1. Introduction to Company Accounts and Issue of Shares and Debentures
P. Chinna Sahaya Rani

2. Issue of shares and debenture
Companies
Unlimited Companies
Limited Companies
Authorized Capital
Share Capital
Other Funding
Issued Capital
Preference Share
Ordinary Share
Debenture
Reserves
Issue of shares and debenture
Called up Capital
Revenue Reserve
Capital Reserve
Paid Up Capital
Price:
- at par
- at premium
- at discount
Payment:
- Payable in full
- by instalments
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3. Introduction
A limited liability company is a legal entity and the existence of the limited liability companies
The owners of a limited liability company will be named as “members” or “shareholders” of the company
Each company is governed by two documents, known as the Memorandum of Association and the Articles of Association
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4. Types of Limited liability companies
Unlimited Company
- Companies do not have limited liability.
B. Limited Company
- The liability of a company can be limited by shares.
A limited company has a separate legal personality.
This means that it can sue or enter into contracts in its
own name.
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5. Types of Limited Liability Companies
There are two types of limited liability companies as follows:
(I) Public Limited Company
(II) Private Limited Company
Descriptions Public Limited Company Private Limited Company
Share Transfer No restriction Restriction
Number of Shareholders No restriction Restriction
(2 to unlimited) (2 to 50)
Raising fund from Public No restriction Restriction
Shares can be traded on Yes No
Stock Exchange or not
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6. Distinction between Partnerships and Limited Liability Companies
Description Partnerships Limited Companies
Number of Members to 20 (except in certain professional 2 to Unlimited (except private limited
business) companies up to 50)
Liabilities of Members Unlimited liability of each partner Limited liability of each shareholder
(except Limited Partners) to their agreed amounts of contributions
on their shares held
Amount of Capital Stated in the Partnership Agreement Restricted to the amount of Authorized
and subject to each partner’s Capital
financial resources
Management of the Partners are entitled to take part in Directors are appointed on behalf of
Business the operations of the business shareholders to manage the business
Distribution of Profits and losses are shared to By way of dividend, profits are shared
Profit each partner in their agreed profit to shareholders in respect of their
and loss sharing ratio shares held
Part of the profits may be unappropriated and retained by the
company for future business purposes
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7. Classification of Capital Authorized Capital
Authorized Capital is the total number of shares and the total amount of Share
Capital which a limited liability company is allowed to issue and it is stated in the
Memorandum of Association. Authorized Capital may be changed and increased
to cope with the growth of the company by the approvals of the shareholder
Issued Capital
Issued Capital is the part of the Authorized Capital actually issued to the shareholders.
Called-Up Capital
Called-Up Capital is the amount of the Issued Capital that the limited liability
companies request their shareholders to pay.
Paid-up Capital
Paid-up capital is the actual amount received from the Called-Up Capital.
The amounts of the Called-Up Capital which has not yet been received will be named
as “Calls in Arrears”. Calls in Advance”refers to the advance payment of the
Un-called Capital from the shareholders.
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8. Types of Share Capital A. Preference Shares
Preference shareholders are entitled to fixed % of dividends before any ordinary
dividends are paid.
No voting rights.
I) Cumulative preference shares
Any unpaid dividends on cumulative preference shares can be carried forward
to a later year.
II) Non-cumulative preference shares
the unpaid dividends cannot be carried forward to later years.
B. Ordinary Shares
- The dividends of ordinary shares are not fixed. They depend on the return of
the company.
- Ordinary shareholders are paid only after all other claims have been met.
- Ordinary shareholders usually have voting rights.
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9. Example: Cumulative preference shares Year 1 Year 2 Year 3 $ $ $
$ $ $
Net Profit / (Loss) for the year before
appropriations (1,000) (2,000) 50,000
5,000 10% Cumulative Preference
Shares of $1 each
Dividend Nil Nil 1,500
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10. Example: Non-cumulative preference shares Year 1 Year 2 Year 3 $ $ $
$ $ $
Net Profit / (Loss) for the year before
appropriations (1,000) (2,000) 50,000
5,000 10% Cumulative Preference
Shares of $1 each
Dividend Nil Nil
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11. Ordinary Shares
The dividends of ordinary shares are not fixed. They depend on
the return of the company.
Ordinary shareholders are paid only after all other claims (e.g,
loan interest and preference share dividends ) have been met.
