Corporate Accounting

Module – 1

Accounting for Share Capital

 Company

Θ Meaning
∆ A company is an association of individuals formed for the purpose of
some business for profit, with capital divisible into transferable
shares.

Θ Definition
∆ Companies act defines company as a company incorporated or
registered under the Companies Act, 2013 or under any other earlier
Companies Acts.
 Characteristics of Company

Θ It is an artificial person created by law.

Θ Liability of shareholders is limited to the extent of face value of

shares held by them.

Θ It has legal entity with perpetual succession.

Θ It can buy and hold the property in its own name

Θ Can sue and be sued in its own name

Θ Company can sign the document using its common seal which acts
as its signature

Θ There is separation of ownership from its management

 Kinds of Companies
Θ From the point of view of formation
∆ Chartered company
• Company incorporated under a charter granted by a king or sovereign
(e.g. British East India Company)

∆ Statutory Company
• Company formed by as special act of parliament or any state legislature
(e.g. LIC, SBI, NAHAI)

∆ Registered Company
• Company incorporated under the companies act 2013 or under earlier
companies act
 Kinds of Companies

Θ From the point of view of Liability

∆ Companies Limited by Shares
• In this case, the liability of its members is limited to the extent of
the nominal value of shares held by them and remaining unpaid.
∆ Companies Limited by Guarantee
• A company which does not have share capital is a company limited
by guarantee.
• In this case, the liability of its members is limited to the amount
they undertake to contribute in the event of the company being
wound up.
∆ Unlimited Companies
• Companies in which liability of members is unlimited. Such
companies are not found in India even though permitted by the
Companies Act, 2013.
 Kinds of Companies
Θ From the point of view of Public Investment

∆ Private Company
• Private company is a company which by its article
• Can make no invitation to public for its shares or debentures
• Except in case of One Person Company, limits the number of its
members to two hundred
• Restricts the right to transfer its shares
• Has minimum paid up capital of Rs.1,00,000 or such higher paid
up capital as may be prescribed
 Kinds of Companies

Θ From the point of view of Public Investment

∆ Public Company

• Public company means a company which—

• is not a private company;

• has a minimum paid-up share capital of five lakh rupees or

such higher paid-up capital, as may be prescribed

• Subsidiary of public company is deemed to be a public company

Brief Description Private Limited Company Public Limited Company

Meaning Minimum Capital : Rs. 100000Right to transfer Minimum Capital : Rs. 500000Subsidiary of a
the shares: Restricted Public Co. is deemed to be a public Co.

Small Company If Paid-up Share Capital does not exceed Rs. 50 Not Applicable
Lakhs and Turnover as per Last Audited
accounts does not exceed Rs. 2 Crore

Minimum Members Required 2 (Two),Maximum 200 (Two Hundred) 7 (Seven)

Name of the Company “Private Limited” as Last Word “Public Limited” as Last Word

Issue of Securities By way of Right Issue or Bonus IssueThrough To Public through Prospectus (“Public Offer”)By
Private Placement way of Right Issue or Bonus IssueThrough
Private Placement

Public Offer to be in Not Applicable In case of public offer of securities, the securities
Dematerialised Form have to be in Dematerialised Form

Securities in Public Offer to be Not Applicable Securities offered in Public Offer, to be listed in
listed in Stock exchanges Recognised Stock Exchanges

Acceptance of Deposits Not allowed to accept deposit Allowed if Paid up share capital is Rs. 100 Crore
or more orTurnover of Rs. 500 Crore or more

Quorum of Meetings Two members personally present Five in case of Members upto 1000;Fifteen in
case of Members more than 1000, upto
5000;Thirty in case of Members exceed 5000.

