as per Boards Resolution No dated )

Share AllotmentShare CapitalShare Premium(Being allotment money due on shares@ tkeach including premium @tkeach as per Boards Resolution Nodated..) Example:3The authorized capital of a company is 1,00,000 shares of tk.10 each. On April 10,2001, 50,000 shares are issued for subscription at a premium of tk.2 per share. The share money is payable as follows: tk.5(including the premium of tk.2) with application, tk.3 on allotment, tk.2 on first call, and tk.2 on final call. The subscription list closes on May 11, 2001, and the directors proceed with allotment on May 18, 2001. The shares are fully subscribed and the application money (including premium) is received in full. The allotment money is received by June 30, 2001, except as regards 500 shares. The first call and the second call money is received by September 30, 2001 and December 31, 2001, respectively, barring the final call money on 200 shares which is not received. Pass necessary Journal entries.Issue of Shares at a discount

Accounting Entries

The entry for discount is generally made at the time of allotment:

Share AllotmentDiscount on issue of sharesShare Capital(Being allotment money due on shares @tk each as per Boards Resolution No dated)

Discount on Issue of Shares appears on the asset side of Balance Sheet and it is gradually written-off against Income Summary or Share Premium Account over a number of years.Example: 4Newcomer Ltd. issued 10,000 shares of tk.10 each at a discount of 10% payable as : On Application tk.2; on Allotment tk.4; and on Final Call tk.3. All shares offered were subscribed for and money was duly received. Pass entries in the cash book and journal of the company and also show the Balance sheet on the company.CALLS-IN ARREAR

(a) Calls-in-ArrearShare AllotmentShare Call(Being Money not paid on allotment and calls transferred to Calls-in Arrear.)

Bank Calls-in-Arrear(Being money collected from defaulting shareholders)

The balance of Calls-in-Arrear, at a year end, is shown in the Balance Sheet as a deduction from respective Share Capital. It is shown in the Balance Sheet until the share on which money unpaid are forfeited. Interest on calls-in-arrear

For interest dueShareholderInterest on Calls-in-Arrear(Being interest due @.....on calls-in-arrear)

(b) When interest is actually realizedBank Shareholder(Being the receipt of interest on calls-in- arrear)

For transferring interest to Income SummaryInterest on calls-in-arrearIncome Summary

Calls-in-Advance

Share ApplicationCalls-in-advance(being excess Application money transferred to calls-in-arrear)OR

Bank Calls-in-Advance(Being call money received for.. in advance.)

(b) Calls-in-AdvanceCalls(being the adjustment for Call-in-Advance)

It should be noted that Calls-in-Advance does not form a part of the Companys share capital and no dividend is payable on such amount. In the Balance sheet, it should be shown on the liabilities side as Calls-in-AdvanceInterest on Calls-in-Advance

For interest due on Calls-in-Advance

Interest on Calls-in-AdvanceShareholder(Being interest due on calls-in-advance@....)

(b)For payment of interest

ShareholderBank(Being interest on Calls-in-Advance paid)

For closing interest on Calls-in-Advance

Income SummaryInterest on Calls-in-Advance(Being interest on calls-in-advance transferred to Income Summary)FORFEITURE OF SHARE

When shares are forfeited, the title of such shareholder is extinguished but the amount paid to date is not refunded to him.

Accounting Entries:

Share Capital [No of shares x called up value per share]Calls-in-Arrear [Amount due]Forfeited Shares [Amount already received](Being the forfeited of ..share for non-payment of due money as per Boards Resolution No..dated.)

It should be noted that if forfeited shares were issued at a premium, the Share Premium Account will be debited if the amount of premium has not been received on such shares.Re-issue of Forfeited Shares:Forfeited shares can be re-issued at any price so long as the total amount received for those shares is not less than the amount in arrear on those shares. In other words, those shares can be re-issued at a discount but such discount should not exceed the forfeited amount. Example: 5Mr. Long who was holder of 200 preference shares of tk.100, on which tk.75 per share has been called up could not pay his dues on Allotment and First call each at tk.25 each per share. The directors forfeited the above shares and reissued 150 of such shares to Mr. short at tk65 per share paid-up as tk.75 per share. Give Journal Entries.A ltd invited applications for 10,000 shares of tk.100 each at a premium of tk.10 per share. The amount is payable as follows: on application tk.25, on allotment tk.35 (including premium), on first call tk.25 and on final call tk.25.The applications were received for 9,000 shares and these were accepted in full. All money due were received except the first, and final call money on 200 shares, which were forfeited. Out of these, 100 shares were subsequently re-issued @ tk.90 per share.You are required to pass journal entry for recording the above transactions including cash.A company issued for public subscription 40,000 equity shares of tk.10 each at a premium of tk.2 per share payable as under:On application tk.2 per share.On allotment tk.5 per share.( including premium)On 1st call tk.2 per share.On 2nd call tk.3 per share.Application were received for 60,000 shares. Allotment was made pro-rata to the applicants for 48,000 shares, the remaining applications being refused and application money was paid back. Money overpaid on application was utilized towards sums due on allotment. A to whom 1,600 shares were allotted failed to pay the allotment, first and second call money and B to whom 2,000 shares were allotted failed to pay the two calls.These were subsequently forfeited after the second call was made. All the forfeited shares were sold to as fully paid up at tk.8 per shares. Show the journal entries required to record the above transactions and the opening balance sheet of the company.