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Meaning of a Company
A company is a voluntary and autonomous association of certain persons with capital divided into
numerous transferable shares formed to carry out a particular purpose in common. It is an artificial
person created by law to achieve the object for which it is formed. Section 3(1) (i) of the Companies Act,
1956 defines a company as Company formed and registered under this Act or an existing company.
Share Capital
No trading concern can run without capital. The divisions of share capital are:
a) Nominal or Registered or Authorized Capital. The amount of capital with which the company
intends to be registered is called registered capital. It is the maximum amount which the
company is authorized to raise by way of public subscription. There is no legal limit on the
extent of the amount of authorized capital.
b) Issued Capital: That part of the authorized capital which is offered to the public for subscription
is called issued capital.
c) Subscribed Capital: That part of the issued capital for which applications are received from the
public is called the subscribed capital.
d) Called up Capital: The amount on the shares which is actually demanded by the company to be
paid is known as called up capital.
e) Paid up Capital: The part of the called up capital which is offered and is actually paid by the
members is known as paid up capital. The sum which is still to be paid is known as calls in
arrears.
f) Reserve Capital. A company may determine by a special resolution that any portion of its share
capital which has not been already called up shall not be capable of being called-up except in
the event of winding up of the company. Such type of share capital is known as reserve capital.
Application for Shares
Whenever shares are to be issued by a company, an advertisement in a leading newspaper is given for
the information of the general public alongwith some important extracts of the prospectus. Those who
are interested to purchase the shares on the basis of that information may have the prospectus for
detailed information and application form. If a person is satis- fied with the profitability and other things
he is required to fill up the application form and to deposit this alongwith the requisite amount (known
as application money) with the pre- scribed scheduled bank. The application money should at least be 5
per cent of the face value of the share. The scheduled bank will send this application money alongwith a
list of appli- cants to the company. The company will ultimately record these in the Application and
Allotment Book
Allotment of Shares
After receiving the applications the directors take steps to allot the shares. Allotment of shares means
acceptance of the offer of the applicant for the purchase of shares. Directors have discretionary power
either to reject or to accept partially the applications. There are no re- strictions on the rights of a
private company to allot its shares. But the public company cannot allot its shares unless:
a) i. The minimum subscription stated in the prospectus has been subscribed by the public. ii.
A prospectus or a statement in lieu of prospectus has been filed with the Registrar before
making the first allotment.
b) iii. The amount of application, i.e., at least 5% of the face value has been received.
The applicants, to whom shares are allotted, will be sent allotment letters. After allotment, they
become the shareholders of the company. Those to whom shares could not be allotted will be sent a
letter of regret along with refund of their application money. The shareholders will be required to pay
the allotment money on allotment of shares which will also be re- corded in the Application and
Allotment Book.
Calls on Shares
Out of the face value of the shares, 5% is payable with application, some money will be paid on
allotment and rest money will be paid as and when calls are made by the company. Generally the
prospectus gives the dates of different calls along with the amount of the calls by shareholders. In case
it is not given in the prospectus, the directors have the discretion to call it in one call or more than one
call. For this a resolution of the Board of Directors must be passed and a notice is sent to the
shareholders with a request to pay the amount of the call.
Journal Entries
Sl
no
Particulars
On Receipt of Application
1 Money
Bank A/c
To Share Application A/c
For excess share application
2 money refunded
Share Application A/c
To Bank A/c
For Share application money
3 transferred to share capital
Share Application A/c
To Share Capital A/c
Amount
Amount
Example 1
PK Ltd. made an issue of 10,00,000 equity shares of Rs. 10 each, payable Rs. 2 on application, Rs. 4 on
allotment and Rs. 4 on call. All the shares are subscribed and amounts duly received. Pass journal
entries to give effect to these. Also show relevant items in the Balance Sheet.
P K Ltd.
Journals
Particulars
Bank Account
To Equity Share Application Account
(Share application money on 10,00,000
equity shares @ Rs. 2 each received)
Equity Share Application Account
To Equity Share Capital Account
(Share application money transferred
to share capital account)
Equity Share Allotment account
To Equity Share Capital Account
Amount Amount
2000
2000
2,000
2,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
Amount
Assets
Cash at Bank
Amount
10,000
10,000
10,000
10,000
Solution 2
Cash Book
Particulars
Amount
To Equity Share
Application
To Equity Share
Allotment
To Equity Share 1st
Call
To Equity Share Final
Call
Particulars
Amount
6991
3000
1497
1994
6991
6991
Journals
Sl
no
Particulars
1 Equity Share Application A/c
Amount
500
500
Amount
3000
1000
2000
1500
1500
3
3
2000
2000
6
6
7009
3)
4)
5)
Adjustment of Excess Money towards the Amount due on the Allotment and Calls
Sometimes a Company may not allot all the shares for which applications have been received. Because
of over subscription, allotment is either made of less number of shares or on pro-rata basis. For
example, if the company offered 100,00,000 shares of Rs.l0 each but applications for 200,00,000 shares
were received by company. The directors sent letters of regret to applicants of 50,00,000 shares and
applicants of 150,00,000 shares were allotted the 100,00,000 shares on pro-rata basis. In such a case,
application money of 50,00,000 shares will be adjusted either on allotment and on calls, if there is still
surplus money after adjusting the allotment and call money due from shareholders it will be refunded in
cash.
