Q.What is the difference between equity share and preference share?
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Share Capital Classification
Let’s start with something you already know. Imagine you and two friends decide to start a small business — say, a food truck. You each put in some money. That money is the capital of the business. It’s the foundation. Now, what if one friend puts in ₹50,000, another puts in ₹30,000, and you put in ₹20,000? You all own the business, but not equally. Your share of the business is proportional to the money you put in. That’s the basic idea behind Share Capital in a company — except a company can have thousands of owners (shareholders), and their ownership is divided into tiny, equal units called shares.
What is Share Capital Classification?
In a company, Share Capital is the total money raised by issuing shares. But not all shares are the same, and not all capital is treated the same way. The NCERT Class 12 Accountancy textbook classifies share capital into two main types from the company’s point of view:
- Equity Share Capital – The basic ownership capital. Equity shareholders are the real owners. They get dividends only if the company makes a profit, and they bear the highest risk.
- Preference Share Capital – A hybrid between equity and debt. Preference shareholders get a fixed dividend before equity shareholders, and if the company is wound up, they get their money back before equity shareholders. But they usually have no voting rights.
Within each, the capital is further classified on the Balance Sheet (the company’s financial position statement) into:
- Authorised Capital – The maximum amount of share capital a company is allowed to issue, as per its Memorandum of Association. Think of it as the legal ceiling.
- Issued Capital – The part of authorised capital that the company has actually offered to the public.
- Subscribed Capital – The part of issued capital that investors have agreed to take (i.e., applied for and been allotted).
- Called-up Capital – The portion of the face value of shares that the company has asked shareholders to pay.
- Paid-up Capital – The portion of called-up capital that shareholders have actually paid. (If some haven’t paid, that’s called “calls in arrears”.)
For a Class 12 exam, you are mostly dealing with Equity Share Capital and Preference Share Capital as the two main categories. The sub-classifications (Authorised, Issued, etc.) appear in the Balance Sheet format.
Why Does This Classification Matter?
Because it determines who gets what, when, and how much.
- Dividend priority: Preference shareholders get their fixed dividend first. Equity shareholders get whatever is left (if anything).
- Risk: Equity shareholders bear the business risk; preference shareholders have a safer, fixed return.
- Control: Equity shareholders vote; preference shareholders usually don’t.
- Accounting: The money received from issuing shares is not revenue — it’s capital. It goes into the Share Capital account on the liabilities side of the Balance Sheet. The company does not debit it as income.
Accounting Treatment: The Journal Entries
When a company issues shares, the accounting depends on whether the shares are issued at par (face value), at a premium (above face value), or at a discount (below face value — but this is now prohibited for equity shares in India). Let’s take the simplest case: issue at par.
Scenario: A company issues 10,000 equity shares of ₹10 each at par. The full amount is received on application.
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c (Dr.) | 1,00,000 | |||
| To Equity Share Capital A/c | 1,00,000 | |||
| (Being 10,000 equity shares of ₹10 each issued at par, fully paid) |
Explanation:
- Bank A/c is debited because the company receives cash (asset increases).
- Equity Share Capital A/c is credited because the company now owes this money to shareholders as capital (liability increases).
If shares are issued at a premium (say ₹12 per share, face value ₹10), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c (credited). That reserve is not distributable as dividend — it’s a capital reserve.
Format: How Share Capital Appears in the Balance Sheet
As per the Companies Act, 2013, the Balance Sheet shows Share Capital under Equity and Liabilities. Here’s the relevant extract (simplified for Class 12):
Balance Sheet of XYZ Ltd. as at 31st March, 20XX (Extract)
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| EQUITY AND LIABILITIES | ||
| 1. Shareholders’ Funds |
Equity and preference shares differ mainly in the nature of dividend and the priority of claim on the company's income and capital.
…
Equity shares are variable-return, voting, residual-claim shares; preference shares are fixed-return, generally non-voting, priority-claim shares.
