Accounting Treatment of Over Subscription of Shares

Over Subscription of Shares

Over Subscription of shares is referred to as the scenario when the company receives applications for shares that are much more in number than the shares offered by the company to the public.

This generally occurs in the case of companies that have a great financial background and reputation in the market and having a high probability of financial gain in the near future.

The SEBI guidelines do not allow straightforward rejection of the applications, but the applications can get rejected in case they have incomplete information and the application money is insufficient.

Therefore, there are three ways or alternatives following which the company can allocate shares to the individuals. These alternatives are discussed in the following lines.

1.Total rejection of some applications: This is done when the number of shares issued by the company is less than the number of applications received. In such instances, the application money is refunded to the rejected applicants.

2. Accepting some applications in full: This refers to the situation where some of the applications are accepted in full and are allotted the number of shares as requested in the application.

3. Pro-rata allotment to some applicants: This method of allocating shares is used when the company wants to provide shares to all the applicants. In this method, no one is refused to have shares while no one also does not receive their full quota of shares as requested.

The shares are allocated using a pro-rata basis which is allocating shares on a proportionate basis. For example, if 1000 shares are issued by the company and 1500 applicants are there, then the proportion becomes two-third (⅔). Which means that for an application submitted for 3 shares, only 2 shares are allotted. 

Accounting Treatment

The following journal entry shall be passed:

In case of rejection of applications

Share application A/c   Dr.

To Bank A/c

(Towards application money returned for rejected applications)

In case of full applications

Bank A/c (total application amount) Dr.

To Share Application A/c

(Towards application money received for the full application of ___ no of shares at __ ₹ each )

In case of pro-rata allotment of shares

Share Application A/c   Dr.

To Share Allotment A/c

(Towards amount of excess application money adjusted for allotment of shares on pro rata basis)

This concludes the article on the topic of Accounting Treatment of Over Subscription of Shares, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S. 

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