Types of Share Capital Explained with Practical Examples
Accounting for share capital is a vital topic in company accounts. It explains how companies raise funds through shares, how these are recorded, and why these processes are crucial for school and professional exams. Understanding different types of share capital is essential for clear concepts and strong exam preparation.
| Type of Share Capital | Meaning | Example |
|---|---|---|
| Authorised Capital | Maximum capital a company can legally raise as per its Memorandum of Association. | ₹50 lakh stated in Memorandum |
| Issued Capital | Part of authorised capital offered to the public for subscription. | ₹30 lakh issued to public |
| Subscribed Capital | Portion of issued capital actually taken up by investors. | ₹25 lakh subscribed |
| Called-up Capital | Amount called by company out of subscribed capital for payment. | ₹20 lakh called-up out of ₹25 lakh |
| Paid-up Capital | Amount actually paid by shareholders from called-up capital. | ₹19.5 lakh after deducting unpaid calls |
| Reserve Capital | Part of uncalled capital reserved for company’s winding up only. | ₹5 lakh reserved by special resolution |
What is Accounting for Share Capital?
Accounting for share capital is the process of recording and managing a company’s share transactions. It ensures every stage—from issue to payment and adjustments—is correctly entered in the books. For board exams, competitive exams, and business understanding, this topic provides foundational knowledge for company accounts.
Types of Share Capital
Understanding types of share capital is key for both theory and practical questions. Each type represents a stage in raising and using company funds.
Classification of Share Capital
- Authorised/Nominal Capital: Legal maximum as per company’s Memorandum.
- Issued Capital: Portion of authorised capital actually offered for sale.
- Subscribed Capital: Amount subscribed by the public or investors.
- Called-up Capital: Amount demanded so far by company from shareholders.
- Paid-up Capital: Amount shareholders have actually paid.
- Reserve Capital: Uncalled capital reserved to be called only at winding up.
Kinds of Shares
Companies can issue different types of shares, each giving different rights and benefits to holders. The two most common types are equity shares and preference shares.
| Type of Share | Dividend Rights | Repayment on Winding Up | Voting Rights |
|---|---|---|---|
| Equity Shares | No fixed dividend; get after preference shares | After preference shareholders | Full voting rights |
| Preference Shares | Fixed dividend paid before equity shares | Priority over equity shareholders | Usually limited voting rights |
Issue of Shares and Process
Companies issue shares to raise money. This process follows several steps to ensure transparency and compliance with laws. Each step has a specific accounting treatment, important for exam questions.
Stepwise Share Issue Process
- Board issues a prospectus to invite public applications.
- Investors submit application money.
- Shares are allotted based on applications received (in case of over/under-subscription, pro-rata allotment or refund happens).
- On allotment, more money is collected from successful applicants.
- Additional calls made as per company’s needs (e.g., first call, second call).
- Any unpaid call amount is termed as calls in arrears.
Journal Entries for Share Capital
Proper journal entries must be recorded for each stage of share issue. This helps in maintaining accurate books and answering numerical questions in exams.
| Stage | Journal Entry | Narration |
|---|---|---|
| On Application Money Receipt | Bank A/c Dr. To Share Application A/c |
Application money received |
| On Application Money Transfer to Capital | Share Application A/c Dr. To Share Capital A/c |
Transfer of application money to share capital |
| On Allotment Money Due | Share Allotment A/c Dr. To Share Capital A/c |
Allotment money becoming due |
| On Allotment Money Receipt | Bank A/c Dr. To Share Allotment A/c |
Allotment money received |
| On First/Second Call Due | Share First Call A/c Dr. To Share Capital A/c |
First/second call amount due |
| On First/Second Call Receipt | Bank A/c Dr. To Share First Call A/c |
First/second call money received |
| On Calls in Arrears | Calls in Arrears A/c Dr. To Share First/Second Call A/c |
Unpaid call money recorded |
| On Forfeiture of Shares | Share Capital A/c Dr. To Forfeited Shares A/c To Calls in Arrears A/c |
Shares forfeited |
| On Reissue of Forfeited Shares | Bank A/c Dr. Forfeited Shares A/c Dr. To Share Capital A/c |
Forfeited shares reissued |
Examples and Numericals
Let’s see an example to make accounting for share capital easier for students.
Example Problem
ABC Ltd. issues 10,000 equity shares of ₹10 each at par, payable as ₹3 on application, ₹4 on allotment, and ₹3 on first and final call. All shares are subscribed and fully paid. Journalize the transactions.
