Accounting for Share Capital

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Accounting for Share Capital

Accounting for Share Capital means  a company usually raises its capital in the form of shares (called share capital) and debentures (debt capital.)

A company sort of organisation is that the third stage within the evolution of sorts of organisation. Its capital is contributed by an outsized number of persons called shareholders who are the important owners of the corporate. But neither all of them can participate in the management of the company nor considered desirable. Therefore, they elect a Board of Directors as their representative to manage the affairs of the company. 

In fact, all the affairs of the company are governed by the provisions of the Companies Act, 2013. A company means a company incorporated or registered under the Companies Act, 2013 or under any other earlier Companies Acts. According to judge Marshal, “a company may be a person, artificial, invisible, intangible and existing only within the eyes of the law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as accompanying its very existence”.

Features of a Company

A company could also be viewed as an association of an individual who contributes money or money’s worth to a standard inventory and uses it for a standard purpose. It is an artificial person having a corporate legal entity distinct from its members (shareholders) and has a common seal used for its signature.

It has sure one of a kind features which distinguish it from the different types of organisation. These are as follows:

  • Body Corporate: A company is made consistent with the provisions of Law enforced from time to time. Generally, in India, the businesses are formed and registered under Companies Law except within the case of Banking and Insurance companies that a separate Law is provided for.
  • Separate Legal Entity: A company has a separate legal entity that is distinct and separate from its members. It can hold and deal with any type of property. It can enter into contracts and even open a bank account in its own name.
  • Limited Liability: The liability of the members of the corporate is restricted to the extent of the unpaid amount of the shares held by them. In the case of the businesses limited by guarantee, the liability of its members is restricted to the extent of the guarantee given by them within the event of the company being wound up.
  • Perpetual Succession: The company is an artificial person created by law continues to exist irrespective of the changes in its membership. A company can be terminated only through law. The death or insanity or insolvency of any member of the corporate in no way affects the existence of the corporate. Members may come and go but the corporate continues.
  • Common Seal: The company being a man-made person, cannot sign its name by itself. Therefore, every company is required to possess its own seal which acts as official signatures of the corporate. Any document which doesn’t carry the harbour seal of the corporate isn’t binding on the corporate.
  • Transferability of Shares: The shares of a public Ltd. are freely transferable. The permission of the corporate or the consent of any member of the corporate isn’t necessary for the transfer of shares. But the Articles of the company can prescribe how the transfer of shares will be made.
  • May Sue or be Sued: A company being a legal person can enter into contracts and can enforce the contractual rights against others. It can sue and be sued in its name if there is a breach of contract by the company.
Kinds of Companies

Companies can be classified either based on the liability of their members or based on the number of members. Based on the liability of its members the companies can be classified into the following three categories:

  1. Companies Limited by Shares: In this case, the liability of its members is limited to the extent of the nominal value of shares held by them. If a member has paid the complete amount of the shares, there’s no liability on his part whatsoever could also be the debts of the corporate. He needn’t pay one paise from his personal property. However, if there’s any liability involved, it is often enforced during the existence of the corporate also as during the completing.
  2. Companies Limited by Guarantee: n this case, the liability of its members is limited to the amount they undertake to contribute to the event of the company being wound up. Thus, the liability of the members will arise only in the event of its winding up.
  3. Unlimited Companies: When there’s no limit on the liability of its members, the corporate is named a vast company. When the company’s property isn’t sufficient to pay off its debts, the personal property of its members is often used for the aim. In other words, the creditors can claim their dues from its members. Such companies aren’t found in India albeit permitted by the businesses Act.

Based on the number of members, companies can be divided into three categories as follows:

  1. Public Company: A public company means a company which (a) is not a private company; (b) is a company that is not a subsidiary of a private company. 
  2. Private Company: A private company is one which by its articles:  (i) Restricts the right to transfer its shares; (ii) A private company must have at least 2 persons, except in case of one person company (iii) Limits the number of its members to 200 (excluding its employees);
  3. One Person Company: Sec. 2 (62) of the companies Act, 2013, defines OPC as a “company which has only one person as a member”. Rule 3 of the Companies (Incorporation) Rules, 2014 provides that: (i) Only a natural person is an Indian citizen and resident in India can form a one-person company, (ii) It cannot carry out non-banking financial investment activities. (iii) Its paid-up share capital is not more than Rs. 50 Lakhs (iv) Its average annual turnover of three years does not exceed Rs. 2 Crores
Share Capital of a Company

A company, being an artificial person, cannot generate its own capital which has necessarily to be collected from several persons. These persons are known as shareholders and the amount contributed by them is called share capital. Since the number of shareholders is very very large, a separate capital account cannot be opened for each one of them. Hence, innumerable streams of capital contribution merge their identities in a common capital account called ‘Share Capital Account’.

