Accounting for Share Capital: Complete Guide for Class 12 NCERT Students

Understanding Share Capital and Its Importance

Share capital is the total amount of capital raised by a company by issuing shares to investors. It represents the ownership interest of shareholders in the company. For Class 12 NCERT students, it is important to know that share capital forms the backbone of a company’s equity and is classified into authorized, issued, subscribed, and paid-up capital.

• Authorized Share Capital: Maximum capital a company can raise.
• Issued Share Capital: Shares actually issued to shareholders.
• Subscribed Share Capital: Shares accepted by investors.
• Paid-up Capital: Amount actually received from shareholders.

Accounting for share capital ensures transparency in how funds are raised and used. It also complies with the Companies Act, 2013, which regulates share issuance and capital maintenance.

Process of Issuing Shares: From Application to Allotment

The issue of shares is a multi-step process governed by legal provisions and company policies. Here’s how it works:

1. Invitation to Subscribe: The company issues a prospectus or letter of offer inviting investors to apply for shares. 2. Application Money: Investors submit application money along with their application. 3. Share Application Account: The money received is credited here initially. 4. Allotment of Shares: Company allots shares based on applications received. 5. Transfer to Share Capital Account: Application money for allotted shares is transferred from Share Application Account to Share Capital Account.

Types of Share Issues

• Public Issue: Shares offered to the general public.
• Rights Issue: Existing shareholders get the right to buy additional shares.
• Private Placement: Shares issued to selected individuals or institutions.
• Bonus Shares: Free shares issued to existing shareholders from reserves.

This process ensures clarity and proper fund management.

Accounting Entries for Share Application, Allotment, and Calls

Accounting for share capital involves recording transactions at various stages:

Worked Example:

A company issues 10,000 shares of Rs. 10 each at par. Application money Rs. 2 per share, allotment Rs. 3 per share, first call Rs. 3 per share, and final call Rs. 2 per share.

• On application:
• Bank A/c Dr. 20,000
• To Share Application A/c 20,000

• On allotment due:
• Share Allotment A/c Dr. 30,000
• To Share Capital A/c 30,000

• On allotment received:
• Bank A/c Dr. 30,000
• To Share Allotment A/c 30,000

• On first call due:
• Share First Call A/c Dr. 30,000
• To Share Capital A/c 30,000

• On first call received:
• Bank A/c Dr. 30,000
• To Share First Call A/c 30,000

• On final call due:
• Share Final Call A/c Dr. 20,000
• To Share Capital A/c 20,000

• On final call received:
• Bank A/c Dr. 20,000
• To Share Final Call A/c 20,000

Methods of Issuing Shares and Their Accounting Treatment

Companies can issue shares through different methods, each with specific accounting treatments:

• Public Issue: Shares are offered to the public via prospectus. Application money is received and recorded in Share Application Account.
• Rights Issue: Existing shareholders get rights to buy shares at a discount or par. Accounting entries are similar to public issue but restricted to existing shareholders.
• Private Placement: Shares issued to select investors privately. Application and allotment entries are recorded as usual.
• Bonus Shares: Issued free to existing shareholders from company reserves. No cash is received; instead, reserves are debited and share capital credited.

Comparison Table: Share Issue Methods

Understanding these methods helps Class 12 students master share capital accounting.

Common Challenges and Solutions in Accounting for Share Capital

While accounting for share capital, students often face challenges such as:

• Pro-rata Allotment: When shares are oversubscribed, shares are allotted on a pro-rata basis. Calculate shares allotted and adjust excess money.
• Forfeiture of Shares: If a shareholder fails to pay allotment or calls, shares may be forfeited. Entries involve debiting Equity Share Capital and crediting Forfeited Shares Account.
• Calls in Arrears and Calls in Advance: Calls not received on due date are calls in arrears; advance payments are calls in advance.

Worked Example: Pro-rata Allotment

Sujal Ltd. received applications for 24,000 shares but allotted only 20,000 shares. Application money is Rs. 3 per share. Arjav applied for 600 shares.

• Shares allotted to Arjav = $600 imes \frac{20,000}{24,000} = 500$ shares
• Application money for 600 shares = Rs. 1,800
• Money for 500 shares = Rs. 1,500
• Excess Rs. 300 adjusted against allotment money

This example clarifies pro-rata allotment and adjustment in accounts.

Summary and Exam Tips for Accounting for Share Capital

For Class 12 NCERT exams, focus on these key points:

• Understand definitions of different types of share capital.
• Memorize journal entries for application, allotment, and calls.
• Practice problems on pro-rata allotment, forfeiture, and reissue of shares.
• Know the legal provisions under Companies Act, 2013.
• Use tables and diagrams to organize information clearly.

Exam Tip: Always write journal entries with proper narration. Use clear dates and amounts. Practice multiple examples to gain confidence.

By mastering these concepts, you will excel in the Accounting for Share Capital chapter.