Class 12 Book Keeping and Accountancy Chapter 8: Company Accounts - Issue of Shares

Key concepts: Company Accounts - Issue of Shares

Share and share capital

A share is one small unit of a company's capital. Share capital is the money the company raises by issuing shares, which gives limited liability to the investors.

Equity and preference shares

Preference shareholders get a fixed dividend first and are repaid first. Equity shareholders bear the risk, get whatever profit is left and are the real owners.

Types of share capital

Authorised (maximum allowed), issued (offered), subscribed (taken up), called-up (demanded), paid-up (actually paid) and reserve capital (called only on winding up).

Steps of a public issue

Prospectus, receipt of applications with application money, allotment (letters of allotment or regret) and then calls on the shareholders.

Share premium and discount

Premium is issue price above face value and is credited to Securities Premium A/c. Discount is issue price below face value and is debited to Discount on Issue of Shares A/c.

Over and under subscription

Over-subscription means more shares are applied for than offered; excess money is refunded or adjusted against allotment. Under-subscription means fewer applications than shares offered.

Calls in arrears and calls in advance

Arrears is called-up money not paid, shown as a deduction from paid-up capital. Advance is money paid before it is called, shown as a liability.

Forfeiture and re-issue

Directors cancel the shares of a defaulting holder. Share Capital is debited with the called-up amount; the amount already received goes to Share Forfeiture A/c. The balance after re-issue goes to Capital Reserve.

Quick revision: important points

• Minimum application money is 5% of nominal value (Sec. 39(2)); at least 14 days notice is needed for a call.
• Premium is credited to Securities Premium A/c and shown on the liabilities side; discount is shown on the assets side.
• Excess application money in pro-rata allotment is adjusted against the allotment due.
• Forfeiture: Share Capital Dr (called-up amount); credit Share Forfeiture A/c (amount received) and unpaid calls.
• Discount on re-issue must not exceed the forfeited amount; leftover Share Forfeiture balance goes to Capital Reserve.
• Paid-up capital = called-up capital less calls in arrears.

Practice MCQs with answers

1. Under the Companies Act 2013, which two types of shares can a company issue?

   1. Bonus shares and rights shares
   2. Equity shares and preference shares
   3. Sweat equity and bonus shares
   4. Ordinary shares and debentures
   Show answer

   Answer: B. Equity shares and preference shares
   The Act allows a company to issue only equity shares and preference shares; other forms such as rights or bonus are methods of issuing them.

2. Which group of shareholders are the risk bearers and real owners of a company?

   1. Preference shareholders
   2. Debenture holders
   3. Directors
   4. Equity shareholders
   Show answer

   Answer: D. Equity shareholders
   Equity shareholders get dividend only after all expenses and preference dividend are met, so they bear the risk and own the company.

3. What is the special right of preference shareholders?

   1. A fixed rate of dividend paid before equity dividend
   2. The right to elect all the directors
   3. A dividend that rises with profits without limit
   4. Freedom from any repayment on winding up
   Show answer

   Answer: A. A fixed rate of dividend paid before equity dividend
   Preference shares carry a fixed dividend paid before equity shareholders, and priority in return of capital.

4. The share capital that a company is authorised to issue by its Memorandum of Association is called ________ capital.

   1. Issued
   2. Subscribed
   3. Authorised
   4. Paid-up
   Show answer

   Answer: C. Authorised
   Authorised capital, also called nominal or registered capital, is the maximum amount the company may raise by issuing shares.

5. The part of issued capital which has actually been taken up by the public is called:

   1. Called-up capital
   2. Subscribed capital
   3. Reserve capital
   4. Unissued capital
   Show answer

   Answer: B. Subscribed capital
   Subscribed capital is the portion of issued capital that the public has applied for and been allotted.

All Class 12 Book Keeping and Accountancy chapters

• Chapter 1: Introduction to Partnership and Partnership Final Accounts
• Chapter 2: Accounts of Not for Profit Concerns
• Chapter 3: Reconstitution of Partnership (Admission of Partner)
• Chapter 4: Reconstitution of Partnership (Retirement of Partner)
• Chapter 5: Reconstitution of Partnership (Death of Partner)
• Chapter 6: Dissolution of Partnership Firm
• Chapter 7: Bills of Exchange
• Chapter 8: Company Accounts - Issue of Shares
• Chapter 9: Analysis of Financial Statements
• Chapter 10: Computer in Accounting

Class 12 Book Keeping and Accountancy notes: all chapters