Issue of Shares

Company Accounts – Issue of Shares
Module 2
Company Accounts – Issue of shares
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CHAPTER AT A GLANCE (Chapter 9)
9.01 Meaning and Nature of Company
9.02 Kinds of Joint Stock Companies
9.03 Stages in the Formation of a Company
9.04 Share Capital of Company
9.05 Disclosure of Share Capital in the Company’s
Balance Sheet
9.06 Type of Shares Issued by Limited Companies

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Above link will provide the following topic ppt
 Accounting of inventory
 Accounting for negotiable instruments
 Consignment Accounting
 Partnership Accounting, including admission, retirement, death and
dissolution of partnership.
 Joint Venture
 Issue of Share
 Issue of Debenture
 Final Accounts of Company
 NGO and NPO
 Branch Accounting
 Accounting for Hirepurchase

9.07 Issue of Shares—The Accounting Treatment
9.08 Over Subscription of Shares
9.09 Under Subscription of Shares
9.10 Forfeiture of Shares
9.11 Reissue of Forfeited Shares
9.12 Book Building
CHAPTER AT A GLANCE (Chapter 9)

9.01
Meaning And Nature Of Company
Definitions and Meaning
Indian Companies Act, 1956 vide its Section 3 (1) (i)
define a Company as
 “A company formed and registered under this Act or an
existing company.”
According to the Act An existing company means,
 “a company formed and registered under any of the
previous company laws.”

9.01
 A company or a joint stock company thus,
 is an organisation incorporated by a group of persons
through a process of law for undertaking (usually) a
business.
 In the eyes of law, it is an artificial person distinct from
its members.
 It has a share capital divided into units called shares,
the owners of which are known as members or
shareholders.
 Unlike partnership, insolvency or death of a member
does not effect for life of a company.

9.01
Characteristics (Features) of a Company
(i) Incorporation: A company is an artificial person created
through the process of law, i.e., the Companies Act or by
the Special Act enacted by the Parliament. Most of the
companies are incorporated under the Companies Act.
(ii) Separate Legal Entity: A company is a separate legal
entity from its share-holders. It can own property, enter
into a contract, conduct business, sue or be sued. The
scope of its activities and the working of the company is
regulated by its Memorandum of Association, Articles of
Association and Provisions of the Companies Act, 1956.

9.01
(iii) Perpetual Succession: A company has a perpetual
succession (continuous life without interruption) not
affected by the death, lunacy or bankruptcy of its
members or shareholders. The life of a company
comes to an end, only by winding up through the
process of law.
(iv) Limited Liability: Liability of its members is limited
(except where the company is incorporated with
unlimited liability) to the value of the shares
subscribed by each of them.

9.01
(v) Transferability of Shares: The shares of a company are
governed by the Articles of Association but, are
normally freely transferable, except in case of private
companies.
(vi) Management and Ownership: A company is not run
by all the members but by their elected representatives
called Directors.
(vii) Common Seal: Every company has its own common
seal which is affixed to all the important documents of
the company.

9.02
Kinds of Joint Stock Companies
A company may be incorporated as a
 Private Company or
 Public Company.

9.02
Private Company
 It is a company which has a minimum paid-up share
capital of Rs.1,00,000 or
 such higher paid-up share capital as may be prescribed
in the Companies Act, 1956 and
 by its Articles of Association:
(a) Restricts the right to transfer its shares, if any.
(b) Limits the number of its members excluding its
present or past employee members to 50.

9.02
(c) Prevents the public from subscribing for any shares or
debentures of the company.
(d) Prohibits any invitation or acceptance of deposits from
persons other than its’ members and directors or their
relatives. [Section 3 (1) (iii)]
The name of a Private Company ends with the words,
‘Private Limited’.

9.02
Public Company
 A Public Company means a company which
(a) is not a private company.
(b) has a minimum paid-up capital of Rs. 5,00,000 or such
higher paid-up capital as may be prescribed.
(c) is a private company, being a subsidiary of a company
which is not a Private Company.[Section 3(i) (iv)]
 The name of a Public Company ends with the word
‘Limited’.

9.02
Basis of Difference between a Private Company and a Public
Company
1. Number of Members
2. Transfer of Shares
3. Paid-up Capital
4. Prospectus
5. Bye-laws or Articles
6. Number of Directors
7. Commencement of Business
8. Allotment of Shares
9. Name

9.03
Stages in the Formation of a Company
The procedure for establishing a company may be
divided into four principal stages:
(i) Promotion,
(ii) Incorporation or Registration,
(iii) Capital Subscription, and
(iv) Commencement of Business.

9.03
(i) Promotion:
 It is the first stage of the company incorporation.
 A person or a group of persons agree to start business
in the form of a company.
 These persons are called Promoters.

