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Interactive Audio Lesson
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Types of Shares
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Today, we will be discussing shares, specifically the two main types: equity shares and preference shares. Who can tell me what an equity share is?
Equity shares don't have a fixed dividend, right? The dividends depend on the company's profits.
Exactly! And can someone explain preference shares?
Preference shares have a fixed dividend and are paid out before equity shares.
Great! A good way to remember is that 'equity' means 'equal', and they share the risks and rewards depending on profits, while 'preference' indicates a priority. Let's move on!
What happens if a company doesn't make a profit? Do equity shareholders still get dividends?
Good question! No, equity shareholders only receive dividends when there are profits. Let's clarify that in our summary. Equity shares depend on profits, preference shares don't.
Basic Terms and Accounting
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Now letβs cover some key terms: face value, issue price, and calls. Can anybody define face value?
Face value is the nominal value of a share, like its basic value.
Thatβs right! And how about the issue price?
It can be at par, premium, or discount when shares are offered!
Exactly! Letβs explore calls as well. What does 'calls' mean in our context?
Calls are payments made in installments for shares.
Great! Now, letβs discuss the journal entries for issuing shares at par. Can someone explain that process?
When shares are issued at par, we debit the Bank account on application and then transfer it to Share Capital on allotment.
Perfect! The steps are application, then allotment. Remember, 'A before A'. Now letβs summarize what we learned.
Forfeiture and Reissue of Shares
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Letβs discuss forfeiture of shares. What does that mean?
Forfeiture happens when the shareholder fails to pay the calls.
Correct! And how can forfeited shares be reissued?
They can be reissued at a discount, but not exceeding the forfeited amount.
Right! Remember, we can only reissue at a discount. Let's summarize just this section: forfeiture is due to non-payment, and reissue can occur at a discount.
Practical Applications
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Now, letβs apply what we've learned. If a company issues 1,000 equity shares at a face value of βΉ10, what's the total capital raised?
That would be βΉ10,000!
Exactly! And what if they issued 500 shares at a premium of βΉ2?
Then it would be βΉ6,000, because itβs βΉ12 per share!
Good job! Always calculate the total by combining the face value and premium. Keep practicing these kinds of questions!
Introduction & Overview
Read a summary of the section's main ideas. Choose from Basic, Medium, or Detailed.
Quick Overview
Standard
The 'Issue of Shares' section outlines the different types of shares, such as equity and preference shares, along with essential terms including face value and issue price. It also discusses the accounting entries for issuing shares at par and at a premium, addressing the concepts of forfeiture and reissue.
Detailed
Issue of Shares
Overview
This section discusses the fundamental process of issuing shares in a Joint Stock Company, a critical aspect of company financing. It emphasizes the types of shares available, essential terminology related to share issuance, and the corresponding accounting practices.
Types of Shares
- Equity Shares: These are shares that do not have a fixed dividend, and their dividends depend on the company's profit.
- Preference Shares: These shares come with a fixed dividend rate and hold priority over equity shares in payments.
Key Terms
- Face Value: The nominal value of a share.
- Issue Price: The price at which shares are offered to the public; can be at par, premium, or discount.
- Calls: Payments required in stages, including Application, Allotment, First Call, and Final Call.
Accounting for Issue of Shares
- At Par: For example, a βΉ10 face value share issued at βΉ10 where the journal entries include:
- On application:
- Bank A/c Dr.
- To Share Application A/c
- On allotment:
- Share Application A/c Dr.
- To Share Capital A/c
- At Premium: When shares are issued above their face value, such as βΉ10 shares issued at βΉ12, the Securities Premium A/c would include the excess amount.
- Forfeiture and Reissue of Shares: Shares can be forfeited due to non-payment of calls and may be reissued at a discount, not exceeding the amount forfeited.
Overall, the issue of shares lays the groundwork for company capital structure and financial health.
Audio Book
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Types of Shares
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- Equity Shares: No fixed dividend. Dividend varies based on profit.
- Preference Shares: Fixed rate of dividend and priority in payment over equity shareholders.
Detailed Explanation
Shares represent ownership in a company. There are two main types: Equity Shares and Preference Shares. Equity shares do not guarantee dividends; instead, the dividend amount depends on the profits made by the company. On the other hand, Preference shares come with a fixed rate of dividend, which means shareholders receive a set payment before any dividends are paid to equity shareholders.
Examples & Analogies
Think of equity shareholders as owners of a restaurant who only get paid when the restaurant makes a profit. If the restaurant does well, they might receive a bonus (dividend). In contrast, preference shareholders are like lenders who receive regular interest payments regardless of how well the restaurant performs β they get their share first.