No. of Directors and 2 (Two);Not required to appoint independent 3 (Three); andIn case of Listed Companies, at
Independent Directors director least One-Third as independent directors
 Types of Companies

From the point of

From the point of view of From the point of view of
view of Public
Formation Liability
Investment
• Chartered company • Companies Limited by • Private Company
• Statutory Company Shares • Public Company
• Registered Company • Companies Limited by
Guarantee
• Unlimited Companies
 Formation of Company

Θ Involves three stages

∆ Promotion

∆ Incorporation and

∆ Commencement of business
 Formation of Company

Θ Promotion

∆ First stage in the formation of company

∆ A company may be formed for carrying on new business or for

absorbing an existing business

∆ The person involved in forming the company is called promoter

 Formation of Company
Θ Incorporation
∆ A group of seven persons in case of public company and two persons in
case of private company may by subscribing their names to memorandum
of association to form an incorporated company
∆ The documents to be filed with ROC by paying necessary stamp duty
• The memorandum of association

• The article of association

• Written consent by the directors

• A statement of the nominal capital

• A certificate from the chartered accountant, or an attorney or company

secretary or director of company that all legal formalities are complied with
 Formation of Company

Θ Commencement of Business
∆ Private Company
• Can commence the business immediately after receiving certificate of
incorporation

∆ Public Company
• Can commence the business only after obtaining the certificate of
commencement of business form the registrar
 Prospectus

Θ Any document described or issued as prospectus inviting deposits

form the public or inviting offers form the public for subscription of

any shares in or debentures of body corporate.

 Share Capital of Company

Θ Main Divisions of Share Capital

1. Authorized or nominal capital

2. Issued Capital

3. Subscribed Capital

4. Called up Capital

5. Paid-up capital

6. Reserve Capital
 Example

Θ Sunrise Company Ltd., has registered its capital as Rs. 40,00,000, divided
into 4,00,000 shares of Rs. 10 each.

Θ The company offered to the public for subscription of 2,00,000 shares of

Rs. 10 each, as Rs. 2 on application, Rs.3 on allotment, Rs.3 on first call
and the balance on final call.

Θ The company received applications for 2,50,000 shares.

Θ The company finalised the allotment on 2,00,000 shares and rejected

applications for 50,000 shares. The company did not make the final call.

Θ The company received all the amount except on 2,000 shares where call
money has not been received.
 Divisions of Share Capital of Company
Θ Authorized Capital

∆ Amount of share capital which a company is authorized to issue by

its Memorandum of Association

∆ It is also called Nominal or Registered capital

Θ Issued Capital

∆ It is that part of the authorized capital which is actually issued to the

public for subscription

 Divisions of Share Capital of Company
Θ Subscribed Capital
∆ It is that part of the issued capital which has been actually subscribed
by the public.

∆ When the shares offered for public subscription are subscribed fully by
the public the issued capital and subscribed capital would be the same.

Θ Called-up Capital
∆ It is that part of subscribed capital with regard to which the calls have
been made

∆ The company may decide to call the entire amount or part of the face
value of the shares.
 Divisions of Share Capital of Company

Θ Paid-up Capital

∆ It is that portion of the called up capital with regard to which

company has received call money from the shareholders.

∆ When the share holders have paid all the call amount, the called-up

capital is the same to the paid-up capital.

∆ If any of the shareholders has not paid amount on calls, such an

amount may be called as ‘calls in arrears’.

 Divisions of Share Capital of Company

Θ Reserve Capital

∆ A company may reserve a portion of its uncalled capital to be called

only in the event of winding up of the company.

∆ It is available only for the creditors on winding up of the company.

 Shares

Θ Shares refer to the units into which the total share capital of a

company is divided.

Θ Holders of these shares are called shareholders

Θ There are two types of shares

∆ Preference Shares and

∆ Equity Shares
 Preference Shares

Θ Preference shares are those shares on which there is preferential right

as

∆ To payment of dividend during lifetime of company

∆ To payment of capital on the winding up

Θ The rate of dividend is fixed

Θ Do not carry voting right (Exceptions)

 Types of Preference Shares

1. Cumulative Preference shares

2. Non-cumulative preference shares

3. Participating preference shares

4. Non-participating preference shares

5. Redeemable preference shares

6. Irredeemable Preference shares

7. Convertible Preference Shares

8. Non convertible preference shares

 Types of Preference Shares
Θ Cumulative Preference Shares
∆ In case of cumulative preference shares any unpaid dividend is
treated as arrears.
∆ The arrears are accumulated and becomes payable out of the profit of
subsequent years
∆ Dividend on equity shares can be paid only after the payment of such
arrears

