Money received in advance from shareholders before it is actually called up by the directors is : (A) debited

Question

Q. Money received in advance from shareholders before it is actually called up by the directors is : (A) debited to calls in advance account (B) credited to calls in advance account (C) debited to share capital account (D) credited to share capital account

(OR)

An offer of securities or invitation to subscribe securities to a select group of persons is termed as : (A) Buy back of shares (B) Employee stock option plan (C) Private placement of shares (D) Sweat Equity

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Part (a)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)

Note

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

Part (b)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.

Important

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)

Note

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) …

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Part (a): Calls in advance is a liability → credited to Calls in Advance A/c — option (B).

Part (b): An offer to a select group of persons is Private Placement of shares — option (C).

Part (a)

When a shareholder pays money for a call the directors have not yet made, the amount is Calls in Advance. It is not yet legally due, so it cannot be credited to Share Capital; it is a current liability. On receipt: Bank A/c Dr., To Calls in Advance A/c. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 81 on this concept.

CBSE 2026Set 67/3/11 markMCQ
$Q. (a) Paramount Ltd. forfeited 2,000 equity shares of ₹ 100 each, ₹ 80 called up, issued at a premium of 10%, for non-payment of first call of ₹ 20 per share. On forfeiture of these shares, Equity Share Capital Account will be ________ by ________. (A) debited, ₹ 1,60,000 (B) credited, ₹ 1,60,000 (C) debited, ₹ 2,00,000 (D) credited, ₹ 2,00,000$
(OR)
$(b) Rudali Ltd. invited applications for issuing 2,00,000 equity shares of ₹ 10 each at a premium of ₹ 2 per share. ₹ 5 per share (including premium) was payable on application. Applications for 2,60,000 shares were received. An applicant for 5,000 shares paid his entire share money along with application. The amount received on application was : (A) ₹ 10,00,000 (B) ₹ 12,00,000 (C) ₹ 12,35,000 (D) ₹ 13,35,000$
›Reveal solutionSolution
Part (a): Equity Share Capital A/c is debited by ₹1,60,000 — option (A).

Part (b): Amount received on application = ₹13,35,000 — option (D).

Part (a)

Forfeiture reverses Share Capital only to the extent called up, at the called-up value per share.

Called-up per share = ₹80; shares forfeited = 2,000

Equity Share Capital A/c debit = 2,000 × ₹80 = ₹1,60,000 …
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CBSE 2026Set 67/3/11 markMCQ
$Q. (a) On 1st April, 2024, Mobi Ltd. issued 3,000, 9% Debentures of ₹ 1,000 each at a premium of 5%. The total amount of interest due on debentures for the year ended 31st March, 2025 will be : (A) ₹ 2,70,000 (B) ₹ 1,50,000 (C) ₹ 27,000 (D) ₹ 15,000$
(OR)
$(b) A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such uncalled amount is called : (A) Uncalled capital (B) Paid-up capital (C) Called-up capital (D) Reserve capital$
›Reveal solutionSolution
Part (a): Annual debenture interest = ₹2,70,000 — option (A).

Part (b): The reserved uncalled amount is Reserve Capital — option (D).

Part (a)

Debenture interest is computed on the nominal (face) value, unaffected by the issue premium.

Total face value = 3,000 × ₹1,000 = ₹30,00,000

Interest = 9% × ₹30,00,000 × 1 year = ₹2,70,000 …
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CBSE 2026Set 67/3/11 markMCQ
$Q. Deep Ltd. issued 6,000, 9% Debentures of ₹ 500 each at ₹ 490 per debenture. 9% Debentures Account will be credited by : (A) ₹ 2,70,000 (B) ₹ 6,00,000 (C) ₹ 29,40,000 (D) ₹ 30,00,000$
›Reveal solutionSolution
The 9% Debentures Account is credited by ₹30,00,000 (face value of 6,000 debentures @ ₹500 each), irrespective of the issue price of ₹490.

Concept: Accounting Treatment for Issue of Debentures at a Discount

When a company issues debentures, the Debentures Account (a liability) is always credited with the face value (nominal value) of the debentures, not the issue price. This is because the company's liability to debenture-holders is to repay the face value at maturity, regardless of what they paid at the time of issue.

