Accounting for Share Capital
A company raises money not by taking a loan but by selling ownership slices called shares — and this chapter shows you exactly how every rupee of that process is recorded, from the first application cheque to the moment a defaulter's shares are cancelled and resold.
Every Indian public company — from Reliance to a newly listed startup — finances its growth through share capital, so understanding these accounting entries is the foundation of corporate finance, auditing, and CA studies; board exams test it heavily in both theory and 20-mark journal entry problems.
Concept
Lots of students think…
"Calls in Arrears is a liability of the company, because the company still owes this amount to the shareholders."
Actually…
It is the other way around — shareholders owe this money to the company for calls they have not yet paid. Calls in Arrears is an asset shown under Current Assets, not a liability.
Companies raise huge sums of money by selling tiny slices of ownership called shares — and accountants record every step of that journey. By the end of this chapter you will understand exactly what happens in the books from the moment an investor applies, all the way to shares being cancelled and resold.
What a share actually is
A company divides its total ownership into millions of small equal pieces — each piece is one share. When you buy a share, you own a tiny part of the company. Every share has a face value (also called par value or nominal value) printed on it — commonly ₹10 or ₹100 — and this is what the company officially records in its books.
Imagine Tata Motors needs ₹500 crore. Instead of borrowing it all from one bank, it offers 5 crore shares at a face value of ₹100 each to the public. Your neighbour buys 10 shares for ₹1,000 — he now owns a tiny slice of Tata Motors.
Three capital terms you must not mix up
Authorised capital is the maximum the company is ever allowed to raise from shares — it is set in the company's official documents. Issued capital is how much of that limit the company actually offers to the public. Paid-up capital is how much the investors have actually paid so far. Think of it as: permitted → offered → received.
A startup gets permission to raise up to ₹10 crore (authorised). It offers shares worth ₹6 crore to investors (issued). But some investors have only paid half their amount so far — so paid-up capital is ₹5 crore. All three numbers refer to the same pool of money at different stages.
Money collected in stages — the calls system
A company does not collect all the share money in one go. It asks for it in instalments called calls: first application money when investors apply, then allotment money when shares are given out, then one or two more calls later. This gives investors time to arrange funds and lets the company collect only what it needs right now.
Say a ₹10 share is issued at ₹10 par. The company asks ₹2 on application, ₹3 on allotment, ₹3 on first call, and ₹2 on final call. Priya applies for 500 shares and sends ₹1,000 (500 × ₹2). When allotment comes, she pays ₹1,500 more. Each time, the company passes a journal entry to record the demand and the receipt separately.
Calls in arrears and calls in advance
Sometimes a shareholder misses a payment deadline — the money they still owe is called calls in arrears, and it sits on the asset side of the balance sheet because the company can collect it later. On the flip side, if a shareholder pays early before the company has even demanded that instalment, that early money is called calls in advance — it sits on the liabilities side because the company still owes that shareholder the formal allotment of that call.
Rajesh holds 200 shares. The first call of ₹3 per share is due, but he pays nothing — so ₹600 is calls in arrears (the company expects this money). His friend Suresh, keen to be done with it, pays the final call of ₹2 per share early — ₹400 is calls in advance (the company will give him credit when the final call is officially made).
Issuing shares at a premium
A well-known company with a strong brand can charge more than the face value for its shares. The extra amount above face value is called the securities premium. This premium goes into a special account called Securities Premium Reserve — it is not profit and cannot be paid out as dividends. It can only be used for specific purposes like issuing bonus shares or writing off certain expenses.
Paytm's parent company issued shares with a face value of just ₹1 but charged investors ₹2,150 per share during its 2021 IPO. That extra ₹2,149 per share — a massive total — went into Securities Premium Reserve. It is recorded as a capital receipt, not as trading income, so no dividend can ever be declared from it.
Oversubscription and pro-rata allotment
When more people apply for shares than the company is offering, it is oversubscribed. The company cannot give everyone what they asked for, so it allots shares proportionally — this is called pro-rata allotment. Extra application money from unsuccessful or partially allotted applicants is either refunded or adjusted against their allotment payment.
A company offers 1,00,000 shares. It receives applications for 3,00,000 shares — three times oversubscribed. Ananya applied for 90 shares but gets only 30 (one for every three she applied for). The application money she paid for 60 extra shares is refunded to her within a week, as SEBI rules require.
Forfeiture and re-issue of shares
If a shareholder repeatedly refuses to pay a call even after a formal notice, the company cancels their shares — this is called forfeiture. The money that shareholder had already paid is not returned; it sits in a Forfeited Shares Account. The company then re-issues those shares to someone new. Any profit left in the Forfeited Shares Account after re-issue goes to Capital Reserve — it cannot become a dividend because it is a capital gain, not business profit.
Rajan had paid ₹500 for his 50 shares but refused to pay the ₹250 call that was due. After a notice, his shares were forfeited. His ₹500 moved to Forfeited Shares Account. The company re-issued those 50 shares to a new buyer at ₹8 each (₹400 total). The ₹100 gap between the ₹400 received and the ₹500 face value was covered from Forfeited Shares Account. The remaining ₹100 credit in that account moved to Capital Reserve.
Notes
The full picture
When a company like a new steel plant or a tech startup needs crores of rupees to grow, it cannot always walk into a single bank. Instead it invites thousands of people to become part-owners by buying shares. Each share has a face value (also called nominal or par value) — commonly ₹10 or ₹100 — printed on the share certificate. The total money the company aims to raise from selling shares is its authorised capital. What it actually issues is called issued capital, and what shareholders actually pay is paid-up capital. These three terms describe the same pool of money at different stages of commitment.
