CS Executive · Corporate Accounting and Financial Management
Accounting for Share Capital for CS Executive
Accounting for share capital means recording how a company issues, collects money on, forfeits, re-issues, capitalises and redeems its shares. You solve questions by tracing each cash or non-cash event into journal entries, using one account per stage: application, allotment, calls, premium, and finally the capital reserves.
What this chapter covers
This chapter covers the full life of a share in the books of a company. You start with the kinds of share capital, then move to issue at par, premium and discount. Next come over-subscription, calls in arrears and in advance, forfeiture and re-issue, and shares issued for non-cash consideration. The chapter ends with bonus shares, rights shares and redemption of preference shares.
Most questions are journal entry problems. You are given a set of facts and must pass the right entries in the right order, and often prepare ledger accounts or a balance sheet extract. The law sits behind the entries. For example, Section 43 divides share capital into equity and preference, Section 52 governs the securities premium account, Section 55 governs preference shares, Section 63 governs bonus shares and Section 69(1) requires a sum equal to the nominal value of the shares to be transferred to the capital redemption reserve when a company purchases its own shares out of free reserves or the securities premium account.
This chapter is the base of Part I of Paper 4. Later topics such as buyback, final accounts and financial statements assume you can handle share capital, reserves and securities premium without hesitation. It also links to Paper 2, where the same shares are studied from the legal side.
Paper 4 Part I Corporate Accounting carries 60 of the 100 marks, and share capital is the foundation for it. The chapter is highly practical and rule-based, so careful practice turns directly into marks. Entries follow a fixed pattern, and examiners give marks for each correct step even if your final figure slips. Since the paper is descriptive with no negative marking, a clear working note and a correct entry sequence earn partial credit. You also need the legal conditions, such as when securities premium can be used or when bonus shares can be issued, to write correct short answers.
Accounting for Share Capital: topics in the order to study them
- 1Share Capital: Types and FeaturesIt gives you the vocabulary (equity, preference, authorised, issued, subscribed, paid-up) that every later entry uses.
- 2Issue of Shares at Par, Premium and DiscountThis is the basic entry pattern for application, allotment and calls, and it introduces the securities premium account.
- 3Over-subscription and Under-subscriptionIt builds on the basic issue entries by adding refund, adjustment of excess money and pro-rata allotment.
- 4Calls in Arrears and Calls in AdvanceIt extends the call entries to cases where shareholders pay late or early, which you need before forfeiture.
- 5Forfeiture and Re-issue of SharesIt uses everything above, because you must reverse amounts already received and handle the capital reserve on re-issue.
- 6Issue of Shares for Consideration Other Than CashIt is short and uses the same entries, with assets or services replacing cash.
- 7Issue of Bonus Shares and Right SharesIt needs your knowledge of premium and reserves, and it tests the legal conditions in Section 63.
- 8Redemption of Preference SharesIt is the hardest topic, because it combines reserves, fresh issue proceeds, premium on redemption and the capital redemption reserve, so you study it last.
How to prepare Accounting for Share Capital
Treat this chapter as a skill to practise, not a set of notes to read. Aim for a fixed entry routine, then add the legal rules.
- Read the types and features of share capital once, and write a one-page list of definitions from Section 43 in your own words.
- Learn the standard entry sequence for an issue: application money received, transfer to share capital on allotment, allotment due, calls due, and each receipt. Write it out until you can do it without notes.
- Do two or three problems on each topic before moving on. Always show a working note for amounts per share, such as application, allotment, call and premium.
- For forfeiture and re-issue, work through the amounts received before forfeiture and the amount re-issued. Check that the capital reserve is limited to the gain relating to the re-issued shares.
- For bonus shares and redemption, list the sources allowed in Sections 52, 55, 63 and 69 on a single sheet. Check each source before using it in an entry.
- Solve past-style questions with a timer, then compare each entry to your working. Mark every error by type, and redo those questions after a week.
- In the last week, write short answers on the legal conditions, such as who can issue bonus shares and from what, so you can state the provision, the facts and a clear conclusion.
Common mistakes in Accounting for Share Capital
Crediting the whole money received on application and allotment to share capital when a premium is included.
Fix: Write a working note splitting each instalment into face value and premium, and credit the securities premium account separately.
Mixing up the amount received with the amount called up in forfeiture entries.
Fix: Debit share capital with the amount called up, credit unpaid calls with the amount not received, and credit forfeited shares with the amount actually received.
Transferring the full forfeited shares balance to capital reserve after a partial re-issue.
Fix: Work out the share of the forfeited amount for the shares re-issued, and transfer only that amount after setting off any discount.
Using the wrong reserve for bonus shares.
Fix: Use only free reserves, securities premium or the capital redemption reserve, and never reserves created by revaluation of assets.
Ignoring the capital redemption reserve when redeeming preference shares out of profits.
Fix: Use the Section 55 sequence: arrange the funds, transfer to capital redemption reserve where profits are used, then pay and cancel the shares.
Writing legal answers with no section or conclusion.
Fix: State the provision, apply it to the facts and end with a clear conclusion, citing the Section where you are sure of it.
Last-day revision: Accounting for Share Capital
- 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.
Accounting for Share Capital practice questions
- Which feature best identifies a share as preference share capital under the Companies Act, 2013?
- Under the Companies Act, 2013, what is the legal position of a share that a company issues at a discount, outside the exceptions provided in…
- Meera Textiles Ltd has 4,00,000 equity shares of Rs 10 each, fully paid. It declares bonus shares in the ratio 1:5 out of free reserves, all…
- In the books of a company, how is the amount of a call that has been made and become due, but remains unpaid by some shareholders on the due…
- Chitra Ltd forfeited 500 shares of Rs 10 each issued at Rs 2 premium, on which the holder had paid application, allotment (including premium…
- Sunrise Textiles Ltd issues 10,000 equity shares of Rs 10 each, fully paid, to Kaveri Machines Ltd as consideration for a machine. The agree…
- Under the Companies Act, 2013, where calls for further share capital are made on shares of a class, what is the requirement regarding the ca…
- Under-subscription: Narmada Steels Ltd offered 1,00,000 equity shares of Rs 10 each but received applications for only 70,000 shares, and th…
Accounting for Share Capital in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Accounting for Share Capital: frequently asked questions
Is Accounting for Share Capital mostly numerical or theory?
It is mostly numerical, as you pass journal entries and prepare ledger accounts. You still need the legal rules from Sections 43, 52, 55, 63 and 69 for short answers and to choose the right entry.
Which topic in this chapter is hardest?
Most students find redemption of preference shares hardest. It combines reserves, fresh issues, premium on redemption and the capital redemption reserve in one problem, so study it last and practise it often.
Can securities premium be used for any purpose?
No. Section 52 lists the permitted uses, including bonus shares, preliminary expenses, issue expenses, premium on redemption (subject to Section 55(2)(d)) and the purchase of own shares or other securities under Section 68. Outside those uses, the account is treated like paid-up share capital for reduction purposes.
Can a company issue bonus shares out of revaluation reserve?
No. Section 63(1) proviso says no bonus issue can be made by capitalising reserves created by revaluation of assets. Bonus shares must also be fully paid and cannot be issued in lieu of dividend.
How should I present answers in the exam?
Show a working note, then the journal entries with narrations in order, and then a short conclusion. For legal parts, state the provision, apply it to the facts and conclude clearly.