Accounting for Share Capital: formula sheet

Key formulas

Funnel of share capital

Authorised ≥ Issued ≥ Subscribed ≥ Called-up ≥ Paid-up

Each stage is a part of the one before it. Equality is possible, for example when the whole issue is subscribed.

Uncalled capital

Uncalled capital = Subscribed capital − Called-up capital

Measured on the same shares. Reserve capital is a part of uncalled capital that is locked until winding up.

Unissued capital

Unissued capital = Authorised capital − Issued capital

This is capital the company is allowed to issue but has not offered yet.

Unpaid on calls (calls in arrears)

Calls in arrears = Called-up capital − Paid-up capital

Arrears arise when called money has not been received. Ignore any calls in advance for this simple form.

Section 43 definition

Equity share capital = all share capital that is not preference share capital

A share is preference only if it has a preferential right to dividend and to return of capital on winding up.

Redemption limit for preference shares

Irredeemable preference shares not allowed; term ≤ 20 years (longer for infrastructure projects as prescribed)

Section 55. The articles must authorise the issue. Shares must be fully paid before redemption.

Preference voting rights

Vote only on matters affecting their rights, winding up, repayment or reduction of capital; all resolutions if dividend unpaid for 2 years or more

Section 47(2) and its second proviso.

Share capital credited

Share capital = number of shares × face value due (called up)

Never credit share capital with the premium.

Securities premium

Securities premium = number of shares × premium per share

Section 52(1) requires it to be transferred to the securities premium account. It is usually collected with allotment or a call.

Discount on issue

Discount = face value − issue price (shares allotted)

Debit discount on issue of shares. Section 53 declares such shares void, except as section 54 or 53(2A) allows.

Application money entry

Bank A/c Dr to Share Application A/c; then Share Application A/c Dr to Share Capital A/c (and refund to bank for rejected money)

Transfer only the amount adjusted against allotted shares.

Allotment entry

Share Allotment A/c Dr to Share Capital A/c and Securities Premium A/c

Debit allotment with the total due, which includes any premium.

Call entry

Share Call A/c Dr to Share Capital A/c

Receipt: Bank A/c Dr to Share Call A/c.

Pro-rata ratio

Ratio = Shares allotted ÷ Shares applied for (on the accepted applications)

Shares allotted to an applicant = Shares applied for × ratio. Example: 3 for 4 means an applicant for 400 shares gets 300.

Total application money received

Shares applied for × Application money per share

This is the amount debited to Bank, including money on rejected applications.

Application money transferred to capital

Shares allotted × Application money per share

Credited to Share Capital from the Share Application account.

Excess application money

(Shares applied for on accepted applications − Shares allotted) × Application money per share

Adjusted against allotment or calls, or refunded.

Refund on rejected applications

Shares applied for on rejected applications × Application money per share

Paid back to applicants in cash. Never adjust it against allotment.

Allotment money still to be received

Allotment due − Excess application money adjusted

Allotment due = Shares allotted × Allotment per share (include any premium due at allotment). If this is negative, the surplus is adjusted to calls or refunded.

Check total

Money received = Capital credited + Premium credited + Refund

Use this check to confirm your Share Application account closes to nil.

Calls in arrears

Calls in arrears = Amount called due − Amount actually received

Shown as a deduction from called-up capital. Not a separate asset.

Interest on calls in arrears

Interest = Arrears × Rate ÷ 100 × Months ÷ 12

Rate = the rate given in the question. Table F only sets a ceiling of 10% p.a., so do not assume a rate if none is given. Count from the due date to the date of payment, or to the year end if still unpaid. Credited to the Interest on Calls in Arrears account (income).

Interest on calls in advance

Interest = Advance × Rate ÷ 100 × Months ÷ 12

Rate = the rate given in the question. Table F only sets a ceiling of 12% p.a., so do not assume a rate if none is given. Count from the date of receipt to the date the call is due. Debited to the Profit and Loss account.

Entry for arrears

Calls in Arrears A/c Dr. To Share Call A/c

Optional: many questions skip this account and leave the call account open.

Entry for advance

Bank A/c Dr. To Calls in Advance A/c; later, Calls in Advance A/c Dr. To Share Call A/c

Calls in advance is a liability until adjusted.

Forfeiture entry

Share Capital A/c (called-up amount) Dr; to Calls in Arrears A/c (unpaid); to Forfeited Shares A/c (amount received)

If premium was due but unpaid, also debit Securities Premium A/c with that unpaid premium.

