The word ‘company’ has not been clearly defined in the Company Act, 1956. According to the Act, all those companies which have been established under old or new company act, are included in it.
According to Lord Justice Lindley, ‘‘It is an association of persons who contribute money or money’s worth to common stock and employ it for common purpose.”
Thus, Company is an association of persons who run a business and get themselves registered as a company. Those who purchase the shares of a company are known as its shareholders. Liability of every shareholder is limited to the amount invested by him. There is no restriction, whatsoever, on the transfer of shares. The existence of the company is separate from its share-holders. The company is free to take a legal action against its shareholders and vice versa. It is an artificial person recognised by law. It is organised by its directors under its common seal. The shareholders of a company are not its agents.
Essential features
The characteristics of a company are as follows :
Legal Entity : A company is an artificial person created by law. It has a separate existence from its members. It gets all its powers from law. A company can sue others and can also be sued. It has a common seal which is the symbol of a company’s signatures. A company cannot be held responsible for any document without common seal.
Unlimited Number of Members : In the case of a public limited company, the minimum number is seven without its maximum limit. A private company must have at least two members but not more than fifty.
Limited Liability : The liability of the members of a company is usually limited to the amount due on the shares hold by them. Under no circumstances the shareholders can be refunded share money during the lifetime of a company. No creditor can touch the private property of a shareholder to recover his loans.
Transfer of Shares : Shares of a joint stock company are transferable and shareholders can thus get the amount invested by them by selling the shares in the open market.
Delegated Management : A joint stock company is an independent, autonomous organisation. The number of members being high, all of them cannot take part in management. Therefore, the real management and control is looked after by the elected representatives, known as directors.
Corporate Existence : According to the Company Act, the members of a company have group existence. A company takes birth by law and it is dissolved by law.
Regulations : The functioning of the company is governed by its memorandum of association and articles of association.
Perpetual Life : A company has perpetual existence, that is, its existence is not affected by the death or lunacy or insolvency or retirement of its members. Shareholders of the company change from time to time but the company continues until finally liquidated.
Kinds of joint stock companies
From the point of view of formation, there are three kinds of companies.
Chartered Companies : These companies were formed once upon a time by the grant of royal charter in England, such as the East India Company or the Bank of England. It is not possible to have such companies now.
Statutory Companies : These companies are formed by a special act of parliament. Examples of statutory companies are the Reserves Bank of India, Life Insurance Corporation of India, The State Bank of India etc.
Registered Companies : Such companies are formed by undergoing the procedure laid down by the Companies Act. The great majority of companies in India have been formed in this manner.
From the point of view of liability, there are three kinds of companies:
1. Companies Limited by Shares : In such cases, a member is liable to pay only the face value or the nominal value of the shares held by him. Once he has paid the amount he cannot be called up to pay anything more even if the company is unable to meet the claims on it.
2. Companies Limited by Guarantee : In the case of such companies, a member gives a guarantee that if the company is going to be wound up, he will contribute a certain sum of money to meet the claims on the company. Such companies are mostly formed for non-profit making purposes.
3. Unlimited Liability Companies : In the case of such companies, the liability of members is unlimited. The members may be called upon to pay any amount to satisfy the needs of the company. Such companies are rare now.
The great majority of companies, now-a-days are of the first type. Whether a company will be limited or unlimited, depends on the memorandum of association. A limited company must have the word, ‘LIMITED’ as the last word of the name. With the consent of the central government, the word ‘Limited’ may be dropped by companies where object is not to make profit.
From the point of view of public involvement, companies may be divided into two kinds:
Private Company
A company is said to be private limited company which is subject to three restrictions, namely, it cannot issue shares to the publi c, the number of shareholders must not exceed 50, and it cannot allow open transfer of shares to the public.
Following are the characteristics of a private limited company:
Number of Shareholders : In a private limited company, there cannot be more than 50 shareholders, leaving the employees.
Limited Liability : The liability of the shareholders of a limited company is always limited.
Use of the Word Private Ltd. : A private company is supposed to use the words ‘Private Limited’ after its name.
Invitation to the Public : A private company is not authorised to invite the public at large to subscribe its shares, that is, it cannot sell its shares in the open market.