Θ Non Cumulative Preference Shares

∆ Unpaid dividend is not carried forward to the next year
∆ Dividend does not get accumulated
 Types of Preference Shares

Θ Participating Preference Shares

∆ In addition to fixed rate of dividend, these kind of shareholders have
right to participate in the surplus profit which remains after the
payment is made to equity shareholders
∆ At the time of winding up the shareholders have right to participate
in surplus of assets which remains after payment is made to equity
shareholders

Θ Non Participating Preference Shares

∆ Shareholders have no right to participate in surplus profit or the
assets which remains after the payment to equity shareholders
 Types of Preference Shares

Θ Redeemable Preference Shares

∆ The preference shares which can be redeemed after a specified
period or at the discretion of company are called redeemable
preference shares

Θ Irredeemable Preference Shares

∆ Preference shares that do not redeem during the lifetime of
company
 Types of Preference Shares

Θ Convertible Preference Shares

∆ Convertible preference shares can be converted into equity shares of
the company as per the terms and conditions of their issue.

Θ Non-convertible Preference Shares

∆ Non-convertible preference shares are not convertible into equity
shares of the company but still have preferential rights to payment of
capital in the event of winding up of the company.
 Equity Shares

Θ Equity Shares are those shares which are not preference shares

Θ Holders of these shares are entitled to a dividend or share in the

property of company after the preference shares are paid

Θ Equity share capital remains permanently with the company.

Θ Equity shareholders have voting rights and elect the management

of the company.

Θ There is no fixed rate of dividend on equity capital.

Issue of Shares
 Terms of Issue
Θ Terms and conditions of issue are stated in prospectus

Θ Shares may be issued

∆ At par (Issue Price = Face Value)
• For example when shares of Rs. 10 (Face value are issued for Rs. 10
only (at par)

∆ At premium (Issue Price > Face value)

• For example when shares of Rs. 10 (Face value) are issued for Rs. 12
that is at premium of Rs.2

∆ At discount (Issue Price < Face Value)

• For example when shares of Rs.10 (face value) are issued for Rs. 8 that
is at discount of Rs.2
 Terms of Issue

Θ Amount received at the time of application is known as

application money

ΘAmount received at the time of allotment is known as allotment

money

Θ Amount received on calls is known as call money

Recent IPOs
 Application for Shares
Θ On issue of shares its advertisement appear in newspaper

Θ Interested investors may get an application form along with the

copy of prospectus

Θ Investors submit filled up application form along with application

money to one of the banks mentioned in advertisement

Θ Application money should be at least 5% of the face value of the

shares applied for.
 Allotment of Shares

Θ Application made by investors is considered as proposal/offer

Θ Company may accept or reject it

Θ All the applicants are informed about the allotment or non-

allotment by letter of allotment or letter of regret

Θ In case of oversubscription allotment is made on pro-rata basis

 Allotment of Shares

Θ A public company can not allot the shares unless

1. Minimum subscription is received

2. Prospectus or statement in lieu of prospectus has been filed with

ROC

3. The application money received is at least 5% of the face value of

shares
 Minimum Subscription
Θ ‘minimum subscription’ of capital cannot be less than 90% of the

issued amount according to SEBI (Disclosure and Investor

Protection) Guidelines, 2000 [6.3.8.1 and 6.3.8.2].

ΘIn the event of non-receipt of minimum subscription within 60

days from the date of closure of issue,
∆The company must refund the subscription amount in full within 78
days without interest and with interest at 15% for the delayed period
beyond 78 days.
 Calls on Shares

Θ Calls play a vital role in making shares fully paid-up and for
realizing the full amount of shares from the shareholders.

