Q.What is meant by 'Issued Capital' ?
Concept understanding — Share Capital Classification
Let’s start with something you already know. Imagine you and two friends decide to start a small business — say, a food truck. You each put in some money. That money is the capital of the business. It’s the foundation. Now, what if one friend puts in ₹50,000, another puts in ₹30,000, and you put in ₹20,000? You all own the business, but not equally. Your share of the business is proportional to the money you put in. That’s the basic idea behind Share Capital in a company — except a company can have thousands of owners (shareholders), and their ownership is divided into tiny, equal units called shares.
What is Share Capital Classification?
In a company, Share Capital is the total money raised by issuing shares. But not all shares are the same, and not all capital is treated the same way. The NCERT Class 12 Accountancy textbook classifies share capital into two main types from the company’s point of view:
- Equity Share Capital – The basic ownership capital. Equity shareholders are the real owners. They get dividends only if the company makes a profit, and they bear the highest risk.
- Preference Share Capital – A hybrid between equity and debt. Preference shareholders get a fixed dividend before equity shareholders, and if the company is wound up, they get their money back before equity shareholders. But they usually have no voting rights.
Within each, the capital is further classified on the Balance Sheet (the company’s financial position statement) into:
- Authorised Capital – The maximum amount of share capital a company is allowed to issue, as per its Memorandum of Association. Think of it as the legal ceiling.
- Issued Capital – The part of authorised capital that the company has actually offered to the public.
- Subscribed Capital – The part of issued capital that investors have agreed to take (i.e., applied for and been allotted).
- Called-up Capital – The portion of the face value of shares that the company has asked shareholders to pay.
- Paid-up Capital – The portion of called-up capital that shareholders have actually paid. (If some haven’t paid, that’s called “calls in arrears”.)
For a Class 12 exam, you are mostly dealing with Equity Share Capital and Preference Share Capital as the two main categories. The sub-classifications (Authorised, Issued, etc.) appear in the Balance Sheet format.
Why Does This Classification Matter?
Because it determines who gets what, when, and how much.
- Dividend priority: Preference shareholders get their fixed dividend first. Equity shareholders get whatever is left (if anything).
- Risk: Equity shareholders bear the business risk; preference shareholders have a safer, fixed return.
- Control: Equity shareholders vote; preference shareholders usually don’t.
- Accounting: The money received from issuing shares is not revenue — it’s capital. It goes into the Share Capital account on the liabilities side of the Balance Sheet. The company does not debit it as income.
Accounting Treatment: The Journal Entries
When a company issues shares, the accounting depends on whether the shares are issued at par (face value), at a premium (above face value), or at a discount (below face value — but this is now prohibited for equity shares in India). Let’s take the simplest case: issue at par.
Scenario: A company issues 10,000 equity shares of ₹10 each at par. The full amount is received on application.
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c (Dr.) | 1,00,000 | |||
| To Equity Share Capital A/c | 1,00,000 | |||
| (Being 10,000 equity shares of ₹10 each issued at par, fully paid) |
Explanation:
- Bank A/c is debited because the company receives cash (asset increases).
- Equity Share Capital A/c is credited because the company now owes this money to shareholders as capital (liability increases).
If shares are issued at a premium (say ₹12 per share, face value ₹10), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c (credited). That reserve is not distributable as dividend — it’s a capital reserve.
Format: How Share Capital Appears in the Balance Sheet
As per the Companies Act, 2013, the Balance Sheet shows Share Capital under Equity and Liabilities. Here’s the relevant extract (simplified for Class 12):
Balance Sheet of XYZ Ltd. as at 31st March, 20XX (Extract)
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| EQUITY AND LIABILITIES | ||
| 1. Shareholders’ Funds | ||
| (a) Share Capital | 1 | 5,00,000 |
| (b) Reserves and Surplus | 2 | 1,00,000 |
| 2. Non-Current Liabilities | ... | ... |
| 3. Current Liabilities | ... | ... |
| TOTAL | 6,00,000 |
Note 1: Share Capital
| Particulars | Amount (₹) |
|---|---|
| Authorised Capital: | |
| 1,00,000 Equity Shares of ₹10 each | 10,00,000 |
| Issued Capital: | |
| 50,000 Equity Shares of ₹10 each | 5,00,000 |
| Subscribed and Fully Paid-up Capital: | |
| 50,000 Equity Shares of ₹10 each | 5,00,000 |
| Total | 5,00,000 |
Do not confuse “Share Capital” with “Reserves and Surplus”. Share Capital is the money originally invested by shareholders. Reserves are profits retained in the business. Both are part of Shareholders’ Funds, but they are separate line items.