9.03
(ii) Incorporation or Registration of a Company
 A company comes into existence upon incorporation
 following the procedure prescribed under the
Companies Act, 1956.
 The promoters make an application to the Registrar of
Companies seeking approval of name of the company.

9.03
After approval of name, following documents are
submitted to the Registrar of Companies
(a) Memorandum of Association: It is a charter of the
company that defines the company’s relation with the
outsiders and the business that company can
undertake.

9.03
It contains the following clauses
 The name of the company ending with the words
‘Private Limited’ or ‘Limited’.
 The place where the registered office is situated.
 The objects which the company can undertake.
 A declaration that the liability of the members is
limited.
 The amount of Authorised Share Capital and how it is
divided.

9.03
(b) Articles of Association: Articles of Association
regulate the internal administration of the company
including the powers of Directors, rights of
shareholders and holding of company’s meetings.
(c) Consent to Act as Directors by the persons named as
Directors in the Articles of Association.
(d) Notice of Address of the Registered Office, in Form
No. 18.
(e) Declaration to the effect that all the requirements of
the Act in respect of incorporation have been
complied with.

9.03
Certificate of Incorporation:
 The Registrar issues Certificate of Incorporation, if he is
satisfied that the requirements of the Companies Act
have been complied with.
 The Company thereafter comes into existence.

9.03
(iii) Capital Subscription:
 A Private Company can commence business
immediately upon its incorporation.
 A Public Company, on the other hand, can commence
business only after obtaining the Certificate for
Commencement of Business for which it has to fulfill
the prescribed requirements.
 Public companies can raise capital through an offer to
public at large for subscription.

9.03
 The companies, making the public issue of capital,
 have to submit a copy of the prospectus* with the
Registrar of Companies and
 Securities and Exchange Board of India (SEBI)
 before it invites public to subscribe for the shares of
the company by circulating the prospectus.
 Applications for shares are received from the public
through the company’s bankers

9.03
 and if the subscribed capital is at least equal to the
minimum subscription** or 90% of the capital issue,
and other conditions of a valid allotment of shares are
fulfilled, the Directors pass a formal resolution of
allotment.
 Shares are issued to the allottees and a return of
allotment is filed with the Registrar of Companies.

9.03
Prospectus
 According to Section 2(36) of the Companies Act,
“Prospectus means
 an invitation to the public for the subscription of its
shares or debentures.”
 The prospectus specifies the terms and conditions of
the issue.

9.03
Minimum Subscription
 Minimum subscription is the amount which, in the opinion
of the Board of Directors must necessarily be raised by the
issue of shares, for the following purposes:
(a) for purchasing necessary assets for the company,
(b) for paying preliminary expenses and commission on sale
of shares,
(c) for paying loan, if arranged for the above two purposes,
(d) for the working capital, and
(e) for any other purpose.

9.03
(iv) Certificate to Commence Business
 A Public Company can commence business only after
obtaining the certificate for commencement of business
from the Registrar of Companies.
For this purpose, the following conditions must be fulfilled:
(a) The company has filed with the Registrar of Companies the
prospectus or a statement in lieu of the prospectus.
(b) Every Director has paid for the shares subscribed by him
for the shares undertaken by him to subscribe in the
Memorandum of Association.

9.03
(c) Shares have been allotted at least equal to the shares
undertaken by the subscribers to the Memorandum of
Association to subscribe.
(d) The Company Secretary or any of its Directors has
certified that the requirements of the Companies Act
in this respect have been complied with.

9.03
Preliminary Expenses
 Preliminary Expenses are the expenses incurred for
incorporating the company,
 such as registration fee paid to the Registrar of
Companies, legal expenses, public issue expenses, etc.
 Preliminary expenses are debited to Profit and Loss
Account immediately following the Accounting
Standard – 26 issued by the ICAI.

9.04
Share Capital Of Company
 Share Capital refers to the amount that a company can
raise or has raised by issue of shares.
From the accounting point of view, share capital can be
classified as follows
(i) Authorised Share Capital
(ii) Issued Share Capital
(iii) Subscribed Share Capital
(iv) Called-up Share Capital
(v) Paid-up Capital
(vi) Reserve Capital

9.04
Share Capital Of Company
Calls-in-Arrear
 Calls-in-Arrear is that part of the Called-up Capital that
remains unpaid by the shareholders
Calls-in-Advance
 A company, if its Articles of Association permit, may
receive the amount not called by it to be paid by the
shareholders.
 The amount so received is known as Calls-in-Advance.
In the Balance Sheet it is shown as a Current Liability.

