Accounting for Share Capital — Class 12 Accountancy Notes & Practice

Take a breath. If the words “share capital” make your stomach tighten a little, you are in exactly the right place, and you are far from alone. Almost every Class 12 student meets this chapter and thinks it is going to be a wall of legal language and impossible journal entries. It is not. Underneath all the formal vocabulary, this chapter is about one very ordinary human situation: a group of people wants to start something big, nobody has enough money alone, so they pool their money together and agree on who owns how much. That is it. Everything else — application, allotment, calls, premium, forfeiture — is just careful record-keeping about that pooling. We are going to walk through it slowly, in order, with numbers small enough that you can check them on your fingers before we scale up to board-exam size. Read at your own pace. Nothing here is a race.

Your Game Plan

1. Read the first three sections slowly and do not write a single journal entry yet. Just get comfortable with the vocabulary.
2. Then learn the three-instalment rhythm — application, allotment, call — until you can recite it half-asleep. Everything else in this chapter is a variation on that rhythm.
3. Do the easy example in each section before you look at the hard one. Cover the answer with your hand first. Always.
4. Only after over-subscription feels solid should you touch forfeiture. Forfeiture built on shaky pro-rata is where most marks quietly disappear.
5. Finish with the worksheet at the end. Write your answer on paper before you click “Show Answer”. Reading a solution feels like learning; it is not. Writing one is.

What a Company Is and Why Share Capital Exists

Imagine six friends in your colony want to buy a scooter to run a small delivery service. The scooter costs ₹60,000. Nobody has ₹60,000. So each friend puts in ₹10,000, and they write on a piece of paper: “each of us owns one-sixth of this scooter, and we will split the earnings one-sixth each.” That single piece of paper is the whole idea of share capital in miniature.

A company is that arrangement, done formally and at scale. Instead of six friends it might be six lakh strangers. Instead of a handwritten paper, the arrangement is registered under the Companies Act, 2013. And instead of “one-sixth”, ownership is chopped into small equal units called shares. If you own 500 shares out of 1,00,000 shares, you own one two-hundredth of the company. The money the company collects by selling these units is its share capital.

Two features of a company are worth pausing on, because they explain almost every rule that follows.

Separate legal entity. The company is treated by law as a person in its own right. It can own the scooter, sign contracts and be taken to court in its own name. The owners are not the company. This is why, in the books of the company, money brought in by owners is shown as a liability of the company towards them — the company “owes” that ownership stake back.

Limited liability. If you buy a share of ₹10 and pay ₹10, that is the absolute end of your risk. If the company collapses owing crores, nobody can come to your house. You can lose the ₹10 you put in; you can never lose more. Feel how reassuring that is — that promise is precisely why ordinary people are willing to hand money to a company run by strangers, and it is why companies can raise the enormous sums that partnerships cannot.

Why it works: every rule in this chapter is downstream of those two ideas. Limited liability is why unpaid amounts must be chased through formal “calls” and can end in forfeiture. Separate legal personality is why share capital sits with the liabilities. Hold those two thoughts and the rest stops feeling arbitrary.

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The Kinds of Share Capital (Authorised to Paid-Up)

This is the section students skip because it “looks like theory”. Please do not. Once these five words are clear, roughly a third of this chapter becomes obvious, and a one-mark question on it appears with cheerful regularity.

Think of a giant water tank on your roof, with the tank shrinking at every stage:

Authorised Capital (also called Nominal or Registered Capital) is the size of the tank. It is the maximum amount of share capital the company is legally permitted to raise, written into its Memorandum of Association. It is a ceiling, not money. A company can have authorised capital of ₹1 crore and a bank balance of ₹4,000.

Issued Capital is how much water the company actually decided to pour in this time — the part of the authorised capital it has offered to the public. It can never exceed authorised capital.

Subscribed Capital is the part of the issued capital that the public actually agreed to take. If you offer 1,00,000 shares and people apply for and are allotted only 92,000, your subscribed capital is 92,000 shares’ worth.

Called-Up Capital is the part of the subscribed capital the company has actually asked shareholders to pay so far. Companies often collect in instalments, so a ₹10 share may have only ₹7 called up.

Paid-Up Capital is what shareholders have genuinely handed over. Paid-up capital = called-up capital minus calls-in-arrears. This is the figure that really matters, because this is the money in the company’s hands.