Categories of Share Capital

Accounting point of view the share capital of the company can be classified as follows:

  • Authorised Capital: Authorised capital is the amount of share capital that a company is authorised to issue by its Memorandum of Association. The company cannot raise quite the quantity of capital as laid out in the Memorandum of Association. It is also called Nominal or Registered capital. The authorised capital is often increased or decreased as per the procedure laid down within the Companies Act. It should be noted that the corporate needn’t issue the whole authorised capital for public subscription at a time. Depending upon its requirement, it’s going to issue share capital but in any case, it shouldn’t be quite the quantity of authorised capital.
  • Issued Capital: It is that part of the authorised capital which is actually issued to the public for a subscription including the shares allotted to vendors and the signatories to the company’s memorandum. The authorised capital which isn’t offered for public subscription is understood as ‘unissued capital’. Unissued capital could also be offered for public subscription at a later date.
  • Subscribed Capital::It is that a part of the issued capital that has been actually subscribed by the general public. When the shares offered for public subscription are subscribed fully by the general public the issued capital and subscribed capital would be equivalent. It may be noted that ultimately, the subscribed capital and issued capital are the same because the number of shares, subscribed is less than what is offered, the company allot only the number of shares for which subscription has been received. In case it is higher than what is offered, the allotment will be equal to the offer. In other words, the very fact of oversubscription isn’t reflected within the books.
  • Called up Capital: It is that part of the subscribed capital which has been called upon the shares. The company may plan to call the whole amount or a part of the face value of the shares. For example, if the face value (also called nominal value) of a share allotted is Rs. 10 and the company has called up only Rs. 7 per share, in that scenario, the called up capital is Rs. 7 per share. The remaining Rs. 3 may be collected from its shareholders as and when needed.
  • Paid-up Capital: It is that portion of the called up capital which has been actually received from the shareholders. When the shareholders have paid all the decision amount, the called up capital is that the same because of the paid-up capital. If any of the shareholders have not paid the amount on calls, such an amount may be called ‘calls in arrears’. Therefore, paid-up capital is adequate to the called-up capital minus call behind.
  • Uncalled Capital: That portion of the subscribed capital that has not yet been called up. As stated earlier, the company may collect this amount at any time when it needs further funds.
  • Reserve Capital: A company may reserve some of its uncalled capital to be called only within the event of completing the corporate. Such an uncalled amount is called the ‘Reserve Capital’ of the company. It is available just for the creditors on completing the corporate.
Share Capital Rs.
Authorised Capital

5,00,000 Shares of Rs.10 each

50,00,000
Issued Capital

2,50,000 Shares of Rs.10 each

25,00,000
Subscribed Capital

Subscribed but not fully paid

2,00,000 Shares of Rs.10 each, Rs.8 called up 

Less: Calls in Arrears

 

 

16,00,000

     (6000)

 

 

 

15,94,000

Nature and Classes of Shares

Shares, refer to the units into which the total share capital of a company is divided. Thus, a share is a fractional part of the share capital and forms the basis of ownership interest in a company. The persons who contribute money through shares are called shareholders.

    The amount of authorised capital, together with the number of shares in which it is divided, is stated in the Memorandum of Association but the classes of shares in which the company’s capital is to be divided, along with their respective rights and obligations, are prescribed by the Articles of Association of the company. As per The Companies Act, a company can issue two types of shares (1) preference shares, and (2) equity shares (also called ordinary shares).

  1. Preference Shares: According to Section 43 of The Companies Act, 2013, a preference share is one, which fulfils the following conditions: (a) That it carries a preferential right to a dividend to be paid either as a fixed amount payable to preference shareholders or an amount calculated by a fixed rate of the nominal value of each share before any dividend is paid to the equity shareholders. (b) That concerning the capital it carries or will carry, on the winding up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders. However, notwithstanding the above two conditions, a holder of the preference share may have a right to participate fully or to a limited extent in the surpluses of the company as specified in the Memorandum or Articles of the company. Thus, the preference shares can be participating and nonparticipating. Similarly, these shares can be cumulative or non-cumulative, and redeemable or irredeemable.
  2. Equity Shares: According to Section 43 of The Companies Act, 2013, an equity share is a share that is not a preference share. In other words, shares which do not enjoy any preferential right in the payment of dividend or repayment of capital, are termed as equity/ordinary shares. The equity shareholders are entitled to share the distributable profits of the company after satisfying the dividend rights of the preference shareholders. The dividend on equity shares is not fixed and it may vary from year to year depending upon the number of profits available for distribution. The equity share capital may be (i) with voting rights; or (ii) with differential rights as to voting, dividend or otherwise under such rules and subject to such conditions as may be prescribed. 

 

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