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  COMPANY ACCOUNTS Page | 1   Chapter:1 Company Accounts - Shares Joint Stock Company is the most practical form of organization for large scale business. In India the Indian Companies Act of 1956 governs joint stock companies. The capital of the company is divided into shares and the owners hold shares of capital. They are therefore known as shareholders of the company.   Share and Share Capital   Meaning, Nature and Types   The most striking feature of a joint stock company is its ownership structure. The capital of a joint stock company is divided into small shares of fixed value. This facilitates easy investment and easy transfer. Shareholders do not directly mange the company. They elect directors who carry out management. The shareholders have the safety of limited liability. In the event of extreme loss or liquidation with excessive outside liability, the non invested wealth of a shareholder is not affected. The face value of the shares held by a person is the maximum amount that he can lose in a joint stock company. If the shares are fully paid up he need not pay anything further even if the company is liquidated with heavy unsettled claims. If the shares held are partly paid up, a shareholder might be asked to pay the unpaid portion of the shares.   Shares can be sold and purchased through the stock exchange. By purchasing shares a person gets part ownership of the business. A share holder does not attain an automatic right to manage the company. Directors are the people who manage the business. They are elected by shareholders. Thus a shareholder can vote to elect directors. He can also contest in the election to become director.    A joint stock company is regarded as an artificial person. It is considered to have an identity apart from the shareholders. A company can enter into contract, buy or sell properties in its own name, file lawsuits or can be sued. It can even file suit against its own shareholders.   Types of share capital   Share capital is basically classified into equity and preference share capital. Equity capital is raised by the issue of equity shares, which are the most common type of shares. The benefits received by equity shares are directly related to the performance of the business. When the business earns good profit equity shareholders will get more dividends.   Preference shares other hand are the ones having priority in the payment of dividend and repayment of capital in the event of liquidation of a company. Divided for the preference shares are paid at a prescribed rate. Preference shareholders have fixed income irrespective of the performance of the business. Equity dividend is declared each year, which will vary according to the profit earned by the business. The equity shareholders are the ones who actually bear the risk in business. When the performance of the business is good, they get a high percentage of income. The value of shares will also increase in the market. Capital appreciation is the prime attraction of equity shares in a company having consistently good performance.   Equity and Preference share capital are two basic channels of share capital. Apart from this basic classification, share capital may be referred by different qualifying terms highlighting certain specific aspects of share capital. In this regard following terms are used to qualify share capital.    COMPANY ACCOUNTS Page | 2   1. Authorised Capital or Registered Capital   This is the maximum amount of capital a company is authorised to raise from the public. Authorized capital is fixed little higher than the immediate capital requirement of the business because authorised capital is specified in the Memorandum of Association of the company and if the company needs more capital in the near future it cannot do so without first altering the memorandum of association. 2. Issued Capital    A company will raise capital from the public only to the extent it needs money for investment. Unused fund indicates inefficiency. The portion of authorized capital that is offered to the public for subscription is known as issued capital.   3. Subscribed Capital   When the shares are offered to the public there is no guarantee that the public will purchase all of them. The part of the issued capital that is actually subscribed by the public is known as subscribed capital.   4. Called up Capital   When shares are offered to the public the company will indicate how and when they have to pay the money. Usually the company will not demand full payment at the time of issue itself. Instead, the capital is collected part by part at application stage, allotment stage, first call stage etc. Called up capital is the portion of subscribed capital which is actually demanded by the company.   5. Paid up Capital   When company calls up capital some shareholders may fail to pay. This amount is called calls in arrears. The amount paid by the shareholders is known as paid up capital.   6. Reserve Capital   Reserve capital is the part of the uncalled capital set aside as reserve, by the company to call up only in the event of liquidation of the company.   Accounting for Share Capital   Capital of joint stock companies is referred as share capital because it is divided into shares. Share capital is usually not collected in lump sum, but in instalments at various stages, such as application, allotment, 1 st  call etc. For the purpose of convenient accounting, a temporary account representing each of these stages will be opened in the ledger which will be closed once the amounts expected on that stage is fully collected or the shares are cancelled for unpaid amounts.   Following are the journal entries for issue of share capital:   Share Application Stage   The first stage in issue of share is the application stage. At this point the company will give extensive publicity to the share issue and invite the public to apply for the shares. A prospectus which is official invitation to the public, containing details of the company, proposed number of shares, its type, value etc. will be issued to the pubic and registered with the registrar of companies. In response to the invitation by the company, public will apply for the shares. A part of the value of shares will be specified as application money which is to be paid along with the application. This amount will be deposited in the bank account of the company. Application money cannot be less than 25% of the issue price. Following journal entries are passed at the collection and capitalisation of application money.   i.. When share application money is received     COMPANY ACCOUNTS Page | 3   Bank Account Dr.   To Share Application Account   ii. Application money credited to Capital Account    Share Application Account Dr.   To Share Capital   The second entry will close the Share Application Account, and in the ledger there will be Cash at Bank on one side and Share Capital on the other, provided the number of applications invited and the number of applications received are the same.   Share Allotment Stage    After the closure of share issue the directors proceed to the allotment of shares. An additional amount towards the capital on the allotted shares is collected at this stage. This amount is called allotment money.   Following journal entries are passed at allotment stage:   i.. Allotment money credited to capital    Share Allotment Account Dr.   To Share Capital   ii. Collection of allotment money    Bank Account Dr.   To share Allotment Account   Share Call    After the share allotment, the company will collect the remaining capital in one or two additional instalments which are known as calls on shares. Same accounting entries are passed for all calls.   Following are the typical entries:   i. Call money credited to capital    Share 1 st  Call Dr.   To Share Capital   ii. Collection of call money    Bank Account Dr.   To Share 1 st  Call   Illustration 4.01    ABC Ltd. invited applications for 1000 shares of Rs.10 each on 1 st  January, 2002. The payments to be made as follows:    COMPANY ACCOUNTS Page | 4   Rs.3 on application; Rs.3 on allotment; Rs.4 on 1 st  call   The issue was fully subscribed and the amounts due on allotment and first call have been received. Pass necessary Journal Entries.   Journal Entries   Particulars   Dr.   Cr    1.   Bank  Account Dr    To Share Application Account    (Application money on 1000 shares @Rs.3 per share)   3,000    3,000    2.   Share Application  Account Dr    To Share Capital (Application money credited to capital account)   3,000    3,000    3.   Share Allotment Account Dr.   To Share Capital    (Share Allotment money @Rs.3 per share credited to Capital)   3,000    3,000    4.   Bank Account Dr.   To Share Allotment    (Share allotment money collected)   3000    3,000    5.   Share 1 st   Call Account Dr.   To Share Capital    (Share 1 st   call amount @Rs.4 per share credited to capital)   4,000    4,000    6.   Bank Account Dr.   To Share 1 st   Call    (Share 1 st   call amount received)   4,000    4,000    Over-Subscription and Under-Subscription   Over-subscription   It is unlikely that the public apply for the exact number of applications invited by the company. When applications received exceed the number invited, the share is said to be over-subscribed. It also means that the company received more application money than what was srcinally invited. Now the company cannot conveniently increase the number of shares and keep the money as capital. Instead, it must refund the excess amount received or make a part allotment on applications adjust the excess money against future calls from shareholders.   When there is over subscription share application account will not be closed by the transfer to capital alone (second entry above). This is because the company has received more money. One of
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