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2.2.2. Basic Terms
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Today, we're discussing the fundamental aspects of shares. Can anyone tell me what equity shares are?
Equity shares are those that don't have a fixed dividend.
That's right! Dividends for equity shares vary based on the company's profits. Now, who can explain what preference shares are?
Preference shares have a fixed rate of dividend and get paid before equity shareholders.
Excellent! Let's summarize: Equity shares relate to profit variability, while preference shares prioritize fixed dividends. Remember, "Equity is variable, Preference is priority."
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Next, let's explore some key terms. Who can define 'Face Value'?
Face value is the original value of a share.
Correct! Now explain 'Issue Price' for me.
It's the price at which shares are offered, and it can be at par, premium, or discount.
Exactly! To help remember, think of "Face is Original, Issue is Pricing." Let's continue with 'Calls.' Any takers?
Calls are amounts payable at different stages, like Application or Allotment.
Great job! Calls are crucial to share issuance. Remember: 'Calls come in steps.'
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Create a free accountNow let’s dive into accounting for shares. What happens when shares are issued at par?
You record the bank account and share application in journal entries.
Correct! For example, when shares are issued at ₹10, we debit Bank A/c and credit Share Application A/c. And what about shares issued at a premium?
The excess amount goes to the Securities Premium A/c!
Exactly. Remember, for premium: 'Add to Securities, it’s a bonus!' Lastly, what do we do if a shareholder fails to pay?
The shares can be forfeited and later reissued at a discount.
Correct! Forfeiture is critical to managing unpaid shares. Good recap today!
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Create a free accountNow let's turn our attention to debentures. Can anyone explain what a debenture is?
A debenture is a loan certificate acknowledging a company's debt.
Good job! Debentures can be classified in different ways. Student_2, can you detail those classifications?
Sure! They can be convertible or non-convertible, secured or unsecured, and redeemable or irredeemable.
Excellent summary! To keep it memorable, think "Convertible Change, Secures and Redeems!" We must also know how to account these debentures. What happens in journal entries for debentures issued at par?
You debit the bank and credit the debenture account.
Exactly! Great teamwork today!
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Create a free accountLast concept today: redemption of debentures. What does redemption imply?
Redemption is the repayment of debentures at maturity or before.
Correct! Could anyone name the methods of redemption?
Methods include lump-sum payment, installment payment, buying back in the market, or converting to shares.
Exactly! Always remember the mnemonic "L.I.M.C": Lump-sum, Installments, Market, Conversion. Now, tell me about the need for Debenture Redemption Reserve.
It's required to ensure companies have funds available for redemption.
Precisely! Today’s lesson was packed with vital terms. Remember your mnemonics as you review!
Overview
Short Summary
This section introduces fundamental terms and concepts related to the accounting of Joint Stock Companies, primarily focusing on shares and debentures.
Medium Summary
In this section, key terms essential for understanding Joint Stock Company accounts are defined, including types of shares (equity and preference), features such as face value and issue price, as well as aspects of debentures, including their types and accounting entries related to their issue and redemption.
Detailed Summary
Detailed Summary
This section covers the basic terms associated with the accounting practices of Joint Stock Companies, focusing on shares and debentures.
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Types of Shares:
- Equity Shares have no fixed dividend, as this varies with profits.
- Preference Shares are characterized by a fixed dividend rate, with a priority over equity shareholders in terms of payment.
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Key Terms:
- Face Value refers to the original value of a share.
- Issue Price is the price at which shares are issued and can occur at par, premium, or discount.
- Calls represent amounts due at different stages of the share acquisition process (i.e., Application, Allotment, etc.).
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Accounting for Shares:
- When shares are issued at par, journal entries for receiving payments and allotting shares are demonstrated.
- If issued at a premium, excess funds contribute to the Securities Premium Accrued.
- Forfeiture of shares occurs when payments are missed, and reissues may happen at a discount.
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Debentures are loan certificates acknowledging a company’s debt, with classifications into various types, including convertible, secured, and redeemable.
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Accounting Entries for Debentures are presented for issues at par and discount, detailing journal entries for transactions.
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Redemption of Debentures involves methods of repayment and the necessity to create a Debenture Redemption Reserve (DRR). Journal entries for regular redemptions and those involving premium payments are discussed.
