Accounting for Share Capital and Debentures
Companies raise long-term funds through shares, which represent ownership, and debentures, which represent borrowed capital. Questions test the share capital schedule, calls, forfeiture and debenture interest.
Share capital
- The schedule runs authorised → issued → subscribed → called up → paid up. Calls in arrears are deducted from called-up capital; calls in advance are added and earn interest.
- Shares may be issued at par, at a premium or at a discount; premium is credited to Securities Premium.
- In pro-rata allotment, excess application money is adjusted against allotment and then against calls.
- Forfeiture: debit Share Capital with the called-up amount, credit Share Forfeiture with amounts already received, and credit Calls in Arrears with the unpaid amount. On reissue at a discount, the loss is debited to Share Forfeiture.
Worked example
Shares of ₹10 were issued at par: application ₹3, allotment ₹4, first call ₹2, final call ₹1. A holder of 500 shares pays only the application money and the shares are forfeited after the first call. Forfeiture entry: Share Capital Dr ₹5,000; To Share Forfeiture ₹1,500 (3 × 500); To Calls in Arrears ₹3,000 (4 + 2 = 6 × 500). If these 500 shares are reissued at ₹8, the entry is Bank Dr ₹4,000, Share Forfeiture Dr ₹1,000, To Share Capital ₹5,000.
Debentures
10,000 9% debentures of ₹100 issued at ₹95 create a loss on issue of ₹50,000 and annual interest of ₹90,000, which is a charge against profit.
Traps
- Treating calls in advance as part of called-up capital instead of a separate addition.
- Debiting Securities Premium on forfeiture when no premium was due.
- Charging debenture interest to the appropriation account instead of profit and loss.
- Forgetting that forfeiture does not cancel the shareholder's liability for amounts already due.