Accounting for Companies

The One Thing

Company accounting distinguishes between owners’ capital raised through shares and borrowed capital raised through debentures. Accurate treatment depends on recording each legal and financial stage separately, including amounts due, amounts received, premiums, arrears, forfeiture, reissue, interest and redemption.

Definitions and Results

• Share Capital: The capital raised by a company through the issue of shares to its members.
• Authorised Capital: The maximum share capital a company is permitted to issue according to its constitutional documents.
• Issued Capital: The portion of authorised capital offered to investors for subscription.
• Subscribed Capital: The portion of issued capital taken up by applicants.
• Called-up Capital: The amount of share capital that the company has asked shareholders to pay.
• Paid-up Capital: The amount of called-up capital actually paid by shareholders, excluding calls in arrears.
• Calls in Arrears: The amount due from shareholders that has not been paid by the specified date.
• Calls in Advance: An amount received from a shareholder before the company has formally called for it. It is not share capital until the relevant call becomes due.
• Equity Shares: Shares that usually carry voting rights and receive dividends depending on available profits.
• Preference Shares: Shares carrying preferential rights regarding dividend payment and repayment of capital on winding up.
• Issue at Par: Issue of shares at a price equal to their face value.
• Issue at Premium: Issue of shares at a price higher than face value. The excess is credited to Securities Premium Account.
• Securities Premium: The amount received over and above the face value of shares or debentures, subject to legal restrictions on its use. It is a capital receipt.
• Application Money: The amount paid by applicants when applying for shares.
• Allotment Money: The amount due from successful applicants when shares are formally allotted.
• Calls: Amounts demanded by the company from shareholders after application and allotment, such as first call and final call.
• Oversubscription: A situation in which applications received exceed the number of shares offered.
• Pro-rata Allotment: Allotment of shares in a fixed proportion when applications exceed the shares available.
• Forfeiture of Shares: Cancellation of shares because a shareholder fails to pay calls or other amounts due.
• Share Forfeiture Account: An account credited with the amount received on forfeited shares, excluding amounts not yet received.
• Reissue of Forfeited Shares: The subsequent issue of forfeited shares to another person, usually at par, premium or discount within legal limits.
• Capital Reserve on Reissue: The profit on reissue transferred from Share Forfeiture Account, limited to the amount forfeited on the shares reissued.
• Debenture: A written acknowledgment of debt issued by a company, normally carrying a fixed rate of interest.
• Debenture Holder: A lender to the company who receives interest and repayment according to the terms of issue. Debenture holders are creditors, not owners.
• Issue of Debentures: Raising borrowed funds through debentures, which may be issued at par, premium or discount and for cash or other consideration.
• Collateral Security: Additional security provided for a loan, where debentures may be issued as a secondary guarantee.
• Interest on Debentures: A finance cost payable at the stated rate, generally calculated on the face value of debentures. It is payable whether or not the company earns profit.
• Redemption of Debentures: Repayment of the debenture liability according to the terms and conditions of issue.
• Loss on Issue of Debentures: The total of discount on issue and premium payable on redemption, treated as a capital loss and written off according to applicable rules.
• Debenture Redemption Reserve: A reserve created, where applicable under prevailing legal requirements, to strengthen the company’s ability to redeem debentures.
• Shareholders and debenture holders: Shareholders provide owners’ capital and may receive dividends depending on distributable profits and declaration. Debenture holders provide borrowed capital and receive contractual interest.

Worked Methods

1. Recording a share issue for cash

• Record receipt of application money:

Bank Account Dr. To Share Application Account

• Transfer application money on allotment:

Share Application Account Dr. To Share Capital Account

• When allotment becomes due, record the nominal amount and any premium:

Share Allotment Account Dr. To Share Capital Account To Securities Premium Account, where applicable.

• Record receipt of allotment money:

Bank Account Dr. To Share Allotment Account

• When a call becomes due:

Share Call Account Dr. To Share Capital Account

• On receipt of the call:

Bank Account Dr. To Share Call Account

The entries must distinguish the application date, allotment date, call dates, amounts becoming due and amounts actually received.

2. Accounting for oversubscription and pro-rata allotment

• Compare the applications received with the number of shares offered.
• If applications exceed the shares available, identify the oversubscription.
• Apply the required pro-rata proportion to determine the number of shares allotted to each applicant.
• Account separately for application money received, application money transferred to share capital and any excess application money adjusted against allotment or refunded, according to the stated treatment.

3. Recording calls in advance and calls in arrears

Calls in advance

If money is received before the relevant call becomes due:

Bank Account Dr. To Calls in Advance Account

Calls in advance remain a separate liability and are not treated as share capital until the relevant call becomes due.

Calls in arrears

If a shareholder does not pay a call, the unpaid amount is transferred to Calls in Arrears Account or shown as a deduction from called-up capital, according to the accounting treatment used.

4. Forfeiture of shares issued at par

When shares issued at par are forfeited because a shareholder fails to pay amounts due:

• Debit Share Capital Account with the called-up amount.
• Credit Share Forfeiture Account with the amount received.
• Credit Calls in Arrears Account with the unpaid amount.