- Ordinary shareholders usually have voting rights
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12. interest payable and the date of redemption.
Other Means of Funding
A. Debentures
Debentures are long-term loans evidenced by deeds which set out the rate of
interest payable and the date of redemption.
B. Reserves
- Reserves are profits or gains which accrue to ordinary shareholders.
- They are undistributed profits which have been retained within the company.
- There are two types of reserves, revenue reserves and capital reserves.
I) Revenue reserves
- They are undistributed trading profits.
- They can be used to pay dividends.
- Examples are the balance on the profit and loss account and general reserve.
II) Capital reserves
- They are gains or profits arising from non-trading or non-operating activities.
- They are not available for distribution as dividends.
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13. a) to write off preliminary expenses
- e.g.
1. Share premium
a) to write off preliminary expenses
b) to write off expenses of issuing shares
c) to write off commissions paid and discounts on shares
d) to pay up a bonus issue
e) to provide premium on redemption of debentures.
2. Revaluation reserve
This is the unrealized gain from an increase in the value of an asset after
revaluation.
3. Capital redemption reserve and debenture redemption reserve
This arises as a result of a company redeeming its shares or debentures by
using its retained profits.
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14. Distinction between Shares and Debentures
Description Ordinary Shares Preference Shares Debentures
Relationship between the Members/Shareholders Member/Shareholders Creditors of the
holders and the company of the company of the company company
Dividends/Interest No fixed percentage A fixed rate of dividends A fixed rate of
or amounts of dividends interest will paid
The dividends will be whether or not the
subjected to the company makes a
profitability and profit
dividends policy of the
company
Priority of Distribution After the distribution Before to Ordinary Before any dividend
of the dividends to Shareholders distributable to
Preference Shareholders Ordinary and Preference
Shareholders
Treatment in Balance Ordinary Share Capital Preference Share Treated as a long term
Sheet Capital liability if the period of
repayment is longer than
one year
Treated as a current liab.
If repayment < 1 yr.
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15. Raising of Capital-Issue of shares and debentures
Issue Price
Issue at Par
The issue price is same as the “PAR”, “NOMINAL” or “FACE” value of the shares
and debentures.
Issue at a Premium
The issue price may be HIGHER than the par value of the shares and debentures.
The difference between the issue price and the par value of the shares or debentures
is named as “SHARE PREMIUM”
Issue at a Discount
The issue price may be LOWER than the par value of the shares and debentures.
The difference between the issue price and the part value of the shares or debentures
is named as “SHARE DISCOUNT’
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16. Methods of Payment Payment in Full Payable by instalments
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17. Payment in full
The full amount of the issue price of the shares and debentures should be
paid to the company on application whether or not the applicants will allot the
shares and debentures.
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18. Descriptions Accounting entries Application Monies Received Dr. Bank
Cr. Ordinary Share Applicants
*”No. of Application” X “Issue Price”
Issue of Ordinary Shares Capital
(a) Issue at Par
Dr. Ordinary Share Applicants
Cr. Ordinary Share Capital
“No of Shares Actually Issued” X “Par Value of Each Share”
(b) Issue at a Premium
Cr. Share Premium
* “No. of Share Actually Issued” X “Par Value of Each Share” will be recorded in Ordinary Share Capital
* “No. of Shares Actually Issued” X “The Value of Share Premium per
Each Share” will be recorded in Share Premium
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19. Descriptions Accounting entries ( c) Issue at a Discount
Dr. Ordinary Share Applicants
Share Discount
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” X “Par Value of Each Share” will be recorded in Ordinary Share Capital
* “No. of Shares Actually Issued” X “The Value of Share Discount per Each Share” will be recorded in Share Discount
Refund of Oversubscribed
Cr. Bank
* “No. of Application Oversubscribed” X “Issue Price”
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20. Payable by instalments
The full amount of the issue price of the shares and debentures will be paid to the
company by instalments
in following steps:
Step 1 Receipt of application money
Step 2 Return of application money to unsuccessful applicants
Step 3 Allotment of shares
Step 4 Receipt of allotment money
Step 5 Call on shares
Step 6 Receipt of call money
These steps are demonstrated in the following example:
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21. Descriptions Accounting entries Application Monies Received Dr. Bank
Cr. Ordinary Share Applicants
* “No. of Application” X “Issue Price”
Issue of Ordinary Shares
Capital
(a) Issue at Par
Dr. Ordinary Share Applicants
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” X “Par Value of Each Share”
(b) Issue at a Premium
Cr. Share Premium
* “No. of Share Actually Issued” X “Par Value of Each Share” will be recorded in Ordinary Share Capital
* “No. of Shares Actually Issued” X “The Value of Share Premium per Each Share” will be recorded in Share Premium
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22. Descriptions Accounting entries ( c ) Issue at a Discount
Dr. Ordinary Share Applicants
Share Discount
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” x “Par Value of Each share” will be recorded in Ordinary Share Capital
* “No. of Shares Actually Issued” x “The Value of Share Discount per Each Share” will be recorded in Share Discount
Refund of Oversubscribed or Rejected Application Monies
Dr. Application and Allotment
Cr. Bank
* “No. of Application Oversubscribed or Rejected” x “Issue Value of Application”
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23. Descriptions Accounting entries Allotment Monies Received Dr. Bank
Cr. Application and Allotment
* “No. of Share Actually Issued” X “Issue Value at Allotment”* Sometimes, oversubscribed application monies may be carried forward and offset against the allotment monies due.
