Lesson 27: Issue of Shares
Master the legal and accounting procedure of issuing shares for raising corporate capital. Learn accounting entries for share issue for consideration other than cash, instalment accounting (Application, Allotment, Calls), Full/Under/Over-Subscription (Pro-Rata Allotment), Securities Premium (Sec 78), Discount rules (Sec 79), Calls in Arrears, Calls in Advance, and Schedule VI Balance Sheet presentation.
Issue Procedure & Consideration Other Than Cash
Par Value & Share Issue Modes
Face Value (Par Value/Nominal Value) is the value stated on the face of a share. A company raises capital following rules set by the Companies Act and SEBI. Shares can be issued either (A) For Consideration Other Than Cash or (B) For Cash.
Consideration Other Than Cash
Shares issued to promoters for incorporation services (debited to Goodwill A/c) or to vendors/creditors for acquiring fixed assets (machinery, building) without cash payment.
Journal Entries for Shares Issued for Cash (Lump Sum vs Instalments)
| Stage / Event | Journal Entry (In Books of Company) | Explanation |
|---|---|---|
| 1. Receipt of Application Money | Bank A/c Dr. To Share Application A/c |
Money collected by company's bankers upon receiving share application forms. |
| 2. Transfer to Capital on Allotment | Share Application A/c Dr. To Share Capital A/c |
Board of Directors approves allotment and transfers application money to capital. |
| 3. Allotment Money Due | Share Allotment A/c Dr. To Share Capital A/c |
Second instalment made due from allottees upon formal allotment. |
| 4. Receipt of Allotment Money | Bank A/c Dr. To Share Allotment A/c |
Collection of allotment instalment from shareholders. |
| 5. Calls Due & Received | Share First/Final Call A/c Dr. To Share Capital A/c Bank A/c Dr. To Share First/Final Call A/c |
Demand for remaining unpaid share money in one or more call instalments. |
Full, Under & Over-Subscription (Pro-Rata Allotment)
Full Subscription
Applications received equal exactly the number of shares offered to the public. All applicants are allotted requested shares.
Under-Subscription
Applications received are less than shares offered. Allotment proceeds provided Minimum Subscription condition is satisfied.
Over-Subscription
Applications exceed shares offered. Company cannot allot more shares than issued. Handled via rejection, partial (Pro-rata) allotment, or a combination.
3 Handling Options for Over-Subscription
- Option 1 (Full Rejection): Reject excess applications, send letter of regret, and refund money directly via
Share Application A/c Dr. To Bank A/c. - Option 2 (Pro-Rata Allotment): Allot shares proportionately to applicants. Excess application money is transferred to allotment via
Share Application A/c Dr. To Share Allotment A/c. - Option 3 (Combination): Reject a part of excess applications and make pro-rata allotment to the remaining applicants. Any excess application money beyond allotment demands may be retained as Calls-in-Advance if authorized by Articles.
Issue of Shares at Premium & At Discount
Securities Premium Reserve A/c
When shares are issued at a price higher than face value (e.g., ₹10 share issued at ₹12 = ₹2 premium). It is a capital gain credited to Securities Premium Reserve Account (usually collected on Allotment).
To Share Capital A/c
To Securities Premium Reserve A/c
Discount on Issue of Shares A/c
When shares are issued at a price below face value (e.g., ₹100 share issued at ₹90 = ₹10 discount). It is a capital loss debited to Discount on Issue of Shares A/c on allotment.
Discount on Issue of Shares A/c Dr.
To Share Capital A/c
Securities premium can be used ONLY for: (1) Issuing fully paid bonus shares, (2) Writing off preliminary expenses/discount on issue of shares/debentures, (3) Paying premium on redemption of preference shares/debentures, (4) Buy-back of shares.
Mandatory conditions for discount issue: (1) Minimum 1 year elapsed since business commencement, (2) Same class of shares already issued, (3) Sanctioned by resolution & court/tribunal, (4) Max discount 10% (higher requires Central Govt sanction).
Calls in Arrears & Calls in Advance
Calls in Arrears
Interest @ 5% p.a.Unpaid share allotment or call money after due date. Debited to Calls-in-Arrears Account. Deducted from Called-up Capital on Balance Sheet. Interest charged @ 5% p.a. for intervening period.
To Share Allotment/Call A/c
Calls in Advance
Interest @ 6% p.a.Money paid by a shareholder before formal demand/call by company. Credited to Calls-in-Advance Account. Shown under Current Liabilities. Interest paid by company @ 6% p.a.
To Calls-in-Advance A/c
Disclosure of Share Capital in Balance Sheet (Schedule VI)
Under Schedule VI of Companies Act, Share Capital is disclosed under Shareholders' Funds in vertical format. Detailed capital breakup is shown in Notes to Accounts.
Interactive Process Flows & Pro-Rata Calculator
Explore visual process models for share issue procedure, share capital classification hierarchy, and use the live Pro-Rata Share Allotment Calculator.
4-Stage Share Allotment Pipeline
Sequential flow of share capital collection from application to final call.
Application
Prospectus issued. Bank receives application money from public.
Allotment
Board allot shares. Money transferred to Capital A/c. Allotment due.
First Call
Demand for first instalment. Unpaid balance moved to Arrears.
Final Call
Final call demanded. Shares fully paid up in Balance Sheet.
Share Capital Classification Hierarchy
Structured division of corporate share capital categories.
Interactive Pro-Rata & Over-Subscription Calculator
Input shares offered, shares applied, and instalment rates to compute refund and allotment adjustment figures automatically.
5 Golden Rules for NIOS Company Accounts Problems
Memorize these 5 mandatory rules for solving Share Issue numericals in NIOS board exams.
Section 78 Securities Premium Rules
4 Restrictive Uses OnlySecurities premium is a capital gain. Under Section 78, it can ONLY be used for: (1) Issuing fully paid bonus shares, (2) Writing off preliminary expenses/discount on shares, (3) Premium on redemption of preference shares/debentures, (4) Buy-back of shares.
Section 79 Share Discount Mandates
Statutory Discount LimitsShares can be issued at discount ONLY IF: 1 year has elapsed since business commencement, shares are of an existing class, approved by resolution and court/tribunal, and discount rate does not exceed 10% (unless central govt approves).
Statutory Interest Rates on Arrears & Advance
5% vs 6% RatesAs per NIOS text: Interest charged by company on Calls-in-Arrears is @ 5% p.a. Interest paid by company on Calls-in-Advance is @ 6% p.a. for the intervening period.
Default Stage for Premium & Discount
Allotment Stage RuleIf the question does not specify the call/stage with which Securities Premium or Discount on Issue is associated, it is ALWAYS assumed to be due at the Share Allotment stage.
Schedule VI Balance Sheet Presentation Sequence
Paid-up Capital DerivationIn the Balance Sheet Notes to Accounts: Paid-up Capital = Subscribed Capital minus Calls-in-Arrears plus Forfeited Shares Account. Authorised and Issued Capital figures are shown as information only and never added into total liabilities.
10 MCQ Practice Quiz
Test your understanding of share issue journal entries, pro-rata adjustments, premium/discount rules, and calls interest.
10 Interactive 3D Flashcards
Click or tap the card to flip between share issue terms/concepts and definitions.
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