Accounting for Share Capital
Class 12 · Accountancy
4 ideas in Class 12 Accountancy, explained in plain words, with games and quizzes to practise.
Kinds of Share Capital and Classes of Shares
Part of: Shares and the company's capital
A company's capital moves in stages: authorised is the ceiling in its charter, issued is what it offers, subscribed is what the public takes, called-up is what it demands, and paid-up is what it actually gets. Shares are equity, with votes but late dividends, or preference, with fixed dividends first. For example, authorised capital of 400000 shares of 10 rupees is 4000000 rupees.
Why it matters. Every share entry and every dividend depends on these stages and classes. Mixing called-up with paid-up overstates cash, and mixing share classes pays the wrong owners first.
Formulas
- Authorised capital = Shares x Face value
- Called-up capital = Subscribed shares x Called per share
- Paid-up capital = Called-up capital - Calls in arrears
Key words
- Authorised capital
- : Maximum capital stated in the charter.
- Called-up capital
- : Part of subscribed capital demanded so far.
- Equity shares
- : Shares with votes but late dividends.
- Preference shares
- : Shares with fixed dividends paid first.
Try it in two minutes
- Draw 5 jars labelled ceiling, offered, taken, demanded and received.
- Pour 40 beads as authorised shares of 10 rupees. Ask: what is the ceiling worth?
- Move beads jar to jar as shares are offered, taken and paid. Ask: where do unpaid calls stick?
Try at home. A firm authorises 100000 shares of 10 rupees, issues 80000, and the public takes 75000. Name each stage amount.
Issue of Shares at Par and at Premium
Part of: Shares and the company's capital
Shares sold exactly at face value are issued at par, and those sold above it are issued at a premium. The extra money goes to a securities premium account, which may fund bonus shares, buy-back or preliminary costs but never dividends. An issue must also win at least 90 percent subscription or it fails. For example, 50000 shares of 10 rupees sold at 12 add 100000 to securities premium.
Why it matters. Premium money looks like free cash but has locked uses. Spending it on dividends breaks the law, and missing minimum subscription voids the whole issue.
Formulas
- Securities premium = Shares x (Issue price - Face value)
- Minimum subscription = 90 / 100 x Issue size
- Cash received = Shares x Issue price
Key words
- At par
- : Issue price equal to face value.
- At a premium
- : Issue price above face value.
- Securities premium
- : Extra money over face value.
- Minimum subscription
- : Lowest take that saves an issue.
Try it in two minutes
- Price 5 beads at face 10 and sell 2 at 12. Ask: where does the extra 4 sit?
- List allowed uses on cards and one banned use, dividends. Ask: which card is out?
- Offer 10 beads and win only 8 takers. Ask: does the issue survive?
Try at home. Issue 20000 shares of 10 rupees at 11 rupees each. Find the securities premium and name one allowed use.
Calls in Arrears, Calls in Advance and Pro-rata Allotment
Part of: Collecting money and handling defaults
After allotment, the company calls the rest in stages. Money called but unpaid is calls in arrears, charged up to 10 percent yearly interest, while money paid before it is due is calls in advance, earning up to 12 percent. When applications flood in, shares go pro-rata and excess application money adjusts to allotment. For example, 20000 unpaid for 6 months at 10 percent costs 1000 in interest.
Why it matters. Calls decide when cash really arrives. Wrong interest or a muddled pro-rata split short-changes honest applicants and lets defaulters off free.
Formulas
- Interest = Amount x Rate x Months / 12 / 100
- Allotted = Applied x Issue size / Applications total
- Allotment due = Allotment money - Excess adjusted
Key words
- Calls in arrears
- : Called money that holders never paid.
- Calls in advance
- : Money paid before it is called.
- Pro-rata allotment
- : Sharing oversubscribed shares by ratio.
- Excess application money
- : Extra paid, adjusted to allotment.
Try it in two minutes
- Call 10 coins from each of 5 holders; leave 2 unpaid. Ask: what are those 2 called?
- Charge 10 percent yearly on the unpaid 2 for 6 months. Ask: how much extra?
- Flood 12 applicants onto 9 shares and share the excess cash forward. Ask: who owes what now?
Try at home. Arrears of 10000 stay unpaid for 3 months at 10 percent yearly. Find the interest due.
Forfeiture and Reissue of Shares
Part of: Collecting money and handling defaults
When a holder misses a call even after warning, the company cancels her shares and keeps what she paid, called the forfeited amount. These shares can be resold at a discount, but the discount can never cross the forfeited amount per share. Any leftover after resale moves to capital reserve. For example, 5 rupees forfeited per share with a 1 rupee resale discount leaves 4 rupees times 150 shares, or 600, for capital reserve.
Why it matters. Forfeiture protects honest shareholders from free riders. A wrong discount or a lost reserve either gifts value away or hides profit that belongs to the owners.
Formulas
- Forfeited amount = Shares x Paid per share
- Discount limit = Forfeited amount per share
- Capital reserve = (Forfeited - Discount) x Reissued shares
Key words
- Forfeiture
- : Cancelling shares for unpaid calls.
- Forfeited amount
- : Money kept on cancelled shares.
- Reissue
- : Reselling cancelled shares.
- Capital reserve
- : Locked gain from reissued shares.
Try it in two minutes
- Give a holder 5 paid coins on a 7 called share and let her miss the last 2.
- Cancel her share and keep the 5 coins. Ask: whose money is it now?
- Resell the share at 6 and move the 4 coin gain to reserve. Ask: why not to profit?
Try at home. Forfeit 100 shares of 10 rupees with 6 paid each, then reissue 80 of them at 8 rupees as fully paid. Find the capital reserve.
What your child will practise
- Calls in Arrears, Calls in Advance and Pro-rata Allotment: Jungle Quick Fire (Quick Fire)
- Forfeiture and Reissue of Shares: Candy Puzzle (Clue Puzzle)
- Forfeiture and Reissue of Shares: Candy Quick Fire (Quick Fire)
- Issue of Shares at Par and at Premium: Desert Quick Fire (Quick Fire)
- Kinds of Share Capital and Classes of Shares: Space Puzzle (Clue Puzzle)
- Quiz: Calls in Arrears, Calls in Advance and Pro-rata Allotment (8 questions)
- Quiz: Forfeiture and Reissue of Shares (8 questions)
- Quiz: Issue of Shares at Par and at Premium (8 questions)
- Quiz: Kinds of Share Capital and Classes of Shares (8 questions)