VIDYA BHARTI PRE- BOARD EXAMINATION 2025-26 MS
VIDYA BHARTI PRE- BOARD EXAMINATION 2025-26 MS
XII, Accountancy Unit 9 Accounting of Shares
ACCOUNTING FOR SHARE
Meaning of Company
According to Section 2 (20) of the Companies Act, 2013, “a Company means a Company incorporated under this act or any previous Companies law”.
Characteristics of a Company
*Separate Legal Entity
*Perpetual Existence
*Limited Liability
*Common Seal
*Separation of Management from Ownership
Kind of a Company
Unlimited Company [Section 2(92)]: An unlimited company is a company whose members bear limitless liabilities towards it.
Company Limited by Guarantee [Section 2(21)]:
Company Limited by Shares [Section 2(22)]:
Private Company –
As per Sec 2(68) of Indian Companies Act 2013, A Private Company is one which has a minimum paid up share capital of ₹. 1 lakhs or such higher paid-up share capital as may be prescribed by the Companies Act, restricts the right to transfer its shares, limited the number of its members to 200, prohibits any invitation to the public to subscribe for any shares or debenture and the name of every private company must end with the words ‘Private Limited’.
Public Company-
As per Sec 2(71) of Indian Companies Act 2013 A Public Company means a company which is not a Private Company and has minimum paid-up share capital of ₹. 5 laces or such higher paid-up share capital as may be prescribed by the Companies Act.
One Person Company(OPC) :
Section 3(1)of Companies Act 2013 and as per Rule 3 of Companies (incorporation) Rules, 2014, introduces a new type of entity to the existing list i.e., apart from forming a Public or Private limited Company, the Act enables the formation of a new entity One Person Company. An OPC means a private limited company with only one person as its member [Sec. 2(62)]. Only natural person who is citizen of India can be a member of OPC. Its minimum paid-up Capital should be ₹. 1, 00,000. It can be formed for business as well as charitable purpose. An OPC can have minimum one and maximum fifteen directors. An OPC cannot convert itself into public or private company unless a period 2 years has expired from the date of its incorporation and conversion is mandatory when the paid-up share capital is increased beyond ₹. 50 Lakhs or its average annual turnover during the relevant period exceeds ₹. 2 Crores.
Distinction between Private Company and Public Company
Meaning of Shares
Total capital of the Company is divided into units of small denominations. Each unit is called ‘Shares’. Share means share in the share capital of a Company and Stock. Section 2(84) Companies Act. The Shares of Company are movable property, transferable in the manner provided by the Articles of Association of the Company (Sec. 82). They are treated as goods under the Sales of Goods Act, 1930. A share is evidenced by a Share Certificate (Sec 84).
Stock and Shares:
Stock is the aggregate of fully paid up shares, consolidated and divided, for the purpose of convenient holding into different parts. As per Sec. 61(1) (C) of Companies Act 2013 all the shares of a Company have been fully paid-up, they may be converted into stock, and re-convert that stock into fully paid-up shares of any denomination.
Types of Shares:
Under Sec. 43 of the Companies Act, 2013, a Company may issue two types of shares, namely:
1. Preference Shares 2. Equity Shares.
Preference Shares [Sec. 43 (b)] :-
Preference Shares are those shares which carry the following two rights:
(i). Preferential right of dividend at a fixed rate before any dividend is paid to the Equity Shareholders.
(ii). At the time of winding up the company, they have a preferential right to return to capital over equity shareholders.
Types of Preference Shares:
*Cumulative Preference Shares * Non-Cumulative Preference Share
*Participating Preference Shares. *Non-Participating Preference Shares.
* Redeemable Preference Shares.
* Irredeemable Preference Shares. According to Sec. 55(1) of Companies Act, 2013 any Company limited by shares shall not issue of Irredeemable Preference Shares.
* Convertible Preferences Share
*Non-Convertible Preference Share
2. Equity Share:
Equity Shares are those shares which are not Preference Shares. Thus, these shareholders do not enjoy any preferential rights. Their rate of dividend is not fixed and it varies from year to year depending upon the profitability of the Company.
Share Capital
Share Capital means the capital raised by Company by issue of shares. Many individuals and institutions contribute varying sums to the Company’s Capital yet there is no separate Capital Account for each of these individuals of institutions. There is one consolidated Capital Account called the Share Capital Account.
Kind of Share Capital
Authorised, Registered or Nominal Capital: Section 2(8) of the Companies Act. Its means such capital as is authorized by the Memorandum of Association of a Company to be the maximum amount of share capital of the Company.