9.05 Disclosure of share capital in the company’s
balance sheet
 The form of Balance Sheet is prescribed in Schedule VI
of the Companies Act.
 Specimen Company’s Balance Sheet on the Liabilities
side and under the head ‘Share Capital’, showing
capital.

Specimen Company’s Balance Sheet

9.06
Types of Shares Issued by Limited Companies
 Capital of a company is divided into units and each
such unit is called a Share.
As per Section 85 of the Companies Act, 1956, share
capital of a company consists of two classes of shares:
(i)Preference Shares and
(ii)Equity Shares.

9.06
(i) Preference Shares [Section 85(i)]
Preference shares are the shares which carry the following
two rights
(a) Preferential right of dividend to be paid as fixed amount
or an amount calculated at a fixed rate.
(b) On winding up or repayment of capital, a preferential
right to be repaid the amount of capital before any
amount is paid to the equity shareholders.
 Section 80 of the Companies Act, 1956 does not permit to
issue Irredeemable Preference Shares.
 Preference Shares cannot be issued which are redeemable
beyond 20 years from the date of issue.

9.06
We may broadly classify the preference shares as follows
 With Reference to Dividend
• Cumulative Preference Shares
• Non-Cumulative Preference Shares
 With Reference to Participation;
• Participating Preference Shares:
• Non-Participating Preference Shares
 With Reference to Convertibility; and
• Convertible Preference Shares:
• Non-Convertible Preference Shares:

9.06
(ii) Equity Shares (Section 85(2)]
 Equity share is the share that is not a preference share.
 Equity shares are the most commonly issued class of
shares which carry the main ‘risks and rewards’ of the
business
 the risks are of losing part or all of the value of shares if
the business loses money or becomes insolvent;
 the rewards are that they take a share of profits in the
form of dividends

9.06
On the following basis Distinction between Preference
Share and an Equity Share can be made
 Right to Dividend
 Rate of Dividend
 Convertibility
 Redemption
 Voting Rights
 Refund of Capital
 Right to Participate in Management

9.07
Issue Of Shares – The Accounting Treatment
 A Public Company can issue shares only after it has
fulfilled the legal requirements, i.e.,
 obtaining the Certificate for Commencement of
Business, filing of prospectus with the Registrar of
Companies and SEBI, etc.
 A Private Company, on the other hand, does not have
to fulfill any such legal requirements.
A company can issue its shares either
1. for cash or
2. for consideration other than cash.

9.07
1. ISSUE OF SHARES FOR CASH
 Shares are said to be issued for cash when the
company receives cash against shares issued,
 payable either in lump sum along with the application
or in installments at different stages

9.07
(i) Shares Payable in Lump Sum
 When shares are issued at par payable in one
installment,
 the shares so payable are said to have been issued in
lump sum.
 It is most commonly in practice.

9.07
Accounting Entries for Issue of Shares
(a) For Receiving Share Application Money
Bank A/c ...Dr.
To Share Application A/c
(Being the amount received as application money)
(b) For Allotment of Shares
Share Application A/c ...Dr.
To Share Capital A/c
(Being the shares allotted to applicants)

9.07
Shares Payable in Installments:
 The amount against the shares can be received in
installments also,
 although not in practice these days.
The amount may be receive in
 at the time of Application
 at the time of Allotment or
 by call

9.07
Entries passed are as follows
On Receipt of Application Money
Bank A/c ...Dr.
To Share Application A/c
On Allotment of Shares Application Money is transferred
to the Share Capital A/c

9.07
Amount Due on Allotment
Share Allotment A/c ...Dr.
On Receipt of Allotment Money
Bank A/c ...Dr.
To Share Allotment A/c

9.07
On the First Call being Due
Share First Call A/c ...Dr.
On Receipt of the First Call
Bank A/c ...Dr.
To Share First Call A/c

9.07
Notes
 It should be noted that the application money
received will remain in the Share Application Account
till the Board of Directors approve the allotment of
shares.
 After the approval, it is treated as a part of the share
capital. Once allotment is made, the applicants are
treated as shareholders and they are liable to pay all
amounts due on shares allotted to them.

9.07
 The word ‘Equity’ or ‘Preference’ is used before the
word shares as the case may be, e.g., Equity Share
Application, Equity Share Allotment or Preference
Share Application, Preference Share Capital, etc.
 If there are more than one call, the entries will be the
same as in case of the first call but the name will be
changed as the second or the final call

9.07
According to Table A of the Companies Act:
(i) The amount of one call should not be more than 25%
of the face value of the share.
(ii) There must be an interval of one month between two
calls.

9.07
Terms of Issue of Shares
Shares of a company may be issued:
 At Par or
 At a Premium or
 At a Discount.
 Accounting treatment of issue of shares in the case of
each of the above is different.