Transfer of Shares : Shares of a Private Limited Company cannot be sold or purchased in the open market.
Public Limited Company
The Indian Companies Act 1956 defines a public company as one which is not a private company and registered under the Act.
The membership of a company can be maximum to the point of its capital. There is no restriction on sale or transfer of its shares.
Difference between a private limited company and public limited company are as follows :
1. A private limited company can be registered by two members only. But a public limited company requires at least seven members.
2. Whereas a private limited company cannot have more than 50 members, there is no maximum limit on a public limited company.
3. A private limited company cannot invite the public to subscribe capital by issuing shares. In the case of a public limited company, the public can be invited to subscribe capital.
4. Whereas in private limited companies, shares can be transferred with the consent of directors, transfer of shares in a public limited company is usually without any restriction.
5. The words ‘Private Limited’ must be used as a part of the name of a private limited company, the word ‘Limited’ must be used as part of the name for public company.
6. Prospectus of a private limited company cannot be issued. But in case a public limited company prospectus must be issued. In the absence of prospectus, a statement in lieu of prospectus has to be filed with the registrar of companies.
7. Whereas special articles of association are necessary, in case of private limited company, special articles of association need not be prepared for a public limited company. In that case, Table ‘A’ given in the Companies Act will apply.
8. Resources of a private limited company are comparatively small. On the opposite, financial and administrative resources of a public limited company are plenty. On account of this, a public limited company can produce goods at a large scale and low cost and as such, the chances of expansion of the company are ample.
9. Private limited companies are free from legal procedures and restrictions. But public limited companies are subject to many legal restrictions.
10. Business may be commenced as soon as the certificate of incorporation is issued in case of a private limited company but in case of a public limited company, in addition to it, the certificates of commencement of business must also be obtained.
11. Whereas in case of a private limited company shares may be allotted as the director wish, but in case of a public limited company, shares may be allotted only if shares equal to the minimum subscription have been applied for.
12. Statutory meeting need not be held in case of private limited company, but statutory meetings must be held and the authority reports must be sent to the members.
13. Restrictions contained in the Companies Act on remuneration do not apply in case of a private limited company. But managerial remuneration can be paid only according to the provision of the Company Act.
Formation of a company
Share Capital of a Company : A company, being an artificial person cannot generate is its own capital which has necessarily to be collected from several persons and generally from a very large number of persons. There cannot, obviously, be a separate capital account for every person contributing to the share capital of a company. Therefore, innumerable streams of capital contribution merge their identities in a common capital account in the ledger. The capital account is known as ‘share capital account’.
Types of Share Capital
The share capital of a company is divided into the following categories :
Authorised Registered or Nominal Capital : This is the amount set out in the memorandum of association which the company has the power to raise. On registration, an advance duty has to be paid on amount of authorised capital. The nominal capital is divided into shares of different denominations, such as Rs. 20, Rs. 25, Rs. 50 and Rs. 100 and so on. It is not necessary for a company to issue the entire amount of capital mentioned in the memorandum of association at one and the same time.
Issued Capital : The part of authorised capital which is offered to the public for subscription, including the shares offered to the vendors for subscription other than cash is called ‘Issued Capital’.
Unissued Capital : The part of authorised capital not offered for subscription is known as ‘Unissued Capital’ which can be issued to the public at a later stage.
Subscribed Capital : It is the part of issued capital which represents the face or nominal value of shares subscribed for i.e. applied for by prospective share holders and allotted by the company. This also includes the face value of shares issued by the company for consideration other than cash.
Unsubscribed Capital : The balance of issued capital not subscribed for is known as unsubscribed capital.
Called up Capital : The portion of subscribed capital that the directors require the shareholders to pay on the shares allotted to them is known as ‘Called up Capital’. It is not necessary for the directors to call for the entire amount on shares subscribed by the shareholders.
Uncalled Capital : The balance of subscribed capital which has not been called up denotes ‘Uncalled Capital’. This can be required to be paid by the shareholders, as and when the directors feel the necessity of additional resources by making calls.
