What is a Accounting for shares? Issue of shares

What is a Accounting for shares?Issue of shares

Introductions
A company needs capital for its operations one of the main sources of capital of a company is shares capital. A public limited company issues prospectus inviting the public to subscribe its shares. However, a private limited company issued shares to directors and investors only. It cannot invite the public to subscribe its shares. These shares are issued either for cash or for considerations other than cash.

Issue of shares

 Procedures of issuing shares
The procedures of issuing shares consist of the following steps:
Selection of merchant banker: a merchant baker is an institution which provides services regarding the issue of share and debentures to the companies. The issuing company should select a merchant banker to manage its shares. The merchant banker is paid commission for its services, which is called under wiring commission.
Issue of prospectus: merchant baker issue invitation on behalf of related company to subscribe invite the public to subscribe newspaper within 90 days of its registrations. A prospectus is used to invite the public to subscribe the share of a company along with the necessary information regarding the company, its management, and the project for which the capital is pressed to be raised by issuing shares.
Receipt by the company of application for shares: after issuance of prospectus, the persons intending to purchase the share of the company fill up the prescribe application form specifying the number of shares applied. The merchant banker accepts the application along with the application money as mentioned in the prospectus.

 Procedures of issuing shares
The procedures of issuing shares consist of the following steps:
Selection of merchant banker: a merchant baker is an institution which provides services regarding the issue of share and debentures to the companies. The issuing company should select a merchant banker to manage its shares. The merchant banker is paid commission for its services, which is called under wiring commission.
Issue of prospectus: merchant baker issue invitation on behalf of related company to subscribe invite the public to subscribe newspaper within 90 days of its registrations. A prospectus is used to invite the public to subscribe the share of a company along with the necessary information regarding the company, its management, and the project for which the capital is pressed to be raised by issuing shares.
Receipt by the company of application for shares: after issuance of prcespectus, the persons intending to purchase the share of the company fill up the prescribe application form specifying the number of shares applied. The merchant banker accepts the application along with the application money as mentioned in the prospectus.

Shares certificate: it is a document of evidence of ownership of shares of a company. It bears the name of shareholder and the number of shares owned by him/her. It is stamped by the common seal of the company and signed by at least one director and company secretary.
Modes of issue of shares
There are three modes of issue of share. They have been mentioned below:

 Issue of shares at par: when a share is issued at its face value, it is called issue of shares at par. If a share of Rs.100 is issued at Rs.100, it is called the issue of share at par.
Issue of share at premium: A share is said to be issued at premium when the issue price exceeds the per value. If a share of Rs.100 each is issued at Rs.110, then it is called issue of share at premium. The excess amount of Rs. 10 (Rs.110- Rs. 100) is share premium.
Issue of shares at discount: when a share issue at an amount less than its face value, it is said to be issued at discount. If a share of Rs.100 is issued at Rs.95, it is said to have been issued at a discount of Rs. 5.
Issue of ordinary/ equity shares at lump sum basis
When full payment is asked for at the time of application, then it is an issue with lump sum payment. The following are the entries to be made under such situation.
The following entries are made for the above mentioned situations:

Issued of ordinary/equity shares in installments
If the total value of a share is collected in different installment, it is called issued of share in installments. The installments are allotment, first call: second call and so on along with the final call like in lump sum basis, the shares might be issued at par or discount or premium.

The following are the various steps of accounting for shares in case of issue in installments:
Collection of share application money: when the application money from the retrospection shareholders is collected, the following entries are passed:
Allotment of share: allotment refers to the distributions of share to the accepted applications. The following entries are passed for the allotment of shares.
Receipt of allotment money: after the allotment of shares, the shareholders pay the allotment money as prescribed. In this situation, the following entry is passed.
Share call: after the receipt of allotment money, the company calls the rest of the share amount as required by the situations. Te following entry is passed:
Receipt of call money: when the call money is received from its shareholder by the company, the following entry is passed.

Calls-in-advance
Calls-in-advance means the uncalled installment accepted by a company In advance from the shareholders. In other words, it is the amount of future installment paid in advance by the shareholders. More precisely, the amount received by a company before calls are made is called call-in-advance.

