Introduction
Welcome to your first lesson on Company Accounts! We are now shifting our focus from partnership firms to companies, which are a distinct and major form of business organization. Understanding how companies manage their finances is a cornerstone of the Grade 12 syllabus.
In this lesson, we will tackle the very first concept you need to know: Share Capital. We will break down the different categories of share capital a company has. Your learning goal is to be able to clearly distinguish between authorized, issued, subscribed, called-up, and paid-up share capital. Mastering this terminology is essential, as it forms the vocabulary for every topic that follows in this module, from issuing shares to presenting them in the company's final accounts.
What is a Company and What are Shares?
Unlike a partnership, a company, especially a large public company, requires a vast amount of capital for its operations and growth. To raise these funds, a company divides its total capital requirement into small, equal units. Each unit is called a share, and the person who buys these shares is called a shareholder.
By buying shares, a shareholder essentially buys a small piece of ownership in the company. The total money collected from these shareholders by issuing shares is known as Share Capital.
To get a clear picture of this fundamental concept, please watch the following short video.
Issue of Shares | Company Accounts Class 12 | Part 1
This video from Rajat Arora provides an excellent, easy-to-understand introduction to why companies issue shares and what share capital represents.
Watch the section from the beginning of the explanation until the introduction of the three types of share capital (timestamp 02:57 to 08:39). Focus on understanding the core idea: why a company needs public investment and how shares represent ownership.
The Journey of Share Capital: A Hierarchy
Think of share capital not as a single number, but as a series of amounts that represent different stages of raising funds. There's a logical flow from the maximum amount a company can raise to the amount it has actually received.
This diagram provides a great visual summary of this hierarchy.
As you can see, each category of capital is a subset of the one before it. Let's explore each of these stages in detail.
A Deep Dive into the Types of Share Capital
To understand these categories thoroughly, we will use a combination of video explanations and a textual summary.
First, watch this video which defines each type of share capital in a clear, structured sequence.
#1 Issue of Shares - Concept - Class 12 / CA Foundation - By Saheb Academy
This video from Saheb Academy walks through each classification of share capital, from Authorized down to Paid-up, providing clear and concise definitions.
Watch the segment from 31:26 to 34:29. Pay close attention to the definition of each term: Authorized, Issued, Subscribed, Called-up, and Paid-up capital.
Now, let's solidify these concepts. The following reading material provides detailed definitions and examples for each type of capital.
This article, 'Types of Share Capital' from PW.live, provides clear, written definitions that you can refer back to. It reinforces the concepts from the video.
Read the sections defining 'Authorized Share Capital', 'Issued Share Capital', 'Subscribed Share Capital', 'Called-Up Share Capital', and 'Paid-Up Share Capital'. The article lists 'Paid-Up' before 'Called-Up', but logically, capital is called-up first, then paid-up. Focus on the definition and key features of each.
Here is a summary of the key distinctions:
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Authorized Capital (or Nominal/Registered Capital):
- This is the maximum amount of share capital a company is legally allowed to issue, as stated in its primary legal document, the Memorandum of Association.
- It's a ceiling, not the actual amount of capital the company has. A company can increase this limit later by following legal procedures.
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Issued Capital:
- This is the portion of the Authorized Capital that the company has offered to the public for subscription.
- For example, if a company is authorized to raise ₹50,00,000, it might decide to issue shares worth only ₹30,00,000 for now.
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Subscribed Capital:
- This is the portion of the Issued Capital that has actually been applied for and allotted to the investors.
- Sometimes, the public may apply for fewer shares than issued (under-subscription) or more shares than issued (over-subscription). We will deal with the accounting for these scenarios later. For now, just know that Subscribed Capital represents the amount investors have committed to.
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Called-up Capital:
- A company might not ask for the full price of the share all at once. It can collect the money in installments (e.g., Application, Allotment, First Call, Final Call).
- Called-up Capital is the portion of the Subscribed Capital that the company has demanded or "called" for payment from the shareholders.
- The remaining portion that has not yet been demanded is called Uncalled Capital.
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Paid-up Capital:
- This is the portion of the Called-up Capital that the shareholders have actually paid. This represents the real cash the company has received from the issue of shares.
- If a shareholder fails to pay an amount that has been called-up, it is known as Calls-in-Arrears. Therefore, Paid-up Capital = Called-up Capital - Calls-in-Arrears.
Test your understanding!
XYZ Ltd. has an authorized capital of ₹50,00,000 divided into 50,000 shares of ₹100 each.
The company offered 30,000 shares to the public.
Applications were received for 28,000 shares.
The company has so far asked shareholders to pay ₹70 per share.
All shareholders paid the amount demanded, except for one shareholder holding 200 shares.
Calculate:
- Issued Capital
- Subscribed Capital
- Called-up Capital
- Paid-up Capital
- Calls-in-Arrears
Show answer
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Issued Capital: The company offered 30,000 shares of ₹100 each.
- Issued Capital = 30,000 shares × ₹100 = ₹30,00,000
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Subscribed Capital: The public subscribed to 28,000 shares of ₹100 each.
- Subscribed Capital = 28,000 shares × ₹100 = ₹28,00,000
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Called-up Capital: The company called up ₹70 on 28,000 subscribed shares.
- Called-up Capital = 28,000 shares × ₹70 = ₹19,60,000
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Calls-in-Arrears: One shareholder failed to pay the called-up amount on 200 shares.
- Calls-in-Arrears = 200 shares × ₹70 = ₹14,000
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Paid-up Capital: This is the Called-up Capital minus the amount not paid (Calls-in-Arrears).
- Paid-up Capital = ₹19,60,000 - ₹14,000 = ₹19,46,000
Practical Application: Disclosure in the Balance Sheet
As an accounting student, it's not enough to just know the definitions. You must know how these figures are presented in a company's financial statements.
According to Schedule III of the Companies Act, 2013, the face of the Balance Sheet only shows the final figure for Share Capital. However, the breakdown into Authorized, Issued, and Subscribed capital, along with calculations for Called-up and Paid-up capital, must be shown in the Notes to Accounts.
Study the following example to see exactly how this is done.
Disclosure of Share Capital in the Balance Sheet
This example from Byjus shows a complete problem and solution, demonstrating how all the different types of share capital are disclosed in the Notes to Accounts for a company's Balance Sheet. This is a crucial format for your exams.
Carefully read the solved example under the heading 'Disclosure of Share Capital in the Balance Sheet'. Trace how the numbers from the question (Authorised, Issued, Applications received, etc.) are used to populate the 'Notes to Accounts' section, ultimately arriving at the final Paid-up Capital figure that appears on the Balance Sheet.
Conclusion
In this lesson, you've taken the first crucial step into Company Accounts. You learned that Share Capital isn't just one number but a series of classifications that tell the story of how a company raises funds from its owners.
Key Takeaways:
- Authorized Capital: The maximum legal limit a company can issue.
- Issued Capital: The portion of authorized capital offered to the public.
- Subscribed Capital: The portion of issued capital that investors agree to buy.
- Called-up Capital: The amount of subscribed capital the company has requested payment for.
- Paid-up Capital: The actual amount the company has received from shareholders. This is the figure that represents the true capital invested.
Understanding this hierarchy is fundamental. In our next lesson, we will build directly on this by learning how to record the journal entries for the issue of shares, tracking the money as it moves through the stages of application, allotment, and calls.