A Key Formula (for Interest on Capital, if applicable)
If the company pays interest on capital (e.g., to partners in a partnership, or on preference shares), the formula is:
Interest on Capital = Capital × Rate of Interest × Time (in years)
For example, if a preference share of ₹100 carries 10% dividend per annum, the annual dividend per share = ₹100 × 10% × 1 = ₹10. This is not an expense — it’s an appropriation of profit (shown in the Profit and Loss Appropriation Account).
The Big Picture
Share Capital Classification is not just a list of categories. It’s the legal and financial skeleton of a company. It tells you:
- How much money the company has raised from owners.
- What rights those owners have.
- How that money is recorded and reported.
For your exam, remember the two main types (Equity and Preference), the sub-classifications (Authorised, Issued, Subscribed, Called-up, Paid-up), and the journal entry for issue of shares. The Balance Sheet format is your friend — practice writing it neatly.
Final takeaway: Share Capital is the ownership money of a company, classified by type and stage of issue, and recorded as a liability (because the company owes it to shareholders). It is never revenue.
Part (a): Issued Capital is the part of Authorised Capital a company offers to the public for subscription.
Part (b): ESOP is the right given to employees/directors to buy the company's shares at a pre-decided price on a future date.
When a company is incorporated, its Memorandum of Association fixes the maximum capital it may raise — the Authorised / Nominal / Registered Capital. A company rarely offers this entire amount at once. The portion of the Authorised Capital that the company actually offers to the public for subscription is called Issued Capital.
Key points:
- It is stated at the nominal (face) value of the shares offered.
- It includes shares issued for cash as well as shares issued for consideration other than cash (e.g. to vendors or promoters).
- Issued Capital cannot exceed Authorised Capital.
- The part of the Authorised Capital not yet offered is called Unissued Capital.
- It is disclosed in the Notes to Accounts under 'Share Capital' in the Balance Sheet.
Issued Capital is that part of the Authorised Capital which a company offers to the public for subscription, stated at the nominal value of the shares offered.
Concept understanding — Share Issuance Conditions
Share Issuance Conditions – A First Look
Think of a company that wants to raise money by selling pieces of itself — those pieces are called shares. But the company can't just collect cash and hand over shares any way it likes. There are rules about when and how the money must come in. These rules are the share issuance conditions.
Everyday Intuition
Imagine you're buying a ₹100 cricket bat from a shop. You could:
- Pay the full ₹100 upfront and take the bat home.
- Pay ₹30 now, ₹30 next week, and ₹40 when the bat arrives.
A company issuing shares works similarly. The total price of one share (called face value or nominal value, say ₹10) can be collected in instalments — but only if the company's board of directors decides so, and only if the company's memorandum and articles allow it. The law (Companies Act, 2013) sets the conditions for these instalments.
Precise Meaning
Share issuance conditions refer to the terms on which a company invites the public to subscribe to its shares. These conditions specify:
- The total amount per share (face value + any premium).
- The number and timing of instalments (called calls) — e.g., application, allotment, first call, final call.
- The minimum amount that must be collected at each stage.
The minimum subscription condition: A company cannot allot shares unless it has received applications for at least 90% of the issued amount. If not, the entire application money must be refunded within 30 days.
Why It Matters
These conditions protect both the company and the investor:
- For the company: Ensures it gets the promised funds in a planned manner, avoiding cash flow problems.
- For the investor: Prevents the company from demanding too much too soon. The investor knows exactly when and how much to pay.
- For accounting: Determines when to record money as share capital (liability) and when to record it as calls-in-arrears (if unpaid).
