Accounting For Share Capital

Accounting for Share Capital
Accounting for Share Capital starts when a company offers shares to the general public. Persons desirous of
becoming shareholders of the company apply to the company for the purchase of a certain number of shares.
This application is to be given on the prescribed form. These applications are given to banks approved by the
company. Each application must be accompanied with the total amount of the value of shares applied for. After
the last date of application has expired, the company gets information from all branches of approved banks
about the total number of shares applied for and the total amount along with applications. This amount may be
called the application money.
If the amount thus collected is equal or more than the amount of minimum subscription stated in the prospectus,
the company proceeds to allot shares to the applicants. If share applications have been received in excess of the
number of shares offered by the company, the issue is said to be over-subscribed and the oversubscribed
amount is returned to the applicants. The decision to allot shares is communicated to applicants by a letter
known as the letter of allotment. These letters are signed by applicants and returned to the company on the basis
of which the company prepares share certificates and these share certificates are sent to the applicants, who are
now shareholders of the company.
Accounting for Share Capital
First or Initial Issue Subsequent Issue
Issue to General Public Issue to Directors Issue of Promoters Issue to Underwriters
Full Subscription Over Subscription Under Subscription
Accounting for Issue of Shares

In the process of raising its minimum subscription, a company invites applications. When the minimum
subscription has been raised, the company proceeds to allot the shares. An application for shares is an offer and
the allotment is an acceptance. The allotment of shares is an act of the company by which an applicant for shares
becomes the holder of the shares.
Over-Subscription
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If the issue is over-subscribed, a certain formula is used to allot the shares. For example, applications for 10
shares may be allotted 50%; applicants for 100 shares may be allotted 25 % of the shares applied for, and so
forth. Thus the excess amount is returned to the applicants. After finalizing the allotment the company informs
the banks of the bases of refund, and the bankers refund the money accordingly.
Example # 1:
(First or Initial Issue with Full and Over-Subscription to General Public)
Alamzeb Industries Ltd. was registered with an authorized capital of Rs. 1,000,000 divided into 100,000
ordinary shares of Rs. 10 each. The minimum subscription limited stated in the memorandum was Rs. 600,000.
The company offered 60,000 shares of Rs. 10 each at par value on July 1st, 2019.
Requirement: Record the above transactions in the books of the company and show how it will be shown in the
Balance Sheet of company if:
(a) Applications for exactly 60,000 shares were received.
(b) Applications for 75,000 shares were received. .
Solution: (a)
General Journal
Amount (Rs)
Date Account Titles and Explanation Ref Debit Credit
2019
July 1 Bank 600,000
Share Application 600,000
(Money received for 60,000 share @ 10 each)
1 Share Application 600,000
Share Capital 600,000
(Applications are allotted the shares)
Solution: (b)
General Journal
Amount (Rs)
2019
July 1 Bank 750,000
Bank 150,000
(Applications are allotted the shares and refund made)
Alamzeb Industries Ltd.

Balance Sheet
As on July, 2019
Assets Amount Liabilities and Share Capital Amount
Current Assets: Liabilities:

Bank 600,000

Share Capital:
Authorized Shares
100,000 @ 10 1,000,000

Issued, Subscribed & Paid Up Capital
60,000 @10 600,000

Total Rs. 600,000 Total Rs. 600,000
Example # 2:
(Share taken by the Directors)
Afaq Hussain Corporation limited was formed with an authorized capital of 50,000 shares of Rs. 100 each.
7,000 shares were issued to the directors on 15 th December, 2019 and 20,000 shares were offered to the public
for subscription. The applications were received for full offered shares. The shares were allotted to the
applications on 25th of December, 2019.
Requirement: Pass the necessary Journal Entries and prepare Balance Sheet?
Solution:
General Journal
Amount (Rs)
2019
Dec 15 Bank 700,000
(7,000 shares taken by directors)
15 Bank 2,000,000
Share Application 2,000,000
25 Share Application 2,000,000
Share Capital 2,000,000
Alamzeb Industries Ltd.

Balance Sheet
As on July, 2019

Bank 2,700,000

Share Capital:
Authorized Shares
50,000 @ 100 5,000,000

Issued to Directors (7,000 @ 100) 700,000
Issued to General Public (20,000 @ 100) 2,000,000

Total Rs. 2,700,000 Total Rs. 2,700,000
Example # 3:
(Shares Issued to Promoters)
Areej Hafeez Limited Company was registered with an authorized capital of Rs. 5,000,000 divided into 500,000
shares of worth Rs. 10 each. On Feb 1 st, 2020, 20,000 shares were issued to promoters in connection with their
services and preliminary expenses paid by them. 30,000 shares were also offered to the general public for
subscription. Applications were received for 40,000 shares on 15th Feb 2020. On 25th Feb 2020 shares were
allotted to the applicants of 30,000 shares and excess application money was refunded.
Requirement: Pass the Journal Entries and show how they would appear in the Company’s Balance Sheet at the
end of February 2020.
Solution:
General Journal
Amount (Rs)
2020
Feb 1 Preliminary Expenses 200,000
(20,000 shares taken by promoters)
15 Bank 400,000
Bank 100,000
(Money for excess 10,000 shares refunded)
Areej Hafeez Limited Company
Balance Sheet
As on Feb, 2020

Bank 300,000

Deferred Cost:
Preliminary Expenses 200,000 Share Capital:
Authorized Shares
500,000 @ 10 5,000,000