The entry is:

Share Capital Account Dr. To Share Forfeiture Account To Calls in Arrears Account

Share Forfeiture Account includes only amounts received on the forfeited shares, not amounts that were never paid.

5. Forfeiture of shares issued at premium

• Determine whether the premium had become due.
• If the premium had become due but was not received, debit Securities Premium Account on forfeiture.
• If the premium had already been received, do not debit Securities Premium Account.
• Record the remaining amounts through Share Capital Account, Share Forfeiture Account and Calls in Arrears Account as appropriate.

Thus, Securities Premium Account is debited only when the premium had become due but was not received.

6. Reissue of forfeited shares

• Determine the amount received on the original issue and credited to Share Forfeiture Account.
• Record the reissue at par, premium or discount.
• If reissued at a discount, ensure that the discount does not exceed the amount forfeited on those shares.
• After the reissued shares have been fully dealt with, transfer the relevant profit from Share Forfeiture Account to Capital Reserve.
• If only part of a forfeited lot is reissued, transfer only the proportionate forfeited amount relating to the shares reissued.

A discount on reissue is therefore limited to the amount previously forfeited on the shares concerned. Forfeiture itself does not create profit; the gain is recognised through Capital Reserve only after successful reissue.

7. Issue of debentures for cash

Issue at par

When money is received for debentures issued at face value:

Bank Account Dr. To Debentures Account

Issue at premium

Record the face value and the excess separately:

Bank Account Dr. To Debentures Account — face value To Securities Premium Account — excess over face value

Issue at discount

Record the discount as a loss:

Bank Account Dr. Loss on Issue of Debentures Account Dr. To Debentures Account — face value

Issue redeemable at premium

Record both the loss arising from the issue terms and the future premium payable on redemption:

Bank Account Dr. Loss on Issue of Debentures Account Dr. Securities Premium Account Dr., where applicable To Debentures Account To Premium on Redemption of Debentures Account

The treatment must distinguish face value, issue price, discount, premium and redemption value.

8. Issue of debentures for purchase of assets

• Record the asset at the agreed value and credit the vendor.
• Settle the vendor’s account by issuing debentures to the vendor.

The asset acquisition and the settlement through debentures are therefore recorded as separate stages.

9. Accounting for interest on debentures

• Record interest when it becomes payable:

Interest on Debentures Account Dr. To Debentureholders Account

• Transfer the interest expense to the Statement of Profit and Loss.

Interest on debentures is a charge against profits and remains payable regardless of whether the company earns profit.

10. Redemption of debentures

Redemption at par

• Record the amount due to debenture holders:

Debentures Account Dr. To Debentureholders Account

• Record payment:

Debentureholders Account Dr. To Bank Account

Redemption at premium

• Record both the debenture liability and the premium payable:

Debentures Account Dr. Premium on Redemption of Debentures Account Dr. To Debentureholders Account

• Pay the debenture holders:

Debentureholders Account Dr. To Bank Account

Redemption by instalments

Where debentures are redeemed in instalments, record interest and redemption entries for the relevant amount and date of each instalment.

Where It Goes Wrong

• Confusing capital categories: Authorised, issued, subscribed, called-up and paid-up capital represent different stages and must not be treated as interchangeable.
• Treating calls in advance as share capital: Money received before a call becomes due is recorded in Calls in Advance Account until the relevant call is formally made.
• Incorrectly recording premium on forfeiture: Securities Premium Account is debited only when the premium had become due but was not received; it is not debited when the premium was already received.
• Allowing excessive discount on reissue: The discount on reissue cannot exceed the amount forfeited on the particular shares reissued.
• Transferring the whole forfeiture balance on partial reissue: If only part of a forfeited lot is reissued, only the proportionate forfeited amount is transferred to Capital Reserve.
• Confusing issue terms and redemption terms: Face value, issue price, premium, discount, amount due, amount received and redemption value must be calculated and recorded separately.

What Gets Asked

This material supports questions requiring students to:

• Define and distinguish authorised, issued, subscribed, called-up and paid-up capital.
• Record share issues at par and at premium using the application, allotment and call entries.
• Account for oversubscription and calculate pro-rata allotment.
• Record calls in arrears and calls in advance.
• Pass journal entries for forfeiture of shares issued at par and at premium.
• Calculate the permissible discount on reissue of forfeited shares.
• Calculate the proportionate amount transferred to Capital Reserve when only part of a forfeited lot is reissued.
• Distinguish shareholders from debenture holders and owners’ capital from borrowed capital.
• Pass entries for debentures issued at par, at premium and at discount.
• Account for debentures issued for purchase of assets.
• Record debentures issued as collateral security.
• Calculate and record interest on debentures as a finance expense.
• Pass entries for redemption at par, redemption at premium and redemption in instalments.
• Calculate Loss on Issue of Debentures from discount on issue and premium payable on redemption.
• Explain the purpose of Securities Premium and Debenture Redemption Reserve.
• Prepare complete journal-entry solutions supported by calculations and clear working notes.