Accounting for Shares: Issue of Shares for Cash

Introduction

Once a company is incorporated it must raise the capital promised in its memorandum, and the usual way a company limited by shares does this is by issuing shares to the public for cash. This chapter studies how the money flows in through the stages of application, allotment and calls, how the entries are recorded, and how the special situations of over subscription, under subscription, premium and discount are handled.

Meaning and classes of shares

A share is one unit of the total capital of a company. The person who holds shares is a shareholder and is a part owner of the company. The Companies Act recognises two main classes.

Ordinary (equity) shares carry no fixed rate of dividend. Their holders are the real risk bearers, receive dividend only after preference shareholders are paid, and carry the main voting rights.

Preference shares carry a fixed rate of dividend that must be paid before any dividend goes to ordinary shareholders, and they rank ahead of ordinary shares in the repayment of capital. Preference shares may be cumulative or non cumulative, redeemable or irredeemable, convertible or non convertible, and participating or non participating.

Stages of issue and the money terms

A share of face value Rs. 100 is usually not collected in one lump. The company calls the money in instalments, for example Rs. 25 on application, Rs. 25 on allotment, Rs. 25 on first call and Rs. 25 on final call. The money received when an investor applies is the application money, the amount demanded when shares are formally allotted is the allotment money, and later demands are the calls.