Accounting for Share Capital Notes2

Study Material & Notes for the Chapter 8

Partnership - ACCOUNTING FOR SHARE CAPITAL

II.  ISSUE OF SHARE CAPITAL – TYPES & CLASSIFICATION OF SHARES & SHARE CAPITAL

A.  Definition & Meaning of Shares
Definition of Share
  • According to Section 2(84) of the Companies Act, 2013 ‘Share’ means a share in the share capital of a company and includes stock.
Meaning of Share
  • A company divides its capital into units of equal denomination. Each unit is called a share. 
  • Each share has a nominal value of face value e.g. 10,100. 
  • For example,  total capital of the company is Rs. 8,00,00,000 divided into 80,00,000 units of Rs. 10 each. Each unit of Rs. 10 will be called a share.
  • These shares are offered to Public for sale to raise capital. This is termed as issuing shares.
  • A person who buys share/shares of the company is called a shareholder and by acquiring share or shares in the company he/she becomes one of the members of the company and forms the basis of ownership interest in a company.
B. Meaning & Type of Share Capital
Meaning of Share Capital
  • Share capital of a company refers to the amount of capital that a company can raise or has raised by issue of shares
  • Share Capital is equal to the Number of shares multiplied by Nominal value of shares. 
  • The amount invested by the shareholders towards the face value of shares is called share capital
  • The amount of share capital desired to be registered by the company is stated in its Memorandum of Association
Type of Share
  • According to Section 43 of the Companies Act, 2013, a company can issue two types of shares (a) Preference Share & (b) Equity Share
a) Preference Shares Section 43(b)

Preference shares are the shares that carry the following two rights:

  1. Preferential right of dividend is to be paid as fixed amount or an amount calculated at a fixed rate.
  2. On winding up or repayment of capital, a preferential right to be repaid the amount of capital before any amount is paid to the equity shareholders.
  3.  
b) Equity Shares Section 43(1)

Equity shares are the shares which are not preference shares.

  1. Thus, this share does not carry any preferential right, equity share is one which is entitled to dividend and repayment of capital on winding-up of the company after the claim of preference shares is satisfied.
  2. Equity shareholders have the right to elect directors of the company. Equity shares are the permanent source of capital.
Distinction between Equity Shares & Preference Shares

Basis

Equity Shares

Preference Shares

Rate of Dividend 

Rate of dividend on Equity shares is variable and depends upon the decision of the Board of directors

Rate of dividend on Preference shares is fixed.

Payment of Dividend

Dividend on Equity shares is paid after payment of dividend to preference shareholders

Dividend on Preference shares is paid before payment of dividend to equity shareholders

Refund of Share Capital on Winding up of the Company

On winding up of the company equity share holders get refund of capital only after preference share holders have been paid off.

Preference shareholders have a preference over equity shareholders in regard to refund of capital in case of winding up of the company

Voting Rights

Equity Shareholders have voting rights in all matters

Preference Shareholders can vote only in special circumstances

Redemption

Equity Shares cannot be redeemed during the life of the company.

Preference Shares can be redeemed as per terms of issue.

C. Types of Share Capital
a) Authorized Capital:-

According to Section 2(8) of Companies Act, 2013, authorised capital means such capital as is authorised by the Memorandum of a Company to be the maximum amount of share capital of a company.  It is also known as Nominal or Registered Capital

Issued Capital:-
  • According to Section 2(50) of the Companies Act, 2013, issued capital means such capital as the company issues from time-to-time for subscription.
  • A company may issue its entire authorised capital or may issue it in parts from time to time as per the needs of the company. 
  • It means and includes the nominal value of shares issued by the company for (a) cash, and (b) consideration other than cash to (i) promoters of a company, and (ii) others like vendors or signatories to the company’s memorandum.
Unissued Capital:-

The remaining portion not yet offered to the public for subscription is called the unissued capital which can be issued later on.

b) Authorized Capital:-
Subscribed Capital:-
  • According to Section 2(86) of the Companies Act, 2013, subscribed capital means such part of the capital which is for the time being subscribed by the members of a company.
  • The portion of nominal value of the issued share capital which is actually paid (or subscribed) by the shareholders forms part of the subscribed capital
Unsubscribed Capital:-
  • The balance of issued capital not subscribed for by the public is called the unsubscribed capital.
c) Subscribed Capital:-
Called up Capital:-
  • According to Section 2(15) of the Companies Act, 2013, called up capital means such part of the capital which has been called for payment
  • The portion of the issue price of the shares which a company has demanded or called from shareholders is known as called up capital.
Uncalled Capital:-
  • Uncalled Capital is that portion of the issued/subscribed capital that is not called up by the company on the shares allotted.
  • If the management shows no intention of calling the outstanding money on such shares, then the uncalled capital will be called reserve capital. 
  • Reserve Capital is that portion of the uncalled capital which a company has decided to call only in case of liquidation of the company.
d) Called up Capital:-
Paid up Capital:-
  • According to Section 2(64) of the Companies Act, 2013, ‘Paid-up Share Capital’ means aggregate of money credited and paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of a company, but does not include any other amount received in respect of such shares, by whatever name called.
Unpaid Capital:-
  • It is that part of the called up capital which has been called but has not been paid by the shareholders i.e. calls-in-arrears
e) Subscribed Capital:-
Subscribed & Fully Paid up Capital:-
  • When the entire face value of a share is called by the company and is also paid by the shareholder, it is said to be subscribed and fully paid up capital.
Subscribed but & not Fully Paid up Capital:-
  • Share capital is said to be subscribed but not fully paid up under following circumstances:
    1. When the company has not called up the full face value of the share.
    2. When the company has called up the full face value of the share but the shareholder has not paid some part of the face value of share, i.e., calls-in arrears.
Share Capital
D. Distinction between Reserve Capital and Capital Reserve

Basis

Capital Reserve

Reserve Capital

Meaning

Capital Reserve means the part of profit reserved by the company for a particular purpose such as to finance long-term projects or to write off capital expenses

It is that portion of the uncalled capital which a company has reserved and decided to call only in case of liquidation of the company to settle its creditors

Created out of 

Capital Profits

Authorized Capital

Disclosure

On the equity & liabilities side of the balance sheet under the head Reserve and Surplus.

Not disclosed at all

Specific Condition

No such conditions

Special Resolution should be passed at AGM for its creation

Utilization

To write of fictitious assets or capital losses etc.

Only when the company is about to wind up.

E. Disclosure in the Balance Sheet and Notes to the Accounts