9.07
Issue of Shares at Par
 Shares are said to have been issued at par when an
applicant has to pay sum equal to the face value of
share, i.e.,
 issue price Rs. 10 and face value is also Rs. 10

9.07
Issue of Shares at a Premium
 Shares issued at an amount more than it’s face value is
known as Shares Issued at a Premium.
 For example, if a Rs. 10 share is issued at Rs. 20, it is an
issue made at a premium—the premium is Rs. 10 per
share.

9.07
 Section 78 of the Companies Act provides that where a
company issues securities (shares, bonds or
debentures) at a premium
 whether for cash or for a consideration other than
cash,
 a sum equal to the aggregate amount of the premium
on these securities shall be transferred to the
Securities Premium Account.
 Securities Premium is a capital receipt for a company
and is shown on liabilities side of Balance Sheet under
the head Reserves and Surplus

9.07
Utilisation of Securities Premium
 The account can only be utilised only for the purposes
specified in
 Section 77A and
 78 of the Companies Act
These sections provide as follows
Under Section 77A - for buy-back of own shares.

9.07
Under Section 78 for
(i) issuing fully paid bonus shares to the shareholders;
(ii) writing off preliminary expenses of the company;
(iii) writing off the expenses of or the commission paid or
discount allowed on any issue of shares or debentures
of the company;
(iv) Providing for the premium payable on the redemption
of preference shares or of any debentures of the
company.

9.07
Accounting Treatment
 A company may collect the amount of securities
premium in lump sum or in installments.
 The premium on shares may be collected by a company
either with application money or with the allotment
money or even with one of the calls money depending
on the terms of issue.
 If the question is silent, it is assumed that the amount
of the securities premium is included in the allotment
money.

9.07
The accounting entry in different cases is given below
(i) When the premium is payable with the application
money
Bank A/c ...Dr.
To Share Application
[With the total application
money A/c including
premium money]

9.07
 It may be observed from the above entry that Securities
Premium Account is not credited although it is received.
 The reason being that application money is in the nature of
deposit and it is not certain whether shares shall be
allotted against it or not.
 If the Securities Premium Account is credited and the
shares are not allotted to the applicant, the amount shall
have to be refunded.
 The amount once credited to the Securities Premium
Account cannot be debited except when utilised for the
purpose specified in Sections 77A and 78 of the Companies
Act.

9.07
(ii) When shares are allotted, the entry is
To Securities Premium A/c
[With the total application
money payable including
premium]
[With the application money
payable towards share capital]
[With the amount of premium
paid with application money]

9.07
(iii) When premium is payable with allotment money
Share Allotment A/c ...Dr.
[With the total amount due]
[With the amount due
towards share capital]
[With the amount of
securities premium]

9.07
When the amount due on allotment is received, it is
credited to the Share Allotment Account by passing the
following Journal entry
Bank A/c ...Dr.
To Share Allotment A/c
 It will be observed from the above that the Securities
Premium Account is credited for the amount of
premium due, i.e., on the allotted shares.
 It means the amount of premium collected shall not be
refunded and, therefore, the Provisions of Section 78
shall not be violated.

9.07
3. Issue of Shares at a Discount (Section 79)
 Shares when issued at a price less than its face value
(nominal value or par value),
 it is said that shares are issued at a discount.
 For example, if a Rs. 10 share is issued for Rs. 9, then it
is issued at a 10% discount.

9.07
Section 79 of the Companies Act provides that a company can issue shares
at a discount only if the following conditions are fulfilled:
(i) The issue of shares at a discount is authorised by a Resolution passed by the
Company in its General Meeting and sanctioned by the Central Government.
(ii) The Resolution specifies the maximum rate of discount at which the shares are
to be issued. The rate cannot exceed 10% unless the Central Government is of
the opinion that a higher rate of discount may be allowed in special
circumstances of the case.
(iii) The shares are of a class which are already issued.
(iv) Not less than one year has, at the date of issue, elapsed since the date on
which the company was entitled to commence business.
(v) The shares are issued within two months of the date on which the issue is
sanctioned by the Central Government or within such extended time as the
Government may allow.

9.07
Section 79 of the Companies Act provides that a company
can issue shares at a discount only if the following
conditions are fulfilled
(i) The issue of shares at a discount is authorised by a
Resolution passed by the Company in its General
Meeting and sanctioned by the Central Government.
(ii) The Resolution specifies the maximum rate of discount
at which the shares are to be issued. The rate cannot
exceed 10% unless the Central Government is of the
opinion that a higher rate of discount may be allowed
in special circumstances of the case.

