What is Oversubscription?
When the number of debentures that are applied for exceeds the number of debentures proffered to the public, the issue is known to be oversubscribed. An enterprise, however, cannot allocate more debentures than it has insisted for subscription. The surplus money received on over subscription might, however, be kept for adjustment towards allotment and the calls to be made. However, the money received from aspirants to whom no debentures have been allocated, would be returned to them.
To put it in other words, a situation in which investors (financiars) show so much attention in a new issue of a security that appeal exceeds supply. If financiars order more shares than there are shares being circulated, the security is known to be oversubscribed. This may influence the cost price when the security is actually circulated.
Accounting Treatment of Over Subscription :
The enterprise may treat the surplus applications received in 1 or more of the following ways :
- Rejection of applications: Often, the applications of shares are not allocated even a single share. In such a scenario, the application money received from such candidates or applicants is given back to them.
- Acceptance of application partially: A few times, the applicants are not allocated the number of shares that they have applied for and directors obtain the application partially. In such a scenario, the applicants are allocated less number of shares than they have applied for. In such a scenario, the surplus money on application partially accepted will be transferred to share allotment account.
The journal entry for using the excess application money received towards amount due on allotment is as follows :
Share application a/c
To Share allotment a/c
The above mentioned is the concept, that is elucidated in detail about the Over Subscription for the class 12 Commerce students. To know more, stay tuned to BYJU’S.