Paid up Capital : The amount of called-up capital, which has actually been paid by the shareholders is ‘Paid up Capital’. The difference between the called up capital and paid up capital arises due to the reason that some share holders fail to pay the amount called up by the company on the shares issued to them.
Unpaid Capital : The balance of called up amount on shares, which has not been received by the company is termed as ‘Unpaid Capital’ or calls in arrears.
Reserve Capital : A company may decide by special resolution that a certain portion of its uncalled capital shall not be available for being called up except in the event and purpose of liquidation. Such a portion is called ‘Reserve Capital’.
Reserve capital should not be confused with capital reserve which is created out of profit. Capital reserve can be distinguished from reserve capital as follows :
The difference
Reserve capital refers to the portion of uncalled share capital which shall not be called. But capital reserve refers to those amounts which are not regarded as free from distribution by ways of dividend through profit and loss account.
It is not mandatory to create reserve capital. But it is mandatory to create capital reserve in case of profit on forfeited shares.
Whereas reserve capital can be used only at the time of winding up business, capital reserve can be used during the life time of the company.
Reserve capital is not disclosed in the company’s balance sheet. But capital reserve is supposed to be disclosed as the first item under the head ‘Reserves and Surplus’ on the liabilities side of the balance sheet.
Reserve capital can not be used to declare a share bonus. But capital reserve save items like revaluation profit, can be used to declare a share bonus.
Whereas reserve capital refers to the amount which has neither been called for nor has been received, capital reserve, save items like revaluation profit, refers to that amount which has already been realized.
Reserve capital cannot be used to write off capital losses. Capital reserve can be used to write off capital losses.
Meaning and nature of classes of shares
A share, as applied to the capital of a company, is one of the units into which the total share capital of a company is divided. Thus, share is a fractional part of the capital and forms the basis of ownership in a company. The persons who contribute money through shares are called shareholders.
A share is not a sum of money but is an interest measured by sum of money. A share is a bundle of rights and obligations contained in the contract (i.e. Articles of Association).
Classes of Shares
The share capital of a company has the distinctive features of being capable of satisfying the investment needs of different categories of people ready for investing in money available with them in the shares of the companies. These shares are generally preference shares and quality equity shares.
Section 86 of the Companies Act 1956 provides that the capital of a company formed after 1st April, 1956 or the capital issued after that date, shall be of only of two kinds—preference share capital and equity share capital.
Preference Shares
According to Section 85 of Indian Companies Act, 1956, a preference share is one which carries the following rights:
(i) During the continuance of the company, the shareholders be assured of a preference dividend i.e. dividend prior to that is paid on equity shares at a stipulated rate or a fixed amount.
(ii) On the winding up of the company, the preference shares must carry the right to the return of capital ahead of the capital returned on equity shares.
Preference shares can be of various types which are as follows:
Cumulative Preference Shares : A cumulative preference share is one which carries the right to a fixed annual dividend or dividend payable at a fixed rate. Such dividend is payable as a fixed annual dividend or dividend payable at a fix rate.
Such dividend is payable after even out of future profits if current year’s profits are insufficient for the purpose. In India, a preference share is always cumulative unless otherwise stated.
Non-Cumulative Preference Shares : A non-cumulative preference share carries with it right to a fixed annual dividend. In case no dividend is declared in a year due to any reason, the right to receive dividend for that year lapses.
Participating Preference Shares : This category of preference shares confer on the holder the right to a dividend every year. In addition, it entitles him to participate in the surplus profits, if any, after equity shareholders have received dividend at a stipulated rate. Similarly, if there is any surplus after repaying the equity share capital upon winding up of the company, this type of share carries the right to receive a predetermined proportion of surplus.
Non-Participating Preference Shares : A share on which only a fixed rate of dividend is received every year, without any accompanying additional rights in profits and in the surplus on winding up, is called ‘Non-participating preference shares. The preference shares are generally presumed to be non-participating.’
Redeemable Preference Shares: These are the types of shares which a company may issue on the stipulation that they ought to be repaid by company after the fixed period or even earlier at company option. The repayment of these shares is called redemption and is governed by section 80 of the Indian Company Act, 1956. In India, Companies can now issue only this category of preference shares.
