UNIT-III: Accounting for Capital Issues:

Accounting for Issue, Allotment and Forfeiture of Shares, Accounting for Debentures Issues
Conversion – Accounting Procedures for Declaring and Distributing Dividends (5 Topics)

Accounting for Capital Issues:

Introduction:
Accounting for capital issues is a complex but crucial aspect of financial reporting for
businesses. It involves recording and reporting the changes in a company's share capital when
shares are issued, redeemed, or forfeited. To understand this process better, here's a
breakdown of key concepts and considerations:

 Types of Capital:

 Authorized Capital: The maximum amount of capital a company is allowed to

issue, as stated in its Memorandum of Association.

 Issued Capital: The portion of authorized capital that has been offered to and
accepted by investors.

 Subscribed Capital: The amount of capital for which investors have committed to
pay, but may not have fully paid yet.

 Paid-up Capital: The portion of subscribed capital that has been paid by investors.

 Uncalled Capital: The portion of subscribed capital that is yet to be called upon by
the company.

 Accounting for Different Issue Types:

 Issue at Par: Shares issued at their face value.

 Issue at Premium: Shares issued at a price above their face value, resulting in a
"share premium" account being credited.

 Issue at a Discount: Shares issued at a price below their face value, resulting in a
"share discount" account being debited.
  Additional Considerations:

 Bonus Issue: Issue of new shares to existing shareholders for free, increasing the
issued capital without raising any new funds.

 Stock Splits: Division of existing shares into a larger number of shares, affecting the
share price but not the total capital.

 Rights Issue: Offer of new shares to existing shareholders on a preferential

basis, allowing them to maintain their ownership percentage if they subscribe.

 Forfeiture of Shares: Shares become void due to non-payment of calls or other

reasons, leading to adjustments in the issued and paid-up capital.

 Accounting Standards and Regulations:

Accounting standards like International Financial Reporting Standards (IFRS) and

Generally Accepted Accounting Principles (GAAP) provide specific guidelines for recording
and reporting capital issues. Additionally, company laws and regulations in each jurisdiction
also play a role.

Accounting for Issue of shares:

According to Indian Companies Act, 2013, “Shares means shares in share capital of the
company and includes stock except where the distinction between stock and share is
expressed or implied.”

The issue of shares is the procedure in which enterprises allocate new shares to the
shareholders. Shareholders can be either corporates or individuals. The enterprise follows the
rules stipulated by Companies Act 2013 while circulating the shares. The Issue of Prospectus,
Receiving Applications, Allocation of Shares are 3 key fundamental steps of the process of
issuing the shares.

The significant steps in the process of issue of shares are given below:

 Issue of Prospectus: The enterprise initially issues the prospectus to the public
generally. The prospectus is an appeal to the public that a new enterprise has come
into the presence and it would require funds for operating the trading concern. It
 comprises of complete data regarding the enterprise and the way in which the money
is to be collected from the prospective investors.

 Receipt of Applications: When the prospectus is circulated to the public, prospective

investors contemplating to sign up and subscribe the share capital of the enterprise
would make an application along with the application money and deposit it with a
scheduled bank as mentioned in the prospectus.

 Allocation of shares: Once the minimum subscription has been done, the shares can
be allocated. Normally, there is always oversubscription of shares, so the allocation is
done on pro-rata ground. Letters of Allotment are sent out to those people who have
been allocated their part of shares. This results in an authentic contract between the
enterprise and the claimant, who will now be a part-owner of the enterprise.

 Type of shares issued: Different types of shares, like equity or preference, have
different accounting implications.

 Issue price: Shares can be issued at par (nominal value), at a premium (above par), or
at a discount (below par).

 Payment received: The timing and method of payment for the shares also affect the
accounting entries.

Public Subscription of Shares:

When a company issue shares to the public, it has to take the following steps:

1. Issue Prospectus
2. Receive Applications
3. Make Allotments
4. Make Calls

1. Issue Prospectus:

For making an appeal to the public to subscribe for its shares, a Public Limited Company,
limited by shares have to issue a prospectus. It is an invitation or a circular given to the
general public to invest in the company or subscribe to its shares. The prospectus of a
company consists of the following:
  Name and address of the registered office of the company
 Names and addresses of the directors
 Objects of the company
 Risks involved in the issue
 Consent from the Securities and Exchange Board of India (SEBI)
 Authorised and Issued Capital of the company
 Number of shares now offered for subscription
 Terms of the present issue
 Dates of opening and closing of the issue, etc.