Amount in forfeited shares account

Forfeited amount = Amount actually received on the shares (excluding any premium already received)

Premium already received is not reversed on forfeiture. This follows accounting practice. Section 52(1) only requires premium received to be credited to securities premium account.

Re-issue entry

Bank A/c Dr (cash received); Forfeited Shares A/c Dr (discount allowed); to Share Capital A/c (face value paid-up shown)

Credit share capital with the full paid-up value at which the shares are treated as issued.

Capital reserve on re-issue

Capital Reserve = Forfeited amount on re-issued shares − Discount allowed on re-issue

Transfer only the portion relating to the shares actually re-issued. If only part of the lot is re-issued, use a proportionate share of the forfeited amount.

Limit on discount

Discount on re-issue ≤ Forfeited amount on those shares

This cap is accepted accounting and legal practice. It ensures the new holder's cash plus the forfeited amount at least equals the paid-up value. Section 53 itself prohibits issue at a discount and does not mention forfeited amounts or a re-issue exception.

Legal rule on discount

Section 53(1)-(2): shares shall not be issued at a discount, except as provided in section 54; a share so issued is void

Section 52(1) requires the premium received on shares issued at a premium to be transferred to the securities premium account. Not reversing it on forfeiture is a matter of accounting practice.

Purchase consideration when paid in shares

Purchase consideration = Number of shares issued × Issue price per share

Issue price = face value + premium (or − discount). Use the issue price, not just face value.

Net assets taken over

Net assets = Agreed value of assets taken over − Liabilities taken over

Use the values agreed in the contract, not the old book values, unless the question says otherwise.

Goodwill or capital reserve

Purchase consideration − Net assets = Goodwill (if positive) or Capital reserve (if negative)

Positive excess is debited as goodwill. Shortfall is credited as capital reserve.

Number of shares to issue

Number of shares = Purchase consideration ÷ Issue price per share

Used when the consideration is given in rupees and you must find the shares.

Securities premium credited

Securities premium = Number of shares × Premium per share

Section 52(1): premium on shares issued, for cash or otherwise, goes to the securities premium account.

Sources of bonus issue (s.63(1))

Free reserves | Securities premium account | Capital redemption reserve

Reserves created by revaluation of assets cannot be capitalised.

Bonus issue entry

Reserve A/c Dr. (to the extent used) To Bonus to Shareholders A/c; then Bonus to Shareholders A/c Dr. To Equity Share Capital A/c

No cash moves. Total equity is unchanged. If partly paid shares exist, first make them fully paid (s.63(2)(e)).

Conditions for capitalisation (s.63(2))

Authorised by articles + Board recommendation and general meeting authorisation + no default on deposits, debt securities or employee statutory dues + partly paid shares made fully paid + prescribed conditions

All must be satisfied. Bonus cannot be issued in lieu of dividend (s.63(3)).

Rights offer period (s.62(1)(a)(i))

Not less than 15 days (or lesser prescribed number) and not more than 30 days

Offer not accepted in this time is deemed declined.

Rights entitlement

Rights shares offered = existing shares held × rights ratio

Ratio is applied to equity shares in proportion to paid-up capital, as nearly as circumstances admit.

Sweat equity conditions (s.54(1))

Special resolution + number, current market price, consideration and class of recipients stated + SEBI regulations (listed) or prescribed rules (unlisted)

Issued from a class already issued. Ranks pari passu with other equity shares (s.54(2)).

Securities premium uses (s.52(2))

Bonus shares | Preliminary expenses | Share or debenture issue expenses, commission, discount | Premium on redemption of preference shares or debentures | Buy-back under s.68

Do not use it for general dividends or other purposes.

Permitted sources

Redemption only out of (a) profits available for dividend, or (b) proceeds of a fresh issue of shares made for redemption

Second proviso to Section 55(2), clause (a). Shares must be fully paid (clause (b) of the same proviso).

CRR on redemption

CRR = Nominal value of shares redeemed − Face value of fresh issue of shares

Applies when redemption is out of profits. If the fresh issue covers the full nominal value, CRR is nil. Premium on the fresh issue is ignored.

Amount payable to holders

Amount payable = Nominal value × (1 + premium %) × number of shares redeemed

Premium on redemption is a liability of the company, usually provided before redemption.

Fresh issue to cover redemption

Number of new shares = Amount to be raised ÷ Issue price per share

Use issue price (including premium) to find the shares needed, but face value only for CRR.