The accounting entries follow the fundamental rule:

Debit what comes in (Bank receives cash at issue price)

Credit the liability at face value (Debentures Account)

Any difference between face value and issue price is treated separately:

Discount on Issue of Debentures (when issue price < face value) is debited as a capital loss

Premium on Issue of Debentures (when issue price > face value) is credited

In this case, Deep Ltd. issued debentures at a discount of ₹10 per debenture (₹500 − ₹490).

Solution

Working Note 1: Calculation of Face Value

Number of debentures issued = 6,000

Face value per debenture = ₹500

Total Face Value = 6,000 × ₹500 = ₹30,00,000

Working Note 2: Calculation of Issue Price

Issue price per debenture = ₹490

Total Cash Received = 6,000 × ₹490 = ₹29,40,000

Working Note 3: Discount on Issue

Discount per debenture = ₹500 − ₹490 = ₹10

Total Discount = 6,000 × ₹10 = ₹60,000

Journal Entry

Date Particulars L.F. Debit (₹) Credit (₹)
Bank A/c 29,40,000
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CBSE 2026Set 67/4/11 markMCQ
$Q. (a) 6,000 shares of ₹ 25 each were forfeited for non-payment of final call money of ₹ 5 per share. The maximum discount that the company can allow on reissue of these shares will be : (A) ₹ 30,000 (B) ₹ 90,000 (C) ₹ 1,20,000 (D) ₹ 1,50,000$
(OR)
$(b) 5,000 shares of ₹ 20 each were forfeited for non-payment of second and final call of ₹ 4 per share. The minimum amount that the company must collect at the time of reissue of these shares will be : (A) ₹ 20,000 (B) ₹ 80,000 (C) ₹ 1,00,000 (D) ₹ 1,20,000$
›Reveal solutionSolution

Part (a): Maximum discount on reissue = Rs.1,20,000 -> (C). Part (b): Minimum amount to collect on reissue = Rs.20,000 -> (A).

Part (a)

Maximum discount on reissue cannot exceed the amount forfeited. Amount received before forfeiture = 25 - 5 = Rs.20 per share -> 20 x 6,000 = Rs.1,20,000. …
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CBSE 2026Set 67/5/11 markMCQ
$Q. (a) Merak Ltd. forfeited 6,000 equity shares of ₹ 10 each for non-payment of final call of ₹ 3 per share. The minimum amount per share at which these shares can be reissued will be : (A) ₹ 3 (B) ₹ 7 (C) ₹ 10 (D) ₹ 6$
(OR)
$(b) Nori Ltd. issued 20,000, 11% debentures of ₹ 100 each at a premium of 10%, redeemable at a premium of 5%. Loss on issue of debentures account will be debited by : (A) ₹ 20,00,000 (B) ₹ 1,00,000 (C) ₹ 3,00,000 (D) ₹ 2,00,000$
›Reveal solutionSolution
Part (a): Minimum reissue price = ₹3 — option (A).

Part (b): Loss on Issue of Debentures = ₹1,00,000 — option (B).

Part (a)

On forfeiture, the amount already received is credited to the Share Forfeiture Account, and on reissue the discount allowed cannot exceed this balance.

Face value = ₹10; final call unpaid = ₹3

Amount forfeited per share = ₹10 − ₹3 = ₹7 (maximum permissible discount) …
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CBSE 2026Set MARCH1 markMCQ
$Q. For public issue of shares company has to take a permission from whom?$
(a) Central Government
(b) SEBI
(c) State Government
(d) Reserve Bank
›Reveal solutionSolution

Permission for a public issue of shares is taken from SEBI, so the answer is (b).

When a company invites the general public to subscribe to its shares, it must comply with the disclosure and investor-protection norms laid down by the Securities and Exchange Board of India (SEBI), the statutory regulator of the securities ma …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Purchase of own equity shares by a company is called A) Buy-back of share B) Repayment C) Redemption D) Capitalisation$
›Reveal solutionSolution
A company purchasing its own equity shares is doing a buy-back - option (A).

