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2.2. Issue 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.
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Now let’s 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.
That’s right! And how about the issue price?
It can be at par, premium, or discount when shares are offered!
Exactly! Let’s explore calls as well. What does 'calls' mean in our context?
Calls are payments made in installments for shares.
Great! Now, let’s 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 let’s summarize what we learned.
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Create a free accountLet’s 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.
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Create a free accountNow, let’s apply what we've learned. If a company issues 1,000 equity shares at a face value of ₹10, what's the total capital raised?
That would be ₹10,000!
Exactly! And what if they issued 500 shares at a premium of ₹2?
Then it would be ₹6,000, because it’s ₹12 per share!
Good job! Always calculate the total by combining the face value and premium. Keep practicing these kinds of questions!
Overview
Short Summary
This section covers the various aspects of issuing shares by joint stock companies, focusing on the types of shares, key terms, and accounting procedures involved.
Medium Summary
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 Summary
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 ₹10 face value share issued at ₹10 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
- On application:
- At Premium: When shares are issued above their face value, such as ₹10 shares issued at ₹12, 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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Create a free account- 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 – they get their share first.
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Create a free account- 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 ₹10,000 (the face value). They offer it to you for ₹12,000 (the issue price). However, you can pay ₹4,000 now and the rest later in installments (calls). This concept works similarly in the share market.
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Create a free account(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/cDetailed 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 ₹10 and is issued at ₹10, 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 ₹100 (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).
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Create a free account(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
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 ₹10 is sold for ₹12, the additional ₹2 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 ₹200 when its original price was only ₹150. The extra ₹50 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.
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Create a free account(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
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).
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Key Concepts
Core takeaways and short definitions to help you quickly recall the key ideas from this section.
Types of Shares: Equity and Preference shares serve different purposes in a company's financing.
Face Value: The nominal value of a share that determines its basic price.
Forfeiture: Shares can be forfeited if shareholders do not pay their installments.
Reissue of Shares: Forfeited shares can be reissued at a discount, not exceeding the amount forfeited.
Examples
Memory Aids
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Stories
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Glossary
Equity Shares
Shares that do not have a fixed dividend, with dividends varying based on company's profits.
Preference Shares
Shares with a fixed rate of dividend and priority in payment over equity shareholders.
Face Value
The nominal value assigned to a share.
Issue Price
The price at which shares are issued, which can be at par, premium, or discount.
Calls
Amounts payable in installments when shares are issued.
Forfeiture
The loss of ownership of shares when a shareholder fails to pay calls.