Issued Capital: is defined in Section 2(50) of the Act. It means such capital as the Company issues from time to time for subscription.
Subscribed Capital: Section 2(86) Subscribed Capital is that part of Issued Capital which has been subscribed for the public. Subscribed capital is shown in the Balance Sheet under two heads:
Subscribed and fully paid up
Subscribed but not fully paid up.
Called-up Capital is defined in Section 2(15) of the Act. It means such part of the Capital, which has been called for payment.
Paid-up Capital is defined in Section 2(64) of the Act. It means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid up in respect of shares issued and also includes any amount credited as paid-up in respect of shares issued and also includes any amount created as paid-up in respect of shares of the Company, but does not include any other amount received in respect of such shares, by whatever name called.
Reserve Capital (Sec 65) - According to Sec. 65 of Indian Companies Act, 2013 ‘A Company may, by a special resolution, determine that a portion of its uncalled capital shall not be called up, except in the event of winding up of the Company.’ In such a case, that portion of the subscribed capital becomes Reserve Capital.
Distinction between Reserve Capital and Capital Reserve
Other ways of Issuing Shares:
Shares can also be issued in the following manner:
Private Placement of Shares
Preferential Allotment.
Right Issue.
Sweat Equity Shares.
Employees Stock Option Plan (ESOP)
Employees Stock Purchases Scheme (ESPS)
Private Placement of Shares:
According to Sec 42 of Indian Companies Act, 2013, private placement of shares refer to issue and allotment of shares to a selected group of persons in place of public issue. These allottees of shares are deprived from selling these shares for a period of three years from the date of allotment called ‘lock in period’.
Preferential Allotment:
A Preferential Allotment is that allotment in which a predetermined price is made to the pre-identified people who are interested in taking a strategic stake in the company such as promoters, ventures, capitalists, financial institutions, buyers of company’s products or its suppliers. In case of preferential allotment the allotters cannot sell their shares for a minimum period of three year called lock in period.
Right Issue or Right Shares:
Under Sec 62 of the Companies Act, 2013, the existing shareholders of public limited Company have a right to subscribe in their existing proportion to the fresh issue of capital or to reject the offer or to sell their rights. The existing shareholders can authorize the company by passing a special resolution to offer such shares to the public as well.
Value of right = Market Price of Share – Average Price of shares*
*Average Price of Shares = (Market Price of Shares Issue+ Price of Proportionate Right Shares)/ (No. of Existing Shares +No. of Right Shares)
Sweat Equity Shares. [Sec. 54 of Indian Companies Act, 2013].
When equity shares are issued by the Company to the employees and directors at discount for consideration other than cash, for providing know-how or making available intellectual property rights. Sec. 2(88), Companies Act 2013. In case of Sweat Equity Shares the allotters cannot sell their shares for a minimum period of one year called lock in period.
EMPLOYEES STOCK OPTION PLAN (ESOP)
The employees stock option plan was first introduced in Companies (Amendment) Act 2000 vide Sec.2 (15A). The scheme was intended to retain high caliber employees or to give them a sense of belonging in the company so a company may offer them equity shares at a pre-determined price which is lower than the market price of the shares. The option is given to whole time directors, officers or employees which give them right to purchase or subscribe shares at a future date. The allotters cannot sell their shares for a minimum period of one year called lock in period.
There are some specific terms associated with ESOP which are explained as under:
Vesting Period: The time duration between the granting date and the date by which all the specified vesting conditions for ESOP have been fulfilled.
Vesting Date: The date on or after which employees are entitled to receive the shares.
Grant Date: The date at which the company and its employees agree to the terms and conditions of ESOP.
Exercise Period: The time duration within which employee should exercise his right to apply shares, against the option vested in him under ESOP.
Exercise Price: The price at which shares are granted by the company to its employees for exercising the option under ESOP
Employees Compensation Expenses Account:
This account denotes proportionate expense or loss for the company which arises due to the difference between the market price and exercise price (issue
Price) of the shares granted under ESOP. At the year end, this account is transferred to Statement of profit and Loss and is shown under head ‘Employees Benefit Expenses’
Employees Stock Option Outstanding Account:
This account represents the total expense or loss due to options granted under ESOP. It is shown in the Balance Sheet under head ‘Shareholders’ fund’ and sub-head ‘Reserves and Surplus’.
Journal Entries
At the time of recording the expense :
Employees Compensation Expense A/c Dr.
To Employees Stock Option Outstanding A/c
(Being the proportionate expenses recognised in respect of ESOP)
Note: This entry will be passed for each year of vesting period.