Non-redeemable Preference Shares : The preference shares which do not carry with them the agreement regarding redemption are called non-redeemable preference shares.
Convertible Preference Shares : These shares confer on its holder a right of conversion into equity shares.
Non-Convertible Preference Shares : When the holder of a preference share has not been conferred upon him right to get his holding converted into equity shares, they are called non-convertible preference shares. These shares are non-convertible unless otherwise stated.
Equity shares
According to section 85 of Companies Act, 1956, ‘‘An equity share is a share which is not a preference share. Thus, shares which entitle their holder to the whole of profits earned by the company, after a fixed dividend on preference shares has been paid by it, are equity shares. This class of shares confer the right to either a fixed dividend or repayment of pre-determined amount of capital in the event of winding up of the company.
Issue of Shares
The shares of a company can be issued in two ways—(i) for cash, and
(ii) for consideration other than cash.
Joint Stock Companies invite letters of application to issue shares after issuing their prospectus. As these companies don’t require the whole amount of the issued capital immediately, they do not issue call for the payment of the full amount of share capital. This amount is divided in some installments. The amount demanded alongwith the application should not be less than five per cent of the face value of shares. The balance is to be paid at the time of allotment and calls. The application money must be deposited with a scheduled bank. The company cannot use this money until it gets certificate of commencement from the registrar of companies.
Allotment : Letters of application received from the public are submitted to the directors of the company who have a right to accept or reject them or accept them partially. The following points should be kept in mind:
(i) Minimum Subscription : Shares allotted after receiving the application money for more than the minimum limit.
(ii) Shares should be allotted within 120 days (four months) from the date of issue of prospectus, otherwise the directors will be responsible individually or jointly for refund of application money alongwith six per cent interest after 130 days.
(iii) Letters of allotment are sent to the applicants who have been issued shares and the applicants to whom shares are not issued should be sent a letter of regret.
The applicant can seek refund of his money before allotment of shares.
(iv) Share certificate is sent to those whom shares are issued.
(v) The return should be submitted to the Registrar of Companies to this effect. It contains every information regarding allotment of shares.
Calls : After the allotment of shares directors send calls for the balance amount. Amount payable at the time of applications and allotment are not known as calls. After that amounts demanded are known as calls. The following points should be kept in mind at the time of sending calls :
(i) Call should be same for similar type of shares.
(ii) No calls should be for more than 25%.
(iii) There should be an interval of one month between two calls.
(iv) Serial number of each call should be given, such as first call, second call, and final call.
Journal Entries for Issue of Shares
on Receiving Application Money
Bank A/c Dr
To Share Application A/c
(For application money for…shares received @ Rs.—each).
On Transferring Share Application Money to Share Capital A/c
Share Application A/c
To Share Capital A/c
(For share capital money transferred to share capital account)
On Refunding the Excess Money :
Share Application A/c Dr
To Bank A/c
(For share application money refunded of unallotted shares)
On Allotment of Shares
Share Allotment A/c Dr
To Share Capital A/c
(For share application money became due on—shares @ Rs.—Each)
On Receiving Allotment Money
Bank A/c Dr.
To Share Allotment A/c
(For allotment money received on—shares @ Rs.—Each)
When First Call Money Becomes Due
Share 1st Call A/c Dr
To Share Capital A/c
(From Rs.—Per shares as per the resolution of Board of Directors became due on—shares)
On Receiving the First Call Money
Bank A/c Dr
To Share First Call A/c
(Being first call money received on—shares @ Rs.—Each)
When Second Call Money Becomes Due
Share Second Call A/c Dr
To Share Capital A/c
(For share second call money became due on—shares @ Rs.—Each as per resolution of board of directors dated—)
On Receiving Second Call Money
Bank A/c Dr
To Share Second Call A/c
(For share second call money received on—shares @ Rs.—Each)
When Final Call Became Due
Share Final Call A/c Dr
To Share Capital A/c
(For share final call money became due on—shares @ Rs.—Each as per the decision of board of directors dated—)
On Receiving Final Call Money
Bank A/c Dr
To Share Final Call A/c
(For share final call money received on—shares @ Rs.—Each)
Note : Some accountants do not open separate Share Application Account and Share Allotment Account, but make a compound entry which is known as Share Application and Allotment Account.
