Classification of Capital, Types of shares,their accounting treatment and disclosure of shares in balance sheet.
Classification of capital
Capital is a financial term that comes in the liabilities side of balance sheet. Its a sum of money that comes into business from different sources. In Public ltd companies we define capital as share capital.We classified it into various types according to their functions.
Authorized capital
A maximum amount of capital that a
company can issue is mentioned in the memorandum and article of association of
a company. Company cannot issue capital exceeding from authorized capital that
mentioned in memorandum and article of association.
Company need to show the authorized
capital amount in their financial balance sheet. But there is no effect of this
amount in balance sheet. Company just need to show how much they can issue.
Issued capital
Issued capital means a portion of authorized capital which have been offered in market to get consideration.
Subscribed capital
Subscribed capital means a portion of
issued capital which has been subscribed or taken by purchaser of shares.
Called-up capital
Called-up capital is a part of
subscribed capital which has been called for payment by the company. If company
have 10000 shares of 10 each have been subscribed by the public of which 500
shares are called-up. Here called-up capital will be 5000 Rs.
Paid-up capital
Paid-up capital is a portion of capital
by which company actually received the amount from shareholder and allotted
shares to them.
Any called-up capital to which amount is
outstanding is called “call in arrears”
Paid-up capital amount is collected by
deducting the call in arrears from called-up capital.
Accounting treatment of shares & Disclosure in Balance sheet
Shares issued at premium
A company can issue their shares at
price above from their face value is termed as shares issued at premium. Like a
firm has 10 Rs face value but issued at 15 Rs. The difference between issued
value and face value is called premium amount and will be credited to share
premium account.
The increase amount in shares will be
treated as reserve. It will not increase the capital amount.
Disclosure of shares issued at premium
Share premium account is a reserve
account by nature and will be shown on balance sheet in equity section. Company
cannot pay dividend or other expense from this reserve. Company can use share
premium reserve in following terms.
- Writing off the preliminary expenses of company.
- Writing off expenses like “commission paid” “discount allowed” on issue of shares and debentures.
- Premium payable on redemption of redeemable preference shares or debentures are deducted from reserve.
- Writing off the amount of bonus shares issued to members of the company.
Shares issued at discount
Company can issue their shares at price
below from their face value is termed as shares issued at discount. Like a firm
has 10 Rs face value but issued at 7 Rs. The difference between issued value
and face value is called discount allowed and will be debited to “Discount on
issue of shares” account.
- Company need to passed the resolution in general meeting to issue the shares on discount and must be sanctioned by the commission.
- The shares must be issued at discount within 60 days after passing the resolution and sectioned by commission.
- Maximum rate of discount must be disclosed in resolution.
- Discount on shares will not be treated as reduction in share capital. The difference between face value and issued value will be treated as expense.
Disclosure of shares issued at discount
Discount on issue of shares can be write-off
from share premium account. If Share premium account not available then
Discount on issue of shares will be treated as expenses and will be shown on
income statement and reduce the profit.
Further shares issue
Company can issue further shares to
pubic other than current members to raised their capital. Company need to passed
a special resolution in meeting and get approval from Federal government for
further issuance of shares.
Right shares
Here, new shares are issued to existing
members according to proportionate of existing shares.
Accounting treat and disclosure of right share
Accounting treatment & disclosure of
right share is same like ordinary shares. We can calculate its value in
following way.
Example ( Right issue of shares)
A company make a right issue of one
share of Rs 100 at premium of 20% for every 3 shares held by the members of the
company. Market value of the one share is 450 Rs. Find the right value.
Answer.
Market value of every 3 shares are 3 x
150 450
Issue price of 1 right share
1 x 120 120
Total value of 4 shares 570
Average price of 4 shares 570 / 4 142.5
Value of right shares (market value –
average value) 7.5 (150 -
142.5)
Accounting entry of right shares
Bank account 120 Dr
Share capital account 100 Cr
Share premium account 20 Cr
Bonus Shares
Companies capitalized profit by issuing
the bonus shares to existing members. Bonus shares are issued from accumulated
undistributed profit, Reserve, Share premium account.
Company cannot issue bonus shares from
revaluation reserve.
Companies issues bonus shares instead of
cash dividends and capitalize their profit due to shortage of cash flow.
Its not a meaningful alternative of cash
dividend. Bonus share increase the share capital without generating any cash
consideration. It will decrease the dividend price per share in future.
Accounting treatment and disclosure of bonus shares
In bonus shares issuance process, share
premium account, profit account or reserve account will be debited and share
capital will be credited.
Share premium account/Un distributed
profit account/reserve account Dr
Share
capital account Cr
Example (Bonus shares)
Xyz company declare 3 bonus shares on
every 2 shares
Share capital (10000 shares @ 100) 1,000,000
Share premium 800,000
Revaluation reserve 1,200,000
Retained earnings 4,000,000
7,000,000
Company standard policy is that, share
premium account will be used for bonus share and retained earning account will
be used if there is a shortage in share premium account.
Revaluation reserve cannot be used
for bonus shares.
Pass journal entry and prepare
balance sheet
Answer
Total number of bonus shares issued (10000/2*3) 15000 Shares
Total value of bonus shares 15000 shares
@ 100 1,500,000
Accounting entry will be
Share premium account 800,000
Dr
Retained earnings account 700,000
Dr
Share
capital account 1,500,000 Cr
Balance sheet extracted
Share capital 2,500,000
Revaluation reserve 1,200,000
Retained earnings 3,300,000
7,000,000
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