The difference between original allotment monies received and oversubscribed application monies will be recorded in these entries
Issue of Ordinary Shares at Call
Dr. Call
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” x “Par Value of Each Share at Call” will be recorded in Ordinary Share Capital
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24. Descriptions Accounting entries Call Monies Received Dr. Call
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” x “Par Value of Each Share at Call” will be recorded in Ordinary Share Capital
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25. Example 1
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26. each at $1.4 per share. The shares were issued on the following terms:
Example 1
Tai Fat Limited made a public offering of its 1,700,000 ordinary shares of $1
each at $1.4 per share. The shares were issued on the following terms:
Per share $
Application
Allotment
First and final call
On 1 February 1997, applications for 3,000,000 shares were received.
Applications for 300,000 shares were unsuccessful and the money involved was
returned on 3 February 1997.
Applications for 700,000 shares were given full allotment.
The remainder of the available shares were allotted among the other applicants on a pro-rata basis.
The balance of the sums received on application was applied to the amounts due on allotment.
The balances due on allotment were received on 1 March 1997.
On 1 April 1997, the first and final call was made and paid in full.
$1.4
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27. Application and Allotment 900,000 Application and Allotment 90,000
Bank
Application and Allotment ,000
Application and Allotment ,000
Application and Allotment ,000
First and Final Call ,000
Application and Allotment
Bank ,000
(300,000*$0.3)
Bank ,000
(3,000,000*$0.3)
Ordinary Shares ,000
(1,700,000*$0.5)
Bank ,000
(1,700,000*$0.6-1,000,000*$0.3)
Share Premium ,000
(1,700,000*$0.4 )
1,620,000
1,620,000
Ordinary Shares
Balance c/f ,700,000
Application and Allotment ,000
First and Final Call ,000
1,700,000
1,700,000
Share Premium
Balance c/f ,000
Application and Allotment ,000
First and Final Call
Ordinary Shares ,000
Bank ,000
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28. Journal Dr Cr $ $ 1. Bank (3,000,000 X $0.30) 900,000
$ $
1. Bank (3,000,000 X $0.30) ,000
Application and Allotment ,000
Being money received for 3,000,000 shares on application
2. Application and Allotment ,000
Bank (300,000 X $0.3) ,000
Being return of application money to unsuccessful applicants for
300,000 shares
3. Application and Allotment ($0.9 X 1,700,000) ,530,000
Ordinary Shares ($0.5 X 1,700,000) ,000
Share Premium ($0.4 X 1,700,000) ,000
Being allotment of 1,700,000 ordinary shares
4. Bank (1,700,000 X $ ,000,000 X $0.30) ,000
Application and Allotment ,000
Being receipt of the amount due on allotment
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29. Journal Dr Cr $ $ 5. First and Final Call 850,000
$ $
5. First and Final Call ,000
Ordinary Shares (1,700,000 X $0.5) ,000
Being call on shares
6. Bank ,000
First and Final Call ,000
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30. Forfeiture and Reissue of Shares
If a member fails to pay the calls requested from him, the directors may declare the shares as the ‘ Forfeited Shares’ and reissue the shares to another shareholder
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31. Descriptions Accounting entries Declaration of Forfeited Shares
(a) Forfeited Shares were Declared when they were not paid
Dr. Bank
Forfeited Shares
Cr. Application and Allotment, OR Call
* “No. of Shares Declared as Forfeited” x “Issue Value at that Stage” will be recorded in Forfeited Shares.