9.07
(iii) The shares are of a class which are already issued.
(iv) Not less than one year has, at the date of issue,
elapsed since the date on which the company was
entitled to commence business.
(v) The shares are issued within two months of the date
on which the issue is sanctioned by the Central
Government or within such extended time as the
Government may allow.

9.07
 New company cannot issue shares at a discount and
also a new class of shares cannot be issued at a
discount.
Accounting Treatment
Share Allotment A/c ...Dr[With the amount due]
Discount on Issue of Shares A/c ...Dr[With the amount of
discount]

9.07
 Discount on issue of shares should be written off firstly
against Securities Premium Account.
 If available and then by debit to Profit and Loss
Account.
Journal Entry
(i) Against Securities Premium Account
Securities Premium Account ...Dr.
To Discount on issue of share

9.07
(ii) By Debit to Profit and Loss Account
Profit and Loss A/c ...Dr.
To Discount on issue of share

9.07
ISSUE OF SHARES FORCONSIDERATIONOTHERTHANCASH
 Companies sometimes, issue shares for consideration
other than cash such as against purchase of land and
building, plant and machinery or purchase of business,
etc.
 The purchase of an asset and issue of shares are two
separate transactions.

9.07
Journal entries
(i) On Purchase of Assets
Sundry Assets A/c (Individually) ...Dr. [With the amount of
purchase price]
To Vendor

9.07
(ii) On Purchase of Business
Sundry Assets A/c (Individually) ...Dr. [Agreed value of
assets]
Goodwill A/c* ...Dr.
To Liabilities A/c (Individually) [Agreed value of
liabilities]
To Vendor** [Agreed price
payable to the
vendor]
To Capital Reserve A/c***

9.07
* If purchase consideration is given and it is more than
net assets, then difference is debited to Goodwill
Account.
** Vendor is credited by purchase consideration payable
to him. It may be given in the question, otherwise it is
equal to net assets, i.e., sundry assets minus sundry
liabilities.
*** If purchase consideration is given and it is less than
net assets, then the difference is credited to Capital
Reserve Account.
Either Goodwill or Capital Reserve will appear at a time

9.07
(iii) On Issue of Shares
(a) If shares are issued to vendor at par
Vendor ...Dr. [With the nominal value of shares
allotted]

9.07
(b) If shares are issued to vendor at premium:
Vendor ...Dr. [With the purchase price]
To Share Capital A/c [With the nominal value of
shares allotted]
To Securities Premium A/c [With the amount of
premium]

9.07
(c) If shares are issued to vendor at a discount:
Vendor ...Dr. [With the purchase
price]
Discount on issue of Shares A/c ...Dr. [With the discount
amount]
To Share Capital A/c [With the nominal
value of shares
allotted]

9.07
A Working Note should be prepared to calculate number
of shares to be issued
ShareaOfPriceIssue
PricePurchase
issuedbetoShareofNumber 

9.07
 If a company issues shares to promoters for their
services to the company,
 such issue of shares is also categorised as issue of
shares for consideration other than cash.
 From the accounting point of view, the amount of
shares issued to the promoters is considered as the
cost of goodwill.
Accounting Entry
Goodwill A/c ...Dr.

9.07
 When shares are issued to underwriters in lieu of their
commission for underwriting the Company’s shares,
The following accounting entries will be passed:
For Commission due
Commission A/c...Dr
To Underwriters
For Discharge of Commission
Underwriters ...Dr
To Share Capital A/c (Shares)
To Bank A/c (Cheque)

9.07
CALLS-IN-ARREAR
 A call means a demand made by a company to the
shareholders to pay amount called within a specified
period.
 If any amount has been called by the company either
as allotment or call money and a shareholder has not
paid that money,
 the amount not received is known as Calls-in-Arrear.

9.07
Rate of Interest
 The company is authorised to charge interest on the
Calls-in-Arrear at a rate specified in its Articles of
Association from the last date fixed for payment to the
date of payment.
 But if the Articles of Association is silent, Table A of the
Companies Act applies, which empowers the Board of
Directors to charge interest at a rate not exceeding 5%
p.a.

9.07
Disclosure in Balance Sheet
 The amount of the Calls-in-Arrear is shown by way of
deduction from the called-up capital in the Balance
Sheet.

9.07
Accounting Treatment of Calls-in-Arrear
There are two methods of dealing with the Calls-in-Arrear
(i) Without Opening the Calls-in-Arrear Account
(ii) By Opening the Calls-in-Arrear Account

9.07
Without Opening the Calls-in-Arrear Account
 Under this method, the amount of Calls-in-Arrear is
retained in respective call account. As a result, no
Journal entry is passed and the balance in the account
is the amount of Calls-in-Arrear.
Example
 The first call money was due on 10,000 shares @ Rs. 2
per share but it was received on 9,500 shares only.
The Journal entries will be as follows:

9.07
 The above balance in the First Call Account indicates the
amount of Calls-in-Arrear.
 Later when company will receive the amount, the balance
of this account will become nil.