'Buy-back' means a company repurchasing its own equity shares from its shareholders, usually to return surplus cash, improve earnings per share, or support the share price. It is distinct from:

Redemption (option C) - applies to preference shares and debentures that are repaid on maturity. …
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CBSE 2026Set ANNUAL1 markMCQ
$Q. A notice of _______ days must be given to the shareholders for payment of calls on shares.$
(a) 14
(b) 25
(c) 51
(d) 90
(a) 14
(b) 25
(c) 51
(d) 90
›Reveal solutionSolution

A notice of 14 days must be given to shareholders for payment of calls on shares (Option A).

A 'call' is a demand made by the Board of Directors on shareholders to pay the uncalled part of the share price (allotment money, first call, final call, etc.). Under the Companies Act's model Table F articles, which most companies adopt in their Articles of Association, the Board is required to give shareholders at least 14 days' notice spe …

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CBSE 2026Set ANNUAL1 mark
$Q. What is Employee Stock Option Plan?$
›Reveal solutionSolution
ESOP gives eligible employees the right to buy company shares later at today's fixed (often discounted) price, aligning their interests with the company's long-term growth.

An Employee Stock Option Plan (ESOP) is an employee benefit scheme that allows a company's employees, officers, or directors to purchase or subscribe to the shares of the company at a future date, at a price that is fixed/predetermined in advance (usually lower than the prevailing market price at the time the option is actually exercised).

Key features:

The employee is given an "option," not an obligation — they may choose to exercise it or let it lapse.

There is typically a "vesting period" — a minimum waiting time the employee must serve before being allowed to exercise the option.

The exercise price is fixed at the time the option is granted, so if the company's share price rises by the time the option vests, the employee benefits from buying shares cheaper than the market price. …
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CBSE 2025Set 67/4/11 markMCQ
$Q. Diksha Ltd. invited applications for issuing 1,00,000 equity shares of ₹ 10 each at a premium of 10%. The whole amount was payable on application. Applications were received for 3,00,000 equity shares. The company decided to allot the shares on pro-rata basis to all the applicants. The amount refunded by the company was : (A) ₹ 22,00,000 (B) ₹ 33,00,000 (C) ₹ 11,00,000 (D) ₹ 20,00,000$
›Reveal solutionSolution

The amount refunded by Diksha Ltd. is ₹ 22,00,000 (Option A). This is the application money returned to applicants whose shares were not allotted under the pro-rata arrangement.

Concept and Accounting Treatment

When a company receives excess applications for shares, it can either reject the excess or allot shares on a pro-rata (proportionate) basis. Here, Diksha Ltd. received applications for 3,00,000 shares against an issue of 1,00,000 shares — three times the number offered. The company decided to allot shares pro-rata to all applicants.

The key accounting principle: Application money received in excess of the amount due on allotted shares must be refunded. The company cannot retain money for shares it does not issue. The refund is a liability until paid, and is recorded by crediting the Bank Account (when refunded) and debiting the Share Application Account.

Since the entire amount (face value + premium) is payable on application, each applicant paid ₹ 11 per share (₹ 10 face value + ₹ 1 premium). For every 3 shares applied, only 1 share is allotted. So for each group of 3 shares applied (₹ 33 paid), the company keeps ₹ 11 (for the 1 allotted share) and refunds ₹ 22 (for the 2 unallotted shares).

Watch out

Common Pitfall

Students often forget that the premium is also collected on application and must be refunded proportionately. The refund is not just on face value — it includes the entire application money for unallotted shares.

Solution

Step 1: Determine the Pro-rata Ratio

Shares applied: 3,00,000

Shares allotted: 1,00,000

Ratio: For every 3 shares applied, 1 share is allotted.

Step 2: Calculate Application Money Received

Particulars Amount (₹)
Number of shares applied 3,00,000
Application money per share (₹ 10 + ₹ 1 premium) ₹ 11
Total application money received ₹ 33,00,000

Step 3: Calculate Application Money Retained

Particulars Amount (₹)
Number of shares allotted 1,00,000
Application money per share (₹ 10 + ₹ 1 premium) ₹ 11
Application money retained for allotted shares ₹ 11,00,000

Step 4: Calculate Refund Amount

Particulars Amount (₹)
Total application money received ₹ 33,00,000
Less: Application money retained (₹ 11,00,000)
Amount refunded ₹ 22,00,000

Tip

Shortcut

Since only 1 out of every 3 shares applied is allotted, 2/3 of the application money is refunded. 2/3 × ₹ 33,00,000 = ₹ 22,00,000. This works because the application money per share is uniform.

