Categories of Share Capital

A company, being an artificial person, cannot generate its own capital. It must collect funds from many individuals, called shareholders. The total amount contributed by them is the share capital. Because the number of shareholders is very large, a separate capital account for each is impossible. Instead, all contributions merge into a single account called the Share Capital Account.

From an accounting point of view, share capital is classified into several categories. Each category represents a different stage in the process of raising and collecting capital.

Authorised Capital

This is the maximum amount of share capital a company is legally allowed to issue, as stated in its Memorandum of Association. The company cannot raise more than this amount. It is also called Nominal Capital or Registered Capital. The authorised capital can be increased or decreased only by following the procedure laid down in the Companies Act. Importantly, the company need not issue the entire authorised capital at once. It may issue only a portion, depending on its immediate requirement, but it can never issue more than the authorised amount.

Issued Capital

This is that part of the authorised capital which is actually offered to the public for subscription. It also includes shares allotted to vendors (as payment for assets purchased) and to the signatories to the company’s memorandum (the initial promoters). The portion of authorised capital that is not offered to the public is called Unissued Capital. This unissued capital can be offered for subscription at a later date.

Subscribed Capital

This is that part of the issued capital which has actually been subscribed (applied for) by the public. If the public subscribes to all the shares offered, issued capital and subscribed capital are equal. However, subscribed capital can be less than issued capital (under-subscription). In that case, the company allots only the number of shares for which applications were received. If the public subscribes for more shares than offered (over-subscription), the allotment is limited to the number of shares offered. The fact of over-subscription is not reflected in the books of accounts; only the actual allotment is recorded.

Called-up Capital

This is that part of the subscribed capital which the company has asked (called) the shareholders to pay. The company may decide to call the entire face value of the share or only a part of it. For example, if a share of face value ₹10 is allotted, the company may call up only ₹7 per share. The remaining ₹3 is uncalled capital and may be collected later as needed.

Paid-up Capital

This is that portion of the called-up capital which has actually been received from the shareholders. If all shareholders have paid the called amount, called-up capital equals paid-up capital. If any shareholder fails to pay the amount due on a call, that unpaid amount is called Calls in Arrears. Therefore:

Paid-up Capital = Called-up Capital – Calls in Arrears

Uncalled Capital

This is that portion of the subscribed capital which has not yet been called up. The company can collect this amount at any time when it needs further funds.

Reserve Capital

A company may decide to reserve a portion of its uncalled capital to be called only in the event of the company’s winding up (liquidation). This amount is called Reserve Capital. It is available only for the creditors of the company upon winding up and cannot be called during the normal course of business.

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The following diagram summarises the relationship between these categories:

Authorised Capital
├── Issued Capital
│   ├── Subscribed Capital
│   │   ├── Subscribed and Fully Paid-up
│   │   └── Subscribed but not Fully Paid-up
│   └── Unissued Capital
└── (Unissued Capital is part of Authorised Capital not offered)

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Illustration: Balance Sheet Presentation

Let us take the example of Sunrise Company Ltd. to see how these categories appear in the Notes to Accounts of the Balance Sheet.

Given data:

• Authorised Capital: ₹40,00,000 divided into 4,00,000 shares of ₹10 each.
• Issued to public: 2,00,000 shares of ₹10 each.
• Payment terms: ₹2 on application, ₹3 on allotment, ₹3 on first call, and the balance (₹2) on final call.
• Applications received: 2,50,000 shares. Allotment made for 2,00,000 shares; applications for 50,000 shares rejected.
• The company did not make the final call.
• All amounts received except call money on 2,000 shares (i.e., calls in arrears on 2,000 shares).

Calculations:

• Called-up amount per share = ₹2 (application) + ₹3 (allotment) + ₹3 (first call) = ₹8 per share.
• Total called-up capital = 2,00,000 shares × ₹8 = ₹16,00,000.
• Calls in arrears = 2,000 shares × ₹3 (first call not paid) = ₹6,000. …