2.2.3 - Accounting for Issue of Shares
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Types of Shares
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Today, we're going to learn about the types of shares that can be issued by a joint stock company. Can anyone tell me what the two main types of shares are?
I think they are equity shares and preference shares.
Correct! Equity shares have no fixed dividend, while preference shares offer a fixed rate of dividend and priority in payment. Remember this with the acronym 'E for Equity, P for Preference,' which highlights their key characteristics.
Why does preference have priority?
Great question! Preference shareholders are paid dividends before equity shareholders, which reduces risk for those shareholders. It's important to understand how share types affect dividend distribution.
In summary, equity shares are at the mercy of profits, while preference shares promise a fixed return.
Basic Terms Related to Shares
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Let's cover some basic terms related to shares. Who can define 'face value' for me?
Isn't face value the original value of a share?
Exactly! Now, what about 'issue price'?
I think it's the price at which shares are sold.
That's right! Shares can be issued at par, premium, or discount. Remember these terms with the mnemonic 'PID: Par, Issue, Discount' to help recall these options. Each affects the company's accounting in different ways.
Lastly, 'calls' are amounts to be paid in installments. Think of 'CALLS as CO-PAYments'. They're crucial for understanding share acquisition.
Accounting for Issue of Shares
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Now that we know the types of shares and key terms, let's talk about accounting for shares issued at par, premium, and the processes of forfeiture and reissue. Can anyone explain what happens when shares are issued at par?
I think it means the shares are sold for the same value as their face value?
Exactly! So, for a ₹10 share issued at ₹10, the journal entries would first be: Bank A/c Dr. To Share Application A/c during application.
And what happens after that?
On allotment, we debit Share Application A/c and credit Share Capital A/c. Now, what if the shares are issued at a premium?
We would credit the Securities Premium Account with the excess.
Exactly! For example, if a ₹10 share is issued at ₹12, we would have extra ₹2 in the Securities Premium Account. In summary, remember: 'At par, simple entries; at premium, add a bonus!'
Forfeiture and Reissue of Shares
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Great work! Now, let's discuss what happens if a shareholder defaults on payments. What do we call that?
That's called forfeiture, right?
Yes! Forfeiture occurs when calls are not paid. Reissued shares can occur, sometimes even at a discount, which cannot exceed the amount forfeited. How can we remember this?
How about the phrase 'Forfeit and Reissue—cover what you lose'?
That's a clever way to remember! So, when shares are reissued, we need to account for the original forfeiture. Any other questions?
What if the reissue price is higher than the forfeited amount?
That's an important consideration, and it’s always best to consult the defined procedures. Today's key takeaway is: 'Hold onto assets but be ready to adjust.'
Introduction & Overview
Read summaries of the section's main ideas at different levels of detail.
Quick Overview
Standard
The section outlines the types of shares (equity and preference), the basic terms associated with share issues, and details the accounting treatment for issuing shares at par, at a premium, and the process of forfeiture and reissue of shares. Understanding these concepts is crucial for the preparation of accurate and compliant financial statements for joint stock companies.
Detailed
Detailed Summary
This section focuses on the accounting for the issue of shares by a joint stock company, emphasizing its importance in proper financial reporting. It begins by categorizing shares into Equity Shares with variable dividends and Preference Shares which provide fixed dividends.
Key Terms:
- Face Value: The nominal value of a share.
- Issue Price: The price at which shares are issued, which can be at par, premium, or discount.
- Calls: Amounts payable by shareholders in installments, typically categorized as Application, Allotment, First Call, and Final Call.
Accounting Treatment:
1. Issue of Shares at Par:
When shares are issued at their face value, such as a face value of ₹10 being issued at ₹10, specific journal entries are made for application and allotment, reflecting the movement of funds and obligations in the company's accounting books.
2. Issue of Shares at Premium:
Shares may also be issued at a price above their face value. For example, a face value of ₹10 being issued at ₹12 results in the excess being credited to the Securities Premium Account.
3. Forfeiture and Reissue of Shares:
Occasionally, shares may be forfeited if shareholders fail to meet payment calls; these can then be reissued, possibly at a discount, ensuring the original amount forfeited is not exceeded.
This comprehensive overview of share issues provides the foundational knowledge necessary for understanding joint stock company accounts.
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Types of Shares
Chapter 1 of 5
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Chapter Content
- Types of Shares
• 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
This chunk explains the two main types of shares issued by companies: Equity Shares and Preference Shares. Equity Shares do not guarantee any fixed dividend, meaning the dividend paid is based on the company's profits. In contrast, Preference Shares provide a fixed dividend and have priority over equity shareholders when it comes to dividend payments.
Examples & Analogies
Imagine a profit-sharing agreement among friends. If they make money from a venture, equity shareholders receive dividends that vary depending on how profitable the venture is. However, preference shareholders get a guaranteed amount before equity shareholders see any money.
