Accounting for Share Capital and Debentures
What the exam tests
Share capital questions test the Schedule III vertical format, calls, forfeiture and reissue; debenture questions test issue, interest and redemption. Numerical questions often combine oversubscription with pro-rata allotment.
Core rules
- Authorised capital is the maximum; issued capital is offered; subscribed capital is accepted. Called-up is the amount demanded; paid-up is called-up minus calls in arrears. Calls in advance are not paid-up capital and earn interest only if the articles provide.
- On oversubscription, excess application money is adjusted against allotment and later calls; it is refunded only when the application is rejected.
- On forfeiture, debit Share Capital with the called-up amount and credit Calls in Arrears and Share Forfeiture with the amount received. Securities premium already received is not reversed.
- On reissue, any discount cannot exceed the forfeiture balance; the remaining balance is transferred to Capital Reserve.
- Debenture interest is a charge against profit, with interest accrued and due shown separately from interest accrued but not due.
Worked example
1,000 shares of ₹10 are issued at par: application ₹2, allotment ₹3, first call ₹3 and final call ₹2. A holder of 1,000 shares pays everything except the final call, so ₹8,000 is received. Forfeiture: Share Capital Dr ₹10,000; To Calls in Arrears ₹2,000; To Share Forfeiture ₹8,000. Reissue at ₹7: Bank Dr ₹7,000; Share Forfeiture Dr ₹2,000; To Share Capital ₹10,000. The remaining ₹6,000 in Share Forfeiture goes to Capital Reserve. The ₹2,000 reissue discount is borne by the forfeiture account, not by Profit and Loss.
Traps
- Treating calls in advance as part of paid-up capital.
- Reversing securities premium on forfeiture.
- Transferring the whole forfeiture balance to capital reserve without deducting the reissue discount.
- Showing debenture interest as an appropriation of profit rather than a charge.