Why it works: the ladder exists because the law lets a company reserve room to grow (authorised) while only taking the money it needs today (called-up). Splitting the idea into five words lets the Balance Sheet tell the reader exactly how much room is left, how much was promised, and how much actually arrived.

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Shares Versus Debentures, and Equity Versus Preference

A company can raise money in two completely different moods. It can say “come and be an owner with me” — that is a share. Or it can say “just lend me money and I will pay you interest and return it” — that is a debenture. Back to the scooter: a friend who puts in ₹10,000 and takes a one-sixth share of the profits has bought a share. An uncle who lends ₹10,000 at 9% interest and wants it back in three years holds a debenture. The uncle gets paid whether the scooter earns anything or not; the friend only gets paid if it does.

Within shares there is a second split you must know, because questions mix the two freely.

Equity shares are the true risk-takers. They vote, they get whatever dividend the company decides, and in a winding-up they are paid last — after every creditor and after preference shareholders. Their reward is unlimited upside: if the company does brilliantly, the whole surplus is theirs.

Preference shares get two “preferences”, which is exactly where the name comes from: first, a fixed rate of dividend paid before any equity dividend, and second, repayment of capital before equity in a winding-up. In exchange they normally give up ordinary voting rights. Think of a preference shareholder as a cautious cousin who says, “I will join, but pay me first and pay me a fixed amount.”

Why it works: the whole design is a risk ladder. Debenture holders take the least risk and get the smallest, most certain return. Preference shareholders sit in the middle. Equity shareholders take the most risk and are rewarded with control and the entire leftover profit. Every accounting rule you meet later simply reflects that ladder.

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Issue of Shares for Cash at Par

“At par” simply means the company sells the share for exactly its face value. A ₹10 share sold for ₹10. No extra, no less. This is the simplest possible case and it is where you should build your confidence.

Here is the sequence of events, and I want you to notice that it is just three ordinary human steps:

1. Application. The company publishes a prospectus. Interested people fill a form and send money with it. At this moment the money is not yet share capital — the company has not yet agreed to give anyone shares. So it is parked in an account called Share Application A/c. Think of it as a holding tray.

2. Allotment. The Board formally decides who gets how many shares. The instant that decision is made, the applicants become shareholders and the money in the tray becomes real capital. So Share Application A/c is closed and Share Capital A/c is credited.

3. Calls. If money was not collected in full, the company later “calls” for the rest in one or more instalments.

Why it works: the application account exists purely because of a timing gap. Money arrives before the company legally commits to giving shares. Accounting hates pretending an obligation exists before it does, so the money waits in a holding account until allotment makes it genuine capital.

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Issue of Shares at a Premium and Securities Premium

Now suppose the scooter business has been running for two years and is doing beautifully. A seventh friend wants to join. Should he pay ₹10,000, the same as the original six? Of course not — the business is worth more now, and letting him in cheaply would quietly rob the six who took the early risk. So he pays ₹14,000: ₹10,000 for his ownership unit and ₹4,000 extra for the value already built up.

That ₹4,000 extra is a premium. A share issued above its face value is issued at a premium. The extra amount is collected in a special account called Securities Premium.

Because it is not an ordinary profit, the law restricts what a company may do with it. Under Section 52 of the Companies Act, 2013, the Securities Premium may be applied only for these purposes:

• Issuing fully paid bonus shares to members;
• Writing off the preliminary expenses of the company;
• Writing off the expenses, commission or discount on the issue of shares or debentures;
• Providing for the premium payable on redemption of redeemable preference shares or debentures;
• Buy-back of its own shares or other securities under Section 68.

The premium can be demanded at any stage, but in practice questions place it either wholly on application or wholly on allotment. Read that detail carefully — it decides everything if the shares are later forfeited.

Why it works: face value is a legal label fixed at incorporation; it does not update as the business grows. Premium is the market’s way of correcting for that. Keeping the two in separate accounts means the Balance Sheet can always tell you how many shares exist (from capital) and how much extra investors were willing to pay (from premium).

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Issue in Instalments: Application, Allotment and Calls

Companies rarely collect the full price at once. Why would they? If a company needs money over three years, taking it all on day one means paying for idle cash. So the price is broken into instalments and collected as the money is actually needed. This is the rhythm of the chapter, so let us slow it right down.

Application money. Paid when you apply. Legally, this cannot be less than 5% of the face value of the share (the SEBI guidelines for public issues are stricter in practice, but for your exam remember the 5% statutory minimum).

