Accounting for Share Capital Transactions

For a company, share capital is the main source of fund. So, when company gets share capital, it is very necessary to record it in the books. To know basics of accounting for share capital transactions is still important for every accountant because today most of companies are limited by shares. Every shareholder's liability is limited up to his bought shares.

Today, we will start  accounting for share capital with following transactions :

(A) Journal Entries of Share Capital Transactions 

1. When company gets Application Money

For doing business, company need big money. Company issues the prospectus during initial public offering. All the person who satisfied with company's written terms and objectives in the prospectus, may apply for getting shares. This is the first transaction which is done between the investor and company. After this, company will not record when one shareholder sells the shares to other shareholder because in the year, a company's shares may be transferred from millions of people to other millions of people. In the end, company will make shareholder register to record the current shareholders.

Important : Because company is not getting full amount from shareholder. So, company divides total receivable money in the share application, share allotment and balance in share calls.

Ok, come to learn when company gets application money.

Bank Account Dr. 

Share Application Account Cr. 

Explanation of this Transaction :

Company gets liquid asset, so bank account will debit. Share application is the creditor account which we will transfer to share capital account allotment of shares to shareholders.

2. Transfer the Share Application to Share Capital Account on the Allotment of Shares 

Allotment means physical transfer of shares from company to investor. After this, a investor will become the owner and shareholder of company. Before this, he is just a creditor. All the application money will be transfer to the investor to whom we did not allot the share. It may happen due to more application than our demanding quota of application which depends on our issued capital.

Share Application Account Dr.

Share Capital Account Cr.

Explanation of this Transaction :

Application money on allotted shares is transferred to share capital account. In simple words, we have transfer current liability into our fixed liability.

3. On the Return of Application of Not Allotted Shares 

Share Application Account Dr.

Bank Account Cr.

Explanation of this Transaction :

The investor has right to get his invested money if company do not give shares. Company is just passing the opposite entry of no. 1 for returning application money to the applicants who could not be allotted any share.

4. When Allotment Money Becomes Due 

Share Allotment Account Dr.

Share Capital Account Cr.

Explanation of This Transaction : 

If company gets all the money from applicants in one installment, company just debits the bank account and credits the share capital account but because we are receiving money in different parts, so, when company has fixed the date when company has to get allotment money from shareholder, company will transfer it to share capital account. Normally, at the date of allotment of money and allotment due dates will be same.

5. When Company Receives Allotment Money 

Bank Account Dr.

Share Allotment Account Cr.

6. When Call Money Becomes Due

Share Call Account Dr.

Share Capital Account Cr.

7.  When Company Receives Call Money 

Bank Account Dr.

Share Call Account Credit

Explanation of 6th and 7th Transaction :

Company may get call money in 1st call, 2nd call and final calls. So, when and which call money will be due, we will transfer this call money to share capital account. When call money will receive, we will debit the bank account and credit the share call account.

(B) Books of Share Capital Transactions 

Company records every applicant's record relating to share capital transaction. This is done through share application and allotment book and share call book. Following is the sample of application and allotment book. With same format, you can also make share call book.

Application No. 1 2 3 4
Date of Application 5/1/2013 5/1/2013 5/1/2013 5/1/2013
Name of Applicant  A   B C  D
Address  Delhi  Mumbai Kolkata  Chennai
Occupation Doctor Accountant  Engineer House Wife
No. of Shares Applied for 5000 3000 2000 40000
Amount Paid on Application Rs. 250,000 Rs. 150,000 Rs. 100,000 Rs. 200,000
C.B. Folio
Distincitve No.
Allotment Letter No. ad45 ad46 ad47 ad48
Amount Due on Allotment Rs. 250,000 Rs. 150,000 Rs. 100,000 Rs. 200,000
Date of Receipt of Cash 15/1/2013 15/1/2013 15/1/2013 15/1/2013
Allotment Money Rs. 250,000 Rs. 150,000 Rs. 100,000 Rs. 200,000
C.B. Folio
Amount of Cash Returned
C.B. Folio
Member's Register No. VVVV7 VVVV8 VVVV9 VVVV10

 (C) Record of Share Capital Transactions in Balance Sheet 

Only Paid up capital will be the part of balance sheet and will be shown in the liability side  because same amount will be shown as cash at bank in the asset side of balance sheet. Following is its example.

You are seeing Rs. 6000 call in arrears. For showing call in arears, you have to investigate whether all the money which is due, has been received or not. If any money which is due but not receive will add in call in area. For showing it in balance sheet, we pass following entry.

Call in Area Account Dr.

First or any Share Call Account Cr.

Important for Students : {This Written Lecture is the Part of CS Accounting Notes for ICSI Students  and Corporate Accounting Notes for Graduate and Post-Graduate Students. }


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Accounting Education: Accounting for Share Capital Transactions
Accounting for Share Capital Transactions
Accounting Education
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