9.07
(ii) By Opening the Calls-in-Arrear Account
 The amount of calls not received is transferred to the
Calls-in-Arrear Account.
Journal Entry
(i) On non receipt of call till the day fixed
Calls-in-Arrear A/c ... Dr.
To Relevant Call A/c
(ii) On receipt of calls-in-arrear at subsequent date
Bank A/c ...Dr.
To Calls-in-Arrear A/c

9.07
Interest on Calls-in-Arrear Account
(iii) On making due the interest on Calls-in-Arrear
Sundry Members A/c ...Dr.
To Interest on Calls-in-Arrear A/c
(iv) On Receipt of Interest on Calls-in-Arrear
Bank A/c ...Dr.
To Sundry Members A/c
(v) Transfer of Interest in Profit and Loss A/c
Interest on Calls-in-Arrear A/c ...Dr.
To Profit and Loss A/c

9.07
CALLS-IN-ADVANCE
 Calls-in-Advance means the amount received by the
company towards Call Money where it has not yet
been called to be paid by the shareholders.
 Calls-in-Advance generally arise in case of partial or pro
rata allotment.
 The excess application money received is adjusted
against the amount due on allotment or calls.

9.07
 The excess application money after adjustment for
allotment is transferred to an account named as Calls-
in-Advance Account, if the prospectus so provides.
 Sometimes, few shareholders may prefer to pay the
entire amount at the time of allotment.
 In such a situation, the advance money in respect of
future call(s) is also transferred to Calls-in-Advance
Account.

9.07
Journal Entry
Bank A/c ...Dr.
To Calls-in-Advance A/c
It is adjusted as and when the respective call is due and
Made
Calls-in-Advance A/c ...Dr.
To Share First Call A/c

9.07
Disclosure in the Balance Sheet
 Since the amount has not become due,
 it is a liability of the company and is shown as a
separate item in the Balance Sheet under the head
‘Current Liabilities’.

9.07
Rate of Interest
 The Company should pay interest at the rate
prescribed in its Articles of Association.
 However, in the absence of the interest clause in the
Articles of Association, according to Table A of the
Companies Act,
 company will have to pay interest @ 6% p.a. on the
Calls-in-Advance.

9.07
Accounting Entries
(i) When interest is paid in Cash
Interest on Calls-in-Advance A/c ...Dr.
To Bank A/c
(ii) When interest is outstanding, i.e., not yet paid
Interest on Calls-in-Advance A/c ...Dr.
To Outstanding Interest A/c Or
To Sundry Shareholders (Members) A/c
 Outstanding interest on Calls-in-Advance is shown
under the head Current Liabilities in the Balance Sheet.

9.07
(iii) On transfer to Profit and Loss Account at the end of
accounting period:
Profit and Loss A/c ...Dr.
To Interest on Calls-in-Advance A/c
 It should be noted that Calls-in-Advance does not form
a part of the company’s share capital and no dividend
is payable on such amount.

9.08
Over Subscription Of Shares
 Oversubscription means applications received for
shares are more than the shares offered for
subscription.
 However, the company cannot allot shares more than it
has offered for subscription.
In the case of oversubscription, the following three
possibilities arise
(i) Excess applications are rejected outright and their
application money is refunded. This is known as
Rejection of Applications.

9.08
(ii) All the applicants may be allotted shares in a fixed
proportion. This is called Partial or Pro rata Allotment.
(iii) The Directors may adopt a combination of the above
two alternatives. Some applications may be accepted
in full, some applications may be out rightly rejected
and hence a proportional allotment may be made to
the remaining

9.08
Accounting Entries in Case of Over Subscription
The three alternatives available to deal with over
subscription are discussed below with the help of
illustrations.
(i) First Alternative—Rejection of Applications
 If the Board of Directors reject the excess
applications, application money received on rejected
applications is returned in full.

9.08
(ii) Second Alternative—Partial or Pro rata Allotment
 If the Board of Directors decide to issue shares to all the
applicants in proportion, it is called pro rata allotment.
 For example, if a company allots 50,000 shares to the
applicants of 70,000 shares. It is a pro rata allotment in the
proportion of 5 : 7
 In such a situation, the main issue is dealing with the
excess amount received on application. A company can
deal with it either by returning the excess amount or retain
it to adjust against the amount due on allotment and calls.

