Accountancy for Class 12, Part 1, Chapter 1 Accounting for Share Capital

Learn CBSE Accountancy Index Terms for Class 12, Part I, Chapter 1 Accounting for Share Capital

1. Company – A company is a legal entity established by a group of individuals to employ and regulate a business firm. A company may be coordinated in different ways for financial liability and tax purposes, relying upon the corporate law of its administration. The line of a business concern in an enterprise will normally ascertain which business substructure it picks, for instance, a partnership, a corporation, or a proprietorship. In such a case, a company may be considered a business.

2. Companies Limited by Shares – In companies limited by shares, the liability of its members is restricted to the level of the nominal value of shares occupied by them. If a shareholder has paid the complete amount of the shares, there is no liability on their side, whatever may be the debts of the enterprise. The members need not pay a single rupee from their private property.

3. Companies Limited by Guarantee – Section 2(21) of Companies Act 2013 defines companies limited by guarantee as “ A company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.’’

4. Unlimited Companies – When there is no constraint on the liability of its shareholders, such a company is known as an unlimited company. When the company’s property is insufficient to pay off its arrears (debts), the private property of its shareholders can be used.

To put it in other words, creditors can ask for their dues from their shareholders. Such enterprises are not to be found in India though approved by Section 2 (20) of the Companies Act.

5. Public Company – A public company is formed by seven or more persons. As per Section 2 (71) of the Companies Act, 2013, a public company is a company that is not a private company, has a minimum capital of Rs.5 lakh or such higher paid-up capital as may be prescribed, and is a private company which is a subsidiary public company.

6. Private Company – As per Section 2 (68) of the Companies Act 2013, a private company means a company having a minimum paid-up capital of Rs.1 lakh or such higher paid-up capital as may be prescribed by its articles, which restricts the right to transfer its shares. Limits the number of its members to 200 (excluding its employees). Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

7. One Person Company – According to Sec.2 (62) of the Companies Act, 2013, ‘company which has only 1 person as a shareholder’. Rule number 3 of the Companies (Incorporation) Rules, 2014 says that only a natural person who is an Indian citizen and an Indian resident can form 1 person company. It cannot execute non-banking financial investment pursuits. It’s paid-up share capital which is not more than ₹ 50 Lakhs. Its aggregate annual turnover of 3 years does not cross ₹ 2 Crores.

8. Share Capital – Share capital is referred to as the capital that is raised by the company by issuing shares to investors. Share capital comprises capital that is generated from funds generated by issuing shares for cash or non-cash considerations.

Companies have a requirement for share capital for the purpose of financing their operations. The share capital of the company will increase with the issuance of new shares.

9. Authorised Capital – Authorised capital is the amount of the share capital in which a company is allowed to issue its Memorandum of Association. The company is not supposed to raise more than the amount of capital as mentioned in the Memorandum of Association. The authorised capital is also known as registered or nominal capital.

The authorised capital can be either decreased or increased as per the process furnished in the Companies Act. It should be understood that the company need not issue the complete authorised capital for public subscription at one time. Relying upon its necessity, it may circulate share capital, but in any scenario, it should not cross more than the amount of authorised capital.

10. Issued Capital – It is that portion of the authorised capital that is usually circulated to the public for subscription, comprising the shares assigned to the merchants and the endorsers to the enterprise’s memorandum. The authorised capital which is not proffered for public consent is called ‘unissued capital’.

In other words, the issued capital is referred to as that part of the authorised capital that is issued to the public for the subscription, which includes shares allotted to the vendors and the signatories of the company’s memorandum. The authorised capital that is not offered for public subscription is referred to as unissued capital, and it can be issued to the public at a later date.

11. Subscribed Capital – The subscribed capital is referred to as that part of issued capital that is subscribed by the company investors. It is the actual amount of capital that the investors have taken.

In other words, it is referred to as that part of the issued capital that is actually subscribed by the public. The issued capital and subscribed capital become equal when the shares issued for public subscription are subscribed fully by the public.

In the long run, subscribed capital becomes less than or equal to the issued capital. In cases where the number of shares subscribed is less than offered, then the company will allot shares for which the subscription is received, and in case it is more, the allotment becomes equal to the offer. The concept of oversubscription is not reflected in the books.

12. Called Up Capital – The amount of share capital that the shareholders owe and are yet to be paid is called up capital. It is that part of the share capital that the company calls for payment.

In other words, it is referred to as that part of the subscribed capital for which the company has asked shareholders to pay. The company can decide to ask the shareholders to pay in full or just a part of the face value of the shares.

13. Paid Up Capital – Paid up capital is referred to as that part of the called up capital that has actually been paid by the shareholders. Called up capital and paid up capital will be equal when all the shareholders have paid the call amount. In the event of non-payment of a called up amount by shareholders, it is referred to as calls in arrears.

14. Uncalled Capital – Uncalled capital is that part of the subscribed capital that hasn’t yet been called upon by the company. The company reserves the right to collect this amount when there is a requirement for funds.

