CA Foundation Company Accounts Share And Share Capital
WHAT ARE SHARES?
The word ‘Share’ refers to a share in the share capital of a company and includes stock. It can also be said that share is just part of securities. Capital is funds contributed by members and investors. INR A Company raising capital by issue of securities known as ‘shares’ does so as per the provisions of the Companies Act, 2013.
Broadly, an organization can raise two forms of capital-owner’s (Equity) Capital or Debt Capital. When owners of a business contribute capital into the business such capital is known as owner’s capital. In the case of company, which a legal person, the owner’s capital is known as Equity Capital and is raised by issue of securities known as ‘shares’ to the members of the company who possess, as per the law, the powers and rights of the owner. If a company raises capital as loan, to be repaid at some point of time, then the contributors of such capital are creditors of the company and that capital is called Debt Capital. Debenture is the name of the security that the company issues when raising debt capital.
It is interesting to note the purpose behind issue of shares by a company to raise share capital. A company by raising share capital receives finance for its activities and also gives the contributories the title of members of the company, who in fact possess the right of the management of the company as provided under the law. Moreover, the shareholders or members are the owners of the profits of the company and when a part of it is distributed by the Management of the company among its shareholders, it is known as dividends.
In a company share capital is classified as- AUTHORISED, ISSUED, SUBSCRIBED AND PAID-UP. Authorized share capital is that total amount which a company can raise as share capital throughout its life. So, it is generally kept at a high figure. That portion of Authorized Share Capital which the company issues in the form of shares is known as Issued Share Capital. For example a company may have authorized capital as INR 10000 crores divided into equity shares of INR 100 each. Now, of the company issues shares worth INR 100 crores in the form of shares of INR each. It means the company issues (offers to sell) 1 crore of shares at INR 100 each to raise a share capital of INR 100 crores. Of this issue, the portion that is purchased is known as subscribed capital which can be equal to issued capital or less than that (remember: it cannot be more than issued capital).
Now each share has a face value, which in the above example is INR 100. This is the amount of share capital that a company can demand legally from the persons who agree to buy the issued shares. This value (INR100) is known as face value or nominal or authorized value of shares.
Shares are issued or offered for subscription by interested buyers through a public document known as prospectus which contains an application form. A portion of face value is usually collected as application money on each share sought to be purchased. Based on the application received, the company allots shares to the applicants, after which the application money becomes a part of the share capital of the company. The balance amount of the face value of a share is collected either wholly as allotment money or partially as allotment money and partially calls on shares.
Just like a share has a face value, it has a issue price that is the amount at which the company is selling the shares to the interested buyers. This price if equal to the face value, it is said that shares are issued at PAR. If the price is more than the face value, then it is an issue at premium and similarly if the price is less than the face value it is known issue at a discount. For each of the types of price of issue of shares, the accounting treatment will differ.
At times, some shareholders don’t pay the full price of the shares issued to them by not paying the calls. In such cases, the company has the legal right to cancel the membership of the shareholder and forfeit the shares. The money received on those shares is no more a part of share capital till the forfeited shares are re-issued.
All the processes explained with regard to the issue of shares are transactions that require appropriate accounting treatment in the books of the issuing company. We discuss the treatment in detail with examples in our lecture videos and it will help you to successfully attempt the questions in your CA Foundation examination.
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