Basic Terms in Share Issuance
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Chapter Content
- Basic Terms
• 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
This chunk covers vital terms related to the issuance of shares. The Face Value is the nominal or original cost of a share that is designated on the stock certificate. The Issue Price refers to the price at which shares are offered to the public, which might be the same (at par), more (at premium), or less (at discount) than the face value. Lastly, 'Calls' are payments that shareholders make in parts, which could occur at different stages of the share issuance process.
Examples & Analogies
Think of Face Value like the tag price on a new smartphone. The Issue Price is what customers actually pay at the register, which could be more during sales. Initial payments when purchasing the phone on a plan could represent the 'Calls'.
Accounting for Shares Issued at Par
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Chapter Content
- Accounting for Issue of Shares
(i) At Par
Example: Face Value ₹10 issued at ₹10
Journal Entries:
• On application:
Bank A/c Dr.
To Share Application A/c
• On allotment:
Share Application A/c Dr.
To Share Capital A/c
Detailed Explanation
This chunk details how companies account for shares issued at par value. When a company issues shares at par, it means the issue price equals the face value. For instance, if the face value is ₹10 and it is issued for ₹10, an accounting entry occurs first at the application stage where the company receives money that is reflected in the Bank account. Following that, when shares are formally allotted, the money is transferred from the Share Application Account to the Share Capital Account.
Examples & Analogies
Picture a club membership. If the membership fee is ₹100 (face value) and you pay exactly that amount, the club records your payment (application) and then updates its member list (allotment) to include you.
Accounting for Shares Issued at Premium
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Chapter Content
(ii) At Premium
Issued at more than face value.
Ex: ₹10 face value issued at ₹12
Securities Premium A/c is credited with excess.
Detailed Explanation
This chunk explains how to account for shares issued at a premium. When a share with a face value of ₹10 is issued at ₹12, the extra amount of ₹2 is considered a premium. The premium amount is recorded in a separate account called the Securities Premium Account. This reflects additional value the market places on the shares above their nominal value.
Examples & Analogies
Consider a concert ticket priced at ₹500 (face value), but due to high demand, it sells for ₹600. The additional ₹100 represents the premium, indicating how valued the ticket is at that moment.
Forfeiture and Reissue of Shares
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Chapter Content
(iii) Forfeiture and Reissue of Shares
• Forfeiture happens when a shareholder fails to pay calls.
• Reissued shares can be at discount (not exceeding the amount forfeited).
Detailed Explanation
This chunk discusses the processes of forfeiture and reissue concerning shares. Forfeiture occurs when a shareholder does not make the required payments for their shares (known as calls). If shares are forfeited, they can be reissued, potentially at a discount, but the discount cannot be greater than the amount forfeited for those shares. This allows the company to recover some of its losses from unpaid calls.
Examples & Analogies
Imagine a friend borrows a book and doesn't return it. You decide to give it to someone else, but since your friend never returned it, you charge a lesser fee to entice the new reader, showing flexibility in reissuing what was lost.
Key Concepts
-
Equity Shares: Shares without fixed dividends.
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Preference Shares: Shares with fixed dividends.
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Face Value: The nominal value of a share.
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Issue Price: The price at which shares are issued.
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Calls: Payments due from shareholders in parts.
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Forfeiture: Cancellation of shares due to non-payment.
Examples & Applications
If a company issues 1,000 equity shares at ₹10 each, the total capital raised is ₹10,000.
If a preference share with a face value of ₹20 is issued at a premium of ₹2, the securities premium account will reflect ₹2,000 for 1,000 shares.
Memory Aids
Interactive tools to help you remember key concepts
Rhymes
Equity shares, wild and free, pay dividends only when dividends be.
Stories
Imagine a merchant with two bags—one labeled 'Equity' and the other 'Preference.' One bag offers sweet candy (profits), and you only get them when the profit is good, while the other promises candy regularly, giving you a feel of security.
Memory Tools
Remember 'FIPS: Face, Issue, Premium, Securities' to track share pricing terms.
Acronyms
Think of 'EPE' for Equity, Preference, and Entry to guide your understanding of share types.
Flash Cards
Glossary
- Equity Shares
Shares that do not have a fixed rate of dividend; dividends depend on the company's profits.
- Preference Shares
Shares that have a fixed rate of dividend and have priority over equity shares in dividend payments.
- Face Value
The nominal or original value of a share stated on the share certificate.
- Issue Price
The price at which a share is issued, which can be at par, premium, or discount.
- Calls
Amounts that shareholders are required to pay in installments.
- Forfeiture of Shares
The cancellation of shares due to a shareholder's failure to pay calls.
- Securities Premium Account
An account representing the premium received on the issue of shares above face value.
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