II. At the time of exercising the options by the employees:
(a) When the options are exercised by all the employees
Bank A/c Dr. [Amount received, i.e., Exercise Price X No. of Shares]
Employees Stock Options Outstanding A/c Dr. [Amount credited to Employees Stock Option Outstanding account,i.e, No. of Shares X (Market Price - Exercise Price)]
To Share Capital A/c [Nominal value of shares]
To Securities Premium Reserve A/c [With the balance amount, i.e., No. of shares x Market Price -. Nominal value)]
(Being the option exercised by the employees)
(b) When the options are not exercised by all the employees and the options get expired.
Bank A/c Dr. [Amount received, i.e., Exercise Price * No. of Shares]
Employees Stock Option Outstanding A/c Dr. [Amount credited to Employees Stock Option Outstanding Account, i.e., No. of Shares (Market Price - Exercise Price)]
To Share Capital A/c [Nominal Value of Shares]
To Securities Premium Reserve A/c [Amount related to options that have been exercised, i.e., No. of Shares x (Market Price - Nominal Value)]
To General Reserve A/c Amount related to options that have not been exercised, i.e., No. of shares x (Market Price - Exercise Price)]
(Being the option exercised by the employees)
Right Issue of Shares:
According to Section 62 of the Companies Act, 2013 the existing shareholders have a right to subscribe to the fresh issue of capital in their existing proportion or to reject the offer or sell their rights. It is known as ‘Right Issue of Shares’. The right issue share price may be above the previous issue price, this difference will be known as value of right. In other words:
Value of right = Market price of a share - Average price of a share.
Buy-Back of Shares:
When a company purchases its own shares from the market, it is called ‘buy-back of shares’. A Company may buy-back its own shares from out of the following sources:
Its free reserves;
the securities premium reserve account [Section 52(2) of the Companies Act, 2013];
The proceeds of any shares or other specified securities.
Employees Stock Purchase Scheme (ESPS):
[Sec. Sec. 62(1)(b) of Indian Companies Act, 2013] Under Sec. 62(1)(b) of the Company Act 2013, a Company may offer shares to its employees under a scheme of “Employee Stock Option” by passing a special resolution at the general meeting of the Company. The Employees Stock Purchase Scheme (ESPS) offers shares to employees of the Company as a part of public issue or otherwise. SEBI has issued guidelines for Employees Stock Purchase Scheme (ESPS) of Listed Companies. Following entry is passed.
Bank A/c Dr
Employee Compensation Expenses A/c Dr.
To Equity Share Capital A/c
To Securities Premium Reserve A/c
(Allotment to employees of ….shares of ₹…each at a premium of ₹…each in exercise of stock options by employees)
Public Subscription of Shares
According to Sec. 2(86) of Companies Act 2013, “Subscribed Capital means such part of capital which is for the time being subscribed by the members of the Company.” Following steps are to be taken by a Public Company for the issue of shares to public:
To issue prospectus
To receive applications- According to Sec. 39 the amount payable on application on each share shall not be less than 5% of the nominal amount of the share, but according to guidelines of SEBI this amount shall not be less than 25% of the issue price of each share.
To make allotments- The Directors of the Company cannot proceed to allot shares unless Minimum subscription has been received by the company [Sec. 39 (1)]. According to company act it has been fixed 90% of the issued amount. As per Sec 39(3) The Company has to get minimum subscription within 30 days from the date of issue of prospectus. It’s not so, the Company cannot proceed for the allotment of shares and the entire application money must be returned within 30 days of the date of issue of the prospectus. If there is a delay in refund of such amount by more than 15 days after the company becomes liable to pay the amount, the company shall be liable to repay it with interest @ 15% p.a. for the delayed period.
To make calls. - In the absence of the AoA, the provisions of Table F of the Indian Companies Act, 2013, will apply. These provision are:
Where the total issue size exceeds ₹ 250 Crores, the amount to be called up either on application or on allotment or on any one call shall not exceed 25% of the total quantum of the issue. It therefore follows that for issues of up to ₹ 250 Crores, the Company is permitted to call up entire issue price on application itself.
All amounts on shares should be fully called up within a period of 12 months from the date of allotment. However, this guideline does not apply to issues of ₹. 500 Crores or above.
There should be interval of at least one month between makings of two calls
At least 14 days’ notice must be given to the shareholders to pay the calls.
No call shall exceed on one-fourth (25%) of the nominal value. Calls must be made on a uniform bases on all the shares within the same class of shares.