Allotment money. Due when the Board allots the shares to you.

First call, second call, final call. Demanded later, whenever the Board resolves to make the call. A call must be authorised by the Articles and each call is a formal demand — the shareholder is not obliged to pay until the company asks.

Why it works: instalments exist for cash-flow reasons, and the “due-then-received” pairing exists because a company must record a legally enforceable claim on its shareholders the moment the call is made, whether or not anyone pays. That claim is an asset until settled. This is the same logic as recording a sale on credit before the customer pays.

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Calls-in-Arrears and Calls-in-Advance

Shareholders are human. Some pay late. Some pay early. Accounting has a tidy name for each.

Calls-in-Arrears is money the company has called for but has not received. It is an amount owed to the company. In the Balance Sheet it is not shown as an asset; instead it is deducted from called-up capital to arrive at paid-up capital. That is the crucial disclosure point.

Calls-in-Advance is money a shareholder has paid before the company asked for it. The company has received cash it has no right to yet, so it is a liability. It is shown under Other Current Liabilities, and it is not added to share capital until the relevant call is actually made.

Two accounts may be opened, though a company may equally choose to leave the shortfall sitting as a debit balance in the relevant call account:

When money is short: Calls-in-Arrears A/c Dr — To Share Allotment / Share Call A/c.
When money comes early: Bank A/c Dr — To Calls-in-Advance A/c, and later when the call is made, Calls-in-Advance A/c Dr — To Share Call A/c.

Why it works: both accounts are the accrual principle doing its job. Revenue and capital are recognised when the right arises, not when cash moves. Arrears means the right arose without the cash; advance means the cash arrived without the right. Each gets parked where it truthfully belongs until the two line up.

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Over-Subscription and Pro-Rata Allotment

This is the section that decides your marks in this chapter, so take it gently and do not rush.

Over-subscription means the public applied for more shares than the company offered. Offer 50,000, receive applications for 75,000 — that is over-subscription. A company cannot allot more shares than it issued, so it must turn some applications away. It has three tools:

Full rejection. Some applicants get nothing. Their entire application money is refunded.
Full allotment. Some applicants get exactly what they asked for.
Pro-rata allotment. Some applicants get a proportionate share. Their excess application money is not refunded — it is carried forward and adjusted against the allotment money they owe.

Why it works: the company holds money that legally belongs to allottees who still owe it money on allotment. Refunding it and then demanding it back a week later would be absurd, so the law and common sense both allow set-off. The excess is simply the same rupees, re-labelled.

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Under-Subscription and Minimum Subscription

The opposite situation: the public applied for fewer shares than the company offered. Offer 1,00,000 shares, receive applications for 96,000 — that is under-subscription. Accounting-wise this is refreshingly easy. Every figure is simply based on the shares actually applied for and allotted, not on the shares offered.

But the law adds one safety net, and it exists to protect investors. Suppose a company says it needs ₹10 crore to build a factory, collects only ₹2 crore, and starts building anyway. It runs out of money halfway, the factory is useless, and the investors lose everything. To stop this, Section 39 of the Companies Act, 2013 requires that no allotment may be made unless the amount stated in the prospectus as the minimum subscription has been subscribed and the application money received.

Why it works: a half-funded project is often worse than no project at all, because the money is spent and nothing is produced. The minimum subscription rule is a hard stop that forces a company to either raise enough to do the job properly or return the money untouched.

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Issue of Shares for Consideration Other Than Cash and to Promoters

Shares do not always have to be paid for in money. Back to the scooter: suppose one friend does not have ₹10,000 but already owns a delivery cycle worth ₹10,000. The group happily says, “give us the cycle and take your one-sixth share.” That is an issue of shares for consideration other than cash.

Companies do this all the time — to buy machinery, land, or an entire running business, and to reward the promoters who did the exhausting work of setting the company up.

Why it works: a share is a claim on the company, and a company can hand over that claim in exchange for anything of value, not just money. Accounting records the substance of the exchange: an asset comes in, an ownership claim goes out. Cash was never part of the story.

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Private Placement, Preferential Allotment, ESOP and Sweat Equity

Not every share issue is a big public advertisement. Sometimes a company quietly approaches a handful of investors it already knows. These routes are short theory topics — a definition and a one-line distinction is usually all that is asked — but they are worth understanding properly because they explain how most real Indian companies actually raise money.

