Company Accounts: Share Issues, Debentures, Reserves and Presentation
What the domain tests
Company accounts questions test share capital, share premiums, forfeiture, debentures, reserves, dividends and statement of changes in equity. You must distinguish equity from liabilities and capital from revenue.
Core rules
- Issue shares at par or at a premium. Debit cash; credit share capital with nominal value and share premium with the excess. Share premium is capital, not profit.
- Forfeiture: debit called-up capital, credit the amount unpaid; any premium already received is usually not refundable. Reissue proceeds and forfeited amounts are accounted for under the company's rules.
- Debentures are borrowings, not share capital. Interest is a finance cost in profit or loss. A premium on redemption is provided over the life of the debenture.
- Reserves include share premium, revaluation surplus and retained earnings. A bonus issue converts reserves into share capital without cash. A rights issue raises cash, often at a discount.
- Dividends are distributions, not expenses. Present them in the statement of changes in equity.
Worked example
A company issues 100,000 ordinary shares of 10 each at 12. Cash = 1,200,000. Share capital increases by 1,000,000; share premium increases by 200,000. If it later makes a 1-for-4 bonus issue, it issues 25,000 shares and transfers 250,000 from reserves to share capital. No cash is received.
Traps
Do not treat share premium as profit available for dividends. Do not charge dividends to profit or loss. Do not classify debentures as equity. A bonus issue does not raise cash or change total equity.