2. Receive Application:

Once the public company has issued a prospectus to the public, it will receive applications
on a prescribed form. The company will accept the application only when it is submitted
along with the application money. The application money should not be less than 25% of
the issue price per share. The public must deposit the amount of application money in
a scheduled bank, mentioned by the company at the time of issuing the prospectus. Till the
company has obtained the certificate of commencement, it cannot withdraw the
application money from the bank. The minimum amount payable on the application of
every share should not be less than 5% of the nominal value of the share.

3. Make Allotments:

After the last date for the application money fixed by the company expires, the bank sends
all the applications to the company. However, unless the company has received a minimum
subscription, it cannot go for allotment.
According to Section 39(1) of the Companies Act, 2013, a Company cannot allot any
securities of the company to public unless the amount stated in the prospectus as the
minimum amount has been received by the company by cheque or other instrument which
has been paid.
Minimum Subscription is the amount, which according to the Directors is the minimum
amount raised by the issue of shares so that it can provide:
1. The price of any property purchased or to be purchased by the company
 2. The preliminary expenses payment (including underwriting, brokerage, and
commission on the issue of shares)
3. The repayment of any money that the company has borrowed for the matters
mentioned in the last two points
4. Working Capital
5. Any other expenditure required to conduct usual business operations.
According to SEBI, if a company does not receive a minimum subscription of 90% of
the net offer made to the public including the devolvement of underwriters within 60
days from the date of closure of the issue, it has to refund the entire amount received
for a subscription.
There can also be a case where a company can receive applications more than it
requires (Over-subscription of shares), For example: if ABC Ltd. invites applications for
10,000 shares through the issue of prospectus and receives applications for 50,000 shares, it
means the issue has been oversubscribed by 5 times. In this case, ………………………….
If a company gets over subscription for the issued shares, it has to reject some applications
in full, accept some partially, and accept some applications in full. The applicants who are
allotted shares are sent a Letter of Allotment, which indicates the number of shares
allotted and the amount due on allotment. However, the applicants who are not allotted
shares are sent a Letter of Regret along with a cheque for the refund of the application
money.

4. Make Calls:

Once the company has received application money and allotment money, it will call money
in subsequent instalments as and when required, which are known as calls. A company can
demand this amount in one instalment, say on the application itself. However, if the
company has not fully called the whole amount on the application, the directors can call for
the unpaid amount in one or more instalments. These instalments are named first call,
second call, third call, and so on. The time interval between two consecutive calls should
be at least one month. The company must make calls strictly in accordance with the
provisions of the Articles of Association. If the AOA is not there, then it should apply
the Provisions of Table F of Schedule I of the Companies Act, 2013. These provisions
are as follows:
 1. If the total issue size of a company exceeds 250 crores, then the amount to be
called up either on application, on the allotment, or calls shall not exceed 25% of
the total quantum of the issue. Hence, if the company issues up to 250 crores,
then it can call up the entire issue price on the application.

2. A company with shares up to 500 crores should fully call up the amount on
shares within a period of 12 months from the date of allotment.
3. The time interval between two consecutive calls should be at least one month.
4. The shareholders must be given notice of at least 14 days to pay the amount of
the call.
The call letter of the company must specify the amount of the call, mode of remitting
money, address to which call money is required to be sent, and the last date for sending the
money.

Preliminary Expenses

The expenses incurred by a company for its establishment are known as Preliminary
Expenses. The expenses included under preliminary expenses are as follows:
 Expenses incurred by the company at the time of registration for the preparation
and printing of various documents.
 Cost of basic books of accounts and a common seal.
 Stamp duty and registration fees of such documents.
 Duty paid on authorised capital.
 Commission given to underwriters.
 Expenses paid on the preparation and printing of prospectus and issuing of
shares.
According to AS-26, a company has to write off preliminary expenses in the year in which
they are incurred, and should be written off from the Securities Premium Reserve
Account. However, if there is no Securities Premium Reserve Account, then the company
can write off preliminary expenses from General Reserve or from Surplus (Balance in
Statement of Profit & Loss Account under ‘Reserves and Surplus’).
Accounting Entries on Issue of Shares:
1. Entries on Receiving Application Money:
The applicants who want to invest in a company deposit the application money directly in
the bank. The bank

Allotment and Forfeiture of Shares:

In business, there are situations where stakeholder loses its share because of non-payment of
his share of instalment or dues. However, a company can only forfeit a share if they allow
forfeiture under the Article of Association of the company.