Use of CRR

CRR is treated as paid-up share capital for the reduction provisions; it may be applied to pay up unissued shares as fully paid bonus shares

Second proviso to Section 55(2), clause (c); Sections 55(4) and 63(1)(iii). It cannot be used to pay dividends.

Filing

Notice to Registrar within 30 days of redemption, with altered memorandum

Section 64(1)(c).

Quick revision

• Share capital under Section 43 is equity (voting or differential rights) or preference.
• Premium received on shares goes to the securities premium account under Section 52(1).
• Securities premium can fund bonus shares, preliminary expenses, issue expenses (including commission and discount), premium on redemption of redeemable preference shares or debentures (subject to Section 55(2)(d)), and the purchase of own shares or other securities under Section 68, as listed in Section 52(2).
• Calls in arrears are unpaid calls; calls in advance are amounts received before they are called.
• On forfeiture, debit share capital with the called-up amount and credit the unpaid calls and the forfeited shares account for the amount received.
• Loss on re-issue is charged to the forfeited shares account, and any balance relating to the re-issued shares goes to the capital reserve.
• Bonus shares must be fully paid and cannot be issued in lieu of dividend (Section 63(3)).
• Bonus shares cannot come from capitalising revaluation reserves.
• A company must be authorised by its articles and the general meeting, and must have no specified defaults, before issuing bonus shares.
• Only redeemable preference shares may be issued, and only if the articles authorise it. They must be redeemable within 20 years. For infrastructure projects a longer period is allowed, subject to redemption of a prescribed percentage each year at the option of the holders. The shares must be fully paid before redemption.
• Redeem out of profits available for dividend or the proceeds of a fresh issue; transfer the nominal value to the capital redemption reserve when profits are used.
• Premium payable on redemption must be provided for before the shares are redeemed (Section 55(2)(d)). For the prescribed class of companies whose financial statements comply with the accounting standards under Section 133, it is provided out of profits. For other companies, it may be provided out of profits or the securities premium account. For preference shares issued on or before the commencement of the Act, even the prescribed-class companies may provide it out of profits or the securities premium account.

Common mistakes

• Treating issued capital as the same as authorised capital. Fix: Authorised is the ceiling in the memorandum. Issued is only what has been offered. The difference is unissued capital.
• Calling subscribed capital the amount received. Fix: Subscribed means applied for and allotted. Money received is paid-up capital, after calls are made.
• Crediting share capital with the premium as well Fix: Split every allotment or call entry: face value part to Share Capital, premium part to Securities Premium.
• Treating securities premium as a profit or free reserve to be used for any purpose Fix: Use it only for purposes listed in section 52(2), or section 52(3) where applicable, such as bonus shares, writing off preliminary or issue expenses, premium on redemption and buy-back.
• Calculating application money on shares allotted instead of shares applied for. Fix: Debit Bank with shares applied for × application money. Only the transfer to capital uses shares allotted.
• Adjusting the refund on rejected applications against allotment. Fix: Money on applications rejected in full is refunded in cash. Only the excess of an accepted applicant is adjusted to allotment.
• Treating calls in advance as part of share capital. Fix: Remember that it is a liability until the call is made. Show it under other current liabilities.
• Counting interest on advance up to the year end or the date of allotment. Fix: Interest on advance runs only from the date of receipt to the date the call is due.
• Crediting Forfeited Shares Account with the full called-up amount instead of the amount received. Fix: Credit Forfeited Shares only with cash actually received. The unpaid part goes to Calls in Arrears.
• Reversing securities premium that was already received. Fix: Debit Securities Premium only for premium that was due but not paid. Received premium stays.

Exam tips

• Practise the funnel statement with numbers. Examiners like questions where you must compute called-up, paid-up and uncalled amounts.
• In theory answers, cite section 43 for the classes, section 47 for voting and section 55 for preference shares. This earns marks for provision.
• Write comparisons as separate points with a heading for each basis. Give a short conclusion at the end.
• Define reserve capital precisely and distinguish it from capital reserve and capital redemption reserve in one line.
• Check every figure against the stage above it. Paid-up can never exceed called-up.
• Write the issue price, face value and premium on top of the answer so the examiner sees your split at once.
• Show narration briefly under each entry, and give working notes for amounts due.
• If a question asks about issue at a discount, add one line of law: section 53(1) prohibits it, section 53(2) makes such shares void, and section 53(2A) gives the creditor exception.