Forfeiture of Shares
When a shareholder fails to pay calls, the company, if empowered by its articles, may forfeit the shares.
If a shareholder has not paid any call on the day fixed for payment thereof and fails to pay it even after
his attention is drawn to it by the secretary by registered notice, the Board of Directors pass a
resolution to the effect that such shares be forfeited. Shares once forfeited become the property of the
company and may be sold on such terms as directors think fit. Upon forfeiture, the original shareholder
ceases to be a member and his name must be removed from the register of members.
Surrender of Shares
After the allotment of shares, sometimes a shareholder is not able to pay the further calls and returns
his shares to the company for cancellation. Such voluntary return of shares to the company by the
shareholder himself is called surrender of shares. Surrender of shares has no separate accounting
treatment but it will be like that of forfeiture of shares. The same entries (as are passed in case of
forfeiture of shares) will be passed in case of surrender of shares.
Particulars
1 Bank Account
Amount
260000
Amount
260000
40000
40000
220000
200000
20000
400000
300000
100000
380000
380000
300000
300000
300000
300000
3,00,000
3,00,000
200000
200000
194000
194000
30000
6000
24000
Working Note:
On 300,000 forfeited shares, the total amount
forfeited is Rs. 24,000.
For 200,000 such shares the amount will be
(200,000/300,000) x
16,000
24,000
Less, Discount on
3,000
Reissue
Transferred to Capital
Reserve
13,000
Balance of Forfeited share account will be shown in balance sheet as Forfeited Share Ac- count in
liability side
Example 4
X Ltd. issued 10,000 Equity shares of Rs. 10 each at a premium of Rs. 2 per share, payable : Rs. 3 on
application (including premium of Re. 1); Rs. 4 on allotment (including the balance of premium) and the
balance in a call. Public subscribed for 12,000 shares. Excess application money was refunded. One
shareholder Mr. A holding 50 shares paid the call money along with allotment. Another Mr. B failed to
pay allotment & call on 30 shares.
These shares were forfeited after the call and 25 of those were reissued at Rs. 9 each. Pass Journals and
prepare the Balance sheet of the company.
Solution 4
Sl
no
Particulars
1 Application Money Received
Bank A/c
Amount
36000
Amount
36000
6000
6000
30000
20000
10000
40000
30000
10000
40130
120
40000
250
50000
50000
49600
150
250
50000
300
30
270
60
225
25
250
25
25
Liabilities
Authorised Capital
Called up & Paid up
Capital
9,995 shares
@ Rs. 10 each
Securities Premium
Amount
Amount Assets
10,00010 1,00,000 Fixed Assets
Amount
Amount
Investments Current
Assets, Loans &
99,950 Advances
19970 Cash at Bank
119955
Miscellaneous
Expenditure
(to the extent not
10 written off)
25
119955
119955
Example 5
B Ltd issued 2,000 shares of Rs. 100 each at a premium of 10% payable as follows :On application Rs 20 (1st Jan. 2008). On allotment Rs.40 (including premium) (1st April 2008). On First
Call Rs. 30 (1st June 2008). On Second & Final call Rs. 20 (1st Aug 2008). Applications were received for
1,800 shares and the directors made allotment in full. One shareholder to whom 40 shares were
allotted paid the entire balance on his share holdings with allotment money and another share holder
did not pay allotment and 1st call money on his 60 shares but which he paid with final call.
Required: Calculated the amount of interest paid and received on calls -in- advance and calls in arrears
respectively on 1st Aug. 2008.
Solution 5
Rs. 12
Rs. 16
28
Rs. 40
Rs. 15
55
Example 6
A limited Company was registered with a capital of Rs. 5,00,000 in share of Rs. 100 each and issued
2,000 such shares at a premium of Rs.20 per share, payable as Rs.20 per share on application, Rs. 50 per
share on allotment (including premimu) and Rs. 20 per share on first call made three months later. All
the money payable on application, and allotment were duly received but when the first call was made,
one shareholder paid the entire balance on his holding of 30 shares, and another shareholder holding
100 shares failed to pay the first call money.