Θ The amount on any call should not exceed 25% of the face value
of shares

ΘThere must be an interval of at least one month between the

making of two calls unless otherwise provided by the articles of
association of the company.
 Journal Entries for Issue of Shares
Bank A/C Dr.
1 On receipt of Application Money
To Share Application A/C

Share Application A/C Dr.

2 On allotment of shares
To Equity Share Capital A/C

Share Application A/C Dr.

3 On rejection of allotment
To Bank A/C

Share Allotment A/C Dr.

4 For the amount due on allotment
To Equity Share Capital A/C

Bank A/C Dr.

5 On receipt of allotment money
To Share Allotment A/C
 Journal Entries for Issue of Shares
Share First Call A/C Dr.
6 When first call is due and called
To Equity Share Capital A/C

Bank A/C Dr.

7 On receipt of first call
To Share first call A/C

Share final Call A/C Dr.

8 When final call is due and called
To Equity Share Capital A/C

Bank A/C Dr.

9 On receipt of final call
To Share final call A/C
 Adjustment of Excess Money Towards
Amount Due on Allotment and Calls

Θ If company receives applications for more number of shares than

issued, it is said to be oversubscribed

Θ In such case company can not make allotment in full

Θ Company may at its choice reject or allot lesser number of shares

than those applied for

Θ Excess application money is adjusted towards the amount due on

allotment and amount due on calls

 Entry for Adjustment of Excess
Application Money
Θ When adjusted towards Allotment

Equity Share Application A/C Dr.

To Equity Share Allotment A/C

ΘWhen adjusted towards Calls

Equity Share Application A/C Dr.

To Call in advance A/C
 Forfeiture and reissue of shares

Θ If a shareholder fails to pay allotment money and or calls made on

him, his shares are liable to be forfeited

Θ Results in compulsory termination of membership

Θ Forfeited shares are taken away as a penalty for non payment of

allotment or call money

Θ Forfeited shares account is shown in balance sheet as addition to

paid up capital until the shares are reissued

Entries for Forfeiture of shares issued at par

Equity Share Capital A/C Dr. (Amount called up on forfeited shares)

To Equity Share Allotment A/C (Amount not paid on forfeited shares)
To Equity Shares First Call A/C (Amount not paid on forfeited shares)
To Equity Shares second Call A/C (Amount not paid on forfeited shares)
To Shares forfeited A/C (Amount paid on forfeited shares)

 Equity share capital account is debited with amount called up on forfeited shares
 Share forfeited account is credited with amount paid
 Allotment or call account is credited with amount not paid
 In case, however, if the premium amount has not been received, either wholly or
partially, in respect of the shares forfeited, the Share Premium Account will also be
debited with the amount of premium not received along-with the Share Capital
Account at the time forfeiture.
 Entry for Forfeiture of Shares Issued at
premium
Θ If amount of premium is received on forfeited shares
Equity Share Capital A/C Dr.
To Equity Share Allotment
To Equity Shares First Call A/C
To Equity Shares second Call A/C
To Shares forfeited A/C

ΘIf amount of premium is not received on forfeited shares

Equity Share Capital A/C Dr.
Equity Shares Premium A/C Dr.
To Equity Shares Allotment A/C
To Equity share Calls A/C
To Shares forfeited A/C
 Entry for Forfeiture of Shares Issued at
Discount

Equity Share Capital A/C Dr.

To Discount on issue of shares A/C
To Equity Share Allotment A/C
To Equity Share Calls A/C
To Shares forfeited A/C
 Reissue of Forfeited Shares
Θ Forfeited shares can either be disposed off or reissued by company

Θ Forfeited shares can also be reissued at discount, but the amount

of discount should not exceed the amount forfeited per share

Θ Discount allowed on reissue of shares is debited to shares forfeited

account

ΘAfter reissue any balance left in the share forfeited account has to
be transferred to capital reserve account proportionate to the
extent of shares reissued

Θ Remaining balance in share forfeited account is carried forward

 Entry for reissue of forfeited shares
Θ For Reissue of shares

Bank A/C Dr. (Actual Amount Received)

