(a) 'Reserve Capital' can be utilised : (A) any time during the life of the company. (B) only at the time of w

Question

Q. (a) 'Reserve Capital' can be utilised : (A) any time during the life of the company. (B) only at the time of winding up of the company. (C) to issue fully paid bonus shares. (D) to provide for premium on the redemption of preference shares.

(OR)

(b) An offer of securities or invitation to subscribe securities to a select group of persons is called : (A) Sweat equity (B) Employee Stock Option Plan (C) Private placement (D) Buy-back of shares

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Part (a)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”.)

Note

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:

Particulars	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

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): (B) Reserve Capital can be called only at winding up.

Part (b): (C) An offer to a select group is a Private placement.

Part (a)

Reserve Capital is the portion of a company's uncalled share capital that, under Section 65 of the Companies Act 2013, the company has resolved (by special resolution) not to call up except in the event of and for the purposes of winding up. It exists to give creditors an assured cushion at liquidation, so it cannot be used during the company's normal life, nor for issuing bonus shares or providing premium on redemption of preference shares (those come from free reserves / Securities Premium). Do not confuse it with Capital Reserve (a reserve created out of capital profits, shown on the liabilities side). …

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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 112 on this concept.

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 MARCH1 markMCQ
$Q. Issued capital is a part of :$
(a) a) Reserve capital
(b) b) Unissued capital
(c) c) Authorised capital
(d) d) Subscribed capital
›Reveal solutionSolution

Issued capital is a portion of the authorised (registered) capital, so the answer is (c) Authorised capital.

Share capital is classified as authorised -> issued -> subscribed -> called-up -> paid-up. Authorised capital is the maximum amount stated in the memorandum. The company need not issue all of it at once; the part it actually offers for public subscription is the issued capital, and the balance is unissued capital. So issued capital is always a part of the …

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CBSE 2026Set MARCH1 mark
$Q. State any one type of shares.$
›Reveal solutionSolution

One type of share is the Equity Share (the other being the Preference Share).

Under the Companies Act, a company can issue two broad classes of shares:

…

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CBSE 2026Set ANNUAL1 mark
$Q. Write the types of preference shares. (any four)$
›Reveal solutionSolution
Four types of preference shares are cumulative, non-cumulative, participating and non-participating.

Preference shares carry a preferential right to dividend and to repayment of capital, and are classified according to the rights attached:

Cumulative vs Non-cumulative - whether unpaid dividends accumulate.

Participating vs Non-participating - whether they share in surplus profits beyond the fixed rate.

Convertible vs Non-convertible - whether they can be converted into equity shares. …
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CBSE 2026Set ANNUAL1 mark
$Q. State whether True or False: Shares are of two types.$
›Reveal solutionSolution

The statement is True.

As per the Companies Act, 2013, a company's share capital is divided into two kinds of shares - equity shares and preference shares. So …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. The capital with which a company is registered, is called:$
(a) Authorized Capital
(b) Issued Capital
(c) Subscribed Capital
(d) Paid-up Capital
(a) Authorized Capital
(b) Issued Capital
(c) Subscribed Capital
(d) Paid-up Capital
›Reveal solutionSolution
The capital with which a company is registered is its Authorized Capital.

Share capital of a company is classified into several categories as it moves from registration to actual cash received:

Authorized Capital — the maximum amount of share capital a company is legally allowed to raise, as stated in its Memorandum of Association (Capital Clause). This is the capital 'with which the company is registered.' It can only be increased by following the procedure laid down in the Companies Act, 2013 (special resolution + approval).

Issued Capital — that part of the authorized capital which the company actually offers to the public/investors for subscription.

Subscribed Capital — that part of the issued capital which has actually been subscribed/applied for and allotted to investors. …
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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 markMCQ

Q. What correct order of capitals is followed while preparing Notes to Account to find out the amount of share capital to be shown in Balance Sheet _______.

(a) Issued capital, Authorised capital, Subscribed capital

(b) Subscribed capital, Issued capital, Authorised capital

(d) Authorised capital, Subcribed capital, Issued capital

(a) Issued capital, Authorised capital, Subscribed capital

(b) Subscribed capital, Issued capital, Authorised capital

(d) Authorised capital, Subcribed capital, Issued capital

›Reveal solution

The correct order is Authorised capital → Issued capital → Subscribed capital (Option C).

Share capital is disclosed in the Notes to Accounts in a logical, descending sequence of scope:

Step	Term	Meaning
1	Authorised Capital	The maximum capital a company is permitted to raise, as stated in its Memorandum of Association.
2	Issued Capital	The part of the authorised capital that the company actually offers for subscription to the public/promoters.
3	Subscribed Capital	The part of the issued capital that has actually been taken up (applied for and allotted) by the public.
…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. The part of authorized capital which is offered to the public is called$
(a) subscribed capital
(b) nominal capital
(c) authorized capital
(d) issued capital
›Reveal solutionSolution
"Issued Capital" is the specific portion of a company's Authorised Capital that is actually offered to the public/investors for subscription.

Share capital in company accounts moves through several well-defined stages:

Authorised (Nominal/Registered) Capital — the maximum amount of capital a company is permitted to raise, as stated in its Memorandum of Association. This is a ceiling, not an actual issue.

Issued Capital — the part of the authorised capital that the company actually offers for subscription to the public/investors. It can never exceed authorised capital.

Subscribed Capital — the part of the issued capital that has actually been subscribed (applied and allotted) by the public.

Called-up Capital — the part of subscribed capital that the company has demanded (called) from shareholders so far. …
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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 2026Set ANNUAL1 markMCQ
$Q. The Part of Authorised capital offered by the company to the public for subscription is ............................... .$
(a) Subscribed Capital
(b) Issued Capital
(c) Called up Capital
(d) Paid up Capital
›Reveal solutionSolution
The part of Authorised Capital offered to the public for subscription is called Issued Capital.

A company's share capital, as taught under "Accounting for Share Capital," has several layers, each a narrower slice of the one before:

Authorised (Nominal/Registered) Capital — the maximum capital a company is permitted to raise, as stated in its Memorandum of Association.

Issued Capital — the part of the Authorised Capital that the company actually offers to the public (or to specific persons) for subscription. It is always ≤ Authorised Capital.

Subscribed Capital — the part of the Issued Capital that is actually applied for and allotted to applicants.

Called-up Capital — the part of the Subscribed Capital that the company has demanded (called) from shareholders so far. …
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CBSE 2025Set MARCH1 markMCQ
$Q. As per SEBI guidelines, the minimum amount on each share called by companies must be at least ______ % of the issue price.$
(a) 25
(b) 30
(c) 5
(d) 20
›Reveal solutionSolution

SEBI guidelines require the minimum amount payable on application to be at least 25% of the issue price. Correct option: (a) 25.

In GSEB Class-12 Commerce Accountancy (Accounting for Share Capital):

…

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Q.(a) 'Reserve Capital' can be utilised : (A) any time during the life of the company. (B) only at the time of winding up of the company. (C) to issue fully paid bonus shares. (D) to provide for premium on the redemption of preference shares.

Part (a)

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