Selling shares is not a single cash transaction — it happens in stages called calls. A company first invites applications; investors send in application money (say ₹30 per share). The company then studies the response, allots shares, and demands allotment money (say ₹40 per share). Later, it can demand the remaining amount in one or two calls — first call (₹20), final call (₹10). If a shareholder pays a call before it is demanded, that early payment is called calls in advance — a liability for the company, because it owes the shareholder the future allotment of that call. If a shareholder misses a payment deadline, that outstanding amount is calls in arrears — a receivable asset for the company, because the shareholder still owes it money.
Most companies issue shares at par, but a popular company can issue shares at a price above face value. If a ₹10 share is issued at ₹50, the extra ₹40 is called a securities premium. This premium must be credited to a separate Securities Premium Reserve account (as required by Section 52 of the Companies Act, 2013) and cannot be distributed as dividend. It can be used only for specific purposes: issuing bonus shares, writing off preliminary expenses, or providing the premium on redemption of debentures. This restriction exists because the premium is a capital receipt — not profit earned through trading.
When a company receives far more applications than it has shares to offer, it is oversubscribed. In that case it cannot give every applicant what they asked for, so it uses pro-rata allotment — dividing available shares proportionally. For example, if 3,00,000 applications arrive for only 1,00,000 shares, each applicant gets one share for every three they applied for. The excess application money is either refunded or adjusted against allotment dues. Pro-rata allotment is a question of who gets shares and how many; calls are a separate question about when and how money is collected.
When a shareholder fails to pay a call even after a notice, the company has the right to cancel — or forfeit — those shares. At the moment of forfeiture, the company debits Share Capital (cancelling the par value of the shares) and credits Forfeited Shares Account with the money it actually received from that shareholder up to that point. Any unpaid calls are written off through Calls in Arrears. Forfeited shares are then re-issued to a new buyer, often at a discount to attract interest. On re-issue, Share Capital is always restored at the full par value — never the discounted re-issue price. Any shortfall between the re-issue price and par is covered from the Forfeited Shares Account. Whatever credit balance remains in the Forfeited Shares Account after covering this discount is a genuine capital profit — it must be transferred to Capital Reserve and cannot be distributed as a dividend.
A clean way to check your forfeiture entries is to verify that the Forfeited Shares Account never shows a debit balance after re-issue — that would mean the company has over-discounted the shares, which is not allowed. The Companies Act says shares cannot be re-issued at a price below the amount originally received from the forfeited shareholder. Keeping this rule in mind will help you spot errors in board exam problems before you run out of time.
An Indian example
In November 2021, Paytm's parent company One97 Communications launched one of India's largest IPOs, issuing shares at ₹2,150 each against a face value of ₹1. That ₹2,149 difference was credited entirely to Securities Premium Reserve — not to profit. Now imagine a smaller scenario inside the same IPO process: Ananya, a retail investor from Kochi, applied for 90 shares by paying ₹215 per share as application money (₹19,350 total). Because the IPO was oversubscribed three times — 3,00,000 applications for 1,00,000 shares — she was allotted only 30 shares on a pro-rata basis (one share for every three applied). The ₹12,900 extra she had sent (60 excess shares × ₹215) was refunded to her bank account within seven working days as SEBI rules require. On allotment, Ananya paid the next instalment. Now imagine a different investor, Rajan, who received 50 shares but failed to pay the first call of ₹500 per share (₹25,000). After a notice period he still did not pay. The company's accountant recorded ₹25,000 in Calls in Arrears, then eventually forfeited Rajan's 50 shares. The amount Rajan had actually paid went into Forfeited Shares Account. When those 50 shares were re-issued to a new buyer at a slight discount, the remaining credit in Forfeited Shares Account — Rajan's partial contribution that no one claimed — moved permanently to Capital Reserve, strengthening the company's balance sheet without increasing its liabilities.
Key concepts covered
- Issue of shares at par/premium
- Calls in arrears & advance
- Forfeiture & re-issue
- Pro-rata allotment
Common misconceptions to watch for
- Many students write 'Calls in Arrears' on the liabilities side of the balance sheet, thinking the company owes this money to shareholders — but it is the other way around: shareholders owe this money to the company, making Calls in Arrears a receivable asset shown under Current Assets.
- Students often credit the re-issue price (not the par value) to Share Capital when forfeited shares are re-issued — the correct rule is that Share Capital is always restored at the full original face value; the gap between re-issue price and par value is debited to Forfeited Shares Account, not to Share Capital.
- A common exam slip is treating the entire Forfeited Shares Account balance as available for general use or dividend — in reality, after re-issue, any remaining credit in Forfeited Shares Account must go exclusively to Capital Reserve because it is a capital profit on a share transaction, not business income.
Questions
Lakshya Technologies Ltd issued 50,000 shares of ₹100 each at ₹20 premium. Calls: on application ₹30, allotment ₹50 (including ₹20 premium), first call ₹25, final call ₹15. Shareholder Sharma (100 shares) defaulted on first call. His shares were forfeited after the final call due date. Later, shares were re-issued at ₹90 each. Show entries and balance sheet treatment.
- 1Record application money and transfer to Share Capital
Dr Bank ₹15,00,000 (50,000 × ₹30) Cr Share Application A/c ₹15,00,000 On allotment — transfer application money: Dr Share Application A/c ₹15,00,000 Cr Share Capital—Application ₹15,00,000
Application money of ₹30 per share is collected and credited to Share Application Account. On allotment, it is transferred to Share Capital.
Question 1 of 6 · medium
A company calls for ₹25 on shares. Shareholder Priya fails to pay on 100 shares. How should this be recorded?
Quiz
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Question 1 of 6 · medium
A company calls for ₹25 on shares. Shareholder Priya fails to pay on 100 shares. How should this be recorded?
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