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2.2.3.1. At Par
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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. Let’s remember this with the acronym 'EP'—Equity = 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. Let’s move on!
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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'—Face 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.
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Create a free accountNow, 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 ₹10 and are issued at ₹10 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.
Overview
Short Summary
This section covers the accounting processes involved in the issue of shares at par value.
Medium Summary
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 Summary
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:
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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 company’s profitability.
- Preference Shares: These provide a fixed rate of dividend and have a higher claim over dividends and assets than equity shareholders.
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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.
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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 ₹10, the journal entries include:
- On Application:
Bank A/c Dr. ₹10To Share Application A/c ₹10
- On Allotment:
Share Application A/c Dr. ₹10To Share Capital A/c ₹10
- On Application:
- For shares with a face value of ₹10, the journal entries include:
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.
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Create a free accountExample: Face Value ₹10 issued at ₹10
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 ₹10, it means the company sells the share for ₹10. 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 ₹10, you pay exactly ₹10 for it. You are getting exactly what you paid for, without any extra costs or discounts.
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Create a free accountJournal 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
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).
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Key Concepts
Core takeaways and short definitions to help you quickly recall the key ideas from this section.
Equity Shares: Shares with variable dividends based on company profits.
Preference Shares: Shares that guarantee a fixed dividend.
Face Value: The nominal value assigned to shares upon issuance.
Issue Price: Price at which shares are sold, can be at par, premium, or discount.
Calls: Installments payable on shares by shareholders.
Examples
Step-by-step examples to apply the section's ideas and test your understanding.
Example: Issuing 100 equity shares at a face value of ₹10 at par results in a total collection of ₹1000.
Example: A company might choose to issue shares at preference shares to attract more investors looking for fixed returns.
Memory Aids
Interactive tools to help you remember key concepts
Stories
Flash Cards
Glossary
Equity Shares
Shares that provide no fixed dividend and dividends depend on company profits.
Preference Shares
Shares that have a fixed rate of dividend and priority in payments over equity shareholders.
Face Value
The nominal value assigned to a share at issuance.
Issue Price
The price at which shares are offered to investors, which can be at par, discount, or premium.
Calls
Payments due from shareholders in installments during the share issuance process.