Maharashtra Board Class 12 Book Keeping and Accountancy Chapter 8 Company Accounts Issue of Shares PDF Download

Company Accounts: Issue Of Shares

Introduction

Capital is the life blood of any business organisation. A sole trader introduces capital out of his own pocket. Similarly the partners also bring capital from their own pockets. But in case of company form of business organisation, the capital is raised through the issue of shares.

Industrial Revolution brought significant changes in the size of business-structure. Joint Stock Company as a modern form of business organisation emerged to meet the requirements of large sized business to remove the main defects or limitation of the partnership form of organisation. That is unlimited liability and shortage of funds. It was therefore felt necessary to collect the capital from the public at large and to encourage the public to contribute capital, here the principal of limited liability was adopted.

Teacher's Note

Companies sell shares like a shop sells goods. When you buy a share, you own a small part of the company. For example, if Reliance company sells 1,00,000 shares and you buy 1 share, you own 1/100000 part of Reliance.

Exam Trick

Remember: Share Capital = Money raised by selling shares. Just like a school collects fees from students, a company collects money by selling shares to people.

Points To Remember

Capital is very important for any business.
Companies raise capital by selling shares to public.
Shareholders own small parts of the company.
Companies can issue two types of shares: Equity and Preference.
Joint Stock Company came after Industrial Revolution.

8.1 Share And Share Capital

8.1.1 Meaning

As per Section 2(84) of companies Act 2013 "Share is the share in the capital of a company and includes stock as well." Share Capital means the capital raised by a company by issue of shares. In case of Company is divided into small parts known as shares. This is why it is known as Share Capital.

According to Companies Act, Company can issue two types of shares namely Equity Shares and Preference Shares.

Equity Shares: A share which is not a preference share is an equity share. It means that if the shareholder is not entitled to a fixed dividend or have priority at the time of repayment of capital will be treated as Equity Share Capital. Equity shareholders participate in profits of a company after all preferential rights have been satisfied. Equity shareholders are the risk bearers and therefore the real owners of the company and can get dividend after payment of all expenses and dividend to preference shareholders.

Preference Shares: Preference shares are those shares which have right with respect to payment of dividend and repayment of capital of winding of the company. Thus preference shareholders enjoy preferential rights in case of payment of dividend and repayment of Capital. Preference shareholders get fixed rate of dividend before giving dividend to equity shareholders. On the basis of additional rights or benefits preference shares can be further classified as follows:

a) Cumulative and Non-cumulative Preference Shares

b) Redeemable and Irredeemable Preference Shares

c) Participative and Non-participative Preference Shares

d) Convertible and Non-convertible Preference shares

As the above classification of Preference shares does not effect on the accounting entires, detail explanation is not given here.

8.1.2 Types Of Share Capital

The different types of share capital are as follows:

i) Authorised Capital: The Authorised Capital is the amount of share Capital which a company is authorised to issue by its Memorandum of Association. The amount of Authorised capital is determined after taking into consideration the future requirements of capital of the company. This capital is also known as "Nominal Capital" or "Registered Capital". This is the maximum amount which a company is authorised to raise by the issue of shares. The Authorised Capital can be increased or decreased by adopting the prescribed legal procedure.

ii) Issued Capital: Issued Capital is that part of the Authorised Capital which is offered to the public for subscription. If the company issue all its shares, Issued Capital will be equal to Authorised Capital. Generally, company issues such number of shares which are sufficient to meet the requirements of the company at the time of their issue. The part of Authorised capital which is not issued to the public is known as Unissued Capital.

iii) Subscribed Capital: Subscribed Capital is that part of Issued Capital which is actually subscribed by the public. When the shares issued for subscription are wholly subscribed, issued capital would be the same as the subscribed capital. The part of issued capital which is not subscribed by the public are known as unsubscribed capital.

Teacher's Note

Think of it like this: Authorised Capital is what the company is allowed to sell. Issued Capital is what it actually puts up for sale. Subscribed Capital is what people actually buy.

Exam Trick

Remember: Authorised = Permission. Issued = Offered. Subscribed = Bought. Just like a school can have 1000 seats (Authorised), but only opens 500 (Issued), and only 450 students join (Subscribed).

Points To Remember

Authorised Capital is the maximum the company can issue.
Issued Capital is what the company actually offers to people.
Subscribed Capital is what people actually buy.
Unissued Capital = Authorised - Issued.
Unsubscribed Capital = Issued - Subscribed.

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