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Accounting for Share Capital

NCERT Class 12 · Accountancy Based on NCERT Class 12 Accountancy textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter introduces the joint stock company as a form of business organisation, focusing on how it raises capital through shares. It covers the legal nature of a company, types of share capital, classification of shares, and the complete accounting treatment for the issue of shares — including at par, at premium, oversubscription, calls in arrears, calls in advance, forfeiture, and reissue. The one big idea a student must walk away with is that every stage of share capital collection (application, allotment, calls) has a specific journal entry and that the Share Capital Account is ultimately credited only when the money becomes part of the company's permanent capital.
Key Concepts (21)
Company
A company is a person, artificial, invisible, intangible and existing only in the eyes of law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.
e.g. Reliance Industries Limited is a company — it can own property, sue, and be sued in its own name, separate from its shareholders.
Separate Legal Entity
A company has a separate legal entity which is distinct and separate from its members. It can hold and deal with any type of property, enter into contracts, and even open a bank account in its own name.
e.g. If a shareholder dies, the company continues to exist — the company's assets are not the personal assets of the shareholders.
Limited Liability
The liability of the members of the company is limited to the extent of unpaid amount of the shares held by them.
e.g. If a shareholder has paid Rs. 8 on a Rs. 10 share, his maximum further liability is only Rs. 2 per share, not the company's debts.
Perpetual Succession
The company being an artificial person created by law continues to exist irrespective of the changes in its membership. Members may come and go but the company continues.
e.g. Even if all original shareholders sell their shares, the company (e.g., Tata Motors) continues to exist.
Common Seal
Every company is required to have its own seal which acts as official signatures of the company. Any document which does not carry the common seal of the company is not binding on the company.
e.g. A contract for buying machinery must bear the company's common seal to be legally binding.
Transferability of Shares
The shares of a public limited company are freely transferable. The permission of the company or the consent of any member of the company is not necessary for the transfer of shares.
e.g. A shareholder of Infosys can sell his shares on the stock exchange without asking the company's permission.
Authorised Capital
Authorised capital is the amount of share capital which a company is authorised to issue by its Memorandum of Association. It is also called Nominal or Registered capital.
e.g. If a company's Memorandum states Rs. 50,00,000 as authorised capital, it cannot issue shares beyond that amount without amending the Memorandum.
Issued Capital
It is that part of the authorised capital which is actually issued to the public for subscription including the shares allotted to vendors and the signatories to the company's memorandum.
e.g. If authorised capital is Rs. 50,00,000 but the company offers only Rs. 20,00,000 worth of shares to the public, the issued capital is Rs. 20,00,000.
Subscribed Capital
It is that part of the issued capital which has been actually subscribed by the public.
e.g. If the company issued 2,00,000 shares but received applications for only 1,80,000 shares, the subscribed capital is 1,80,000 shares.
Called up Capital
It is that part of the subscribed capital which has been called up on the shares, i.e., what the company has asked the shareholders to pay.
e.g. If face value of a share is Rs. 10 and the company has called up only Rs. 7, the called up capital is Rs. 7 per share.
Paid up Capital
It is that portion of the called up capital which has been actually received from the shareholders. Paid up capital is equal to the called-up capital minus call in arrears.
e.g. If called up capital is Rs. 7 per share on 1,00,000 shares but Rs. 20,000 is unpaid, paid up capital is Rs. 6,80,000.
Calls in Arrears
When any shareholder fails to pay the amount due on allotment or on any of the calls, such amount is known as ‘Calls in Arrears’/‘Unpaid Calls’.
e.g. If a shareholder does not pay the first call of Rs. 2 per share on 100 shares, the calls in arrears is Rs. 200.
Calls in Advance
Sometimes shareholders pay a part or the whole of the amount of the calls not yet made. The amount so received from the shareholders is known as “Calls in Advance”.
e.g. A shareholder pays the final call of Rs. 2.50 per share before it is due — this is calls in advance.
Minimum Subscription
The minimum amount that, in the opinion of directors, must be raised to meet the needs of business operations of the company relating to property purchase, preliminary expenses, repayment of borrowings, working capital, and other expenditure. It cannot be less than 90% of the issued amount according to SEBI guidelines.
e.g. If a company issues shares worth Rs. 10,00,000, it must receive at least Rs. 9,00,000 as minimum subscription before allotment.