Basic Terms Related to Shares
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- Face Value: Original value of a share.
- Issue Price: Price at which shares are issued (can be at par, premium, or discount).
- Calls: Amounts payable in installments (e.g., Application, Allotment, First Call, Final Call).
Detailed Explanation
Understanding the basic terms is crucial. The 'Face Value' of a share is its original value set by the company, which remains constant. The 'Issue Price' can vary; it might be equal to, above, or below the face value. 'Calls' refer to payments made by shareholders in stages. For example, when a company issues shares, it might ask for a part of the payment during application and the rest later in additional calls.
Examples & Analogies
Imagine a friend wants to sell you a bike worth βΉ10,000 (the face value). They offer it to you for βΉ12,000 (the issue price). However, you can pay βΉ4,000 now and the rest later in installments (calls). This concept works similarly in the share market.
Accounting for Issue of Shares at Par
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(i) At Par
Example: Face Value βΉ10 issued at βΉ10
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, it means they are sold for their face value. For instance, if a share has a face value of βΉ10 and is issued at βΉ10, simple journal entries are made to reflect this transaction. First, the money received during application (bank account) is moved to a share application account. Once shares are allotted, the amount from the share application is then transferred to the share capital account.
Examples & Analogies
Think of it like selling a book at the price printed on the cover. When someone pays you βΉ100 (the face value), you record that as money received (Bank A/c), and when you hand over the book (allotment), you transfer the receipt to reflect that you have sold a book (Share Capital A/c).
Accounting for Issue of Shares at Premium
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(ii) At Premium
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 more than their face value. For example, if a share with a face value of βΉ10 is sold for βΉ12, the additional βΉ2 per share is considered a premium. This premium amount is credited to a separate account called the Securities Premium A/c, which recognizes the additional funds the company has raised over the nominal share value.
Examples & Analogies
Consider this like selling a limited edition collectible for βΉ200 when its original price was only βΉ150. The extra βΉ50 you earn (the premium) can go into a special savings jar just for collectibles (Securities Premium A/c). This denotes the value collectors place on the item over its printing cost.
Forfeiture and Reissue of Shares
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(iii) Forfeiture and Reissue of Shares
β’ Forfeiture happens when a shareholder fails to pay calls.
β’ Reissued shares can be at discount (not exceeding the amount forfeited).
Detailed Explanation
Forfeiture occurs when a shareholder does not pay the required call amounts on their shares. In such cases, the company has the right to cancel or 'forfeit' those shares to recover its losses. Once forfeited, these shares can be reissued to other investors, possibly at a discount, but the discount cannot exceed the amount that was not paid during the original share's call.
Examples & Analogies
Imagine lending a friend the money to buy a smartphone (the share), but they fail to repay you after a few installments (calls). You might decide to take the smartphone back (forfeit it) and sell it to someone else for less than the original price (reissue at a discount, but you still need to cover your loss).
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
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Types of Shares: Equity and Preference shares serve different purposes in a company's financing.
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Face Value: The nominal value of a share that determines its basic price.
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Forfeiture: Shares can be forfeited if shareholders do not pay their installments.
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Reissue of Shares: Forfeited shares can be reissued at a discount, not exceeding the amount forfeited.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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If a company has issued 1,000 equity shares at βΉ10 each, the total capital raised is βΉ10,000.
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A preference share with a fixed dividend of βΉ2 per share provides a consistent return for shareholders.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
π΅ Rhymes Time
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Equity shares let dividends flow, Preference gets paid first, that's how we grow!
π Fascinating Stories
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Once in a town, two friends wanted to invest. One chose equity shares for fun, betting on profits, while the other picked preference for steady income, showing that different strategies exist!
π§ Other Memory Gems
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E for Equity, P for Preference β Remember which yields dividends and which takes precedence!
π― Super Acronyms
F.I.P.
- Forfeiture
- Issue price
- Preference shares β Key aspects to remember when learning about shares!
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, with dividends varying based on company's profits.
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Term: Preference Shares
Definition:
Shares with a fixed rate of dividend and priority in payment over equity shareholders.
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Term: Face Value
Definition:
The nominal value assigned to a share.
-
Term: Issue Price
Definition:
The price at which shares are issued, which can be at par, premium, or discount.
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Term: Calls
Definition:
Amounts payable in installments when shares are issued.
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Term: Forfeiture
Definition:
The loss of ownership of shares when a shareholder fails to pay calls.