- On application money receipt:
Bank A/c Dr. 30,000
To Share Application A/c 30,000 - On transfer of application money:
Share Application A/c Dr. 30,000
To Share Capital A/c 30,000 - On allotment money due:
Share Allotment A/c Dr. 40,000
To Share Capital A/c 40,000 - On receipt of allotment:
Bank A/c Dr. 40,000
To Share Allotment A/c 40,000 - On first and final call due:
Share First & Final Call A/c Dr. 30,000
To Share Capital A/c 30,000 - On receipt of first and final call:
Bank A/c Dr. 30,000
To Share First & Final Call A/c 30,000
If you want to practice more, see TS Grewal solutions for Class 12 Share Capital and DK Goel Chapter 4 for a variety of solved questions.
Share Capital in Financial Statements
Share capital is shown under ‘Shareholders’ Funds’ in the balance sheet. It includes both equity and preference share capital. Additional details such as numbers of shares, paid-up value, and share premium are also disclosed according to law. This helps investors and examiners evaluate the company’s financial position.
Why Accounting for Share Capital Matters
This topic is crucial for board exams, CA/CS exams, and daily business understanding. It helps students learn to classify capital, record proper transactions, and interpret the financial health of any company. At Vedantu, we simplify the process so you can master this core topic efficiently. For more on types, processes, and share capital-related questions, visit Issue, Forfeiture & Reissue of Shares and Types of Share Capital.
In summary, accounting for share capital explains how a company records share-related transactions, from issue to payment and adjustments. Understanding different types—authorised, issued, paid-up, and more—helps students excel in exams and business. Regular practice with examples and proper journal entries ensure strong concepts for future success.
FAQs on Accounting for Share Capital: Meaning, Types & Journal Entries
1. What is share capital?
Share capital represents the funds a company raises by issuing shares to its shareholders. It's a crucial component of a company's equity and is recorded in the balance sheet. Understanding share capital accounting is vital for Class 12 Commerce students preparing for exams like those using TS Grewal or DK Goel textbooks.
2. What are the 4 types of share capital?
While there are more than four, four key types of share capital are: Authorized capital (maximum amount a company can issue), Issued capital (shares offered to the public), Subscribed capital (shares accepted by investors), and Paid-up capital (amount received from shareholders).
3. What is the journal entry for share capital?
Journal entries for share capital depend on the stage of the share issue process. They include entries for share application, allotment, calls (installments), calls in arrears, calls in advance, forfeiture of shares, and reissue of shares. Each has specific debit and credit accounts.
4. What is a capital share in accounting?
A capital share represents a unit of ownership in a company. It grants the holder certain rights, including voting rights (for equity shares) and dividend payments (depending on the share type). The total value of these shares forms the company's share capital.
5. What is the difference between equity and preference shares?
Equity shares represent ownership and give voting rights, while preference shares have priority in dividend payments and capital repayment during liquidation. Preference shareholders usually have limited or no voting rights. Both are crucial in share capital accounting.
6. How are shares issued and what are the procedures?
Shares are issued through a process involving several steps: Share application (investors apply), allotment (shares assigned), and calls (installments collected). Accounting for each stage involves different journal entries. Concepts like pro-rata allotment (fair distribution during oversubscription) are also important.
7. How does share capital impact Earnings Per Share (EPS)?
Share capital directly affects EPS. An increase in the number of shares outstanding (due to a new issue) can dilute EPS, reducing the earnings per share. This must be considered when analyzing company performance and understanding the impact of share capital accounting.
8. What is the accounting treatment for calls in arrears?
Calls in arrears represent unpaid installments on shares. They are treated as a debit in the calls in arrears account. This account is then reconciled with the share capital account to accurately represent the company's financial position.
9. How is share capital shown in the balance sheet?
Share capital is presented under the equity section of the balance sheet. It shows the authorized capital, issued capital, and paid-up capital. The balance sheet provides a snapshot of the company's financial health, including its share capital structure.
10. What are some solved examples of share capital accounting?
Numerous solved examples are available in Class 12 accounting textbooks like TS Grewal and DK Goel. These examples cover various scenarios, including share application, allotment, calls, and forfeiture of shares, illustrating the practical application of share capital accounting principles.
11. What is the accounting for share premium?
Share premium is the excess amount received over the par value of shares. It is credited to a separate share premium account and is part of shareholders' equity. This account is shown separately from the share capital itself in the balance sheet.
12. What is the difference between authorized, issued, and subscribed share capital?
Authorized share capital is the maximum number of shares a company can issue as per its memorandum of association. Issued share capital represents the shares actually offered for sale. Subscribed share capital is the portion of issued capital that has been applied for and accepted by investors.