In the UBSE Class-12 Commerce Accountancy (Company Accounts) syllabus, share capital is classified into equity share capital and preference share capital. The main points of difference:
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| Rate of dividend | Fluctuating — depends on profits available and the Board's decision | Fixed rate, decided at the time of issue |
| Priority of dividend | Paid only after preference dividend is paid in full | Paid before any dividend is paid to equity shareholders |
| Priority of capital repayment | Repaid last at the time of winding up | Repaid before equity share capital at the time of winding up |
Showing the 12 most recent of 82 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.Issued capital is a part of :(a) a) Reserve capital(b) b) Unissued capital(c) c) Authorised capital(d) d) Subscribed capital
›Reveal solutionSolution
Issued capital is a portion of the authorised (registered) capital, so the answer is (c) Authorised capital.
Share capital is classified as authorised -> issued -> subscribed -> called-up -> paid-up. Authorised capital is the maximum amount stated in the memorandum. The company need not issue all of it at once; the part it actually offers for public subscription is the issued capital, and the balance is unissued capital. So issued capital is always a part of the …
- CBSE 2026Set MARCH1 markQ.State any one type of shares.
›Reveal solutionSolution
One type of share is the Equity Share (the other being the Preference Share).
Under the Companies Act, a company can issue two broad classes of shares:
…
- CBSE 2026Set ANNUAL1 markQ.Write the types of preference shares. (any four)
›Reveal solutionSolution
Four types of preference shares are cumulative, non-cumulative, participating and non-participating.
Preference shares carry a preferential right to dividend and to repayment of capital, and are classified according to the rights attached:
- Cumulative vs Non-cumulative - whether unpaid dividends accumulate.
- Participating vs Non-participating - whether they share in surplus profits beyond the fixed rate.
- Convertible vs Non-convertible - whether they can be converted into equity shares. …
- CBSE 2026Set ANNUAL1 markQ.State whether True or False: Shares are of two types.
›Reveal solutionSolution
The statement is True.
As per the Companies Act, 2013, a company's share capital is divided into two kinds of shares - equity shares and preference shares. So …
- CBSE 2026Set ANNUAL1 markMCQQ.The capital with which a company is registered, is called:(a) Authorized Capital(b) Issued Capital(c) Subscribed Capital(d) Paid-up Capital(a) Authorized Capital(b) Issued Capital(c) Subscribed Capital(d) Paid-up Capital
›Reveal solutionSolution
The capital with which a company is registered is its Authorized Capital.
Share capital of a company is classified into several categories as it moves from registration to actual cash received:
- Authorized Capital — the maximum amount of share capital a company is legally allowed to raise, as stated in its Memorandum of Association (Capital Clause). This is the capital 'with which the company is registered.' It can only be increased by following the procedure laid down in the Companies Act, 2013 (special resolution + approval).
- Issued Capital — that part of the authorized capital which the company actually offers to the public/investors for subscription.
- Subscribed Capital — that part of the issued capital which has actually been subscribed/applied for and allotted to investors. …
- CBSE 2026Set ANNUAL1 markMCQQ.What correct order of capitals is followed while preparing Notes to Account to find out the amount of share capital to be shown in Balance Sheet _______.(a) Issued capital, Authorised capital, Subscribed capital(b) Subscribed capital, Issued capital, Authorised capital(c) Authorised capital, Issued capital, Subscribed capital(d) Authorised capital, Subcribed capital, Issued capital(a) Issued capital, Authorised capital, Subscribed capital(b) Subscribed capital, Issued capital, Authorised capital(c) Authorised capital, Issued capital, Subscribed capital(d) Authorised capital, Subcribed capital, Issued capital
›Reveal solutionSolution
The correct order is Authorised capital → Issued capital → Subscribed capital (Option C).
