The Orient Company Limited offered for public subscription 20,000 equity shares of Rs. 10 each at a premium of

Numerical Questions · Q18

The Orient Company Limited offered for public subscription 20,000 equity shares of Rs. 10 each at a premium of 10% payable as follows:

Particulars	Amount (₹)
On Application	2
On Allotment (including premium)	4
On First Call	3
On Second and Final Call	2

Applications for 26,000 shares were received. Applications for 4,000 shares were rejected. Pro-rata allotment was made to the remaining applicants. Both the calls were made and all the money were received except the final call on 500 shares which were forfeited. 300 of the forfeited shares were later reissued as fully paid at Rs. 9 per share. Give journal entries and prepare the balance sheet.

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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

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The Orient Company Ltd. issued 20,000 shares of ₹10 each at a 10% premium (₹1 per share). Applications for 26,000 shares were received; 4,000 were rejected and the remaining 22,000 applicants were allotted 20,000 shares on a pro-rata basis.

Payment schedule (per share): Application ₹2 · Allotment ₹4 (including ₹1 premium) · First Call ₹3 · Second & Final Call ₹2.

Step 1 – Pro-rata and application money

Application money received = 26,000 × ₹2 = ₹52,000. Refund on 4,000 rejected shares = ₹8,000. From the 22,000 allotted applicants, application money received = ₹44,000, of which ₹40,000 (on the 20,000 allotted shares) is retained and the excess ₹4,000 is adjusted against allotment.

Step 2 – Forfeiture treatment

When shares issued at a premium are forfeited after the premium has already been received, the premium is not written back — it stays in the Securities Premium account. Only the amount received towards share capital is credited to Share Forfeiture. The 500 defaulting shares had paid, towards capital, Application ₹2 + Allotment (capital portion) ₹3 + First Call ₹3 = ₹8 per share (the ₹1 premium is excluded).

Forfeited amount on 500 shares = 500 × ₹8 = ₹4,000
Reissue of 300 shares at ₹9 fully paid (face ₹10): discount = ₹1 × 300 = ₹300
Profit on reissue = (300 × ₹8) − ₹300 = ₹2,400 − ₹300 = ₹2,100 → Capital Reserve
Balance left in Share Forfeiture (200 shares not reissued) = 200 × ₹8 = ₹1,600

Journal Entries

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	52,000
To Share Application A/c		52,000
(Application money received on 26,000 shares @ ₹2)
Share Application A/c Dr.	52,000
To Share Capital A/c (20,000 × ₹2)		40,000
To Bank A/c (refund on 4,000 shares)		8,000
To Share Allotment A/c (excess adjusted)		4,000
Share Allotment A/c Dr.	80,000
To Share Capital A/c (20,000 × ₹3)		60,000
To Securities Premium A/c (20,000 × ₹1)		20,000
Bank A/c Dr.	76,000
To Share Allotment A/c (80,000 − 4,000 adjusted)		76,000
Share First Call A/c Dr.	60,000
To Share Capital A/c		60,000
Bank A/c Dr.	60,000
To Share First Call A/c		60,000

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Applications for 4,000 shares are rejected (money refunded) and the rest allotted pro-rata; 500 shares are forfeited for non-payment of the final call and 300 are reissued at ₹9, fully paid. Capital Reserve = ₹2,100, and the Balance Sheet totals ₹2,21,700.

Key figures (premium 10% = Re. 1 per share)

Allotment of ₹4 includes Re. 1 premium, so its face portion is ₹3. On the 500 forfeited shares the amount received towards face value = application ₹2 + allotment (face) ₹3 + first call ₹3 = ₹8 per share; the Re. 1 premium was received on allotment and is not disturbed; only the final call of ₹2 was unpaid.

Applications: 26,000 received; 4,000 rejected (refund 4,000 × ₹2 = ₹8,000); the remaining 22,000 applicants allotted 20,000, so excess on 2,000 shares × ₹2 = ₹4,000 is adjusted to allotment.

Journal Entries in the Books of The Orient Company Ltd.

Particulars	Debit (₹)	Credit (₹)
Bank A/c (26,000 x ₹2) Dr.	52,000
To Share Application A/c		52,000
Share Application A/c Dr.	52,000
To Share Capital A/c (20,000 x ₹2)		40,000
To Bank A/c (refund on 4,000 shares)		8,000
To Share Allotment A/c (excess on 2,000 shares)		4,000
Share Allotment A/c (20,000 x ₹4) Dr.	80,000
To Share Capital A/c (20,000 x ₹3)		60,000
To Securities Premium Reserve A/c (20,000 x Re. 1)		20,000
Bank A/c (80,000 - 4,000) Dr.	76,000
To Share Allotment A/c		76,000
Share First Call A/c (20,000 x ₹3) Dr.	60,000
To Share Capital A/c		60,000
Bank A/c Dr.	60,000
To Share First Call A/c		60,000
Share Second and Final Call A/c (20,000 x ₹2) Dr.	40,000
To Share Capital A/c		40,000
Bank A/c (19,500 x ₹2) Dr.	39,000
Calls-in-Arrears A/c (500 x ₹2) Dr.	1,000
To Share Second and Final Call A/c		40,000
Forfeiture of 500 shares
Share Capital A/c (500 x ₹10) Dr.	5,000
To Share Forfeiture A/c (500 x ₹8)		4,000
To Calls-in-Arrears A/c (500 x ₹2)		1,000
Reissue of 300 shares at ₹9, fully paid
Bank A/c (300 x ₹9) Dr.	2,700
Share Forfeiture A/c (300 x Re. 1) Dr.	300
To Share Capital A/c (300 x ₹10)		3,000
Transfer to Capital Reserve
Share Forfeiture A/c Dr.	2,100
To Capital Reserve A/c		2,100

Working Notes …

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Key figures (premium 10% = Re. 1 per share)

Journal Entries in the Books of The Orient Company Ltd.

Working Notes …

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