Accounting For Share Capital

When shares are forfeited, the amount already received from defaulting shareholders is transferred to the Share Forfeiture Account. After the forfeited shares are reissued, any remaining balance that the company retains becomes a capital profit. Since this profit arises from a capital transaction and not business operations, it cannot be distributed as dividends. Therefore, it is transferred to the Capital Reserve. This reserve strengthens the company's financial position and is used for specific purposes such as issuing bonus shares or writing off capital losses. Hence, Capital Reserve is the correct destination for the forfeiture balance.

Securities premium arises when shares are issued at a price higher than their face value. This amount is kept in the Securities Premium Reserve and can be used only for specific statutory purposes. The important uses are as follows:
1. Issue of fully paid bonus shares to shareholders.
2. Writing off preliminary expenses of the company.
3. Writing off discount or commission on issue of shares or debentures.
4. Providing premium payable on the redemption of preference shares or debentures.

Forfeiture of shares refers to the cancellation of shares by a company when a shareholder fails to pay the allotment money or subsequent calls within the specified time. When the company issues a notice demanding payment and the shareholder still does not comply, the company has the right to forfeit those shares. Once forfeited, the shareholder loses ownership rights, voting rights and any amount already paid on those shares. The forfeited amount becomes a capital profit for the company and may later be transferred to the Capital Reserve after reissue. Forfeiture ensures discipline among shareholders and protects the company from non-payment issues.

ABC Ltd. acquired a building worth Rs. 5,40,000 from XYZ Ltd. and settled the payment by issuing shares of Rs. 100 each at a premium of 20 percent. This means each share is issued at Rs. 120, consisting of Rs. 100 face value and Rs. 20 premium. The number of shares issued will be 5,40,000 divided by 120, giving 4,500 shares. The Building Account is debited with Rs. 5,40,000 to record the asset. XYZ Ltd. is credited with the same amount to recognise the liability. Then, Share Capital Account is credited with Rs. 4,50,000 (4,500 × 100), and Securities Premium Account is credited with Rs. 90,000 (4,500 × 20). These entries completely settle the amount payable to XYZ Ltd. and properly reflect capital raised with premium.

When a company receives more applications than the number of shares offered, it faces over-subscription. In such cases, the company has two main options. First, it may adopt the rejection method, where excess applications are completely rejected and application money is refunded. Second, it may use the pro-rata allotment method, where shares are allotted proportionately to applicants based on the number of applications received. Under this method, applicants receive fewer shares than they applied for, and excess application money is either refunded or adjusted towards allotment or call money. These options help the company manage excess demand fairly and maintain transparency in the allotment process.

Un-called capital is the portion of subscribed share capital that the company has not yet demanded from shareholders. When shares are issued, shareholders agree to pay the full nominal value, but the company may choose to call for this amount in instalments. The part that remains unpaid because the company has not yet asked for it is known as un-called capital. It remains a liability for shareholders because they must pay it whenever the company demands. Un-called capital provides financial flexibility to the company, as it can call the remaining amount in the future to meet financial needs. It is different from calls in arrears, which refer to unpaid amounts that were already demanded.

Share capital refers to the total amount of money raised by a company through the issue of shares to shareholders. It represents the ownership interest of members in the company and forms the main source of long-term finance. When individuals purchase shares, they contribute funds to the company, which can be used for expansion, operations or investment. Share capital may be classified into authorised, issued, subscribed, called-up and paid-up capital, depending on how much the company is permitted to raise and how much has been actually received. Share capital gives shareholders voting rights, dividend entitlement and a share in the company's assets at the time of winding up.

Authorised capital refers to the maximum amount of share capital that a company is legally permitted to raise by issuing shares, as stated in its Memorandum of Association. It represents the upper limit of capital that the company can call from shareholders. A company cannot issue shares beyond this limit unless it amends its memorandum by following legal procedures. Authorised capital is divided into different classes of shares with specified nominal values. Although a company may not issue all of its authorised capital immediately, it provides flexibility for future expansion. It helps determine the company's overall financial capacity and borrowing power, as lenders often consider authorised capital as an indicator of financial strength.

Called-up capital is the amount demanded by the company from shareholders, while paid-up capital is the amount actually received. Shareholders can never pay more than what the company has called for; they can either pay the full called amount or default partially. Therefore, paid-up capital can be equal to or less than called-up capital but never more. This makes the given statement false as it is legally and logically impossible for paid-up capital to exceed the called amount.