Shares Forfeited A/C Dr. (Discount Allowed)

To Equity Share Capital A/C (Amount Credited as Paid up)

Θ For transferring remaining balance in share forfeiture account to

capital reserve account
Shares Forfeited A/C Dr. (Balance Amount in Share Forfeiture)

To Capital Reserve Account

 Issue of Shares at Premium

Θ A company may issue shares at premium

Θ Premium amount so received is credited to separate account

called “Securities Premium Account”

Θ Share premium amount is shown on liability side of balance sheet

under the head “Reserves and Surplus”

Θ Share premium is usually payable with allotment

Θ However premium may be collected wholly or partly with

application money, allotment money or call money
 Issue of Shares at Premium

Θ Share premium is considered as capital profit

Θ Share premium amount can only be used for the following purposes
∆ For the issue of fully paid bonus shares to the members of the
company
∆ For writing off the preliminary expenses of the company
∆ For writing off the expenses of, or commission paid or discount
allowed on, any issue of shares or debentures of the company
∆ For providing premium payable on the redemption of any redeemable
preference shares or debentures of the company
 Entries for Issue of Shares at Premium
Θ If application amount includes share premium

Bank A/C Dr.

To Equity Shares Application A/C

Equity Shares Application A/C Dr.

To Equity Share Capital A/C

To Equity Share Premium A/C

 Entries for Issue of Shares at Premium
Θ If allotment amount includes share premium

Equity Shares Allotment A/C Dr.

To Equity Share Capital A/C

To Equity Share Premium A/C

Bank A/C Dr.

To Equity Shares Allotment A/C

 Issue of Shares at Discount
Θ A company may issue shares at discount subject to following conditions
∆ The shares are of class which has already been issued
∆ Issue of shares is authorized by a resolution passed in general meeting and
sectioned by company law board
∆ The resolution specifies the maximum rate of discount which should not exceed
10% of nominal value of shares or such higher percentages as the company law
board (CLB) may permit
∆ One year must have been elapsed since the date on which company was entitled
to commence business
∆ The shares are issued within two months after the date on which the issue
sanction by CLB
∆ Every prospectus relating to the subsequent issue of shares shall contain the
particulars of discount allowed on the issue of shares
Journal Entry for issue of shares at discount

Equity Shares Allotment A/C Dr.

Discount on issue of shares A/C

To Equity Share Capital A/C

 Calls in Arrears and Calls in Advance

Θ Any amount called by the company but not paid by the

shareholders is known as “calls in arrears”

Θ If directors want and if article provides, an interest not exceeding

10% may be collected from shareholders on calls in arrears

Θ Sometimes some shareholders pay a part or the whole of the

amount of the calls not yet made. The amount so received from
the shareholders is known as “Calls in Advance”.

Θ Interest is paid on the calls in advance as per the provisions of

article and normally does not exceed 12% per annum
 Journal Entries for Calls in Arrears
Θ When amount is not received on first call or second and final call

Bank A/C Dr. (Amount received on calls)

Call in arrears A/C Dr. (Amount not Received)

To Equity Share First Call A/C

To Equity shares Second Call A/C

ΘWhen amount of calls in arrears is received along with interest

Bank A/C Dr. (Amount of calls in arrears and interest)

To Call in arrears A/C

To Interest on calls in arrears

 Journal Entries for Calls in Advance
Θ When Call Money is received before the call is made
Bank A/C Dr.
To Calls in advance A/C

ΘWhen Call money is received

Calls in advance A/C Dr.
To Particular Call A/C

ΘWhen interest is paid on calls in advance

Interest on calls in advance A/C Dr.

To Bank A/C
Issue of Shares for Consideration other than Cash
Θ In case shares are issued to some persons who sell some assets to
the company or to the promoters for their services

Θ When shares are issued to vendors, the entry will be

Sundry Assets A/C Dr.
To Vendor A/C

Vendor A/C Dr.

