Introduction
Issuing shares is a fundamental process for companies to raise capital. It involves creating and selling new shares to investors, who become part-owners of the company. This process is not only pivotal for the growth and expansion of a business but also requires meticulous accounting treatment. In this tutorial, we will explore the accounting treatment of the issue of shares, supported by detailed examples and journal entries.
Types of Shares Issued
Before diving into the accounting entries, it’s essential to understand the types of shares a company can issue:
- Equity Shares: These represent ownership in the company. Equity shareholders are entitled to vote in the company’s general meetings and receive dividends.
- Preference Shares: These shares come with a fixed dividend rate and have a preference over equity shares for dividend payments and repayment of capital.
Accounting Treatment for the Issue of Shares
The accounting treatment of the issue of shares involves several steps, from application to allotment, and includes various entries in the company’s books. Let’s break down these steps:
1. Application Money
When a company invites the public to subscribe to its shares, it receives application money. This is the initial amount paid by investors when they apply for shares.
Journal Entry for Application Money:
Bank A/C Dr
To Share Application A/C Cr
(Being application money received)2. Allotment of Shares
Once the applications are reviewed, the company allots shares to the applicants. The application money is then transferred to the Share Capital account. If the application money is more than the nominal value of the shares (i.e., issued at a premium), the excess is credited to the Securities Premium account.
Journal Entry for Allotment:
Share Application A/C Dr
To Share Capital A/C Cr
To Securities Premium A/C (if issued at premium) Cr
(Being application money transferred to share capital and securities premium)3. Allotment Money
After the allotment, the company may call for further amounts known as allotment money. This is the next installment paid by the shareholders.
Journal Entry for Allotment Money Due:
Share Allotment A/C Dr
To Share Capital A/C Cr
(Being allotment money due on shares)Journal Entry for Allotment Money Received:
Bank A/C Dr
To Share Allotment A/C Cr
(Being allotment money received)4. Calls on Shares
In addition to application and allotment money, a company may call for additional amounts from shareholders. These are known as calls, and they can be first call, second call, final call, etc.
Journal Entry for Call Money Due:
Share First Call A/C Dr
To Share Capital A/C Cr
(Being first call money due on shares)Journal Entry for Call Money Received:
Bank A/C Dr
To Share First Call A/C Cr
(Being first call money received)Worked Example
Let’s consider an example to illustrate these entries.
Scenario: XYZ Ltd. issues 10,000 equity shares of $10 each at a premium of $2 per share. The money is payable as follows:
- On Application: $3
- On Allotment: $5 (including premium)
- On First Call: $2
- On Final Call: $2
Step-by-Step Journal Entries
- Application Money Received
Bank A/C Dr $30,000
To Share Application A/C Cr $30,000
(Being application money received for 10,000 shares @ $3 each)- Transfer of Application Money to Share Capital
Share Application A/C Dr $30,000
To Share Capital A/C Cr $30,000
(Being application money transferred to share capital)- Allotment Money Due
Share Allotment A/C Dr $50,000
To Share Capital A/C Cr $40,000
To Securities Premium A/C Cr $10,000
(Being allotment money due, $4 per share towards share capital and $1 towards premium)- Allotment Money Received
Bank A/C Dr $50,000
To Share Allotment A/C Cr $50,000
(Being allotment money received)- First Call Money Due
Share First Call A/C Dr $20,000
To Share Capital A/C Cr $20,000
(Being first call money due on 10,000 shares @ $2 each)- First Call Money Received
Bank A/C Dr $20,000
To Share First Call A/C Cr $20,000
(Being first call money received)- Final Call Money Due
Share Final Call A/C Dr $20,000
To Share Capital A/C Cr $20,000
(Being final call money due on 10,000 shares @ $2 each)- Final Call Money Received
Bank A/C Dr $20,000
To Share Final Call A/C Cr $20,000
(Being final call money received)Key Points to Remember
- Over-subscription: If the number of shares applied exceeds the number issued, the company may reject some applications or allot shares on a pro-rata basis.
- Calls in Arrears and Calls in Advance: If a shareholder fails to pay the call money, it’s termed as calls in arrears. Conversely, if the shareholder pays in advance, it’s recorded as calls in advance.
- Forfeiture of Shares: If shareholders fail to pay calls after repeated reminders, the company can forfeit their shares.
Example of Share Forfeiture and Reissue
Scenario: XYZ Ltd. forfeits 500 shares from a shareholder who did not pay the first and final call money. These shares were initially issued at a premium. The company later reissues these shares at a discount.
Journal Entries for Forfeiture:
Share Capital A/C Dr $5,000
To Share First Call A/C Cr $1,000
To Share Final Call A/C Cr $1,000
To Share Forfeiture A/C Cr $3,000
(Being forfeiture of 500 shares for non-payment of calls)Journal Entries for Reissue:
Assuming the reissue price is $9 per share.
Bank A/C Dr $4,500
Share Forfeiture A/C Dr $500
To Share Capital A/C Cr $5,000
(Being reissue of 500 forfeited shares at $9 per share)Conclusion
Issuing shares is a crucial activity for companies, and understanding the accounting treatment involved is essential for accurate financial reporting. This tutorial has provided a comprehensive guide with examples and journal entries to help you grasp the concepts thoroughly. Remember, the process involves multiple stages, from receiving application money to handling calls and potential forfeiture and reissue of shares. Mastering these entries ensures clarity and precision in a company’s financial records.