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Final Accounts of Companies: According to statutory requirements, companies need to prepare a Balance Sheet and a Statement of Profit and Loss, inclusive of key adjustments like depreciation and provisions.
Audio Book
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Create a free account• Face Value: Original value of a share.
Detailed Explanation
The face value of a share, also known as par value, is the value assigned to it by the company. It is important because it represents the minimum amount that shareholders will pay for a share when it is issued. This amount does not change regardless of the market price of the share after it has been issued.
Examples & Analogies
Think of the face value like the price tag on an item in a store. If a shirt has a price tag of $20, that is its set price regardless of whether it goes on sale or not. Similarly, the face value of a share is like that price tag — it's the original value assigned to it.
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Create a free account• Issue Price: Price at which shares are issued (can be at par, premium, or discount).
Detailed Explanation
The issue price is the amount at which a share is sold to investors when it is first issued. Shares can be issued at three different price levels: at par, which is the same as the face value; at a premium, which is above the face value; and at a discount, which is below the face value.
Examples & Analogies
Imagine a concert where tickets (shares) can be sold at their original price (face value), a higher price (premium) if the event is very popular, or a lower price (discount) to sell out remaining seats as the event date approaches. Each pricing strategy serves a different purpose for the issuer.
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Create a free account• Calls: Amounts payable in installments (e.g., Application, Allotment, First Call, Final Call).
Detailed Explanation
Calls refer to payments that shareholders are required to make on their shares in installments rather than all at once. When a company issues shares, it can specify various types of calls like 'application' (initial payment when applying for shares), 'allotment' (payment upon shares being formally issued), and other calls such as 'First Call' and 'Final Call' for the remaining amount.
Examples & Analogies
Consider buying a car where you pay an upfront fee to book (application), followed by the remaining balance in stages. Each payment you make is like a call on your share — you commit a part of your total payment at a time until you fully own the car (the shares).
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Create a free account• Forfeiture happens when a shareholder fails to pay calls. • Reissued shares can be at discount (not exceeding the amount forfeited).
Detailed Explanation
Forfeiture of shares occurs when a shareholder fails to pay the calls on their shares. This means they lose their rights to the shares, and the company can take back these shares. The company can then reissue these forfeited shares, often at a discount to attract new buyers, but not for more than the unpaid amount.
Examples & Analogies
Imagine renting an apartment but failing to pay rent. The landlord can take back the apartment (forfeit) and potentially offer it again at a lower rent to fill it quickly. Similarly, companies can regain and reissue shares to ensure they maintain the capital they need.
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Key Concepts
Core takeaways and short definitions to help you quickly recall the key ideas from this section.
Equity Shares: No fixed dividend; varies based on profits.
Preference Shares: Fixed dividend, priority over equity shares.
Face Value: Original share value, as stated on the share certificate.
Issue Price: Price paid for shares, can be at par, premium, or discount.
Calls: Payments made in installments by shareholders during share acquisition.
Debenture: Long-term loan instrument acknowledging a debt obligation.
Securities Premium Account: Records excess over face value received during share issuance.
Redemption Methods: Different ways to repay debentures upon maturity.
Examples
Step-by-step examples to apply the section's ideas and test your understanding.
An example of equity shares could be shares issued by a startup company where dividends vary based on the business's performance.
For example, if a company issues ₹100 shares at a 10% premium, the issue price would be ₹110, with the ₹10 going into the Securities Premium Account.
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Glossary
Joint Stock Company
A voluntary association of individuals engaging in business, contributing capital, sharing profits, and having limited liability.
Equity Shares
Shares that provide dividends based on company profits without a fixed rate.
Preference Shares
Shares with a fixed dividend rate that have priority over equity shares in payment.
Face Value
The original value of a share as stated on the stock certificate.
Issue Price
The price at which shares are offered to the public, which can be at par, premium, or discount.
Calls
Amounts payable by shareholders in installments during the share acquisition process.
Debenture
A long-term security that represents a loan made to a company that is to be repaid at a later date.
Securities Premium Account
An account that records the excess amount received over the face value of shares issued at a premium.
Forfeiture
The cancellation of shares when a shareholder fails to pay the required calls.
Debenture Redemption Reserve (DRR)
A reserve that companies must create to ensure funds are available for the repayment of debentures.