Entries on Issue of Shares:
Entries on receiving application:
Bank A/c Dr
To Share Application A/c
(Being application money received on …… shares @ ₹…..each.)
Share Application A/c Dr
To Share Capital A/c
(Being application money on allotted shares transferred to share capital A/c)
Sometime, the directors do not allot any share to some of the applicants. The application money of such applicants is refunded to them-
Share Application A/c Dr
To Bank A/c
Entries for share allotted:
Share Allotment A/c Dr
To Share Capital A/c
(Being amount due on allotment on …..Shares @ ₹. … each)
Bank A/c Dr
To Share Allotment A/c
(Being Allotment money received on …… shares @ ₹…..each.)
Entries for First Call :
Share First Call A/c Dr
To Share Capital A/c
(Being amount due on First Call on ….. Shares @ ₹ .… each)
Bank A/c Dr
To Share First Call A/c
(Being First Call money received on …… Shares @ ₹…..each.)
Entries for Second & Final Call :
Share Second & Final Call A/c Dr
To Share Capital A/c
(Being amount due on Second & Final Call on ….. Shares @ ₹. … each)
Bank A/c Dr
To Share Second & Final Call A/c
(Being Second & Final Call money received on …… Shares @ ₹…..each.)
Issue of Shares for Consideration other than Cash
Issue of Shares to Promoters :
Incorporation Cost or Formation Cost / Goodwill A/c Dr.
To Share Capital A/c
(Being ……Shares issued @ ₹. …..each to the Promoters)
Issue of shares for purchase of Assets:
When assets are purchased from vendors:
Sundries Assets A/c Dr.
To Vendor’s A/c
When shares are issued to vendors :
Vendor’s A/c Dr
To Share Capital A/c
Issue of Shares at Premium (Sec. 52).
The term ‘Securities Premium’ has been used instead of ‘share premium’ in accordance with the provisions of Companies (Amendment) Act, 1999.but as per the guidance note on schedule III issued by the ICAI, the terminology used will be ‘Securities Premium’ and not the ‘Securities Premium Reserve’ because the terminology used by Companies Act. 2013 under Section 52 is Securities Premium (not Securities Premium Reserve).
According to Section 52 (2) Sub Section 1 of Companies Act, 2013, the amount of Securities Premium can be used only for the following purposes:
For writing off the preliminary expenses.
For writing off discount allowed on issue of shares or debentures or commission paid on issue of shares or debentures i.e., underwriting commission.
For issuing fully paid bonus shares to equity shareholders.
For providing for the payment of premium payable on redemption of preference shares or debentures.
For by back of its own shares (Sec 68).
Control Premium: The Control Premium means Premium that shareholders pay to gain control of the Company. The Government of India received ₹ 1000 Crores from Japanese car maker Suzuki. The Government described this as Control Premium.
Condition for Issuing Shares at a Discount
Call -in- Advance and Interest thereon
The amount of future calls is received in advance by the company. According to Sec. 50 of Indian Companies Act 2013, such amount of call in advance can be accepted by company if it is so authorised by its AoA.
Bank A/c Dr.
To Call-in- Advance A/c
(Being Call received in Advance)
Call in advance A/c is shown separately on the liabilities side of B/S under the sub heading Subscribed Capital,
In future, when the call is made by the directors, the following entries will be passed-
Bank A/c Dr.
Call-in- Advance A/c Dr.
To Share Call A/c
Note: if a company is authored by its AoA to accepted ‘call in advance’. The Article must also state the rate of interest payable on calls in advance. If the company adopted Table F of Schedule I of Indian Companies Act 2013, it is required to pay 12% p.a.
Interest on Call-in- Advance A/ Dr
To Bank A/c
Call –in- Arrear and Interest thereon
Maximum Companies do not open Call-in-Arrear account in their books because no provision has been given in the Companies Act. Some shareholders fail to pay the amount of allotment or call when it becomes due; this is known as Calls –in- Arrears.
Call-in-Arrear A/c Dr.
To Share ……. Call A/c
Note: Such debit balance of calls- in- arrear will be shown as a deduct from the amount of the Subscribed Capital on the liabilities side of B/S. if a Company is authored by its AoA to accepted ‘Call-in- Arrear A/c’. The Article must also state the rate of interest payable on Call-in- Arrear A/c. If the company adopted Table F, according to Clause 16 of Table F Schedule 1 of Companies Act, 2013, interest shall be charged at a rate not exceeding 10% p.a.
Bank A/c Dr.