15. Reserve Capital – Reserve capital is that part of the uncalled capital that a company may keep as a reserve which is only used in the event of winding up of a company. The creditors have access to such capital in case the company is winding up.

16. Preference Shares – Preference shares, also known as preferred stock, are an exclusive share option that enables shareholders to receive dividends announced by the company before the equity shareholders.

Preference shares provide the shareholders with the special right to claim dividends during the company lifetime, and also with the option to claim repayment of capital, in case of the winding up of the company. It is considered a hybrid security option as it represents the characteristics of both debt and equity investments.

The capital raised by issuing preference shares is known as preference share capital, and preference shareholders can be regarded as owners of the company. They, however, do not enjoy any kind of voting rights, unlike equity shareholders.

17. Equity Shares – An equity share, normally known as an ordinary share, is part ownership where each member is a fractional owner and initiates the maximum entrepreneurial liability related to a trading concern. These types of shareholders in any organisation possess the right to vote.

18. Calls in Arrears – The portion of called-up capital that is not paid by the shareholder within a specified time is known as calls-in-arrears. In other words, when a shareholder fails to pay the amount due on allotment or any subsequent calls, then it is termed call-in-arrears.

The company is authorised by its Article of Association to charge interest at a specified rate on the amount of call-in-arrears from the due date till the date of payment. If not authorised in the Articles of Association, then the company may charge interest at 10% p.a. according to Table F of the Companies Act, 2013.

It is deducted from the called-up share capital on the liabilities side of the company’s balance sheet. The company can also forfeit the shares on account of non-payment of the calls money after giving proper notice to shareholders.

19. Calls in Advance – Calls in advance mean calls not due but paid by the shareholder in advance. Thus, the amount of future calls is received in advance by the company. In other words, when a shareholder pays the whole amount or a part of the amount in advance, that is, before the company calls, then it is termed as calls in advance.

The company is authorised by its Article of Association to pay interest at the specified rate on calls in advance from the date of payment till the date of the call made. If the Article of Association is silent in this regard, then the Table F of Companies Act, 2013 shall be applicable, that is, interest at 12% p.a. is provided. It is shown under the heading of current liabilities on the liabilities side of the company’s balance sheet.

20. Over Subscription – When shares are issued to the public for subscription through the prospectus by well-managed and financially strong companies, it may happen that the total number of applications received for shares exceeds the number of shares offered by the company to the public, such a situation is called the situation of over-subscription. A company can opt for any of the three alternatives to allot shares in case of over-subscription of shares.

21. Under Subscription – In case when share applied by the public is lesser than the number of shares issued by the company is called under-subscription. As per the Securities Exchange Board of India (SEBI), the minimum subscription is 90% of the shares issued by the company.

This implies that the company can allot shares to the applicants provided if applications for 90% of the issued shares are received. Otherwise, the company should refund the entire application amount received. In this regard, a necessary journal entry is passed only after receiving and refunding the application.

In this case, normal entries are made as the adjustment is not needed for any excess.

22. Issues of Shares at a Premium – A company’s capital consists of shares that can be utilised to earn more capital for the company. Public companies issue shares to the public so that they can subscribe to their share capital, while private companies opt for an initial public offering or IPO to offer shares to the public.

Companies can issue shares at the face value of the share, while there is an option for the issue of shares at a value that is more than the face value/par value or nominal value of the shares. Such a type of share issue is known as the issue of shares at a premium.

The difference between the face value/par value or nominal value of shares and the price of shares issued at a premium is the premium amount. It is generally issued by companies that have an excellent financial record, are well managed, and have a great reputation in the market.

23. Issue of Shares at a Discount – According to Section 53 of the Companies Act, 2013, except as provided in section 54 (that is, issue of sweat equity shares), a company shall not issue shares at a discount. Any share issued by a company at a discount price shall be void.

24. Issue of Shares for Consideration Other Than Cash – It may happen that a company has acquired another company or purchased some assets from a vendor, and then instead of paying by cash, the company has opted to settle the payment by issuing shares on consideration other than cash to the vendors. The shares can be issued in three ways: at par, at discount, and at a premium.

25. Private Placement of Shares – In this strategy, the organisation that is issuing shares sells its shares secretly or privately to at least one institutional agent who thus offers them to their customers and partners. This strategy is very advantageous and prudent. Additionally, the organisation gets the cash rapidly, and there is no danger of non-receipt of least membership or subscription.

The monetary foundation might demand a colossal markdown, rebate, or different conditions for the private acquisition of shares. Besides, it may not sell the protections in the share market, yet keep them with it.

26. Forfeiture of Shares – In business, there are situations where a stakeholder loses their share because of non-payment of his share of instalment or dues. However, a company can only forfeit a share if they allow forfeiture under the Article of Association of the company.

Forfeiture of shares is referred to as the situation when the allotted shares are cancelled by the issuing company due to non-payment of the subscription amount as requested by the issuing company from the shareholder. In the event of forfeiture of shares, the shareholders lose the rights and interests of being a shareholder and cease to be a member of the organisation.

