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Classification of Capital: accounting treatment of Shares & disclosure

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.
    Classification of Capital

    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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