Explain in brief the main categories in which the share capital of a company is divided.

Long Answer Questions · Q2

Q. Explain in brief the main categories in which the share capital of a company is divided.

Yanam CbseNCERTSubjective· 3mImportance★★★★★

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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”.)

Note

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:

Particulars	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
(a) Share Capital	1	5,00,000
(b) Reserves and Surplus	2	1,00,000
2. Non-Current Liabilities	...	...
3. Current Liabilities	...	...
TOTAL		6,00,000

Note 1: Share Capital

Particulars	Amount (₹)
Authorised Capital:
1,00,000 Equity Shares of ₹10 each	10,00,000
Issued Capital:
50,000 Equity Shares of ₹10 each	5,00,000
Subscribed and Fully Paid-up Capital:
50,000 Equity Shares of ₹10 each	5,00,000
Total	5,00,000

Watch out

Do not confuse “Share Capital” with “Reserves and Surplus”. Share Capital is the money originally invested by shareholders. Reserves are profits retained in the business. Both are part of Shareholders’ Funds, but they are separate line items.

A Key Formula (for Interest on Capital, if applicable)

If the company pays interest on capital (e.g., to partners in a partnership, or on preference shares), the formula is:

Interest on Capital = Capital × Rate of Interest × Time (in years)

For example, if a preference share of ₹100 carries 10% dividend per annum, the annual dividend per share = ₹100 × 10% × 1 = ₹10. This is not an expense — it’s an appropriation of profit (shown in the Profit and Loss Appropriation Account).

The Big Picture

Share Capital Classification is not just a list of categories. It’s the legal and financial skeleton of a company. It tells you:

How much money the company has raised from owners.
What rights those owners have.
How that money is recorded and reported.

For your exam, remember the two main types (Equity and Preference), the sub-classifications (Authorised, Issued, Subscribed, Called-up, Paid-up), and the journal entry for issue of shares. The Balance Sheet format is your friend — practice writing it neatly.

Final takeaway: Share Capital is the ownership money of a company, classified by type and stage of issue, and recorded as a liability (because the company owes it to shareholders). It is never revenue.

The share capital of a company is divided into two main categories based on the amount called up and paid by shareholders. These categories are shown on the Equity and Liabilities side of the Balance Sheet under "Shareholders' Funds."

1. Authorised Capital (or Registered/Nominal 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 without amending the memorandum. It is disclosed only as a footnote or in the notes to accounts, not as a liability.

2. Issued, Subscribed, and Paid-up Capital

This is the capital actually offered to the public and taken up. It is further classified as:

Category	Description
Issued Capital	The nominal value of shares offered to the public for subscription.
Subscribed Capital	The part of issued capital that has been taken up by the public.
Called-up Capital	The portion of the face value that the company has demanded from shareholders.
Paid-up Capital	The amount actually received from shareholders against the called-up amount. If all calls are paid, it equals Called-up Capital.
Calls-in-Arrears	The amount called up but not yet paid by shareholders. It is deducted from Called-up Capital to arrive at Paid-up Capital.
Calls-in-Advance	Money received from shareholders for calls not yet made. It is shown as a separate current liability, not as part of share capital.

✓Final answer

The share capital of a company is primarily divided into Authorised Capital (the maximum limit) and Issued, Subscribed, and Paid-up Capital (the capital actually raised and received), with adjustments for Calls-in-Arrears and Calls-in-Advance.

A company’s share capital is divided into Authorised Capital, Issued Capital, Subscribed Capital, Called-up Capital, and Paid-up Capital — each representing a distinct stage in the capital-raising process, from the maximum the company can issue to the amount actually received from shareholders.

Why This Classification Matters

When a company raises funds by issuing shares, it doesn’t simply collect all the money at once. The law (Companies Act, 2013) requires a clear, step-by-step record of how much capital the company is allowed to raise, how much it has offered to the public, how much has been taken up by investors, how much has been demanded from them, and finally how much has actually been paid. This classification protects both the company and its shareholders — it prevents the company from issuing more shares than permitted, and it shows exactly how much money is still outstanding from shareholders.

