Introduction
Hello! Welcome back to our journey through Company Accounts.
In our previous lesson, we established the foundational vocabulary by distinguishing between authorized, issued, subscribed, called-up, and paid-up share capital. Now, we'll put that knowledge into action. Today's goal is to learn how to record the journal entries for the issue of shares at par and at a premium, covering each stage of the process: application, allotment, and calls.
This lesson is purely about the mechanics of recording these transactions. Since you have a strong background in journal entries from your Grade 11 studies, you'll find the underlying principles familiar. We are essentially applying the rules of debit and credit to the new context of share capital.
The Accounting Logic of Issuing Shares
At its core, when a company receives money from shareholders, it's a receipt of capital. You might recall the first entry you ever learned for starting a business: Bank A/c Dr. To Capital A/c. The process for a company is the same in principle, but because the money is collected in stages, we use temporary accounts to track the process.
Let's start by understanding this multi-stage process and the sequence of journal entries.
Issue of Shares | Company Accounts Class 12 | Part 1
This video by Rajat Arora provides an excellent walkthrough of the entire journal entry process for issuing shares in installments. It masterfully connects the new entries to the basic 'Bank to Capital' entry you already know.
Watch the video from 18:04 to 30:29. Pay close attention to: The names of the stages: Application, Allotment, First Call, and Final Call. The two entries passed for each stage. The critical difference in the order of entries for the Application stage versus the Allotment and Call stages.
Recording the Journal Entries: Issue at Par
"Issue at Par" simply means the company issues the share at its face value. For instance, a share with a face value of ₹10 is sold for ₹10.
Based on the video, let's summarize the standard sequence of eight journal entries.
1. On Receipt of Application Money
- First, investors send money with their applications. The company receives cash.
Bank A/c Dr.To Share Application A/c
2. On Allotment of Shares (Transfer of Application Money)
- After deciding who gets the shares, the application money is transferred to the actual capital account.
Share Application A/c Dr.To Share Capital A/c
Notice the key point from the video: for the application stage, money is received first, and then it is transferred to capital. For all subsequent stages, the logic is reversed.
3. On Allotment Money Becoming Due
- The company first makes the allotment money due, creating a receivable from the shareholders.
Share Allotment A/c Dr.To Share Capital A/c
4. On Receipt of Allotment Money
- Shareholders pay the amount due.
Bank A/c Dr.To Share Allotment A/c
5. On First Call Money Becoming Due
- The company "calls" for the next installment.
Share First Call A/c Dr.To Share Capital A/c
6. On Receipt of First Call Money
- Shareholders pay the first call amount.
Bank A/c Dr.To Share First Call A/c
This pattern continues for any subsequent calls (e.g., Second & Final Call).
This image provides a clear, formatted example of these entries.
To see this in a problem-solving context, review the following example.
CBSE Class 12 Accounts, Accounting for share capital
This resource from Career Launcher provides a straightforward, solved problem for issuing shares at par. It's a perfect application of the entries we just discussed.
Find 'Example 1' in the document. Read the question and then carefully trace how the journal entries in the solution correspond to the application, allotment, and call money amounts.
Recording the Journal Entries: Issue at Premium
"Issue at Premium" occurs when a company with a strong reputation sells its shares for more than their face value. For example, a share with a face value of ₹10 might be issued for ₹12. The extra ₹2 is the premium.
This premium is a capital gain for the company and is credited to a separate account called Securities Premium Account. This account is shown under "Reserves and Surplus" on the liability side of the Balance Sheet.
Let's see how this works.
Issue of Shares | Premium and Par | Class 12 | Part 3
The same instructor, Rajat Arora, now explains the concept of issuing shares at a premium. This video will clarify why it's done and how to adjust the journal entries.
Watch the segment from 00:34 to 12:30. Focus on: The definition of 'at par' vs. 'at premium'. The key rule: If the question is silent, the premium is always collected with the allotment money. How the 'Securities Premium' account is credited in the 'due' entry.
The only change in our journal entries occurs at the stage where the premium is due. If the premium is collected with allotment money, the entry for making the allotment money due becomes:
Share Allotment A/c Dr.(With the total amount due: capital + premium)To Share Capital A/c(With the face value portion)To Securities Premium A/c(With the premium portion)
All other entries (receiving the money, and entries for other stages) remain the same. The Bank A/c is simply debited with the total amount received.
Here's an example to illustrate.
CBSE Class 12 Accounts, Accounting for share capital
Let's look at another solved problem, this time involving a premium. This will help you master the placement of the 'Securities Premium' account.
Find 'Example 2' under the 'Shares issued at premium' heading. This example is particularly useful because it shows the premium being collected across multiple stages, demonstrating the flexibility of the concept. Trace the 'To Securities Premium' part in each 'due' entry.
Test your understanding!
ABC Ltd. issued 20,000 shares of ₹10 each at a premium of ₹3 per share. The amount was payable as follows:
- On Application: ₹4
- On Allotment: ₹5 (including ₹1 premium)
- On First & Final Call: ₹4 (including ₹2 premium)
All shares were subscribed and the money was duly received. What will be the journal entry for making the First & Final Call money due?
Show answer
The entry will be:
Share First & Final Call A/c Dr. 80,000To Share Capital A/c 40,000To Securities Premium A/c 40,000
Calculation:
- Total amount due on call = 20,000 shares × ₹4 = ₹80,000
- Amount for share capital = 20,000 shares × ₹2 (₹4 total - ₹2 premium) = ₹40,000
- Amount for premium = 20,000 shares × ₹2 = ₹40,000
Conclusion
In this lesson, we have translated the concepts of share capital into concrete accounting entries. You now have the mechanical skills to record the entire process of a company raising capital from its shareholders.
Key Takeaways:
- Issue at Par: The journal entries follow a standard two-step process for each installment (due, then receive), except for the application stage (receive, then transfer). The
Share Capital A/cis always credited with the face value. - Issue at Premium: The process is identical, but the extra amount received is credited to the
Securities Premium A/cin the 'due' entry of the relevant installment. - Order Matters: Always remember the unique sequence for application money:
Bankentry first, thenCapitaltransfer. For all other stages, it'sCapital(due) entry first, thenBankentry.
In our next lesson, we will address a common real-world complication: oversubscription. We will learn how to handle situations where a company receives applications for more shares than it has offered, introducing the important concept of pro-rata allotment.