9.08
(iii) Third Alternative—Combination of the above two
alternatives
 In case of oversubscription, the Directors can make full
allotment to some applicants, partial allotment to
others and no allotment to the rest.
 In such a situation, application money is returned to
the unsuccessful applicants, surplus money on partially
allotted shares is retained for utilising the amount due
on allotment and future calls.

9.09
Under Subscription Of Shares
 The shares are said to be undersubscribed if the
number of shares applied for is less than the number
of shares offered to public for subscription.
 In such a situation, Journal entries are passed on the
basis of shares applied for.

9.10
Forfeiture Of Shares
 Forfeiture of shares means cancellation of shares and
forfeiting the amount received against these shares.
 If any shareholder fails to pay the calls (allotment
money or calls) and the company has the power to
forfeit the shares, the shares may be forfeited by giving
the shareholders a notice to pay the amount by the
specified date.
 If the shareholder still does not pay, the Directors may
forfeit them by passing an appropriate resolution.

9.10
Effect
 The name of the shareholder is removed from the
Register of Members and amount already received on
these shares is forfeited by the company.
 The forfeited amount is transferred to newly opened
Forfeited Shares Account. It means that he does not
remain a shareholder of the company.

9.10
Accounting Entry
At the time of passing the entry for forfeiture of shares,
the following issues should be considered:
1. Amount called-up in respect of those shares.
2. Amount already received in respect of those shares.
3. Amount due but not received in respect of those
shares.
 We know that the shares can be issued at par or at a
premium or at a discount. Accounting entry for
forfeiture will vary according to the situation.

9.10
Forfeiture of Shares Originally Issued at Par
 In this situation, Share Capital Account is debited with
the called-up value of shares forfeited.
 Allotment or Calls Account is credited with the amount
due but not paid by the shareholder(s).
 (Alternatively, Calls-in-Arrear Account is credited for
the amount due but not received, if it was transferred
to Calls-in-Arrear Account.).
 Forfeited Shares Account is credited with the amount
received in respect of these shares.

9.10
Journal Entry
Share Capital A/c ...Dr. [With called-up amount]
To Forfeited Shares A/c [With amount already received]
To Share Allotment A/c [Amount due but not paid]
To Share First Call A/c [Amount due but not paid)]
To Share Final Call A/c [Amount due but not paid]
Or
To Calls-in-Arrear A/c*
*If Calls-in-Arrear Account is maintained, it would be credited
in place of Share Allotment Account and Call Account.

9.10
Disclosure
 The balance of the forfeited shares account is added to
the paid-up capital in the liabilities side of the Balance
Sheet.
Note
 On forfeiture, Share Capital Account is always debited
with the called-up amount and not by the nominal
value of share.

9.10
Forfeiture of Shares Originally Issued at a Premium
 When the shares are issued at a premium and the
amount for premium was duly received on the shares
forfeited,
 it would remain in the Securities Premium Account,
i.e., amount received towards securities premium will
not be cancelled.
 In other words, Securities Premium Account will not be
debited at the time of forfeiture of shares.

9.10
 The amount of premium received on forfeited shares is
not transferred to forfeited shares account because of
the restrictions imposed by Sections 77A and 78 of the
Companies Act.
 If, however, the amount of the premium has been
credited to the Securities Premium Account but has not
been received, the Securities Premium Account is
debited for the premium in respect of the forfeited
shares.

9.10
Forfeiture of Shares which were issued at Premium
(i) If premium has been received
Share Capital A/c ...Dr. [Amount called-up premium]
To Share Allotment A/c [Amount not received on
allotment]
To Share Call/Calls A/c [Amount not received on calls]
To Forfeited Shares A/c [Amount received so far]

9.10
Note
 The accounting entry on forfeiture of shares when the
premium has already been received on forfeited shares
would be the same as the one passed in case of shares
originally issued at par.
 The reason is that the premium money received even
on forfeited shares is never transferred to Forfeited
Shares Account by debiting Securities Premium
Account.

9.10
(ii) If premium has not been received
Share Capital A/c ...Dr. [Amount called-up so far less
premium]
Securities Premium A/c ...Dr. [Premium amount called-up
but not received]
To Share Allotment A/c [Amount not received on
allotment]
To Share Call/Calls A/c [Amount not received on calls]
To Forfeited Shares A/c [Amount received so far]

9.10
 Although Securities Premium Account can not be
debited except for the purposes stated in Section 77A
and 78 of the Act.
 However, in this case Securities Premium Account has
been debited because the due amount has not been
received.

9.10
Forfeiture of Shares Originally Issued at a Discount
 In this situation Share Capital Account is debited with
the called-up value of shares forfeited.
 Allotment or Calls Account is credited with the amount
due but not paid by the shareholder(s). Alternatively,
Calls-in-Arrear Account can be credited.
 Forfeited Shares Account is credited with the amount
already received in respect of these shares.