Forfeiture of Shares Meaning

Forfeiture of shares is referred to as the situation when the allotted shares are cancelled by the
issuing company due to non-payment of the subscription amount as requested by the issuing
company from the shareholder.

In the event of forfeiture of shares, the shareholders loses the rights and interests of being a
shareholder and ceases to be a member of the organisation.

Some shareholders might fail to pay instalments, viz., allocation of money or call money.
In such a scenario:

 Their share will be forfeited, which means that the shareholder’s share will be
cancelled.

 All the entries associated with the forfeited stocks, apart from those associated with
premium, already mentioned in the accounting records must have conversed.

Accounting Entries on Forfeiture of Share

Every company according to the situation might issue the forfeited shares either at a premium
or at par.

When Forfeiture of shares Issued at Par– In this situation:

 1. The share capital account of a company is debited with the amount called-upon the
current date of forfeiture on shares.

2. The shares call account or shares allotment amount maintains arrears Account then
the called-up balance is credited in that account.

3. Forfeiture of Shares issued at Premium- This situation has two possibilities,

4. 1. Securities Premium amount has been received- Here, the share capital amount is
debited with the called-up amount and then it will be credited to Shares Allotment
(amount not received on allotment), Forfeited Shares (received amount with less
premium), Final Call Account, and First Call.

2. Securities Premium amount has not been received – the share capital amount is
debited with the called-up amount. If securities premium is not received, securities
premium is debited.

Forfeiture of Shares issued at discount: Shares that are issued initially at discount and then
forfeited. Such discount must be written off and an adjustment entry needs to be passed. In
this case discount applicable on forfeited shares is written back by crediting the Discount on
Issue A/c.

Effects of Share Forfeiture

Share forfeiture can have several effects on the employee and the company.

1. Loss of ownership: The employee loses share ownership when shares are forfeited. This
means they will no longer have the right to vote on company matters or receive dividends.
2. Loss of potential gains: If the forfeited shares were expected to increase in value over
time, the employee might lose out on potential gains. This could be a significant loss if the
shares were granted as part of their compensation package.
3. Impact on financial ratios: Such shares can impact the company's financial ratios. For
example, if the company has a high number of forfeited shares, it may have a lower earnings
per share (EPS) or return on equity (ROE), which could impact investor confidence.
4. Impact on treasury stock: Forfeited shares can increase the number of outstanding
shares and dilute the value of existing shares. However, if the company chooses to retire the
shares instead of reissuing them, it can reduce the number of outstanding shares and increase
the value of existing shares.
5. Legal and tax implications: Share forfeiture can have legal and tax implications for
both the employee and the company.

Benefits of Forfeited Shares

Forfeited shares can provide benefits to a company in many ways.

1. When the money paid for forfeited shares is returned to the company, it can be used for
various purposes, such as funding future development projects or paying off liabilities and
improving the company’s financial position.
2. If the company decides to reissue the forfeited shares, it can sell them at a higher price
than their face value. The additional amount received, known as the premium, can be added
to the company's reserves and surplus. This can increase its ability to invest in growth
opportunities.
3. Overall, forfeited shares can provide a source of funds for a company and increase its
financial flexibility and strength.

Accounting for Debentures Issues:

Allotment and forfeiture of shares are two crucial concepts in company finance, dealing with
the distribution and potential cancellation of share ownership. Let's break them down
individually:

Allotment of Shares:

 This refers to the formal process of assigning shares to applicants during a new share
issue.

 Applicants express their interest by subscribing to a specific number of shares, and the
company decides how many shares to allot to each subscriber based on certain criteria
(e.g., first-come-first-served, pro rata basis).

 The allotment process culminates in issuing share certificates to successful applicants,

confirming their ownership in the company.

Forfeiture of Shares:
  This occurs when a shareholder fails to fulfil their obligation to pay for the allotted
shares within a specified timeframe.

 Reasons for forfeiture could include non-payment of subscription money, call money
(instalments), or failure to comply with certain conditions attached to the share issue.

 The company formally cancels the forfeited shares, extinguishing the shareholder's
ownership rights and reverting the shares to the company's control.