Each category answers a specific question:

Category	What it tells us
Authorised Capital	The maximum amount the company can raise (as per its Memorandum of Association).
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 (applied for and allotted).
Called-up Capital	The amount the company has demanded from shareholders (may be less than face value).
Paid-up Capital	The amount actually received from shareholders against the calls made.

Watch out

A common mistake is to treat Subscribed Capital as the same as Paid-up Capital. They are different: subscribed capital is the amount promised by shareholders; paid-up capital is the amount received. If a shareholder fails to pay a call, the subscribed capital remains unpaid.

The Five Categories in Detail

1. Authorised Capital (or Nominal Capital)

This is the ceiling — the maximum amount of share capital a company is allowed to raise, as stated in its Memorandum of Association. It is fixed at incorporation and can only be increased by a special resolution and payment of additional fees to the Registrar of Companies.

Example: If a company’s Memorandum says “Authorised Capital ₹50,00,000,” the company cannot issue shares worth more than that without amending the Memorandum.

2. Issued Capital

This is the portion of authorised capital that the company actually offers to the public (or to existing shareholders via rights issue). It cannot exceed the authorised capital.

Example: If authorised capital is ₹50,00,000 and the company issues shares worth ₹30,00,000, the issued capital is ₹30,00,000.

3. Subscribed Capital

This is the part of issued capital that investors have applied for and been allotted. It may be less than issued capital if the issue is undersubscribed.

Example: If the company issued ₹30,00,000 worth of shares but only received applications for ₹28,00,000, the subscribed capital is ₹28,00,000.

Tip

In practice, for a fully subscribed issue, Subscribed Capital = Issued Capital. But if the issue is oversubscribed and the company rejects some applications, subscribed capital may be less than issued capital.

4. Called-up Capital

When a company issues shares, it may not demand the full face value immediately. Instead, it makes calls — e.g., ₹30 on application, ₹30 on allotment, ₹40 on first call. The total amount called so far is the called-up capital.

Example: A share of face value ₹100 may be called up as ₹50 on application and ₹50 on allotment. The called-up capital is ₹100 per share (if fully called), but if only ₹50 is called, the called-up capital is ₹50 per share.

5. Paid-up Capital

This is the amount actually received from shareholders against the calls made. If a shareholder fails to pay a call, the unpaid amount is shown as Calls-in-Arrears, and paid-up capital = called-up capital minus calls-in-arrears.

Example: Called-up capital is ₹1,00,000, but ₹5,000 remains unpaid. Paid-up capital = ₹95,000.

How They Relate (A Visual Flow)

Authorised Capital (maximum allowed)
        ↓
Issued Capital (offered to public)
        ↓
Subscribed Capital (taken up by investors)
        ↓
Called-up Capital (amount demanded)
        ↓
Paid-up Capital (amount received)

Important

Paid-up Capital is the figure that appears on the Equity and Liabilities side of the Balance Sheet under “Share Capital.” It represents the actual money the company has in hand from shareholders.

A Quick Example to Tie It Together

Suppose a company is registered with an Authorised Capital of ₹10,00,000 (10,000 shares of ₹100 each). It issues 8,000 shares (Issued Capital = ₹8,00,000). All 8,000 shares are subscribed (Subscribed Capital = ₹8,00,000). The company calls ₹60 per share (₹30 on application, ₹30 on allotment) — Called-up Capital = 8,000 × ₹60 = ₹4,80,000. Shareholders pay ₹4,70,000, leaving ₹10,000 unpaid (Calls-in-Arrears). Paid-up Capital = ₹4,70,000.

In the Balance Sheet, you would show:

Authorised Capital (for information only, not added to liabilities)
Issued, Subscribed and Paid-up Capital = ₹4,70,000
Calls-in-Arrears (deducted from the above)