Q.Manmohan Ltd. invited applications for issuing 50,000 equity shares of ₹ 10 each at par. The amount payable per share was as follows : On application ₹ 3; on allotment ₹ 4 and on first and final call ₹ 3. Applications were received for 1,45,000 equity shares. Applications for 20,000 equity shares were rejected and remaining applicants were allotted shares on a pro-rata basis. Excess application money received with application was adjusted towards sums due on allotment and first and final call. Amount credited to calls-in-advance account was : (A) ₹ 2,25,000 (B) ₹ 25,000 (C) ₹ 1,75,000 (D) Nil
Concept understanding — Share Capital Accounting
Let’s begin with something you already know from everyday life.
Imagine you and two friends decide to start a small business — say, a tiffin service. You each put in some money to buy utensils, a stove, and ingredients. That money you all contributed is the capital of the business. The business doesn’t own that money; it owes it back to you, the owners. In accounting, we call you the shareholders, and the money you put in is share capital.
Now scale that up to a company. A company needs huge amounts of money to build factories, buy machinery, or develop software. It raises this money by selling shares — small units of ownership. When you buy a share, you become a part-owner of that company. The total money collected from all shareholders is the company’s share capital.
Why does share capital matter in accounting?
Because the company is a separate legal person. It does not own the money — the shareholders do. So the company must record exactly how much it has collected from whom, and in what form. This affects the balance sheet (where share capital appears under Equity and Liabilities) and the cash flow (money coming in from shareholders is a financing activity).
The precise meaning (NCERT Class 12)
Share Capital is the money raised by a company by issuing shares to the public or to promoters. It is shown under the head Shareholders’ Funds in the Balance Sheet.
There are two main types of shares:
- Equity shares – ordinary shares; owners get dividends only if the company makes profit.
- Preference shares – owners get a fixed dividend before equity shareholders, but usually have no voting rights.
Accounting treatment — the journal entries
When a company issues shares, it follows a standard sequence. Let’s say a company issues 10,000 equity shares of ₹10 each at par (i.e., at face value). The money is received in two instalments: ₹4 on application, ₹6 on allotment.
Step 1: Application money received
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c Dr. | 40,000 | ||
| To Share Application A/c | 40,000 | ||
| (Being application money received on 10,000 shares @ ₹4 each) |
Step 2: Transfer application money to Share Capital
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Share Application A/c Dr. | 40,000 | ||
| To Share Capital A/c | 40,000 | ||
| (Being application money transferred to Share Capital) |
Step 3: Allotment money due
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Share Allotment A/c Dr. | 60,000 | ||
| To Share Capital A/c | 60,000 | ||
| (Being allotment money due on 10,000 shares @ ₹6 each) |
Step 4: Allotment money received
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c Dr. | 60,000 | ||
| To Share Allotment A/c | 60,000 | ||
| (Being allotment money received) |
If shares are issued at a premium (e.g., ₹10 face value, issued at ₹12), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c. It is not part of share capital.
The Balance Sheet format (as per NCERT)
Under Equity and Liabilities, share capital appears like this:
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| 1. Shareholders’ Funds | ||
| (a) Share Capital | 1 | 1,00,000 |
| (b) Reserves and Surplus | 2 | 20,000 |
| 2. Non-Current Liabilities | ... | ... |
| 3. Current Liabilities | ... | ... |
And Note 1 (Share Capital) is typically shown as:
| Particulars | Amount (₹) |
|---|---|
| Authorised Capital | |
| 1,00,000 Equity Shares of ₹10 each | 10,00,000 |
| Issued Capital | |
| 80,000 Equity Shares of ₹10 each | 8,00,000 |
| Subscribed and Paid-up Capital | |
| 80,000 Equity Shares of ₹10 each fully paid | 8,00,000 |
Authorised Capital is the maximum amount the company can raise (as per its Memorandum). Issued Capital is what it actually offers. Subscribed Capital is what the public accepts. Paid-up Capital is what the shareholders have actually paid.
A formula you must know (for interest on capital, if applicable)
In case of a partnership (not company), interest on capital is calculated as:
Interest on Capital = Capital × Rate of Interest × Time (in years)
For example, if a partner’s capital is ₹1,00,000 and the interest rate is 10% per annum for one year, the interest is ₹10,000.
But for a company, there is no “interest on share capital” — shareholders get dividends, not interest. Dividends are paid out of profit, not charged as an expense.
Common mistake to avoid
Do not confuse Share Capital (money from owners) with Debentures (loans from the public). Share capital is ownership; debentures are debt. Share capital is shown under Shareholders’ Funds; debentures under Non-Current Liabilities.
Why this matters for your exam
NCERT Class 12 Accountancy (Part II, Chapter 1) expects you to:
- Pass journal entries for issue of shares (at par, at premium, at discount — though discount is now prohibited).
- Prepare the Share Capital note in the Balance Sheet.
- Understand the difference between calls in arrear and calls in advance.
- Handle pro-rata allotment (when shares are oversubscribed).
Start with the intuition: share capital is the money owners give the company to run its business. The accounting is just recording that transaction honestly — debit the bank, credit the shareholders’ account. Everything else is detail.
Part (a): ₹25,000 is credited to Calls-in-Advance, option (B). Part (b): subscribed capital is the subscribed portion of issued capital, option (C).
Pro-rata: 50,000 allotted / 1,25,000 accepted = 2 : 5.
| Stage | Amount (₹) |
|---|---|
| Application received (1,25,000 x 3) | 3,75,000 |
| Less: due on application (50,000 x 3) | 1,50,000 |
| Excess available | 2,25,000 |
| Less: allotment due (50,000 x 4) | 2,00,000 |
| Balance -> call (not yet made) = Calls-in-Advance | 25,000 |
Since the first and final call has not been made, the remaining ₹25,000 is held as Calls-in-Advance.
Amount credited to Calls-in-Advance A/c = (B) ₹25,000.
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): ₹25,000 is credited to Calls-in-Advance, option (B). Part (b): subscribed capital is the subscribed portion of issued capital, option (C).
- (A) describes Authorised capital.
- (B) describes Issued capital.
- (C) Subscribed capital - the part of issued capital actually subscribed by the public. Correct.
- (D) describes Paid-up capital.
Correct statement = (C) It is that part of the issued capital which has been actually subscribed by the public.
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