According to section 38 of Nepal Company Act, 2063, a company if permitted by its articles of association may receive uncalled amount of installment from shareholders on shares held by them.
The money received on calls-in-advance is a liability for company and appears in the liability side of the balance sheet till its adjustment. Hence, it is not regarded as a part of capital. The company has to pay the interest as specified by the article from the date of receipt to the date of calls due.
Interest on calls-in-advance
The company has to pay interest on the amount of calls-in-advance from the date of its received to the date of adjustment as specified in the articles of association. For this, the following entries are made.
Calls-in arrears
If a shareholder fails to pay the called up amount due within the specified time, it is known as calls-in-arrear. It is deducted from the called up capitals in the balance sheet so as to come up with the paid up capital. The company has right to charge interest on such amount. There are two alternative methods of accounting for calls-in-arrears:
Method I: no separate account for calls-in-arrears
Under this method, call-in arrears account is not opened separately for the amount of calls-in-arrears. The calls-in-arrears is shown as the different between the amounts due and actual amount received. More specifically, the different between the debit and credit of the installment account represents calls-in arrears.
Under subscription of share
When the number of shares applied by the public is less than the number of shares offered by a company for subscriptions, it is called under subscription of share. In simple words, when a company received less number of applications than it's issued of share, it is a situation of under subscriptions of share.
In case of under subscription of shares, the accounting entries are made on the basis of number of applicants received by the company not the number of share issued by it.
Over subscription of shares
When the number of share applied exceeds the number of share issued, it is called 'over subscription of share.'
In case of over subscription, a company cannot allot shares to all the application in full. It can be dealt as follows:
a.    Rejection of excess applications
Under this alternative, the company rejects the excess applications and allots the shares in full. For the rejection, the applications, the application money is refunded in full with letter of regret. The following entries' are made in such a situations.
b.    Pro-rate allotment
On over subscription of share, if a company allots shares proportionately to all the applicants', it is called pro-rate allotment. For example, a company issue 10,000 shares to the public, for which it receive 20,000 applications. If all the applicants are allotted shares in the ratio of 10, 0000:20,000 i.e. one share for every two shares applied, it is called allotment of shares.
In this case, excess application money is not refunded but retained and adjusted towards amount due on allotment and subsequent calls. The following journal entries are passed in these situations.
c.    Mixed allotment
When a combination of the difference alternative is adopted in the case of over subscription, it is called mixed allotment method. Under this method method, a company allots full share to some, a pro-rate allotment to some, partial allotment to some and no allotment to the rest. The application money is returned to the unsuccessful, but excess application money on pro-rate allotment is retained for utilizing to the amount due on allotment and subsequent calls as shown below.
Calls-in arrears on share issued on pro-rats basis
The amount of calls-in-arrears on the shares, which were allotted on pro-rata basis, is computed as below:
Issue of share other than cash
Generally, a joint stock company issues its shares for cash. However, a company may issue its shares for other purpose too. It is called issue of share for consideration other than cash. For instance, if shares are issue to vendors for the purchase of assets or business, it is called 'issue of share for consideration other than cash'. It is made the following purposes.

c.    Issue of share for the purchase of business
Sometimes, a joint stock company acquits the business of another concern. On purchase of business, the companies take over all the assets and liability payable at an agreed price. Te Company, which acquires or purchase the business of other, is called the purchasing company and the seller of business is called the vendor. Similarly, the agreed price to be paid by purchasing company to the vender is called the amount of purchase consideration. The purchase price is determined as below.