To Interest on Call-in- Arrear A/c
Forfeiture of Shares [Article 28 to 33 of Table F in Companies Act, 2013]
If any shareholder fails to pay the amount due on allotment or any call within the specified period, the Directors may cancel his share. This is called Forfeiture of Shares. It may be noted that the shares can be forfeited only if the AoA of the Company allowed them to be forfeited. If no rules are given in Articles, the provisions of Table F of Schedule I of Companies Act, 2013 regarding forfeiture apply. The usual procedure is that the defaulting shareholder must be given a minimum 14 days’ notice requiring him to pay the unpaid amount on his shares together with the accrued interest thereon. After the forfeiture, the name of the shareholder is removed from the Register of Members. The amount already paid by him belongs to the Company and is not returned to him.
Entries on Forfeiture of Shares
Forfeiture of shares which were issued at par: Share Capital A/c Dr. (No. of shares × called up value per share)
To Share Allotment A/c (amount not received on allotment)
To Share Call A/c (amount not received on allotment)
To Share Forfeiture A/c (amount received from due call)
Note: In case ‘call in arrear’ a/c is maintained by a company, call in arrear a/c would be credited in the above entry instead of share allotment and share call A/c.
Forfeiture of shares which were issued at premium:
When forfeiture takes place after the premium is received:-
As such, “Securities Premium A/c will not be debited in the entry for forfeiture in this case
When forfeiture takes place before the premium is received:-
Share Capital A/c Dr. (No. of shares × called up value per share)
Securities Premium A/c Dr. (If the premium has not been received)
To Share Allotment A/c (amount not received on allotment)
To Share Call A/c (amount not received on allotment)
To Share Forfeiture A/c (amount received from due call)
Re-Issue of Forfeited Shares
Directors have the authority to reissue the forfeited shares at Par, at Premium or at Discount. However, if the shares are re-issued at a discount the amount of the discount cannot exceed the amount previously received on these shares [means amount forfeited by the Company].
If the Forfeited shares are reissued at par:
Bank A/c Dr
To Share Capital A/c
If the Forfeited shares are reissued at premium :
Bank A/c Dr
To Share Capital A/c
To Securities Premium A/c
If the Forfeited shares are reissued at par:
Bank A/c Dr
Share Discount A/c Dr
To Share Capital A/c
After the reissue of forfeited shares, the credit balance left in the forfeiture a/c must be transferred to Capital Reserve A/c
Share Forfeiture A/c Dr
To Capital Reserve A/c
Note: if all the forfeited shares are not re-issued, only that proportion of share forfeiture account which belongs to the re-issued shares should only be transferred to Capital Reserve A/c.
SHARE CAPITAL: IN THE BALANCE SHEET
As per Schedule III of Companies Act, 2013, Share Capital is disclosed in Balance
Name of the Company…………
Balance Sheet
as on …………..
Notes to Accounts
Deposit in an Escrow Account:
Escrow means cash or bond deposited with a third party as a guarantee until a specified condition has been performed. SEBI guidelines provide that in order to fulfill its obligations under the scheme of buy-back of shares, a Company must open an Escrow account with a third party (normally a bank). An Escrow account may consist of
(a) cash deposited with a commercial bank; or
(b) bank guarantee in favour of the merchant banker: or
(c) deposit of acceptable securities with appropriate margin or
(d) a combination of (a) (b) and (c) with merchant banker.
Escrow account must consist of an amount equal to 25% of the consideration payable if consideration is not more than 100 cores plus 10% of the consideration exceeding ₹. 100 cores. On payment of all the sums due to shareholders who had accepted the offer of buy-back, the amount and /or securities deposited in escrow shall be released to the company. The Escrow Account can be forfeited by the SEBI in case of non-fulfillment of its obligations by the Company.
Buy-back of Shares [Sec. 68 (i)]
Bye-back means purchasing of its own shares by the Company, (Amendment) Act, 1999 vide sections, 77A, 77AA and 77B has allowed Companies to purchase their own share subject to fulfillment of certain condition:
The buy-back should be authorised by the Articles of Association of the Company.
A special resolution is to be passed in the GM Director proved the buy-back does not exceed 10% of the total paid up equity capital and free reserve of the Company. However there cannot be more than one such buy-back in any period of 365 days.
The ratio of the debt owed by the Company should not be more than 2:1 after the buy-back.
All the shares for buy-back should be fully paid-up.
The buy-back should be completed within 12 months from the date of passing the special resolution.
Where companies buy-back its shares, it shall not make further issue of shares within a period of 24 month except by way of bonus issue or in the discharge of some obligations such as conversion of preference shares or debentures into equity shares.
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