(b) Forfeited Shares were NOT Declared when they were not paid
Allotment / Call in Arrears
* “No. of Shares Unpaid” x “Issue Value at that Stage” will be recorded in Allotment / Call in Arrears
Unpaid Value Declared as Forfeited Shares
Dr. Forfeited Shares
Cr. Allotment / Call in Arrears
Transfer the Value of Allotment / Call in Arrears to Forfeited Shares
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32. Descriptions Accounting entries
Transfer the call-up value of Forfeited share from issued share capital to Forfeited shares
Dr. Ordinary Share Capital
Cr. Forfeited Shares
*”No. of shares Declared as Forfeited” x “Call-up value of Shares Forfeited” will be transferred to Forfeited Shares
Transfer the called-up value of Forfeited share from issued share capital to Forfeited shares
Reissue of Forfeited Shares or not
Forfeited Shares are “NOT Reissued”
Dr. Forfeited Shares
Cr. Share Premium
Any paid amount of the Forfeited Shares will be transferred to the Share Premium
Forfeited Shares Account is closed
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33. Descriptions Accounting entries Reissue of Ordinary Shares
Dr. Forfeited Shares
Cr. Ordinary Share Capital
* “No. of Shares Reissued” x “Called-up value of shares forfeited” will be recorded in Ordinary Share Capital
Receipts from the reissue of shares
Dr. Bank
Cr. Forfeited Shares
*”No. of shares Reissued” x “Issue Value of Each Reissued Share”
Transfer of the excess amount over the called-up nominal value of the shares reissued
Cr. Share Premium
Any balance of the Reissue of Forfeited Shares will be transferred to
the Share Premium
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34. Example 2
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35. The shares were issued on the following terms: Per share $
Example 2
Tai Cheong Limited made a public offering of its 1,000,000 ordinary shares of $1
each at $1.5 per shares
The shares were issued on the following terms:
Per share $
Application
Allotment on 1 April
First call on 1 June
Final call on 1 September
On 1 March 1997, applications for 1,000,000 shares were received. They were given
full allotment. All sums due on received on 10 April All money for the first
call was received on 10 June, except for one shareholder who had been allotted
1,000 shares.
$1.5
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36. the directors made the final call and all sums due were received.
Case 1
All money for the final call was received on 15 September 1997, except for the
shareholder who failed to pay the first call. The directors had not declared the shares
forfeit by 31 December 1997.
Case 2
All money for the final call was received on 15 September Except for the
shareholder who failed to pay the first call. The directors declared the shares
forfeit on 1 October 1997.
Case 3
The directors declared the shares forfeit on 1 July On 1 August 1997,
600 shares were reissued for $0.9 each, subject to a final call. On 1 September 1997,
the directors made the final call and all sums due
were received.
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37. Case 1
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38. Case 1 Application and Allotment 800,000 Ordinary Shares Share Premium
Mar 1 Bank (1,000,000 X $0.60) ,000
Apr 1 Ordinary Shares ,000
(1,000,000*$0.3)
Apr 10 Bank (1,000,000 X $0.20) ,000
Apr 1 Shares Premium ,000
(1,000,000*$0.5)
800,000
800,000
Ordinary Shares
Apr Application and Allotment ,000
Share Premium
Dec Balance c/f ,000
Apr Application and Allotment ,000
Bank
Mar 1 Application
Apr 15 Allotment
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39. First Call Final Call Calls in Arrears Bank Mar 1 Application 600000
June Ordinary Shares ,000
June Bank (1,000, ,000) x $ ,500
June Calls in Arrears
500, ,000
Final Call
Sep Ordinary Shares ,000
Sep Bank (1,000, ,000) X $ ,800
Sep Calls in Arrears
200,000
200,000
Calls in Arrears
June 10 First Call
Dec
Sep Final Call
Bank
Mar 1 Application
Apr 15 Allotment
June 1 First call
Final call
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40. Ordinary Shares June First call 500000 Sept 1 Final call 200000 700
Apr Application and Allotment ,000
June First call
Sept 1 Final call
Balance Sheet as at 31 December 1997 (Extract) $
Current Assets
Called-up Capital not yet paid
Share Capital
Issued and Fully Paid
1,000,000 Ordinary Shares of $1 each
Reserves
Share Premium
700
500000
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41. Case 2
