Software Solution India Ltd. invited applications – Class 12 Accountancy

Numerical Questions · Q3

Software Solution India Ltd. invited applications for 20,000 equity shares of Rs. 100 each, payable:

Particulars	Amount (₹)
On Application	40
On Allotment	30
On First and Final Call	30

The company received applications for 32,000 shares. Application for 2,000 shares were rejected and money returned to applicants. Applications for 10,000 shares were accepted in full and applicants for 20,000 shares allotted half of the number of shares applied and excess application money adjusted into allotment. All money due on allotment and call was received. Prepare journal and cash book.

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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

Important

Authorised Capital is the maximum amount the company can raise (as per its Memorandum). Issued Capital is what it actually offers. Subscribed Capital is what the public accepts. Paid-up Capital is what the shareholders have actually paid.

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

Watch out

Do not confuse Share Capital (money from owners) with Debentures (loans from the public). Share capital is ownership; debentures are debt. Share capital is shown under Shareholders’ Funds; debentures under Non-Current Liabilities.

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.

Step 1 – Understanding the Problem

The company issued 20,000 shares at ₹100 each, payable in three stages:

Application: ₹40 per share
Allotment: ₹30 per share
First & Final Call: ₹30 per share

Applications received: 32,000 shares

Rejected: 2,000 shares (money returned)

Remaining applications: 30,000 shares for 20,000 shares available.

Pro-rata allotment:

10,000 shares applied → allotted in full (10,000 shares)
20,000 shares applied → allotted half (10,000 shares)

Excess application money from the 20,000 applicants (who applied for 20,000 but got 10,000) is adjusted towards allotment.

Step 2 – Calculating the Amounts

Application money received:

32,000 shares × ₹40 = ₹12,80,000

Rejected applications:

2,000 shares × ₹40 = ₹80,000 (returned)

Valid applications: 30,000 shares

Application money retained: 30,000 × ₹40 = ₹12,00,000

Allotment due:

20,000 shares × ₹30 = ₹6,00,000

Excess application money available for adjustment:

Applicants for 20,000 shares paid for 20,000 shares but got only 10,000 shares.

Excess per applicant: 10,000 shares × ₹40 = ₹4,00,000

This ₹4,00,000 is adjusted against allotment.

Net allotment money receivable:

₹6,00,000 – ₹4,00,000 = ₹2,00,000

First & Final Call due:

20,000 shares × ₹30 = ₹6,00,000

Step 3 – Journal Entries

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	12,80,000
To Share Application A/c		12,80,000
(Being application money received on 32,000 shares @ ₹40)
Share Application A/c Dr.	12,80,000
To Share Capital A/c		8,00,000
To Share Allotment A/c		4,00,000
To Bank A/c		80,000
(Being application money transferred: ₹8,00,000 to capital for 20,000 shares, ₹4,00,000 adjusted to allotment, ₹80,000 refunded for rejected shares)
Share Allotment A/c Dr.	6,00,000
To Share Capital A/c		6,00,000
(Being allotment money due on 20,000 shares @ ₹30)
Bank A/c Dr.	2,00,000
To Share Allotment A/c		2,00,000
(Being net allotment money received after adjustment)
Share First & Final Call A/c Dr.	6,00,000
To Share Capital A/c		6,00,000
(Being first & final call money due on 20,000 shares @ ₹30)
Bank A/c Dr.	6,00,000
To Share First & Final Call A/c		6,00,000
(Being call money received)

Step 4 – Cash Book (Bank Column)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Share Application A/c	12,80,000	By Share Application A/c (refund)	80,000
To Share Allotment A/c	2,00,000	By Balance c/d	20,00,000
To Share First & Final Call A/c	6,00,000
Total	20,80,000	Total	20,80,000

✓Final answer

The total cash received from the issue is ₹20,80,000 (₹12,80,000 application + ₹2,00,000 allotment + ₹6,00,000 call), and after refunding ₹80,000, the net cash in bank is ₹20,00,000.

The company issued 20,000 shares at ₹100 each, received applications for 32,000 shares, rejected 2,000 applications, and pro-rata allotted the remaining 30,000 applications to 20,000 shares. Excess application money was adjusted towards allotment. All subsequent calls were fully received. The journal entries and cash book are prepared below.

Concept and Accounting Treatment

This is a classic case of pro-rata allotment in share capital accounting. When a company receives more applications than the shares offered, it cannot simply keep the excess money — it must either refund it or adjust it against future calls, as per the company's decision and the terms of the prospectus.

The key accounting principle here is the separate treatment of application, allotment, and call money. Each stage represents a distinct contractual obligation between the company and the shareholder. The application money is held in trust until allotment is made. Once allotment is confirmed, the application money becomes part of share capital.

