Sumit Machine Ltd. issued 50,000 shares of Rs. 100 each at premium of 5%. The shares were payable as follows:

Numerical Questions · Q8

Particulars	Amount (₹)
On Application	25
On Allotment	50
On First and Final Call	30

The issue was fully subscribed and money was duly received except the final call on 400 shares. The premium was adjusted on allotment. 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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Journal Entries in the books of Sumit Machine Ltd.

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	12,50,000
To Share Application A/c		12,50,000
(Being application money received on 50,000 shares @ ₹25 each)
Share Application A/c Dr.	12,50,000
To Share Capital A/c		12,50,000
(Being application money transferred to Share Capital)
Share Allotment A/c Dr.	25,00,000
To Share Capital A/c		25,00,000
(Being allotment money due on 50,000 shares @ ₹50 each)
Bank A/c Dr.	25,00,000
To Share Allotment A/c		25,00,000
(Being allotment money received)
Share First & Final Call A/c Dr.	15,00,000
To Share Capital A/c		15,00,000
(Being first & final call money due on 50,000 shares @ ₹30 each)
Bank A/c Dr.	13,88,000
Calls-in-Arrears A/c Dr.	12,000
To Share First & Final Call A/c		15,00,000
(Being call money received except on 400 shares @ ₹30 each)
Securities Premium Reserve A/c Dr.	2,50,000
To Share Allotment A/c		2,50,000
(Being premium of ₹5 per share adjusted on allotment)

Note

Premium of 5% on ₹100 = ₹5 per share. Total premium = 50,000 × ₹5 = ₹2,50,000. This is credited to Securities Premium Reserve and adjusted against allotment.

Balance Sheet of Sumit Machine Ltd. (as at ...)

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
Shareholders' Funds
Share Capital	1	50,00,000
Reserves and Surplus	2	2,38,000
Total		52,38,000

ASSETS
Current Assets
Cash and Bank Balances		51,38,000

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The company received full payment except the final call on 400 shares (₹12,000 due). Journal entries record application, allotment (with premium), call, and call arrears. The Balance Sheet shows called-up capital, calls-in-arrears, and the Securities Premium Reserve.

Concept and Accounting Treatment

This is a share capital issue at a premium. The key rule: the premium is collected with the allotment money because the question says "premium was adjusted on allotment." That means the allotment amount of ₹50 per share includes the ₹5 premium. So the allotment money is split: ₹45 goes to Share Capital (called-up value) and ₹5 goes to Securities Premium Reserve.

The shares are fully subscribed (50,000 shares). The only default is on the final call for 400 shares. Those 400 shareholders have not paid the last ₹30 each. This creates "Calls-in-Arrears" — a deduction from the called-up capital in the Balance Sheet.

Remember: Calls-in-Arrears is not an expense. It is a personal account of the defaulting shareholders. It appears on the liabilities side as a negative figure under Share Capital.

Journal Entries in the Books of Sumit Machine Ltd.

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	12,50,000
To Share Application A/c		12,50,000
(Being application money received on 50,000 shares @ ₹25 each)

Share Application A/c Dr.	12,50,000
To Share Capital A/c		12,50,000
(Being application money transferred to Share Capital)

Share Allotment A/c Dr.	25,00,000
To Share Capital A/c		22,50,000
To Securities Premium Reserve A/c		2,50,000
(Being allotment due: ₹50 per share, including premium of ₹5)

Bank A/c Dr.	25,00,000
To Share Allotment A/c		25,00,000
(Being allotment money received)

Share First and Final Call A/c Dr.	15,00,000
To Share Capital A/c		15,00,000
(Being first and final call due on 50,000 shares @ ₹30 each)

Bank A/c Dr.	14,88,000
Calls-in-Arrears A/c Dr.	12,000
To Share First and Final Call A/c		15,00,000
(Being call money received on 49,600 shares; call not received on 400 shares)

Watch out

A common mistake is to treat Calls-in-Arrears as an expense and debit it to Profit & Loss. It is NOT an expense. It is a personal account representing money due from shareholders. It is shown as a deduction from Share Capital in the Balance Sheet.

Balance Sheet of Sumit Machine Ltd. (as per the given data)

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
Shareholders' Funds
Share Capital	1	49,88,000
Reserves and Surplus	2	2,50,000
Total		52,38,000

ASSETS
Current Assets
Cash and Bank Balances	3	52,38,000
Total		52,38,000

Notes to Accounts

Note 1: Share Capital	Amount (₹)
Authorised Capital	(not given)
Issued Capital
50,000 Equity Shares of ₹100 each	50,00,000
Subscribed and Called-up Capital
50,000 Equity Shares of ₹100 each	50,00,000
Less: Calls-in-Arrears (400 shares x ₹30)	(12,000)
Paid-up Capital	49,88,000

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