Required: Give Journal entries to record the above transactions and show how they will apperar in the
companys Balance Sheet.
Second Call @ Rs. 30 per share.
Solution 6
Particulars
Bank A/c
To Share Application A/c
[Being the issue of 2,000
shares and application money
received @ Rs 20 per share]
Share Application A/c
To Share Capital A/c
[Being the transfer of
application money on 2,000
shares @ Rs. 20 per share to
Share Capital A/c)
Share Allotment A/c
To Share Capital A/c
To Securities Premium A/c
[Being the allotment mony on
2,000 shares @ Rs 50 including
premium made due)
Bank A/c
To Share Allotment A/c
[Being the allotment money on
2,000 shares
@ Rs. 50 per share received)
Share First Call A/c
To Share Capital A/c
[Being the first call mony on
2,000 shares @ Rs 20 per
share made due)
Bank A/c
To Share First Call A/c
To Call-paid-in-advance A/c
(Being the first call money on
1,900 shares @ Rs. 20 per
share and share Second call
money on 30 shares
@ Rs. 30 per share received)
Amount Amount
40000
40000
40000
40000
100000
60000
40000
100000
100000
40000
40000
38900
38000
900
Liabilities
Amount
Amount
Assets
Authorised Capital
5,000 shares of Rs.100
each
Issued Capital
2,000 shares of Rs.
100 each
Subscribed Capital
2,000 shares of Rs.100
each Rs. 70 per share
Capital paid up
Less: Calls Unpaid
Reserves & Surplus:
Securities Premium
Current Liabilities
Calls paid-in-advance
140000
2000
Amount
Amount
1,78,900
138000
40000
9000
178900
178900
Example 7
B Ltd purchase the assets of Rs. 10, 80,000 from C Ltd. The consideration was payable in fully paid
equity shares of Rs. 100 each. Required: Show the necessary journal entries in books of B Ltd. assuming
that
a) Such shares are issued at par
b) Such shares are issued at premium of 20%
c) Such shares are issued at discount of 10%
Solution 7
Particulars
Sundry Assets A/c
To C Ltd.
Amount
Amount
10,80,000
10,80,000
10,80,000
10,80,000
10,80,000
900000
180000
10,80,000
120000
1200000
At Par
10,80,000
100
10,800
At a Premium
10,80,000
120
9,000
At a Discount
10,80,000
90
12,000
Example 8
SOS Limited issued a prospectus inviting applications for 6,000 shares of Rs. 10 each at a premium of Rs
2 per share, payable as follows; On application Rs 2 per share; On allotment Rs 5 per share (including
premium): On 1st call Rs 3 per share; On Second and Final Call Rs 2 per share., Applications were receive
for 9,000 shares and allotment was made prorata to the applicants of 7,500 shares, the remaining
applicants were refused allotment. Money overpaid on applications was applied towards sums due on
allotment. D to whom 100 shares were allotted, failed to pay the allotment money and on his
subsequent failure to pay the first call, his shares were forfeited. Z, the holder of 200 shares, failed to
pay both the calls, and his shares were forfeited after the second and final call.
Of the shares forfeited 200 shares were sold to C credited as fully paid up for Rs 8.50 per share, the
whole of Ds shares being included. Required: Show Journal and Cash Book entries in the books of the
company.
Solution 8
Cash Book
Particulars
To Share Capital:
(Rs. 2 on 9,000 shares)
To Share Allotment a/c
(allotment money received)
To Share 1st Call a/c
(Rs. 3on 5,700 shares)
To Share 2nd & Final Call a/c
To Share Capital a/c
(Rs. 8.50 on 200 shares)
Particulars
Share Application A/c
To Share Capital
(Being Share application
money transferred to Share
Capital
Account)
Share Application A/c
To Share Allotment A/c
(Being Share application
money at Rs.2 on 1,500 shares
adjusted against allotment.)
Share Allotment A/c
To Share Capital A/c
To Securities Premium A/c
[Being the allotment money
due]
Share First Call A/c
To Share Capital A/c
[Being the first call money
due]
Share Capital A/c
Rs
18,000
Particulars
By Share Application a/c
Rs
3,000
26,550
By Balance c/d
71,750
17,100
11,400
1,700
74,750
74,750
Amount Amount
12000
12000
3000
3000
30000
18000
12000
18000
18000
800
200
250
450
300
11800
11800
2000
1000
600
400
300
300
450
450
12 5
Rs. 250
Rs. 50
500
Rs.450
Rs. 30,000
Rs. 3,000
Rs.
450
3,450
26,550
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