Journal Entry for Refund …
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CBSE 2025Set 67/4/11 markMCQ
$Q. That portion of the called-up capital which has been actually received from the shareholders is called : (A) Issued Capital (B) Reserve Capital (C) Paid-up Capital (D) Nominal/Registered Capital$
›Reveal solutionSolution

The portion of called-up capital actually received from shareholders is Paid-up Capital — option (C).

Concept: Share Capital Classification

When a company is formed, it goes through several stages of capital subscription and collection. Understanding the hierarchy of share capital terms is fundamental to company accounts.

The Authorised/Nominal/Registered Capital is the maximum amount of capital a company is permitted to raise, as stated in its Memorandum of Association. This is the ceiling figure.

Out of this authorised capital, the company may offer only a portion to the public — this is the Issued Capital. Not all authorised capital needs to be issued at once.

When shareholders apply and are allotted shares, the company typically does not demand the full face value immediately. It calls up the amount in instalments — application money, allotment money, and one or more calls. The total amount the company has asked shareholders to pay up to a given point is the Called-up Capital.

Now comes the critical distinction: shareholders may default. Some may not pay the call money when demanded. The amount the company has actually collected — the cash or bank balance received from shareholders against the called-up amount — is the Paid-up Capital.

Watch out

Students often confuse called-up with paid-up. Called-up is what the company asked for; paid-up is what it received. If all shareholders pay promptly, called-up equals paid-up. If there are defaults (calls-in-arrear), paid-up will be less than called-up.

Reserve Capital is a special category: it is that part of uncalled capital which the company, by a special resolution, reserves to be called only in the event of winding up. It cannot be called during the normal life of the company.

Treatment in Books

Paid-up Capital appears on the liabilities side of the Balance Sheet under "Share Capital." It represents the actual equity contribution received and is the true measure of shareholders' investment realised by the company.

The accounting equation reflects this: …
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CBSE 2025Set 67/4/11 markMCQ
$Q. (a) On 1st April, 2024, Bright Ltd. issued 20,000, 11% debentures of ₹ 100 each at a premium of 10%, redeemable at a premium of 10%. Loss on issue of debentures was : (A) ₹ 2,00,000 (B) ₹ 4,00,000 (C) ₹ 20,00,000 (D) ₹ 40,00,000$
(OR)
$(b) Minimum subscription for allotment of shares as per Securities and Exchange Board of India (SEBI) guidelines cannot be less than 90% of _________ capital. (A) Reserve (B) Issued (C) Nominal/Registered (D) Subscribed$
›Reveal solutionSolution

Part (a): (A) ₹2,00,000. Part (b): (B) Issued.

Part (a)

When debentures are redeemable at a premium, the premium payable on redemption is a definite future liability recognised at issue as Loss on Issue of Debentures. Here premium on redemption = 10% of face value = 20,000 × ₹10 = ₹2,00,000. The 10% premium received on issue is a separate credit to Securities Premium Reserve — it is not subtracted from the loss. …
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Particulars	Amount (₹)
Number of shares applied	3,00,000
Application money per share (₹ 10 + ₹ 1 premium)	₹ 11
Total application money received	₹ 33,00,000

Particulars	Amount (₹)
Number of shares allotted	1,00,000
Application money per share (₹ 10 + ₹ 1 premium)	₹ 11
Application money retained for allotted shares	₹ 11,00,000

Particulars	Amount (₹)
Total application money received	₹ 33,00,000
Less: Application money retained	(₹ 11,00,000)
Amount refunded	₹ 22,00,000

Q.Money received in advance from shareholders before it is actually called up by the directors is : (A) debited to calls in advance account (B) credited to calls in advance account (C) debited to share capital account (D) credited to share capital account

Part (a)

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