Issued to Promoters (20,000 @ 10) 200,000
Issued to General Public (30,000 @ 10) 300,000

Example # 4:
(Shares Issued to Underwriters)
On November 1st, 2019 Waqar Ahmad & Co. Ltd. having authorized share capital of worth Rs. 1,000,000
(100,000 numbers of shares @ 10 each); Offered 20,000 ordinary shares @ 10 each for public subscription. On
November 15th, it is made known to the company that applications were received for 15,000 ordinary shares.
The 5,000 share not taken by the general public and as per agreement, taken up by the underwriters, on
November 25th, 2019, the company allotted the shares.
Requirement: Pass Journal Entries and prepare Balance Sheet as on November 2019.
Solution:
General Journal
Amount (Rs)
2019
Nov 15 Bank 150,000
25 Bank 50,000
(5,000 @ 10 share taken by underwriter)
Waqar Ahmad & Co. Ltd.
Balance Sheet
As on Feb, 2020

Bank 200,000

Share Capital:
Authorized Shares
100,000 @ 10 1,000,000

Issued to Underwriter (5,000 @ 10) 50,000
Issued to General Public (15,000 @ 10) 150,000

Example # 5:
(Issue of Share at Premium)
On October 2019, Huzaifa Bashir Ltd. had authorized capital of 200,000 shares of worth 10 each. The
management of the company decided to issue 50,000 shares at a premium of Rs. 2 per share. Applications were
received for 70,000 shares. Shares were allotted and money was refunded for applicants of 20,000 shares.
Required: Pass Journal Entries and make Balance Sheet as on October 31st, 2019.
Solution:
General Journal
Amount (Rs)
2019
Oct Bank 840,000
Share Premium 100,000
(Applications are allotted the shares with Rs. 2 Premium)
Bank 240,000
(20,000 share application money refunded)
Huzaifa Bashir Ltd.
Balance Sheet
As on October 31st, 2019

Bank 600,000

Share Capital:
Authorized Shares
200,000 @ 10 2,000,000

Share par value 50,000 @ 10 500,000
Premium 50,000 @ 2 100,000

Example # 6:
(Issue of Share at Discount)
Soha Khan Ltd. with an authorized capital of 50,000 shares of Rs. 100 each passed a resolution in a general
meeting to issue 20,000 shares at a discount of 20%. Applications were received for 15,000 shares and
subsequently shares were allotted.
Required: Record the transactions in the books of the company as on August 31st, 2019.
Solution:
General Journal
Amount (Rs)
2019
Oct Bank 1,200,000
Share Application 1,200,000
(Money received for 15,000 share @ 80)
Share Application (15,000 * 80) 1,200,000
Discount on Issue of Share (15,000 * 20) 300,000
Share Capital 1,500,000
(Allotment of shares with discount on issuance of shares)
Soha Khan Ltd.
Balance Sheet
As on August 31st, 2019

Bank 1,200,000

Deferred Cost: Share Capital:
Discount on Issue of Share 300,000 Authorized Shares
200,000 @ 10 2,000,000

Issued, Subscribed
20,000 @ 100 2,000,000
Paid Up Capital
Share par value 15,000 @ 100 1,500,000

Total Rs. 1,500,000 Total Rs. 1,500,000
Example # 7:
(Issue of Share in Consideration of Assets other than Cash)
Rimsha Tanoli Ltd. acquires Building Rs. 500,000; Machinery Rs. 200,000: Equipment Rs. 300,000 and Land
Rs. 1,000,000 from Janat Bibi and offers Rs. 900,000 in cash and the balance in fully paid up shares of Rs. 100
each at a premium of Rs. 10 per share. Janat Bibi accepts this offer.
Required: Pass the Journal Entries in the book of Rimsha Tanoli Ltd. at January 31st, 2020.
Solution:
General Journal
Amount (Rs)
2019
Oct Building 500,000
Machinery 200,000
Equipment 300,000
Land 1,000,000
Janat Bibi 2,000,000
(Assets acquired from vendor)
Janat Bibi 2,000,000
Cash 900,000
Share Capital (10,000 * 100) 1,000,000
Premium (10,000 * 10) 100,000
(Cash paid and 10,000 shares allotted at premium)
Example # 8:
(Issue of Share for Purchase of Running Business)
Example # 9:

Accounting For Share Capital

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Accounting For Share Capital

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Accounting for Share Capital

Accounting for Share Capital

First or Initial Issue Subsequent Issue

Issue to General Public Issue to Directors Issue of Promoters Issue to Underwriters

Full Subscription Over Subscription Under Subscription

Accounting for Issue of Shares

Alamzeb Industries Ltd.

Assets Amount Liabilities and Share Capital Amount

Current Assets: Liabilities:

Alamzeb Industries Ltd.

Assets Amount Liabilities and Share Capital Amount

Current Assets: Liabilities:

(Shares Issued to Promoters)

Assets Amount Liabilities and Share Capital Amount

Current Assets: Liabilities:

(Shares Issued to Underwriters)

Assets Amount Liabilities and Share Capital Amount

Current Assets: Liabilities:

(Issue of Share at Premium)

Assets Amount Liabilities and Share Capital Amount

Current Assets: Liabilities:

(Issue of Share at Discount)

Assets Amount Liabilities and Share Capital Amount

Current Assets: Liabilities:

(Issue of Share in Consideration of Assets other than Cash)

(Issue of Share for Purchase of Running Business)

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