Accounting for Share Capital and Debentures
Company accounts in the UPMSP paper focus on share capital and debentures: issue, calls, forfeiture, reissue, premium and redemption. Learn the vertical presentation of share capital and the meaning of each capital term.
Share capital rules
- Authorised, issued, subscribed, called-up and paid-up capital are shown in order.
- Shares may be issued at par, at a premium (credited to securities premium) or at a discount, subject to legal rules.
- Calls in arrears are deducted from called-up capital; calls in advance are shown separately.
- On forfeiture, the amount already received is forfeited; shares may be reissued. Discount on reissue cannot exceed the forfeited amount, and any balance is capital reserve.
- Pro-rata allotment applies when applications exceed the issue; excess application money is adjusted towards allotment.
Debentures
Debentures are long-term borrowings. Interest is a charge against profit, payable whether or not the company earns profit. They may be issued at par, premium or discount and redeemed by payment, conversion or sinking fund.
Worked example
100 shares of ₹10 each; application ₹3 and allotment ₹4 were received; the first call of ₹3 was not paid. Forfeiture credits share capital with ₹700. Reissue at ₹6 as fully paid: discount is ₹4 per share, ₹400 in total. Capital reserve = 700 − 400 = ₹300.
Traps
- Forfeiting the unpaid call amount rather than the amount received.
- Crediting securities premium on forfeiture.
- Charging debenture interest to appropriation.
- Reissuing at a discount larger than the forfeited amount.