Q.Diwakar enterprises Ltd. issued 10,00,000, 6% debentures on April 1, 2016. Interest is paid on September 30, 2016 and March 31, 2017. Record necessary journal entries assuming that income tax is deducted @10% of the amount of interest.

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

Step 2: Transfer application money to Share Capital

Step 3: Allotment money due

Step 4: Allotment money received

The Balance Sheet format (as per NCERT)

Under Equity and Liabilities, share capital appears like this:

And Note 1 (Share Capital) is typically shown as:

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

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.