For the pro-rata adjustment, the excess application money is not refunded but is transferred to the allotment account. This means the company receives less cash on allotment date because part of the allotment dues are already "paid" through the excess application money. The journal entries must reflect this adjustment clearly.

The Cash Book in company accounts is simply the cash column of the journal — it records all cash receipts and payments. In practice, the cash book is the primary book of entry, and journal entries for cash transactions are posted directly from it.

Solution

Step 1: Determine the Allotment Pattern

Total shares offered: 20,000

Total applications received: 32,000

Rejected applications: 2,000 shares (money returned)

Valid applications: 30,000 shares (for 20,000 shares offered)

The company decided:

10,000 shares applied for → allotted in full (10,000 shares)
20,000 shares applied for → allotted half (10,000 shares)

Total allotted: 10,000 + 10,000 = 20,000 shares ✓

Step 2: Calculate Money Receivable and Adjustments

Application money:

Received on 32,000 shares × ₹40 = ₹12,80,000
Refunded on 2,000 shares × ₹40 = ₹80,000
Retained on 30,000 shares × ₹40 = ₹12,00,000

Allotment money:

Due on 20,000 shares × ₹30 = ₹6,00,000
Excess application money available for adjustment:
- For the 10,000 shares allotted in full: No excess (applied 10,000, allotted 10,000)
- For the 20,000 shares allotted half: Applied 20,000 shares, allotted 10,000 shares
  - Application money received on 20,000 shares = 20,000 × ₹40 = ₹8,00,000
  - Application money actually required for 10,000 shares = 10,000 × ₹40 = ₹4,00,000
  - Excess = ₹8,00,000 - ₹4,00,000 = ₹4,00,000
- Total excess = ₹4,00,000 (only from the pro-rata group)

Cash receivable on allotment:

Allotment due: ₹6,00,000
Less: Excess application money adjusted: ₹4,00,000
Cash to be received: ₹2,00,000

Call money:

Due on 20,000 shares × ₹30 = ₹6,00,000
No adjustment — full cash received

Journal Entries

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	12,80,000
To Share Application A/c		12,80,000
(Being application money received on 32,000 shares @ ₹40 each)

Share Application A/c Dr.	12,80,000
To Share Capital A/c		8,00,000
To Share Allotment A/c		4,00,000
To Bank A/c		80,000
(Being application money transferred: ₹8,00,000 to share capital for 20,000 shares allotted; ₹4,00,000 adjusted towards allotment; ₹80,000 refunded for rejected applications)

Share Allotment A/c Dr.	6,00,000
To Share Capital A/c		6,00,000
(Being allotment money due on 20,000 shares @ ₹30 each)

Bank A/c Dr.	2,00,000
To Share Allotment A/c		2,00,000
(Being balance allotment money received after adjusting excess application money)

Share First and Final Call A/c Dr.	6,00,000
To Share Capital A/c		6,00,000
(Being first and final call money due on 20,000 shares @ ₹30 each)

Bank A/c Dr.	6,00,000
To Share First and Final Call A/c		6,00,000
(Being call money received on 20,000 shares)

Watch out

A common mistake is to credit the full application money to Share Capital directly. Remember: application money becomes share capital only for the shares allotted. The excess is either refunded or adjusted — never credited to capital until allotment is confirmed.

Cash Book (Bank Column)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Share Application A/c	12,80,000	By Share Application A/c (Refund)	80,000
To Share Allotment A/c	2,00,000	By Balance c/d	20,00,000
To Share First & Final Call A/c	6,00,000
Total	20,80,000	Total	20,80,000

Tip

In the cash book, only actual cash inflows and outflows are recorded. The adjustment of ₹4,00,000 from application to allotment is a book entry — no cash moves, so it does not appear in the cash book.

Working Notes

WN1: Calculation of Excess Application Money

Shares in pro-rata category: Applied 20,000, Allotted 10,000
Application money received on 20,000 shares @ ₹40 = ₹8,00,000
Application money required for 10,000 shares @ ₹40 = ₹4,00,000
Excess = ₹8,00,000 - ₹4,00,000 = ₹4,00,000

WN2: Cash Received on Allotment

Allotment due on 20,000 shares @ ₹30 = ₹6,00,000
Less: Excess application money adjusted = ₹4,00,000
Cash received = ₹2,00,000

WN3: Total Cash Received

Application (net of refund): ₹12,80,000 - ₹80,000 = ₹12,00,000
Allotment: ₹2,00,000
Call: ₹6,00,000
Total: ₹20,00,000