On Receiving Cash
Bank A/c Dr
To Share Application & Allotment
A/c
(For share application & allotments money received on—shares @ Rs.—Each)
On Transfer to Share Capital
Account:
Share Application & Share
Allotment A/c Dr
To Share Capital A/c
(For share application and allotment money transferred to share capital A/c)
Note : Students should go through the information given in question thoroughly. If they are asked to prepare cash book alongwith journal, all the cash and bank transactions will be entered in the cash book and other entries will be passed through journal.
Entries for cash received will be passed through the cash book are given on page 452.
Method of Showing Share Capital in the Balance Sheet of the Company is given on page 453-454.
Under Subscription of Shares : When public do not apply for all the shares issued by a company, it is termed as under subscription of shares. Accounting entries are made only for subscribed shares. It is possible only when the managers and directors have already received minimum subscription and have allotted shares for that amount.
Issue of shares for consideration other than cash
When a company purchases some assets (including services) instead of making payment to the supplier in the form of cash, it issues its full paid shares. Such an issue of shares is called as the issue of shares for consideration other than cash. Such shares are disclosed separately under the head ‘Share-Capital’ (Sub-head, Subscribed Capital) in the balance sheet of a company.
If shares are issued to such a person or an enterprise from whom the company has purchased some assets, the following entry will be made in the journal.
Assets A/c (By Name) Dr
To Share Capital A/c
(For—Shares allotted to M/s—in consideration of assets purchased for the company)
Note : This fact is mentioned in the balance sheet of the company.
Calls Paid in Advance : Sometimes, it so happens that some persons or a firm pays the whole amount to the company in one instalment. In this way the company receives the amount of future instalments in advance. The amount thus received in advance is shown on the liability side of the balance sheet. All the calls are made with full amount but the entry for amount received is made after deducting the amount already received.
On receipt of calls money in advance
Bank A/c Dr
To Calls in Advance A/c
(For the receipt of call money in advance)
When the call money is due and amount is received in advance, the following compound entry will be made :
Bank A/c Dr
Calls in Advance A/c Dr
To Share 1st Call A/c
(For Call in advance adjusted)
Journal entry for Interest paid on calls received in advance
Preliminary Expenses A/c Dr.
To Bank A/c
(For the payment of interest for calls received in advance)
Calls in Arrears : If a shareholder is unable to meet the calls, it’s known as call in arrears. If the managers and directors wish and there is provision in the articles of association, they can charge interest @ 5% on calls in arrears.
The following journal entry is made for calls in arrears :
When Call Money is Due:
Share First/Second/Third
Call A/c Dr
To Share Capital A/c
(For share call money due on—@ Rs.—per share)
When Call Money is Actually Received :
Bank A/c Dr
To Share First/Second/Third
Call A/c
(For Call money required on—shares @ Rs.—Each as)
At the end of the financial year, outstanding amount is transferred to calls in Arrears or calls unpaid account and the following entry is made:
Calls in Arrears A/c Dr
To Share First/Second/Final A/c
(For unpaid amount transferred to calls unpaid or calls in arrears A/c)
When the concerned shareholders makes payment, with interest on non-payment of call money by mistake, the following journal entry is made:
Bank A/c Dr.
To Share First/Second/
Third call A/c
To Interest on calls in
Arrears A/c
(For money on calls in arrears received along with interest)
Issue of Shares at Premium : When a company issues its shares at higher than the printed price, it is known as shares issued at premium. Suppose a share worth Rs. 100 is issued at Rs. 105, the company will receive Rs. 5 more than the price of the share. The amount of Rs. 5 is known as premium.
According to the Section 78 of the Indian Companies Act, shares can be issued at premium for the following proposes :
(i) To write off the preliminary expenses from the books of accounts.
(ii) To write off the expenses commission or discount on issuing of shares/debentures.
(iii) To issue bonus shares.
(iv) To make up the loss of redeeming the shares or debentures at premium.
Accounting entries for issue of Shares at Premium : Generally, the amount of premium is received along with the application money or at the time of allotment of shares. The following journal entries are made to issue the shares at premium.