9.10
 It is desirable that the amount shown in the debit of
the Discount on Issue of Shares Account should have a
definite association with the number of shares issued.
 Therefore, when the shares issued at a discount are
forfeited, the Discount on Issue of Shares Account is
credited with the discount originally allowed on the
issue of the shares.

9.10
The entry is
Share Capital A/c ...Dr.
To Discount on Issue of Shares A/c
To Various Calls A/c
To Forfeited Shares

9.11
Reissue Of Forfeited Shares
 The forfeited shares become the property of the
company and the Directors have the authority to
reissue them at Par, at a Premium or at a Discount.
 In case, they are issued at a discount, the discount
cannot exceed the amount that had been received, i.e.,
the forfeited amount.

9.11
The entry is
Bank A/c ...Dr.
Forfeited Shares A/c ...Dr.
If the forfeited shares are reissued at a price higher than that
paid-up, the excess is credited to the Securities Premium
Account.
The entry is
Bank A/c ...Dr.

9.11
Note
The forfeited shares can be issued at a discount.
The maximum amount of discount which may allowed
on reissue is explained as follows
Case Maximum Discount
1. When the shares were
originally issued at par or at a
premium.
The amount credited to the
Forfeited Shares A/c.
2. When the shares were
originally issued at a discount.
The amount credited to the
Forfeited Shares A/c + the
amount of original discount.

9.11
Transfer of Balance in the Forfeited Shares Account
After the reissue of the forfeited shares, the credit
balance left in the Forfeited Shares Account is a capital
gain and is transferred to the Capital Reserve Account.
Forfeited Shares A/c ...Dr.
To Capital Reserve A/c

9.11
When all Forfeited Shares are not reissued
 If all the forfeited shares are not reissued, only that
part of the Forfeited Shares Account which belongs to
the reissued share is transferred to capital reserve.
 Capital Reserve = (No. of Shares Reissued × Amount
forfeited per share) – Discount allowed on reissue per
share
 The forfeited amount on shares not yet reissued is
shown in the Balance Sheet as an addition to the paid-
up capital.

9.12
Book Building
The Concept
 Book Building is a capital issuance process used in
Initial Public Offer (IPO) which aids price and demand
discovery.
 It is a process used for marketing a public offer of
equity shares of a company.

9.12
Book Building
 It is a mechanism where, during the period for which
the book for the IPO is open, bids are collected from
investors at various prices, which are above or equal to
the floor price.
 The process aims at tapping both wholesale and retail
investors. The offer/issue price is then determined
after the bid closing date based on certain evaluation
criteria

9.12
Book Building
Why book building?
 The most apparent reason for choosing Book Building
process by companies to sell the shares is that it is a
mechanism for price discovery.
 Since institutional and retail investors have the option
to bid for the equity, at or above a particular floor
price, decided by the company in consultation with the
merchant bankers, it helps the company realise the
near correct value for its equity.

9.12
Book Building
 In other words, the price is what the investors perceive
the value (or rather intrinsic value) of the company to
be.
 Besides, through this route, the company saves on cost
and time required to complete the issue.

9.12
Book Building
The Process
 The Issuer who is planning an IPO nominates a lead
merchant banker as a ‘book runner’.
 The Issuer specifies the number of securities to be
issued and the price band for orders.
 The Issuer also appoints syndicate members with
whom orders can be placed by the investors.

9.12
Book Building
Investors place their order with a syndicate member who
inputs the orders into the ‘electronic book’. This process is
called ‘bidding’ and is similar to open auction.
 A Book should remain open for a minimum of 5 days.
 Bids cannot be entered less than the floor price.
 Bids can be revised by the bidder before the issue closes.
 On the close of the book building period the ‘book runner
evaluates the bids on the basis of the evaluation criteria
which may include
— Price Aggression
— Investor quality
— Earliness of bids, etc.

9.12
Book Building
 The book runner and the company conclude the final
price at which it is willing to issue the stock and
allocation of securities.
 Generally, the number of shares is fixed i.e. the issue
size is frozen based on the price per share discovered
through the book building process.
 Allocation of securities is made to the successful
bidders.
 Book Building is a good concept and represents a
capital market which is in the process of maturing

9.12
Book Building
Flowchart of Book-building process
 Price discovery is basically a function of the demand
for the stock at various prices.
 A weighted average of all the bids received is
calculated to arrive at the final price.
 Sometimes, the pricing and allocation also takes into
consideration the fact that the allotment should be
made in such a way so as to leave some craving for the
stock post its listing on the bourses, which would
provide the support needed for the stock in its early
days of trading.

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