As mentioned above, the purchasing company takes over both the assts and liability of the vendor (seller) company. The excess of assets over liability taken by the purchasing company form vendor is called net assets or net worth. The results of the difference between purchase consideration and net assets are presented below.
Opening balance sheet
The balance sheet prepared after the issue of share for cash, purchase of various assts or business by issuing share is known as opening balance sheet. It shows the amount of share capital issued for cash and for consideration other than cash, amount of share premium (at the time of issue, if any), capital reserve (created at the time of issue of share for the purchase of business) and other liabilities taken by the company on its liability side. Similarly, it assets side shows amount of goodwill (created at the time of issue of share for the purchase of business), various assets taken over by the company, cash at bank (issued of share cash), any item of miscellaneous expenditure etc.
Preparation of cash book
A cash book is used for recording cash receipts and payments. Hence, he amounts received on account of different share installments are debited and cash payment for refund for excess application money are credited. Finally, it is balanced to know the cash balance.
d.    Issue of shares to promoters
When a company issues shares to promoters for their contribution in the establishment and development of the company, it is called issue of shares to prompters. It is done to honors them. Te amount of such issue is considered as the cost of goodwill and debited to goodwill amount.
e.    Issue of shares for underwriting commission
An underwriter is a person or institution who/ which guarantees the minimum subsections of the shares of a company. An underwritten ensures the company that in case the shares offered to the public are not subscribed at minimum: the balance will be taken up him/it. For this, the underrated on the issue price of shares or debentures.
Entries for the issue of preference share
The shares which enjoy some preferential right over to equity shares are call the preference shares. The preference shareholders get dividend at a fixed rate or amount before any dividend to equity shares. The redemption of preference share capital is made before the redemption of equity share capital at the time of liquidation of the company. However, preference shareholders do not carry voting right.
Redemption of preference share
A company can issue two types of shares i.e. equity share and preference shares. The issue of preference shares is one of the important sources of capital of a company. Redemption is the process of repaying an obligation at predetermined amounts and timings. The redeemable preference shares are issued on the terms that shareholders will at a futures date be repaid amount which they invested in the company as provided by articles of association.

Redemption of preferences shares can take place under the following conditions.
•    There must be provision in the articles of association regarding the redemption of preference shares.
•    The redeemable preference shares must be fully paid up. If there is any partly paid share, is should be converted into fully, paid share before redemption.
•    The redeemable preference shareholders should be paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption.
•    If the shares are redeemed at a premium, it should be provided out of share premium or profit and loss account or general reserve account.
•    The amount of capital reserve cannot be used for redemption of preference shares.
•    If the shares are redeemed out of undistributed profit, the nominal value of share capital, so redeemed should be transferred to capital redemption reserve account. This is also known as capitalization profit.

Forfeiture of shares
Forfeiture of shares is cancellation and withdrawal of share certificate issued by a company. A company forfeits the shares if the shareholders fail to pay the installment due on specified time. When a company forfeits the shares, it is not necessary to refund the amount paid by the shareholders.

When shares are forfeited, the name of such defaulting shareholder is removed from the register of members and the allotment is cancelled. According to Nepal Company act, the board of director can add a maximum of 3 months of time for making payment of the installment in additional to normal time period of 30 days. If the defaulter fail to pay the default amount within the period, their shares can be forfeited after notification in newspaper or magazines. The forfeited amount remains a capital profit for the company.
Accounting for forfeiture of shares
The various situations under which the shares are forfeited are mentioned below.
Forfeiture of shares originally issued at par
The following entries are passed for the forfeiture of shares which were originally issued at par. The entry may be passed by showing the calls-in-arrears or not.
Forfeiture of share originally issued at premium
The following entry is passed for the forfeiture of shares which originally issued at premium.
a.    Forfeiture when premium has been received
In such a situation, the share premium account is not debited and the amount of premium by the shareholder is also not included in the share forfeiture account.
b.    Forfeiture when premium has not been received
In such a situation, the share premium account is debited to the extent of the amount of premium to be paid by the shareholders.
Forfeiture of shares originally issued discount
Since, the discount on issue of share is debited at the time of issue; it is reversed and credited while passing the forfeiture entry.
Re-issue of forfeited shares
The process of selling forfeited shares is called re-issue of shares. A company may re-issue the forfeited shares as per the article of association to other party or person other than the defaulter. The forfeited shares may be issued at par or premium or discount.

The amount received on the forfeiture of shares should be adjusted with the re-issue. When the amount received on forfeiture of share exceeds the loss on reissue of share, it should be transferred to capital reserve account. The capital reserve is used for writing off the preliminary expenses, reissued, the gain on the forfeiture and reissue on these shares are only transferred to capital reserve account.