Private Placement is an offer of securities made to a selected group of identified persons rather than to the public at large, made under Section 42 of the Companies Act, 2013 through a private placement offer letter. There is no prospectus and no public advertisement. It is faster and cheaper than a public issue, which is why growing companies use it.

Preferential Allotment is an issue of shares to a chosen set of persons — often strategic investors, or the promoters themselves — on a preferential basis under Section 62(1)(c), at a price determined under the prescribed valuation rules. Think of private placement as the route and preferential allotment as a particular kind of issue made under it.

Employees Stock Option Plan (ESOP) gives directors, officers or employees the option, under Section 62(1)(b), to buy a stated number of the company’s shares at a pre-agreed price at a future date. It is a way of paying people partly in ownership so their interests line up with the company’s long-term success. Note the word “option” — the employee may choose not to exercise it.

Sweat Equity Shares are shares issued under Section 54 to directors or employees at a discount, or for consideration other than cash, in return for know-how, intellectual property rights or value additions they have contributed. This is the one narrow legal exception to the general prohibition on issuing shares at a discount.

Why it works: a public issue is expensive and slow, and it is designed to protect small retail investors who cannot investigate a company for themselves. When a company deals only with a few sophisticated investors or its own employees, that heavy protection is unnecessary, so the law provides lighter routes with their own safeguards.

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Forfeiture of Shares

Imagine one of the six scooter friends promised ₹10,000 but paid only ₹4,000 and then stopped answering the phone. After repeated reminders, the group says: “You are out. Your name comes off the ownership paper, and the ₹4,000 you did pay stays with us.” That is forfeiture, and yes, it is as harsh as it sounds — but the shareholder had a legally binding promise and broke it.

Formally: if a shareholder fails to pay allotment money or any call, the company may, after following the procedure in its Articles (notice, a reasonable time to pay, warning of forfeiture), cancel the shares. The shareholder loses the shares and loses the money already paid.

Why it works: a shareholder made a legally enforceable promise to pay for the shares. Breaking it damages the company and the other shareholders. Forfeiture cancels the shares and keeps the part-payment as compensation. Because the shares no longer exist, capital must be reduced; and because the money is kept but is not trading profit, it goes to a separate holding account rather than to the Statement of Profit and Loss.

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Re-Issue of Forfeited Shares and Capital Reserve

Forfeited shares do not vanish. The company now holds them back and can sell them to somebody new. This is re-issue. Because these shares have a slightly awkward history, the company is allowed to sell them cheaply to attract a buyer — and this is the one place where the word “discount” is entirely legal.

The re-issue entry is always built the same way:

Bank A/c Dr (the amount actually received)
Share Forfeiture A/c Dr (the discount allowed, if any)
  To Share Capital A/c (the paid-up value of the re-issued shares)
  To Securities Premium A/c (only if re-issued above the paid-up value)

And then, separately:

Share Forfeiture A/c Dr — To Capital Reserve A/c (the leftover gain)

Why it works: the company originally kept the defaulter’s money as compensation for a broken promise. Some of that compensation is then spent attracting a replacement buyer. Whatever survives is a real, permanent gain arising from a capital transaction, not from trading. Accounting keeps such gains out of distributable profit by parking them in Capital Reserve.

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Presentation of Share Capital in the Balance Sheet

Everything we have done so far has to end up somewhere visible. Under Schedule III, Part I of the Companies Act, 2013, a company’s Balance Sheet shows only a one-line total for Share Capital on the face, with the full breakdown pushed into a Note to Accounts. So the face of the Balance Sheet stays clean, and the detail lives in the note.

On the face, under I. EQUITY AND LIABILITIES → 1. Shareholders’ Funds → (a) Share Capital, you write one figure and a note number. That is all.

The note itself follows a strict order, and it is worth memorising the skeleton because the marks are given for the structure as much as for the arithmetic:

Why it works: the reader of a Balance Sheet wants one honest number for how much owner-money is actually in the business, and then the freedom to dig into the detail if they want it. Schedule III delivers exactly that: a single total on the face, the whole story in the note.

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Practice Worksheet With Full Answers

Here is the part that actually moves your marks. Ten original questions, mixed 1, 3, 4 and 6 mark. Please write your answer on paper before you open the reveal — reading a solution feels productive but changes very little; producing one changes everything. If you get stuck, go back to the relevant section rather than peeking. You have time.

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