On Receiving Premium along with Share Application Money :
Bank A/c Dr
To Share Application A/c
(For share application money received alongwith premium on—shares @ Rs.—Per share)
On Transferring the Money Received at the Time of Application :
Share Application A/c Dr
To Share Capital A/c
(For application money transferred to share capital account and share premium account)
If the amount of premium is received along with the allotment of shares, the following journal entry is made when the amount becomes due :
Share Allotment A/c Dr
To Share Capital A/c
(For allotment money became due along with premium)
On receiving Allotment Money alongwith Premium :
Bank A/c Dr
To Share allotment A/c
(For allotment money received along with premium.)
Note : It may be kept in mind that when the amount of premium becomes due it is credited separately in the journal. On receipt of cash, it is not written separately but included in the amount received on allotment of shares.
Issues of Shares at Discount : According to Section 79 of the Indian Companies Act, shares can be issued at discount under the following conditions:
(i) The company has run the business for at least one year and has already issued such shares.
(ii) The amount of discount can be 10% at the maximum.
(iii) A resolution to this effect has been passed in the general body meeting of the shareholders and the sanction of Company Board has been obtained.
(iv) These shares should be issued within two months from the date of written sanction of court in this connection.
Forfeited shares are generally re-issued at discount. The amount of discount is debited. Students should write the amount of discount with the concerned entry. If it has been mentioned in the question, it should be accounted for along with allotment of shares as follows :
When Allotment Money is Due:
Share Allotment A/c Dr
Discount on Issue of Dr.
Allotment A/c
To Share Capital A/c
(For the allotment money due on—shares @ Rs.—with the adjustment of the amount allowed as discount)
On Receiving the Amount of Allotment :
Bank A/c Dr
To Share Allotment A/c
(For allotment money received at a discount of Rs.—per share)
The following entry is passed to write discount
Profit & Loss A/c Dr
To Discount on Issue of Shares A/c
Pro-rata Allotment : If the goodwill of a company is high, applications are received for more shares than the proposal for their issue. Under these circumstances requests of all the applicants cannot be accepted. There- fore, the company allots their shares in proportion to the total shares to be issued. It is called pro-rata allotment of shares. For example if Gupta & Co. invited application from the public for public issue of 90,000 shares, but they received applications for 1,00,000 shares and allotted them shares on prorata basis. It means that every applicant who applied for 10 shares got 9 shares only.
Forfeiture of Shares : The company demands money on shares in instalments from the shareholders from time to time. If a person does not pay the instalment, the company sends a reminder. If he still fails to pay the amount, the company can forfeit shares. The directors pass a resolution to this effect. Shares once forfeited become the property of the company and may be re-issued on such terms as directors deem fit. Upon forfeiture, the original shareholder ceases to be a member and his name must be removed from the register of members.
Following points should be taken into consideration in this connection :
Amount demanded on the forfeited shares.
Amount received on these shares.
Amount not received on these shares.
Forfeiture of Shares
Share Capital A/c Dr
To Share Forfeiture A/c
To Calls Unpaid A/c
(For—shares forfeited due to non payment of call money)
When Shares Belonging to Pro-rata Category are Forfeited : If some of the shares belonging to the pro-rata category are forfeited, students face difficulty in calculating the amount to be forfeited on these shares and the amount in arrears on allotment. To reach the correct situation, the following procedure should be followed:
(i) Calculate the number of shares applied for by the person whose shares are being forfeited. Apply the formula, which follows :
Total Shares Applied × Shares Allotted by the Co. to the shareholders concerned ¸ Total Shares Allotted
(ii) Multiply the number of shares by the amount of application money. It will give total money paid by the shareholder with the applications. This amount is forfeited on default and credited to the share forfeiture account.
(iii) Deduct from the application money received, the amount payable on application with the help of shares allotted. The result is the excess application money sent by the applicant in advance with the application. This money is available for adjustment towards allotment.
(iv) Calculate the amount due on allotment and deduct from it the amount sent in advance with applications. The result is the amount in arrears on allotment. This amount is credited to share allotment account at the time of making entry for forfeiture.