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42. Case 2 Ordinary Shares Apr 1 Application and Allotment 300,000
Oct 1 Forfeited shares (1000*$1)
June First call
Dec 31 Bal c/d
Sept 1 Final call
Calls in Arrears
June 10 First Call
Oct 1 Forfeited shares
Sep Final Call
Forfeited shares
Oct Call in Arrears
Oct 1 Ordinary shares
(1000*$1)
Dec 31 Bal c/f
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43. 999000 500000 300 Balance Sheet as at 31 December 1997 (Extract)
Share Capital
Issued and Fully Paid
999,000 Ordinary Shares of $1 each
Reserves
Share Premium
Forfeited Shares
999000
500000
300
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44. Case 3
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45. Case 3 Ordinary Shares Reissue Share Premium 500,240 Calls in Arrears
July Forfeited Shares
(1,000 x $0.80)
Apr Application and Allotment ,000
June First Call ,000
Dec Balance c/f ,600
Aug Forfeited Shares (600 x $0.80)
Sept Final Call (999,600 X $0.2) ,920
1,000,400
Reissue
1,000,400
Share Premium
Apr Application and Allotment ,000
Dec Balance c/f ,240
Aug Forfeited Shares
500,240
500,240
Calls in Arrears
June First Call
July 1 Forfeited Shares (1000*$0.5)
Forfeited shares
July 1 Calls in arrears
July 1 Ordinary shares (1000*$0.8) 800
Aug 1 Ordinary shares (600*$0.8)
Aug 1 Bank (600*$0.9)
Aug 1 Share premium
Dec 31 Bal c/d
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46. *Amount transferred to share premium:
Final call
Sept 1 Ordinary shares
(999600*$0.2)
Sept Bank
Bank
Mar 1 Application
Apr 10 Allotment
June 10First call
Aug 1 Forfeited shares
Sept 15 Final call
*Amount transferred to share premium:
Receipt from original holder (600*$0.8)
Less: Share premium (600*$0.5)
180
Add: Receipt from second holder (600*$0.9)
720
Less: Called-up nominal value (600*$0.9)
240
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47. 999600 500240 120 Balance Sheet as at 31 December 1997 (Extract)
Share Capital
Issued and Fully Paid
999,000 Ordinary Shares of $1 each
Reserves
Share Premium
Forfeited Shares
999600
500240
120
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48. Right issue
Right issue is an offer to the existing shareholders to subscribe for more shares, in proportion to their existing shareholding, usually at a relatively cheap price.
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49. Bonus issue
Bonus shares are issued when there is a build-up of reserves (e.g. undistributed profits) in the company.
Those profit will often not be represented by cash, since the profits have been invested in other assets to expand the business.
It is done by changing the company’s reserves into share capital and allotting shares to existing shareholders por rata, e.g. one share for every two shares held
This decrease the amount of retained earnings and increases the share capital. There is no entry on cash or bank account because mp cash changes hands, the bonus shares are issued free.
Dr. Profit and Loss (retained earnings) account
Cr. Share Capital account (with the nominal value of shares allotted as fully paid bonus shares)
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50. Debenture A debenture is a written acknowledgement of debt.
Debenture are long-term loans which attract a large number of investors.
The terms of debentures such as the rate of interest payable, the date of redemption (if applicable) and security given by the borrowing company are governed by a trust deed
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51. Issue of debenture
The accounting treatment of debenture is the same as that of shares, except for the change in the name of the accounts
Debenture may be issued payable in full or payable by instalments
Debenture can be issued at par, at premium or at a discount
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52. P. Chinna Sahaya Rani

53. P. Chinna Sahaya Rani

54. P. Chinna Sahaya Rani

55. P. Chinna Sahaya Rani

56. The company has actually issued 75,000 shares.
Better Enterprises Ltd was formed with the legal right to be able to issue 100,000 shares of $1 each.
The company has actually issued 75,000 shares.
None of the shares has yet been fully paid up. So far the company has made calls of $0.80 per share.
All the calls have been paid by shareholders except for $200 owing from one shareholder.
Authorised share capital = Issued share capital =
Called-up capital = Calls in arrear =
Paid-up capital =
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57. $1,000,000
$75,000
$60,000
$200
59,800
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