To Share Capital A/C
To Share Premium A/C

ΘWhen shares are issued to promoters for their services

Goodwill A/C Dr.
To Share Capital A/C
 Right Issue

Θ In right issue shares are issued to existing share holders on right

basis

Θ The existing shareholders may accept or reject the offer

Θ The shareholders can sell their right in full or in part to other

person

Θ If shareholders have neither subscribed nor transferred their right,

then the company can offer the issue to public

Right issues in 2018

 Right issue example
Θ Suppose a company offers to its shareholders the right to buy one
share of Rs.100 each at Rs. 150 for every three shares of Rs.100 each
held, and the market value of share is Rs.200. Calculate value of right.
Market value of three shares (3*200) 600
Add: Price to be paid for acquiring one right share 150
Total price to be paid for 4 shares 750

750
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑛𝑒 𝑠h𝑎𝑟𝑒=
4
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑛𝑒 𝑠h𝑎𝑟𝑒=187.50

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓𝑡h𝑒 𝑟𝑖𝑔h𝑡 𝑓𝑜𝑟 𝑜𝑛𝑒 𝑠h𝑎𝑟𝑒=200 −187.50

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓𝑡h𝑒 𝑟𝑖𝑔h𝑡 𝑓𝑜𝑟 𝑜𝑛𝑒 𝑠h𝑎𝑟𝑒=12.5
 Underwriting

Θ While selling share/debentures the company undertakes the risk that

share or debentures offered for subscription may not be taken up by
public

Θ In case of failure to get minimum subscription company can not make

allotment

Θ To overcome this risk company enters into contract with firms, banks,
insurance companies etc. called underwriters

Θ Underwriters undertake (Buy) the whole or part of the offered shares

or debentures which may not be subscribed by the public, in
consideration of commission.
 Underwriting

Θ If any balance remains unsubscribed for which he has given guarantee

then he will take up the unsubscribed portion of shares or debentures
and pay for them

ΘFor the services rendered by the underwriters, they are entitled to

commission of 5% (Maximum) of issue price of shares and 2.5%
(maximum) of the issue price of debentures.

ΘThose forms which bear the underwriters stamp are called marked
applications

ΘThose applications which do not bear the mark of underwriter are

known as unmarked applications
 Calculation of Liability of Underwriters

Θ When an underwriter underwrites the whole of the issue and the

issue has not been subscribed fully by the public, the underwriter
takes up the unsubscribed portion of the issue

ΘBut if the underwriter underwrites only a portion of the issue, the

liability of underwriter is decided only after giving effect of marked
applications in his favor
 Calculation of Liability of Underwriters

Θ The liability of underwriter can be calculated on

∆ Gross Liability Basis
• Unmarked applications are credited in favor of the underwriters in the
ratio of their original underwriting proportion.

∆ Remaining Liability Basis

• Unmarked applications are credited in favor of the underwriters in the
ratio of their remaining liability
• Remaining Liability = Gross Liability – Marked Applications
 Firm Underwriting

Θ It is quite natural that underwriter himself may like apply for certain
number of shares in his own capacity

Θ In other words he requires certain number of shares definitely (Firmly)

for himself

Θ This is known as firm underwriting

Θ Underwriter has no right to set off his firm underwriting against his
liability as an underwriter

Θ So here underwriter need to subscribe for the

∆ Shares applied by him as an individual
∆ Shares underwritten by him as an underwriter
 Brokerage

Θ Brokerage is merely an act procuring subscription for the shares or

debentures issued without any responsibility

Θ Broker receives brokerage on the shares subscribed through him

and has no obligation to take up any shares

ΘThe entry for underwriting commission or brokerage is

Commission on issue of shares Dr.
To Underwriter (Broker)
 Bonus Shares
Θ A prudent company would create reserves out of its profit