Forfeiture of Shares Issued at Par : When shares issued at par are forfeited, capital account is debited with the amount called and the amount received and unpaid are credited.
Forfeiture of Shares Issued at Discount : Amount of discount is cancelled on forfeiture of shares issued at discount. Amount of discount being loss to company is debited at the time of issue of shares. Therefore amount of discount is credited at the time of forfeiture of share.
Share Capital A/c Dr
To Share Forfeited A/c
To Calls Inpaid A/c
To Discount on Issue of Shares A/c
(Being—shares issued at discount forfeited)
Forfeiture of Shares Issued at Premium : (i) When shares are forfeited on Receipt of Premium :
If the amount of premium has been received and the shares have been forfeited on account of non-payment of call money, premium is treated as forfeited. According to the section 78 of the Company Act, 1956, profits once received cannot be cancelled. Therefore, no journal entry is passed to cancel the amount of premium received and as such no attention is paid to premium.
Share Capital Account Dr
To Share Forfeiture A/c
To Calls Unpaid A/c
(Being—shares forfeited after receipt of premium due to non payment of call money)
(ii) When Shares are Forfeited Before the Receipt of Premium :
If the shares have been forfeited before the receipt of premium and the amount of premium has become due, premium account is debited and thus cancelled.
Share Capital A/c
Share Premium A/c
To Share forfeiture A/c
To Calls unpaid A/c
(For—Shares forfeited due to non-payment of call money)
Re-issue of forfeited Shares
Although a company can re-issue its shares at any price yet the amount receivable and amount already received before forfeiture of shares both should be equal to paid up capital of the shares. Suppose a share of Rs. 100 on which
Rs. 100 were called and Rs. 40 only received was forfeited at a loss of Rs. 60 must be realized at the re-issue of shares. Now, with the help of another example, we shall study a share whose written price is Rs. 100 and on which Rs. 80 were called but received Rs. 40 only and therefore forfeited. If this share is re-issued, at least amount obtained by subtracting the amount received (Rs. 40) out of amount called (Rs. 80) must be realized.
Journal entries for re-issue of forfeited shares
Bank account is debited by the amount received on re-issue of shares and the discount account is also debited to the share forfeiture account. The amount called on these shares is credited to capital account. The forfeited shares are reissued as under :
Bank A/c Dr.
Share Forfeited A/c Dr.
To Share Capital A/c
(For—forfeited shares re-issued)
In this way, it can be seen that on re-issue of shares, discount cannot be allowed more than the forfeited amount.
Capital Reserve on Reissue of Shares : If the amount received on re-issue of shares is more than the amount forfeited, the difference between the two is capital gain of the company and it is transferred to Capital Reserve Account by the following journal entry :
Share Forfeiture A/c Dr.
To Capital Reserve A/c
(For—profit on re-issue of shares transferred to Capital reserve account)
Capital Reserve Fund : The amount transferred to this account is used to write off fixed expenses such as preliminary expenses, discount on issue of debentures shares, goodwill, etc.
When the shares issued at a discount are forfeited and re-issued, the new shareholders get the benefit of share forfeiture account along with the discount. For this, the following journal entry is passed :
Bank A/c Dr.
Discount A/c Dr.
Share forfeiture A/c Dr.
To Share Capital A/c
(For the Shares earlier issued at discount reissued)
When a company re-issues only a part of the forfeited shares, the discount on re-issues can be only in proportion to the shares re-issued. The leftover sum is transferred to Capital Reserve Account. The balance of the share forfeiture account is shown in the new balance sheet under ‘Share Forfeiture Account’ and added to the capital.
Re-issue of Forfeited shares originally issued at premium
When the shares, which were earlier issued at premium are re-issued, the company is not bound to issue them at premium. However, if the same are again re-issued at a premium the journal entry will be as follows:
Bank A/c Dr.
Share Forfeiture A/c Dr.
To Share Capital A/c
To Share Premium A/c
(For re-issue of forfeited shares at premium)
Share Forfeiture A/c Dr
To Capital Reserve A/c
(For profit on re-issue of forfeited shares transferred to Capital Reserve
A/c)
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