Accounting Treatment
When shares are issued, the company receives money in stages. Each stage has a specific journal entry.
Key accounts involved:
- Bank A/c – Debited when money is received.
- Share Application A/c – Credited when application money is received.
- Share Allotment A/c – Credited when allotment money is due.
- Share Capital A/c – Credited for the face value of shares.
- Securities Premium Reserve A/c – Credited for any amount above face value (premium).
- Calls-in-Arrears A/c – Debited if a shareholder fails to pay a call.
Step-by-step entries (assuming ₹10 face value, ₹2 premium, issued at ₹12 per share in two instalments: application ₹5, allotment ₹7):
1. On receipt of application money:
Bank A/c Dr. ₹5,00,000
To Share Application A/c ₹5,00,000
(Being application money received on 1,00,000 shares @ ₹5 each)
2. On transfer of application money to share capital (after allotment):
Share Application A/c Dr. ₹5,00,000
To Share Capital A/c ₹5,00,000
(Being application money transferred to share capital)
3. On allotment money becoming due:
Share Allotment A/c Dr. ₹7,00,000
To Share Capital A/c ₹5,00,000
To Securities Premium Reserve A/c ₹2,00,000
(Being allotment money due on 1,00,000 shares @ ₹7 each, including ₹2 premium)
4. On receipt of allotment money:
Bank A/c Dr. ₹7,00,000
To Share Allotment A/c ₹7,00,000
(Being allotment money received)
If a shareholder fails to pay a call, the unpaid amount is transferred to Calls-in-Arrears A/c (a personal account representing the amount due from the shareholder). It is shown as a deduction from share capital in the Balance Sheet.
Format in the Balance Sheet (as per NCERT)
Under Equity and Liabilities, Shareholders' Funds → Share Capital is shown as:
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| Authorised Capital (e.g., 1,00,000 shares of ₹10 each) | 10,00,000 | |
| Issued Capital (e.g., 1,00,000 shares of ₹10 each) | 10,00,000 | |
| Subscribed Capital | ||
| - Subscribed and fully paid | 10,00,000 | |
| - Subscribed but not fully paid | ||
| (e.g., 1,00,000 shares of ₹10 each, ₹8 called up) | 8,00,000 | |
| Less: Calls-in-Arrears | (50,000) | |
| Add: Forfeited Shares (if any) | 20,000 | |
| Total Share Capital | 7,70,000 |
Never confuse called-up capital (the amount the company has demanded) with paid-up capital (the amount actually received). The difference is calls-in-arrears.
Key Formula (if applicable)
There is no single formula for share issuance conditions themselves. But for interest on calls-in-arrears (if the company's articles allow it):
Interest on calls-in-arrears = Amount unpaid × Rate of interest × (Period / 12 months)
For example, if ₹50,000 is unpaid for 3 months at 10% p.a.:
Interest = ₹50,000 × 10% × (3/12) = ₹1,250
This interest is credited to the company's profit and loss account (or to a separate interest account) and debited from the defaulting shareholder.
Final Takeaway
Share issuance conditions are the rules of the game for collecting money from investors. They determine the timing of cash flows, the accounting entries at each stage, and the presentation of share capital in the Balance Sheet. Always remember: the minimum subscription condition is a non-negotiable legal requirement — if not met, the company must refund all application money.
Part (a): Issued Capital is the part of Authorised Capital a company offers to the public for subscription.
Part (b): ESOP is the right given to employees/directors to buy the company's shares at a pre-decided price on a future date.
Employees Stock Option Plan (ESOP) is a scheme under which a company grants its permanent employees, directors or officers an option — a right but not an obligation — to buy or subscribe to the company's shares at a pre-determined (usually concessional) price on a specified future date.
Its purpose is to:
- reward employees for their contribution,
- create a sense of ownership, and
- retain and motivate talented employees.
The employee is free to exercise the option or not. As per the Companies Act, 2013, ESOP is such an option given to employees/directors/officers of the company.
ESOP is the right (option) granted by a company to its employees, directors or officers to buy or subscribe to its shares at a pre-fixed price on a future date.
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