Accounting for Share Capital

Under Section 2(20) of the Indian Companies Act, 2013, a company is an artificial legal person created by law, having separate legal entity, perpetual succession, a common seal, and limited liability.

Classification of Share Capital on the Balance Sheet:

1. Authorized (Nominal) Capital: The maximum amount of share capital stated in the Memorandum of Association (MOA) that the company is legally authorized to raise. (Stated for information only; not added in totals).
2. Issued Capital: The portion of authorized capital offered to the public for subscription.
3. Subscribed Capital: The portion of issued capital applied for by the public:
   • Subscribed and Fully Paid Up: When the company has called the entire nominal face value, and all shareholders have paid full amounts.
   • Subscribed but NOT Fully Paid Up: When either the company has not called the full face value, or some shareholders have failed to pay calls (Calls-in-Arrears).
4. Called-up Capital: The portion of nominal value demanded by directors from shareholders.
5. Paid-up Capital: $\text{Called-up Capital} - \text{Calls-in-Arrears}$.

When shares are issued at a price higher than their nominal face value (e.g., a ₹10 share issued for ₹15), the excess ₹5 is credited to Securities Premium Account:

Share Allotment A/c ............................ Dr. [Total Allotment Due]
    To Share Capital A/c ............................... [Face Value portion]
    To Securities Premium A/c .......................... [Premium portion]

CRITICAL EXAM QUESTION: Statutory Uses of Securities Premium (Section 52(2)):

Securities Premium is a capital reserve and can strictly be used ONLY for the following five purposes:

• 1. Issuing fully paid Bonus Shares to existing shareholders.
• 2. Writing off Preliminary Expenses of the company.
• 3. Writing off expenses of, or commission paid, or discount allowed on any issue of shares or debentures.
• 4. Providing for Premium Payable on the Redemption of preference shares or debentures.
• 5. For the Buy-Back of own shares under Section 68.
• (It can NEVER be used to pay normal cash dividends!)

Over-subscription occurs when the number of shares applied for exceeds the number of shares offered for sale. The company cannot issue more shares than offered. Directors manage excess applications via:

• Rejection: Rejecting excess applications and refunding application money (`To Bank A/c`).
• Pro-Rata Allotment: Allotting shares proportionately to all applicants (e.g., allotting 3 shares for every 5 shares applied).

The Pro-Rata Accounting Matrix:

If a shareholder fails to pay allotment or call money after a mandatory 14-day legal notice, the company cancels their shareholding (Forfeiture). The company seizes the shares and retains all money previously paid:

A. Forfeiture of Shares Issued at Par (or Premium already received):

Share Capital A/c .............................. Dr. [No. of shares × CALLED-UP Face Value]
    To Calls-in-Arrears A/c ............................ [Amount UNPAID by shareholder]
    To Share Forfeiture A/c ............................ [Amount ALREADY PAID on face value]

B. Forfeiture when Premium was NOT received:

The unpaid premium must be debited to cancel the earlier accrual: `Securities Premium A/c Dr.`.

C. Reissue of Forfeited Shares:

Bank A/c ....................................... Dr. [Shares reissued × Reissue Price]
Share Forfeiture A/c (Discount allowed) ........ Dr. [Maximum discount allowed = amount forfeited]
    To Share Capital A/c ............................... [Shares reissued × Paid-up Value]

D. Transfer of Net Capital Gain to Capital Reserve:

Share Forfeiture A/c ........................... Dr. [Net Gain on Reissued Shares]
    To Capital Reserve A/c ............................. [Transfer of Capital Profit]