Alteration in the value of shares and share capital
A company may alter the value of its shares and share capital due to a number of reasons. According to Nepal Company Act, 2063 a company can change i.e. increase or decrease its share capital by passing a resolution on the general meeting of the shareholders. Such change in the share capital must be approved by the office of the company registrar. It should further be supported by the necessary amendment in the article and memorandum of association. In addition to the above mentioned situation, alternation of share capital can be done in the following ways.
a.    Increase in share capital: a company can increase its authorized share capital. For this, a special resolution has to be passed by the general assembly of shareholders and amendment in the article and memorandum of associations along with the approval of company registrar.
b.    Decrease in share capital: for decrease the share capital, the above mentioned procedures are to be followed as with the increase of share capital. According to Nepal Company Act, the following are the ways to decrease the share capital of a company.
i.    When the called up capital is not paid, the capital is fixed up to the paid up capital.
ii.    Refunding the paid up capital
iii.    Decreasing the value of share due to natural calamities or loss.

c.    Consolidation of higher denomination into small denomination
d.    Sub division of high denomination into small denomination
e.    Cancellation or decrease of unissued capital
f.    Conversion of share into stock.
Issue of Bonus shares
The shares, which are issued by a company to its existing shareholder in free of charges, are called bonus shares. These shares are issued on pro-rate basis. If a company built up substantial reserves, it decides to capitalize a part here reserves by issuing bonus shares to existing shareholders. As mentioned above, it is not necessary for the shareholders to pay anything for bonus shares. Since, bonus share are create by the conversion of retained earnings or other reserve into equity share capital, it does not represent a source of funds to the company. Hence, the assets side of the balance sheet of a company does not change with the issue of bonus shares. Hence, the assets side of the balance sheet of a company does not change with the issue of bonus share. However, the reserves in liability side decrease with increase with the equity share capital.

Write the producers for issue of share for cash
A joint stock company can collect the required capital form the public by issue share for cash in installments or lump sum. The procedures of issue shares consist of the following steps:
Selection of merchant banker: the issue company should select a merchant banker to manage its shares. The merchant banker is paid commission for its services, which is called underwriting commission.
Issue of prospectus: a merchant banker issue invitation on behalf of related company to subscribe its shares through leading newspaper within 90 day of its registration issuing prospectus.
Receipt by the company of application for shares: after issuance of prospectus, the person intending fto purchase the shares the company fill up the prescribed application form specifying the number of share applied.
Allotment of share to applicants: after the date of application is over, the merchant banker of the company distributes shares among the application which are called allotment of shares.

What do you mean by calls-in-advance? Show its accounting treatment.
Calls-in-advance in the amount of future installment paid in advance by the shareholders. In simple words, the amount received by a company before calls are made is calls-in-advance. The money received on calls-in-advance is not a part of share capital; therefore, a separate account is opened and credited to that account, called calls-in-advance account.
What do you mean by calls-in-arrears? Show its accounting treatment.
If a shareholder fails to pay due amount intentionally or unintentionally within a specified time, it is known as calls-in-arrears. It is deducted from the called up capital in the balance sheet so as to come up with the paid up capital.
Write about the under subscription of share.

When the number of shares applied by the public is less than the number of shares offered by the company for subscription, it is called under subscription of shares. In simple words, when a company received less number of applications than its issued number of applications than its issued number of shares, it is a situation of under subscriptions of shares. In case of under subscription of share, the accounting entries are made on the basis of number of applications received by the company not on the basis of number of shares issued by it.

Write the meaning of over subscription of shares. How is it dealt in accounting records?
When the number of shares applied by the public exceeds the number of shares issued, it is called 'over subscription of share.' In the case of over subscription, a company cannot allot shares to all the applicants in full. Such conditions can be dealt as follows:
•    Rejection of excess applications
•    Pro-rate allotment
•    Mixed allotment
Write about the issue of share other than cash.
A company may issue its shares for other purpose than cash also. This is called issue of share for consideration other than cash. For example. If shares are issued to venders for the purchase of assets or business, it is called' issued of share for consideration other than cash. Issues of share for consideration other than cash are made for the following purposes.
•    Purchase of assets
•    Purchase of business
•    To prompters
•    Underwriting commission