27. Forfeiture of Shares Issued at a Premium – Forfeiture of shares issued at a premium has two possibilities:

1. Securities Premium amount has been received – Here, the share capital amount is debited with the called-up amount, and then it will be credited to shares allotment (amount not received on allotment), forfeited shares (received amount with less premium), final call account, and first call.

2. Securities Premium amount has not been received – The share capital amount is debited with the called-up amount. If a security premium is not received, the security premium is debited.

28. Reissue of Forfeited Shares – Forfeiture of shares can occur when some of the shareholders are unable to pay one or more of the instalments, which can be allotment money or call money. In such situations, the company can forfeit the shares, which is cancelling their allotment. After the shares are forfeited, the company can reissue the shares; in this case, it is known as the reissue of forfeited shares or the reissue of shares.

For the reissue of shares, the company can conduct an auction and dispose of the shares. The shares can be reissued at any price, but there is a clause, and it states that the total money received on shares should not be less than the price of shares held in arrears.

29. Buy-back Shares – Buy-back of shares means repurchasing of its own shares by a company from the market to reduce the number of shares in the open market. As per Section 77A, 77AA, and 77B of the Company Act of 1956, a company can buy back its own shares and debentures to improve EPS (Earnings Per Share), to return surplus cash to the shareholders that are not required by the business. To support the value of its shares and to facilitate the capital restructuring of the company. To prevent take-over bids.

30. Issue of Prospectus – The enterprise initially issues the prospectus to the public generally. The prospectus is an appeal to the public that a new enterprise has come into the presence, and it would require funds for operating the trading concern. It comprises complete data regarding the enterprise and the way in which the money is to be collected from prospective investors.

31. Receipt of Application – When the prospectus is circulated to the public, prospective investors contemplating signing up, and subscribing to the share capital of the enterprise, would make an application along with the application money and deposit it with a scheduled bank as mentioned in the prospectus.

32. Allotment of Shares – Once the minimum subscription has been done, the shares can be allocated. Normally, there is always an oversubscription of shares, so the allocation is done on pro-rata ground. ‘Letters of Allotment’ are sent out to those people who have been allocated their part of the shares. This results in an authentic contract between the enterprise, and the claimant, who will now be a part-owner of the enterprise.

33. Minimum Subscription – When shares are issued to the general public, the minimum amount that must be subscribed by the public so that the company can allot shares to the applicants is termed ‘minimum subscription’. As per the Companies Act of 1956, the minimum subscription of shares cannot be less than 90 % of the issued amount. If the minimum subscription is not received, the company cannot allot shares to its applicants, and it shall immediately refund the entire application amount received from the applicants.

34. Joint Stock Company – A joint stock company is an organisation that is owned jointly by all its shareholders. Here, all the stakeholders have a specific portion of stock owned, usually displayed as a share.

Each joint stock company share is transferable, and if the company is public, its shares are marketed on registered stock exchanges. Private joint stock company shares can be transferred from one party to another party. However, the transfer is limited by agreement and family members.

35. Non-redeemable Preference Shares – Non-redeemable preference shares are those shares that cannot be redeemed during the entire lifetime of the company. In other words, these shares can only be redeemed at the time of winding up of the company.

36. Cumulative Preference Shares – Cumulative preference shares are a special type of shares that entitles the shareholders to enjoy a cumulative dividend payout at times when a company is not making profits. These dividends will be counted as arrears in years when the company is not earning profit and will be paid on a cumulative basis the next year when the business generates profits.

37. Non-cumulative Preference Shares – These types of shares do not accumulate dividends in the form of arrears. In the case of non-cumulative preference shares, the dividend payout takes place from the profits made by the company in the current year. If there is a year in which the company doesn’t make any profit, then the shareholders are not paid any dividends for that year, and they cannot claim dividends in any future profit year.

38 . Participating Preference Shares – These types of shares allow the shareholders to demand a part in the surplus profit of the company, in the event of liquidation of the company, after the dividends have been paid to the other shareholders. In other words, these shareholders enjoy fixed dividends, and also share a part of the surplus profit of the company along with equity shareholders.39. Non-participating Preference Shares – These types of shares do not yield the shareholders the additional option of earning dividends from the surplus profits earned by the company. In this case, the shareholders receive only the fixed dividend.

40. Redeemable Preference Shares – Redeemable preference shares are shares that can be repurchased or redeemed by the issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of inflation.

41. Convertible Preference Shares – Convertible preference shares are a type of shares that enables the shareholders to convert their preference shares into equity shares at a fixed rate after the expiry of a specified period, as mentioned in the memorandum.

41. Non-convertible Preference Shares – These types of preference shares cannot be converted into equity shares. These shares will only get a fixed dividend payout, and also enjoy a preferential dividend payout during the dissolution of a company.

We hope that the offered Accountancy Index Terms for Class 11 with respect to Part 2, Chapter 1: Accounting for Share Capital will help you.

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