Share capital is disclosed in the Notes to Accounts in a logical, descending sequence of scope:
Step Term Meaning 1 Authorised Capital The maximum capital a company is permitted to raise, as stated in its Memorandum of Association. 2 Issued Capital The part of the authorised capital that the company actually offers for subscription to the public/promoters. 3 Subscribed Capital The part of the issued capital that has actually been taken up (applied for and allotted) by the public. … - CBSE 2026Set ANNUAL1 markMCQQ.The part of authorized capital which is offered to the public is called(a) subscribed capital(b) nominal capital(c) authorized capital(d) issued capital
›Reveal solutionSolution
"Issued Capital" is the specific portion of a company's Authorised Capital that is actually offered to the public/investors for subscription.
Share capital in company accounts moves through several well-defined stages:
- Authorised (Nominal/Registered) Capital — the maximum amount of capital a company is permitted to raise, as stated in its Memorandum of Association. This is a ceiling, not an actual issue.
- Issued Capital — the part of the authorised capital that the company actually offers for subscription to the public/investors. It can never exceed authorised capital.
- Subscribed Capital — the part of the issued capital that has actually been subscribed (applied and allotted) by the public.
- Called-up Capital — the part of subscribed capital that the company has demanded (called) from shareholders so far. …
- CBSE 2026Set ANNUAL1 markMCQQ.The Part of Authorised capital offered by the company to the public for subscription is ............................... .(a) Subscribed Capital(b) Issued Capital(c) Called up Capital(d) Paid up Capital
›Reveal solutionSolution
The part of Authorised Capital offered to the public for subscription is called Issued Capital.
A company's share capital, as taught under "Accounting for Share Capital," has several layers, each a narrower slice of the one before:
- Authorised (Nominal/Registered) Capital — the maximum capital a company is permitted to raise, as stated in its Memorandum of Association.
- Issued Capital — the part of the Authorised Capital that the company actually offers to the public (or to specific persons) for subscription. It is always ≤ Authorised Capital.
- Subscribed Capital — the part of the Issued Capital that is actually applied for and allotted to applicants.
- Called-up Capital — the part of the Subscribed Capital that the company has demanded (called) from shareholders so far. …
- CBSE 2025Set MARCH1 markMCQQ.Which of the following is not shown under the heading 'Share capital' in a balance sheet?(a) Authorised capital(b) Issued capital(c) Reserve capital(d) Subscribed capital
›Reveal solutionSolution
Authorised, issued and subscribed capital are all shown under 'Share Capital'; reserve capital is not disclosed there. Correct option: (c).
In GSEB Class-12 Commerce Accountancy (Share Capital):
- Reserve capital = the portion of uncalled capital that a company resolves to call only at the time of winding up. …
- CBSE 2025Set ANNUAL1 markMCQQ.Sweat equity shares are issued to (A) Employees (B) Directors (C) Both (A) and (B) (D) None of them
›Reveal solutionSolution
Sweat equity shares are issued to employees and directors, so the answer is (C).
Sweat equity shares are equity shares issued by a company to its employees or directors at a discount, or for consideration other than cash, in recognition of their know-how, intellectual property or value additions to the company.
- They reward contribution, so both employees (A) and directors (B) can receive them. …
- CBSE 2025Set ANNUAL1 markMCQQ.To whom is dividend given at a fixed rate in a company ? (A) Equity shareholders (B) Preference shareholders (C) Debenture holders (D) Promoters
›Reveal solutionSolution
Dividend at a fixed rate is given to preference shareholders, so the answer is (B).
Preference shares enjoy two preferential rights: a fixed rate of dividend paid before equity dividend, and priority in repayment of capital on winding up.
- Equity shareholders (A) receive a fluctuating dividend decided each year out of remaining profits, not a fixed rate.
- Debenture holders (C) receive interest, not dividend, and are creditors, not members. …
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following is not a part of the capital structure of a company? (A) Share capital (B) Debt capital (C) General Reserve (D) Working capital.
›Reveal solutionSolution
Working capital is not part of capital structure — option (D).
Capital structure describes how a company finances itself through its long-term sources of funds. It typically includes:
- Share capital (equity and preference),
- Reserves and surplus (such as General Reserve), and
- Debt capital (long-term borrowings/debentures). …
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