 Forfeited shares can be reissued to new investors or retired permanently, depending

on the company's decision and relevant regulations.

Here are some additional points to consider:

 Allotment and forfeiture are often governed by the company's Articles of Association
and relevant corporate laws.

 Proper procedures and documentation are crucial throughout both processes to ensure
fairness and compliance.

 Accounting entries must be made to reflect the allotment and subsequent forfeiture of
shares, impacting the company's share capital and other financial statements.

Conversion of Debenture:
Types of Debentures:

There are many different types of debentures based on various factors like security,
convertibility, permanence, negotiability, and priority. Here's a breakdown of some of the
most common types:

By Security:

 Secured Debentures: These are backed by specific assets of the company, offering
additional security to the investor in case of default.

 Unsecured Debentures: These are not backed by any specific assets, making them
riskier for investors but often offering higher interest rates.
By Convertibility:

 Convertible Debentures: These offer the option to be converted into equity shares of
the company at a predetermined price and time. This gives investors the potential for
capital appreciation in addition to the fixed interest payments.

 Non-Convertible Debentures: These cannot be converted into equity shares and

offer only fixed interest payments until maturity.

By Permanence:

 Redeemable Debentures: These have a fixed maturity date when the company must
repay the principal amount to the debenture holder.

 Irredeemable Debentures (Perpetual Debentures): These have no fixed maturity

date and the company only has to pay the fixed interest in perpetuity.

By Negotiability:

 Registered Debentures: These are registered in the name of the holder and cannot be
freely transferred.

 Bearer Debentures: These are transferable by simply delivering the physical

certificate to the new owner.

By Priority:

 Senior Debentures: These have priority over other types of debentures in terms of
repayment in case of liquidation.

 Subordinated Debentures: These have lower priority in terms of repayment

compared to senior debentures.

Other noteworthy types:

  Zero-coupon Debentures: These are issued at a discount to their face value and do
not pay any interest. The investor's return comes from the difference between the
issue price and the face value at maturity.

 Puttable Debentures: These give the investor the right to sell the debentures back to
the company at a predetermined price before maturity.

Conversion of Debenture:

The conversion of debentures refers to the process of exchanging debt securities, specifically
debentures, for equity shares in a company. Debentures are essentially long-term debt
instruments issued by a company that offer a fixed interest rate to the holder. However, some
debentures come with an embedded option that allows the holder to convert their debentures
into equity shares at a predetermined price and under specific terms.

Types of Debentures:

Debentures come in various forms, each with unique characteristics that cater to
different needs of both issuers and investors. Here's a breakdown of some key types:

Based on convertibility:

 Convertible Debentures: These offer the option to convert the debenture into equity
shares of the issuing company at a predetermined price and time. This gives investors
the potential for equity upside while enjoying fixed interest payments until
conversion.

 Non-Convertible Debentures (NCDs): As the name suggests, these cannot be

converted into equity and offer a fixed interest rate and maturity date. They appeal to
investors seeking stable income and lower risk compared to convertible ones.

Based on redemption:

 Redeemable Debentures: These have a fixed maturity date at which the issuing
company must repay the principal amount along with accrued interest.
  Irredeemable Debentures (Perpetual Debentures): These do not have a fixed
maturity date and the issuer pays only periodic interest without ever returning the
principal amount. They resemble equity investments in this aspect.

Other classifications:

 Secured Debentures: Backed by specific assets of the issuer, offering higher security
to investors in case of default.

 Unsecured Debentures: Not backed by any specific assets, making them riskier for
investors but often offering higher interest rates.

 Registered Debentures: The issuer maintains a register of debenture

holders, facilitating direct communication and interest payments.

 Bearer Debentures: Freely transferable without registration, offering greater

anonymity and liquidity.

Here's how the conversion of debentures typically works:

1. The company issues convertible debentures: These debentures will have a specific
conversion price, which is the price at which the debenture can be exchanged for
equity shares. The conversion price is usually set at a premium to the current market
price of the company's shares, to incentivize the investor to hold the debentures until
they mature.

2. The debenture holder has the right to convert: During the conversion period, the
debenture holder can choose to convert their debentures into equity shares at the
predetermined conversion price. They are not obligated to do so, and they can choose
to hold the debentures until they mature and receive the face value plus accrued
interest.

