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Interactive Audio Lesson
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Types of Shares
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Today, we'll start with the types of shares a company can issue. Can anyone tell me what equity shares are?
Equity shares don't have a fixed dividend, right? They pay based on the profit?
Exactly! Equity shareholders get dividends that vary with profits. And what about preference shares?
They have a fixed rate of dividend and get paid before equity shareholders?
Great! Now, remember: for equity, think 'Earnings vary', and for preference, 'Priority pays'.
Issue Price and Premium
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Letβs now discuss the issue price of shares. Who knows what it means?
It's the price at which the company issues its shares, either at par, premium, or discount!
Correct! And when shares are issued at a premium, the extra amount above the face value is recorded where?
In the Securities Premium Account!
Awesome! Remember the mnemonic 'Structural Profits' for Securities Premium!
Accounting for Issue of Shares
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Now, how do we record the journal entry when shares are issued at par?
We debit the Bank Account and credit the Share Capital account.
Thatβs right! And what changes if the shares are issued at a premium?
We also add the Securities Premium Account for the extra amount!
Fantastic! Remember: 'Deposit Share Securities' for these steps in issuing shares.
Forfeiture and Reissue
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Letβs talk about forfeiture. What happens if a shareholder fails to pay their calls?
The shares can be forfeited!
Exactly! And if we reissue those shares, what should we keep in mind?
They can be sold at a discount, but not for more than the amount we forfeited!
Correct! Use the phrase 'Forfeit to Reissue' to remember the process.
Introduction & Overview
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Quick Overview
Standard
The section focuses on the specifics of issuing shares at a premium, detailing accounting practices and journal entries associated with this process, including forfeiture and reissue of shares.
Detailed
At Premium
In this section, we explore the concept of issuing shares at a premium, an important aspect of a Joint Stock Company's financial operations. Shares can be issued at various prices, including at par, at a premium, or at a discount.
Key Points Covered:
- Types of Shares: Equity shares vary in dividend distribution based on profit, while preference shares have a fixed dividend rate.
- Accounting for Share Issues: When shares are issued at a premium, the amount above the face value is recorded in the Securities Premium Account. For example, if a share with a face value of βΉ10 is issued for βΉ12, the premium of βΉ2 is credited to the Securities Premium account.
- Issues of Forfeiture and Reissue: If shareholders fail to pay calls, the shares may be forfeited and can later be reissued, potentially at a discount, not exceeding the amount forfeited.
Understanding these concepts is crucial for accurate record-keeping and financial statement preparation.
Audio Book
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Definition of Premium Issued Shares
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Issued at more than face value.
Ex: βΉ10 face value issued at βΉ12
Securities Premium A/c is credited with excess.
Detailed Explanation
When shares are issued at a premium, it means they are sold for a price higher than their face value. For instance, if the face value of a share is βΉ10 and it's issued at βΉ12, the difference of βΉ2 is the premium. The accounting entry reflects this by crediting the Securities Premium Account, which is a separate account that records this excess amount paid by the shareholders.
Examples & Analogies
Imagine you are selling a limited edition toy that typically costs βΉ10. If you sell it for βΉ12 because it's unique, the extra βΉ2 is like a bonus or premium that people are willing to pay for the special item. In accounting, this extra amount is noted in a separate account to show the value beyond the regular price.
Accounting Entries for Premium Shares
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Example: If a company issues shares with a face value of βΉ10 at a premium of βΉ2, the total amount received for each share is βΉ12.
Journal Entries:
-
On Application:
Bank A/c Dr. βΉ12
To Share Application A/c βΉ12 -
On Allotment:
Share Application A/c Dr. βΉ12
To Share Capital A/c βΉ10
To Securities Premium A/c βΉ2
Detailed Explanation
When shares are sold at a premium, specific accounting entries need to be made. First, when the application money is received, the total amount (in this case, βΉ12 per share) is recorded as a debit to the Bank Account. Then, on allotment, the share capital is credited at the face value (βΉ10), and the excess (the premium of βΉ2) is credited to the Securities Premium Account. This ensures that both the share capital and the additional premium are accurately reflected in the financial statements.
Examples & Analogies
Think of it like a concert ticket. If the ticket's face value is βΉ100, but due to high demand, you sell it for βΉ120, the βΉ20 difference is like the premium. When you cash it out, you record the βΉ100 as your base income and the extra βΉ20 in a separate premium account. This way, you can show both how much money you made from ticket sales and how much came from its popularity.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
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Equity Shares: Shares without a fixed dividend, dependent on profits.
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Preference Shares: Shares with fixed dividends and priority for payments.
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Securities Premium: The additional amount received above face value upon share issuance.
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Forfeiture: The process of taking back shares if payment is not made.
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Reissue of Shares: The process of reselling forfeited shares, potentially at a discount.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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Example 1: A company issues 1,000 equity shares of βΉ10 at a premium of βΉ2. The journal entry would reflect both the Share Capital and Securities Premium accounts.
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Example 2: If a shareholder fails to pay the first call on their shares, those shares can be forfeited. After forfeiture, if the shares are reissued at βΉ8, they cannot be sold for less than βΉ8.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
π΅ Rhymes Time
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Equity shares bring varied cheer; preference shares keep profits near.
π Fascinating Stories
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Once there was a company that issued shares at βΉ10 but decided to sell them for βΉ12 to raise capital. The excess βΉ2 helped the company invest in new projects.
π§ Other Memory Gems
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E.P.F.R - Equity, Preference, Forfeiture, Reissue: Key concepts in share issuance.
π― Super Acronyms
SAFE - Shares At Face, or Equity
- Remember how shares can be issued!
Flash Cards
Review key concepts with flashcards.
Glossary of Terms
Review the Definitions for terms.
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Term: Equity Shares
Definition:
Shares that do not have a fixed dividend. Dividend varies based on company's profits.
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Term: Preference Shares
Definition:
Shares with a fixed rate of dividend and priority over equity shareholders in payment.
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Term: Face Value
Definition:
The original value of a share as stated on the share certificate.
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Term: Issue Price
Definition:
The price at which shares are offered to the public (can be at par, premium, or discount).
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Term: Calls
Definition:
Amounts payable in installments for sharesβlike Application, Allotment, and Final Call.
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Term: Securities Premium Account
Definition:
An account reflecting the excess amount received over the face value of shares issued.