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Types of Shares
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Today, we're starting with the types of shares that companies can issue. Does anyone know the two main types of shares?
I think they're equity shares and preference shares.
That's correct! Equity shares do not have a fixed dividend, which means the dividend depends on the company's performance. Letβs remember this with the acronym 'EP'βEquity = Profit-dependent. How about preference shares?
Preference shares have a fixed dividend, right?
Exactly! And they also have priority in dividend payment over equity shareholders. So, keep in mind 'Fixed before Profit'! Now, can anyone give examples of situations where each type is beneficial?
Equity shares might be better for companies that expect high growth in profits.
Preference shares would be safer for investors who want stable returns.
Great insights! So, to recap, equity shares are dependent on profits, while preference shares give fixed returns. Letβs move on!
Basic Terms in Share Issuance
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Now, let's talk about some essential terms like 'Face Value' and 'Issue Price'. Who can explain what Face Value means?
It's the original value of a share, right?
Correct! And what about the Issue Price?
Issue Price is the price at which shares are offered to investors, and it can be at par, premium, or discount.
Excellent! Remember 'F-I-P'βFace value is the Initial price, while Issue price can vary. Why do you think this differentiation is important?
It helps investors understand how much they need to pay for the shares compared to their value.
Right! It reflects the company's current market standing. Now, let's move on to the accounting aspects.
Accounting for Issue of Shares at Par
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Now, let's get into the accounting for shares issued at par. Can anyone explain what it means?
It means the shares are sold at their face value.
Exactly! For example, if equity shares have a face value of βΉ10 and are issued at βΉ10 at par, how would we record this in the journal?
We would debit the Bank Account and credit the Share Application Account upon application.
Correct! Let's write it out: `Bank A/c Dr.`, then `To Share Application A/c`. And what happens next on allotment?
We debit the Share Application A/c and credit Share Capital A/c.
Perfect! That's how we record the cash inflow and the capital generation. Good job, everyone! Recap with the journal entries: Application and Allotment.
Introduction & Overview
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Quick Overview
Standard
In this section, we explore the concept of shares issued at par value, specifically focusing on equity shares and preference shares. We cover the essential terms associated with share issuance, accounting entries for shares issued at par, and the implications of such transactions on a company's financial records.
Detailed
Detailed Summary of Section 2.2.3.1 - At Par
In this section, we delve into the accounting practices surrounding the issuance of shares by joint stock companies, specifically focusing on shares issued at par. A share issued at par means that the face value of the share is equal to its issue price.
Key Aspects Discussed:
- Types of Shares: There are two primary types of shares issued by companies:
- Equity Shares: These shares do not guarantee any fixed dividend; the payment of dividends depends on the companyβs profitability.
- Preference Shares: These provide a fixed rate of dividend and have a higher claim over dividends and assets than equity shareholders.
- Terminology: The section explains crucial terms that are fundamental to understanding share issuance:
- Face Value: This is the nominal value of the share, which is defined when the share is issued.
- Issue Price: The actual price at which the shares are offered to investors, which can be at par, premium, or discount.
- Calls: This refers to amounts owed by the shareholder in installments, such as Application, Allotment, First Call, etc.
- Accounting for Issuance: The section provides journal entries for the accounting of shares issued at par, illustrated by a straightforward example:
- For shares with a face value of βΉ10, the journal entries include:
- On Application:
Bank A/c Dr. βΉ10To Share Application A/c βΉ10- On Allotment:
Share Application A/c Dr. βΉ10To Share Capital A/c βΉ10
This section forms the basis for understanding how shares are recorded and impacts overall company accounts, signifying the flow of capital and the rights of shareholders.
Audio Book
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Definition of 'At Par'
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Example: Face Value βΉ10 issued at βΉ10
Detailed Explanation
The term 'At Par' refers to the situation when shares are issued at their face value. For example, if a share has a face value of βΉ10, it means the company sells the share for βΉ10. This is a common practice because it simplifies the financial transactions for both the shareholders and the company.
Examples & Analogies
Think of 'At Par' like a ticket for a concert. If the face value of the ticket is βΉ10, you pay exactly βΉ10 for it. You are getting exactly what you paid for, without any extra costs or discounts.
Journal Entries for Issuing Shares at Par
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Journal Entries:
β’ On application:
Bank A/c Dr.
To Share Application A/c
β’ On allotment:
Share Application A/c Dr.
To Share Capital A/c
Detailed Explanation
When shares are issued at par, specific journal entries are recorded to reflect the financial transaction. First, when potential shareholders apply and pay the application money, the company debits the Bank A/c and credits the Share Application A/c. Once the shares are allotted, the amount in the Share Application A/c is then transferred to the Share Capital A/c, representing that the capital is now part of the equity of the company.
Examples & Analogies
Consider this process like a restaurant that takes advance bookings for tables. When a customer pays a deposit to reserve a table, the restaurant records this as money received (Bank A/c). Once they confirm the reservation, they acknowledge that this reserved money is now officially theirs (Share Capital A/c).
Definitions & Key Concepts
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Key Concepts
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Equity Shares: Shares with variable dividends based on company profits.
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Preference Shares: Shares that guarantee a fixed dividend.
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Face Value: The nominal value assigned to shares upon issuance.
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Issue Price: Price at which shares are sold, can be at par, premium, or discount.
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Calls: Installments payable on shares by shareholders.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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Example: Issuing 100 equity shares at a face value of βΉ10 at par results in a total collection of βΉ1000.
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Example: A company might choose to issue shares at preference shares to attract more investors looking for fixed returns.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
π΅ Rhymes Time
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For equity shares, the profit comes first, with preference shares, stability is a must!
π Fascinating Stories
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Imagine a company issuing two types of shares: equity for adventurers willing to take risks, and preference for wise investors seeking safety and steady income. This way, investors can choose their journey!
π§ Other Memory Gems
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Use 'F-IP' to remember: 'Face value is Initial Price', and 'Issue prices vary'!
π― Super Acronyms
Remember 'E-P' for Equity = Profit-dependent, Preference = Fixed!
Flash Cards
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Glossary of Terms
Review the Definitions for terms.
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Term: Equity Shares
Definition:
Shares that provide no fixed dividend and dividends depend on company profits.
-
Term: Preference Shares
Definition:
Shares that have a fixed rate of dividend and priority in payments over equity shareholders.
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Term: Face Value
Definition:
The nominal value assigned to a share at issuance.
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Term: Issue Price
Definition:
The price at which shares are offered to investors, which can be at par, discount, or premium.
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Term: Calls
Definition:
Payments due from shareholders in installments during the share issuance process.