3. The conversion process: If the debenture holder decides to convert, they will need to
submit a conversion notice to the company. The company will then cancel the
debentures and issue the equivalent number of shares to the debenture holder.
There are several reasons why a company might issue convertible debentures:

 Raise capital: Convertible debentures can be a way for a company to raise capital
without having to issue new shares. This can be beneficial if the company wants to
avoid diluting the existing shareholders' ownership.

 Attract investors: Convertible debentures can be attractive to investors who are

looking for a combination of fixed income and the potential for capital appreciation.
The fixed interest rate provides a certain level of security, while the conversion option
gives the investor the opportunity to benefit if the company's share price goes up.

 Improve the company's credit rating: Issuing convertible debentures can improve a
company's credit rating because it shows that the company has access to additional
sources of capital.

There are also some risks associated with converting debentures:

 Dilution: If a large number of debentures are converted into shares, it can dilute the
ownership of existing shareholders.

 Volatility: The value of the shares received upon conversion can be volatile, and the
debenture holder may end up with fewer shares than they expected.

 Loss of interest: If the debenture holder converts before the maturity date, they will
lose out on the remaining interest payments.

Here's an image that summarizes the process of conversion of debentures:

Conversion of Debentures process

Accounting Procedures for Declaring and Distributing Dividends:
Accounting Procedures for Declaring:
Declaring dividends involves a formal process to distribute a portion of the company's profits
to its shareholders. Here's a breakdown of the key procedures:

1. Board of Directors Meeting:

 The board of directors convenes a meeting to discuss and vote on the proposed
dividend.

 Factors considered include the company's financial performance, future investment

plans, and overall market conditions.

 If approved, the board recommends a dividend amount and sets a timeline for further
steps.

2. Declaration Date:

 The board officially declares the dividend on a specific date, publicly announcing the
approved amount per share.

 This triggers a series of downstream processes related to shareholder eligibility and

payment logistics.

3. Record Date:

 The company establishes a record date, typically a few days after the declaration date.

 Only shareholders on the company's books as of the record date are entitled to receive
the declared dividend.

 Buying or selling shares after the record date won't affect the shareholder's right to the
declared dividend.

4. Ex-Dividend Date:

 The ex-dividend date falls one trading day before the record date.
  Shares purchased on or after the ex-dividend date will not be eligible for the
upcoming dividend payout.

 The stock price typically adjusts downward on the ex-dividend date to reflect the
reduced ownership claim.

5. Payment Date:

 The company distributes the dividend to eligible shareholders on the designated

payment date, usually 30 to 60 days after the record date.

 Payment may be through electronic deposit, checks, or other methods as specified by

the company.

Additional Points:

 Companies may also declare interim dividends during the financial year, in addition
to the final dividend declared at the annual general meeting.

 Specific procedures and regulations may vary depending on the company's

jurisdiction and its articles of association.

 Shareholders are advised to stay informed about dividend declarations through

company announcements and financial statements.

Distributing Dividends:
Types of Dividends:

1. Regular Dividends:

 These are the most common type of dividend, paid out periodically (usually quarterly
or annually) from a company's current earnings.

Regular Dividends being distributed

  The amount of the dividend is usually fixed, but it can be changed by the board of
directors.

 Regular dividends are a reliable source of income for investors, and they can help to
increase the total return on investment (ROI).

2. Special Dividends:

 These are one-time dividends paid out in addition to regular dividends, often due to
excess profits or the sale of assets.

o Special dividends are not guaranteed, and they are typically larger than
regular dividends.
 Investors may receive special dividends as a bonus, and they can help to boost the
stock price.

3. Stock Dividends:

 Instead of cash, companies may issue additional shares of stock to shareholders as a

dividend.

 This increases the shareholder's ownership stake in the company but doesn't
directly provide cash.

 Stock dividends can be a good way for companies to reward shareholders without
paying out cash, and they can also help to increase the liquidity of the stock.

4. Scrip Dividends:

 Companies may issue scrip, a form of IOU, as a dividend if they are short on cash.

Scrip can be exchanged for cash later or used to purchase company goods or services.

 Scrip dividends are not as common as other types of dividends, but they can be a way
for companies to conserve cash while still rewarding shareholders.
5. Liquidating Dividends:

 These are paid out when a company is dissolving and distributing its remaining assets
to shareholders.

 This represents a return of capital rather than a share of profits.

 Liquidating dividends are typically only paid out when a company is going out of
business