What is Accounting for Share Capital Class 12: Complete Guide

Definition and Importance of Accounting for Share Capital

Accounting for Share Capital is the process of recording, classifying, and summarising financial transactions related to the issuance and management of shares by a company. In Class 12 Accountancy, this topic helps students understand how companies raise capital through shares and maintain proper records.

Share capital forms the backbone of a company’s equity structure. It represents the amount invested by shareholders in exchange for ownership rights. Proper accounting ensures transparency and legal compliance, which is crucial for stakeholders like investors, creditors, and regulators.

Key points:

• Share capital is the total amount raised by issuing shares.
• It can be divided into equity and preference shares.
• Accounting for share capital involves journal entries, ledgers, and financial statements.

This topic is essential for Class 12 students preparing for CBSE exams and forms a foundational concept in company accounts.

Types of Share Capital Explained for Class 12 Students

Understanding the types of share capital is critical in this chapter. The main categories are:

• Equity Share Capital: Ordinary shares giving voting rights and dividends.
• Preference Share Capital: Shares with preferential rights to dividends and repayment.
• Authorized Share Capital: Maximum capital a company can raise as per its Memorandum of Association.
• Issued Share Capital: Portion of authorized capital offered to investors.
• Subscribed Share Capital: Shares accepted by investors.
• Called-up Share Capital: Amount requested from shareholders.
• Paid-up Share Capital: Amount actually received from shareholders.

This classification helps students differentiate share capital stages and their accounting treatment.

Accounting Entries for Issuance of Shares

When a company issues shares, it must record the transactions accurately. The common journal entries include:

1. On Application Money Received:

• Debit Bank Account
• Credit Share Application Account

2. On Allotment of Shares:

• Debit Share Application Account
• Credit Share Capital Account

3. On Calls Money Received (First Call, Second Call, etc.):

• Debit Bank Account
• Credit Share Call Account

Example:

A company issues 10,000 equity shares of ₹10 each at par. Application money received is ₹3 per share.

• Bank A/c Dr. ₹30,000
• To Share Application A/c ₹30,000

On allotment:

• Share Application A/c Dr. ₹30,000
• To Share Capital A/c ₹30,000

This process ensures all money received is properly accounted for and linked to share capital.

Forfeiture and Reissue of Shares: Key Concepts

Sometimes shareholders fail to pay calls money, leading to forfeiture of shares. Forfeiture means the company cancels the shares and retains the money received so far.

Accounting for Forfeiture:

• Debit Share Capital Account (full share value)
• Credit Share Forfeiture Account (amount received)
• Credit Calls in Arrears Account (amount unpaid)

Reissue of Forfeited Shares:

If forfeited shares are reissued at a discount, the discount is adjusted against the Share Forfeiture Account.

Example:

• Share Capital ₹10 per share
• Shares forfeited after ₹7 received
• Reissued at ₹8

Journal entry on reissue:

• Bank A/c Dr. ₹8
• Share Forfeiture A/c Dr. ₹2 (to adjust discount)
• To Share Capital A/c ₹10

This topic is important for Class 12 students to understand real-life company scenarios.

Calls in Arrears and Calls in Advance: Accounting Treatment

Calls in Arrears occur when shareholders do not pay the amount called by the company on their shares. Calls in Advance happen when shareholders pay more than the amount called.

Calls in Arrears:

• Shown as a deduction from Share Capital in the balance sheet.
• No entry on the date of call; entry made when money is received or shares are forfeited.

Calls in Advance:

• Treated as a current liability.
• Debit Bank Account and Credit Calls in Advance Account when money is received.

Example:

If ₹5 per share is called but ₹3 is unpaid, ₹3 is Calls in Arrears.

Understanding these concepts helps students prepare accurate company accounts.

Summary of Important Formulas and Examples

Here are some key formulas and examples to help Class 12 students master Accounting for Share Capital:

Formulas:

• Total Share Capital = Number of Shares × Face Value per Share
• Called-up Capital = Number of Shares × Call Amount
• Paid-up Capital = Called-up Capital – Calls in Arrears

Example 1:

A company issues 5,000 shares of ₹10 each at par. It calls ₹7 per share. Calculate called-up and paid-up capital if ₹1,000 calls are unpaid.

• Called-up Capital = 5,000 × ₹7 = ₹35,000
• Calls in Arrears = ₹1,000
• Paid-up Capital = ₹35,000 – ₹1,000 = ₹34,000

Example 2:

Shares forfeited after receiving ₹6 per share on ₹10 face value shares. Reissued at ₹8.

Journal entry for reissue:

• Bank A/c Dr. ₹8
• Share Forfeiture A/c Dr. ₹2
• To Share Capital A/c ₹10

These examples clarify the accounting process for share capital transactions.