Accounting Treatment

Accounting Treatment of Share Capital

When a company issues shares to the public, the total amount payable on each share is collected in instalments — typically on application, allotment, and subsequent calls. The accounting treatment for each stage is distinct, and the journal entries reflect the flow of money from the public into the company's share capital.

Money Received on Application

The first instalment is called application money. This money is collected from applicants who have applied for shares. The amount received is deposited in a separate bank account opened specifically for this purpose.

The journal entry for receiving application money is:

At this stage, the money is not yet share capital — it is held in a temporary account called Share Application Account. This is because the company has not yet decided which applicants will actually receive shares.

Treatment on Allotment

Allotment is the formal acceptance of the application by the company's directors. Once allotment is made, the applicants become allottees (shareholders). Several accounting actions happen at this point:

1. Transfer of application money to Share Capital — Since the shares have now been allotted, the application money received on those shares becomes part of the share capital. The entry is:

2. Refund of money on rejected applications — If some applications are rejected (e.g., because the company received more applications than shares available), the application money on those rejected applications must be returned to the applicants within the period prescribed by law/SEBI. The entry is:

3. Adjustment of excess application money — When a company receives applications for more shares than it can allot, it may allot a reduced number of shares to each applicant. The excess money paid by those applicants (the difference between what they applied for and what they got) is often adjusted towards the allotment money due from them. The entry is:

4. Amount due on allotment — The company also asks for a separate allotment instalment from the allottees. The amount due on allotment is recorded as:

5. Receipt of allotment money — When the allottees pay the allotment money:

Combined Entry for Excess Application Money and Refund

Instead of making separate entries for refund and adjustment, a combined entry can be passed:

Combined Share Application and Allotment Account

Some companies maintain a single Share Application and Allotment Account instead of separate accounts. The reasoning is that application and allotment are closely inter-related — allotment cannot happen without application, and application without allotment is meaningless.

When this combined account is used, the journal entries are:

1. Receipt of application and allotment money together:

2. Transfer of application money and allotment amount due to Share Capital:

3. Refund on rejected applications:

4. Receipt of balance allotment money (if not already received):

Applications Supported by Blocked Amount (ASBA)

ASBA is a method developed by SEBI for applying to IPOs and Rights Issues. Under this method:

• The applicant authorises the bank to block the application money in their bank account (a lien is created).
• The bank does not actually debit the account at the time of application.
• Only when securities are allotted does the bank debit the applicant's account for the amount payable on the allotted securities.
• If securities are not allotted, the bank simply removes the block (lien) on the amount.

This means the company receives the money only after allotment, not at the application stage. The accounting treatment remains the same — the entries are recorded when the money is actually received by the company.

Accounting Treatment on Calls

After allotment, the remaining amount on shares is collected through calls. The directors have the authority to make calls as and when they decide, unless the timing is specified in the prospectus.

Important rules regarding calls:

• The amount of any single call should not exceed 25% of the face value of the share.
• There must be an interval of at least one month between two calls (unless the articles of association provide otherwise).
• A minimum of 14 days' notice must be given to shareholders to pay the call amount.
• Calls must be made on a uniform basis on all shares within the same class.

Naming of calls:

• The first call is called Share First Call Account.
• The second call is called Share Second Call Account, and so on.
• The last call is always called "First and Final Call" (if only one call after allotment) or "Second and Final Call", "Third and Final Call", etc.
• If the entire balance after allotment is collected in one call, it is called the "First and Final Call".

Journal entries for calls:

1. When call amount becomes due: