Summary
Chapter 1 of the Class 12 Accountancy NCERT textbook, "Accounting for Share Capital," covers the nature of a joint stock company, types of share capital, kinds of shares, and the complete accounting treatment for issue, forfeiture, and reissue of shares.
- The company as a distinct organisation — The chapter frames the joint stock company under the Companies Act 2013 — a separate legal entity with limited liability, perpetual succession and transferable shares — and classifies companies by liability and by membership such as public, private and one person companies.
- Layers of share capital and kinds of shares — It unpacks how a company's capital is described in stages — authorised, issued, subscribed, called-up and paid-up — and contrasts preference shares, which carry priority on dividend and repayment, with equity shares that hold the residual claim.
- Recording an issue across its stages — Students learn to account for shares issued at par or premium through application, allotment and calls, handling real complications like over- and under-subscription, calls in arrears or advance, and shares issued for consideration other than cash.
- Forfeiture and reissue — When calls go unpaid the chapter shows how shares are forfeited and later reissued at par, premium or discount, with the profit surviving after reissue transferred to Capital Reserve rather than treated as ordinary income.
Key points & formulas
- 01A company has seven distinguishing features: body corporate, separate legal entity, limited liability, perpetual succession, common seal, transferability of shares, and the capacity to sue or be sued.
- 02Companies are classified by liability into limited by shares, limited by guarantee, and unlimited; and by membership into public, private, and one person companies (OPC).
- 03Share capital has seven categories: authorised (nominal/registered), issued, subscribed, called-up, paid-up, uncalled, and reserve capital. Paid-up capital equals called-up capital minus calls in arrears.
- 04A company can issue two classes of shares — preference shares (preferential right to dividend and capital repayment) and equity shares (residual rights; dividend varies year to year).
- 05Shares are issued in instalments: application money (minimum 5% of face value), allotment money, and calls; each call must not exceed 25% of face value with at least one month between calls.
- 06On over-subscription, directors may (1) fully accept some and reject others, (2) make pro-rata allotment to all, or (3) combine both approaches; the minimum subscription must be at least 90% of the issued amount as per SEBI guidelines.
- 07Premium on shares is credited to Securities Premium Reserve Account and may be used only for five specified purposes: bonus shares, writing off preliminary expenses, writing off expenses or discount on securities, paying premium on redemption of preference shares or debentures, and buy-back of shares.
- 08Forfeited shares may be reissued at par, premium, or discount; the discount on reissue cannot exceed the amount already received on those shares. The surplus remaining in the Share Forfeiture Account after reissue is transferred to Capital Reserve.
Frequently asked questions
01What does Chapter 1 of Class 12 Accountancy Part II cover?
The chapter covers the nature and features of a joint stock company, kinds of companies, categories of share capital, classes of shares (preference and equity), and the full accounting treatment for issue of shares at par and premium, calls in arrears and advance, over- and under-subscription, forfeiture of shares, and reissue of forfeited shares.
02What is the difference between authorised capital and paid-up capital?
Authorised capital (also called nominal or registered capital) is the maximum amount a company is permitted to issue as stated in its Memorandum of Association. Paid-up capital is the portion of called-up capital actually received from shareholders; it equals called-up capital minus calls in arrears.
03What are the two types of shares a company can issue under the Companies Act, 2013?
Under Section 43 of the Companies Act, 2013, a company can issue preference shares and equity shares. Preference shares carry a preferential right to dividend at a fixed amount or rate and to repayment of capital on winding up, while equity shares do not enjoy these preferential rights.
04What is the minimum application money required when a company issues shares?
Application money must be at least 5% of the face value of the share. If the company fails to receive minimum subscription (not less than 90% of the issued amount as per SEBI guidelines) within 120 days of the prospectus, it cannot proceed with allotment and must refund application money.
05What are calls in arrears and what interest rate applies to them?
Calls in arrears (also called unpaid calls) is the amount not paid by shareholders on allotment or on any call by the due date. Table F of the Companies Act provides that interest on calls in arrears shall not exceed 10% per annum for the period from the due date to the date of actual payment.
06What are calls in advance, and how are they treated in the balance sheet?
Calls in advance is the amount paid by shareholders before the relevant call is made by the directors. It is a liability of the company, credited to Calls in Advance Account, and shown under current liabilities in the balance sheet. Table F provides for interest on calls in advance at a rate not exceeding 12% per annum.
07For what purposes can Securities Premium Reserve be used?
Securities Premium Reserve can be used only for five purposes: (a) issuing fully paid bonus shares, (b) writing off preliminary expenses, (c) writing off expenses, commission, or discount on any securities, (d) paying premium on redemption of preference shares or debentures, and (e) buy-back of the company's own shares.
08What is the accounting entry for forfeiture of shares issued at par?
On forfeiture, Share Capital Account is debited with the called-up amount, Share Forfeiture Account is credited with the amount already received, and the unpaid call accounts (or Calls in Arrears Account) are credited with the amount not received. All entries relating to the forfeited shares are reversed except those relating to premium already received.
09How is profit on reissue of forfeited shares treated?
When forfeited shares are reissued, the discount allowed on reissue is debited to Share Forfeiture Account. The balance remaining in Share Forfeiture Account in respect of the reissued shares — which is the capital profit — is transferred to Capital Reserve Account.
10How are shares issued for consideration other than cash recorded?
When a company issues shares to vendors in exchange for assets rather than cash, the asset account is debited and the vendor's account is credited at the agreed amount. The vendor's account is then debited and Share Capital Account (and Securities Premium Reserve, if issued at premium) is credited on issue of shares.
11What is reserve capital?
Reserve capital is a portion of uncalled capital that a company reserves to be called only in the event of winding up. It is available solely to creditors on winding up and cannot be called during the normal existence of the company.
12What are the three alternatives available to directors when a share issue is oversubscribed?
Directors may (1) accept some applications in full and totally reject the others, refunding the rejected application money; (2) make a pro-rata allotment to all applicants, adjusting excess application money towards allotment; or (3) combine both — reject some applications outright and make pro-rata allotment to the remaining applicants.
13Can shares be issued at a discount?
As a general rule, a company cannot issue shares at a discount. The Companies Act permits issue at a discount only in the case of reissue of forfeited shares (where the discount cannot exceed the amount already received on those shares) and issue of sweat equity shares.
14Is the CBSE Class 12 Accountancy (Accounting for Share Capital) PDF free to download?
Yes, the NCERT PDF for this chapter is available free to download on cbseprepmaster.com with no sign-up or account required.
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