Θ Company at its choice may pay bonus to shareholders in cash

Θ But cash bonus may affect company’s working capital position

Θ To control outflow of cash from business and at the same time to

satisfy shareholders, a company may issue bonus shares to existing
shareholders

Θ Bonus shares are issued for free to shareholders

 Bonus Shares
Θ Issued in specific ratio

Θ Issued out of reserves

Θ Results in conversion of reserves into capital

Θ Bonus can also be paid by converting partly paid up shares into

fully paid up shares
 Bonus shares
Θ Bonus shares can be issued out of
1. Capital Redemption Reserve account
2. Share premium account
3. General reserves
4. Credit balance in Profit and Loss Account
5. Capital profit such as profit prior to incorporation, profit on purchase
of business and profit on sale of fixed assets
6. Balance in debenture redemption reserve
7. Any other reserves accumulated out of profits
First two accounting balances can be used only for issuing fully paid
bonus shares and not for making partly paid up shares into fully paid up
 Bonus shares
Θ Reserves not available for issue of bonus shares
∆ Capital reserve arising due to revaluation of assets
∆ Share premium arising on issue of shares on amalgamation or
takeover
∆ Investment allowance reserve/development rebate reserve before
expiry of eight years of creation
∆ Balance in debenture redemption reserve before redemption takes
place
∆ Surplus arising from the change in method of charging deprecation.
 Bonus Shares – Accounting Treatment
Θ If the bonus is to be utilized for making partly paid up shares fully
paid up
Profit and Loss A/c Dr.
General Reserve A/c Dr.
Capital Reserve A/c Dr.
To Bonus to shareholders A/c

Share Final Call A/c

To Share Capital A/c

Bonus to shareholders A/c

Share Final Call A/c
 Bonus Shares – Accounting Treatment
Θ If the payment of bonus is made by the issue of fully paid bonus
share
Profit and Loss A/c Dr.
General Reserve A/c Dr.
Capital Reserve A/c Dr.
To Bonus to shareholders A/c

Bonus to shareholders A/c

To share capital A/c
To Share premium A/c
 Redemption of Preference Shares
Θ According to section 80, preference shares which can be redeemed after
a specific period or at discretion of company are called redeemable
preference shares.

Θ Redeemable preference shares can redeem subject to following

conditions
∆ The shares to be redeem should be fully paid up
∆ Preference shares can be redeemed either
• out of the profits of the company which would otherwise be available for
dividend or
• out of the proceed of the fresh issue of shares made for the purpose of
redemption
 Redemption of Preference Shares
Θ Redeemable preference shares can redeem subject to following
conditions
∆ The premium if any payable on redemption must be provided either
• out of the accumulated profit of the company or
• out of the company’s share premium account before the shares are
redeemed

∆ When the shares are redeemed out of the profit available for paying
dividend, an amount equal to nominal value of shares so redeemed
should be transferred from profit to Capital Redemption Reserve
account
 Redemption of Preference Shares
Θ Redeemable preference shares can redeem subject to following
conditions
∆ The capital redemption reserve account may be applied by the
company, in paying up the unissued shares of the company to be
issued to the members of company as fully paid bonus shares
∆ The redemption of preference shares by a company shall not be
taken as reduction in authorized capital of the company
∆ If the new shares are issued for the purpose of redemption, it will
not be treated as increase of capital
 Journal Entries for Redemption of
Preference Shares
Θ When fresh issue of shares are made
Bank A/c Dr.
To Share Capital A/c
To Share premium A/c (If issued at premium)

ΘWhen shares are redeemed at premium

Share premium A/c
Profit and Loss A/c
To Premium on Redemption A/c
 Journal Entries for Redemption of
Preference Shares
Θ Amount to be transferred to capital redemption reserve account
Redeemable Preference Shares (Face Value)

Less: Fresh issue of shares

Face value if issued at par or premium
Actual Amount received if issued at discount

Amount to be transferred to Capital Reserve

Profit and Loss a/c Dr.

General Reserves a/c Dr.
To Capital Redemption Reserve a/c
 Journal Entries for Redemption of
Preference Shares
Θ For transferring the capital to the shareholders

Redeemable Preference Share Capital A/c Dr.

Premium on redemption A/c
To redeemable preference shareholder’s A/c

ΘWhen the payment is made to the shareholders

Redeemable Preference Shareholders A/c

To bank A/c
Thank
You