Over Subscription
When applications for more shares of a company are received than the number offered to the public for subscription.
e.g. A company offered 20,000 shares but received applications for 25,000 shares — this is oversubscription.
Pro-rata Allotment
When the directors allot shares in proportion to the number of shares applied for, instead of rejecting excess applications entirely.
e.g. If 30,000 shares are applied for but only 20,000 are available, each applicant gets 2/3rd of the shares they applied for.
Share Premium
When shares are issued at a price more than their nominal value (face value), the excess amount is called premium.
e.g. A Rs. 10 share issued for Rs. 15 has a premium of Rs. 5 per share.
Forfeiture of Shares
When a shareholder fails to pay the allotment or call money, the company may forfeit (cancel) the shares and the amount already paid by the shareholder is forfeited to the company.
e.g. If a shareholder paid Rs. 5 on application and allotment but did not pay Rs. 3 on first call, the company can forfeit the shares and keep the Rs. 5.
Reserve Capital
A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such uncalled amount is called ‘Reserve Capital’ of the company.
e.g. A company may decide that Rs. 2 per share on 1,00,000 shares will only be called if the company is wound up — this is reserve capital of Rs. 2,00,000.
Preference Shares
A preference share is one which carries a preferential right to dividend (fixed amount or fixed rate) before any dividend is paid to equity shareholders, and on winding up, preferential right to repayment of capital before equity shareholders.
e.g. A 9% Preference Share of Rs. 100 gives the holder a right to Rs. 9 dividend every year before any dividend is paid to equity shareholders.
Equity Shares
An equity share is a share which is not a preference share. Equity shareholders are entitled to share the distributable profits after satisfying the dividend rights of preference shareholders.
e.g. Ordinary shares of a company like HDFC Bank are equity shares — dividend varies with profits.
Formulas & Equations (5)
Paid up Capital = Called up Capital – Calls in Arrears
Reads as: Paid up capital equals called up capital minus calls in arrears
Variables: Paid up Capital (Rs.), Called up Capital (Rs.), Calls in Arrears (Rs.)
Use when: Calculating the actual amount received from shareholders for balance sheet presentation
⚠ Students often forget to deduct calls in arrears and show called up capital as paid up capital.
Share Premium = Issue Price – Face Value
Reads as: Share premium equals issue price minus face value
Variables: Share Premium (Rs.), Issue Price (Rs.), Face Value (Rs.)
Use when: When shares are issued at a premium, to calculate the amount to be credited to Securities Premium Reserve
⚠ Students sometimes credit the premium amount to Share Capital instead of Securities Premium Reserve.
Calls in Arrears = Number of Shares Defaulted × Amount Unpaid per Share
Reads as: Calls in arrears equals number of shares defaulted multiplied by amount unpaid per share
Variables: Calls in Arrears (Rs.), Number of Shares Defaulted (units), Amount Unpaid per Share (Rs.)
Use when: Calculating total unpaid amount on calls for journal entry and balance sheet disclosure
⚠ Students forget to include allotment money in calls in arrears if unpaid.
Pro-rata Allotment Ratio = Shares Offered / Shares Applied
Reads as: Pro-rata allotment ratio equals shares offered divided by shares applied
Variables: Pro-rata Allotment Ratio (fraction), Shares Offered (units), Shares Applied (units)
Use when: Calculating how many shares each applicant gets in case of oversubscription with pro-rata allotment
⚠ Students apply the ratio to the application money instead of the number of shares.
Amount to be transferred to Capital Reserve on Reissue of Forfeited Shares = Forfeited Amount on Reissued Shares – Discount Allowed on Reissue (if any)
Reads as: Amount to be transferred to capital reserve on reissue of forfeited shares equals forfeited amount on reissued shares minus discount allowed on reissue
Variables: Capital Reserve (Rs.), Forfeited Amount on Reissued Shares (Rs.), Discount Allowed on Reissue (Rs.)
Use when: After reissuing forfeited shares, to calculate the profit to be transferred to Capital Reserve
⚠ Students transfer the entire balance of Share Forfeiture Account to Capital Reserve without considering discount on reissue.
How It Works
Issue of Shares at Par (Full Subscription)
  1. Step 1: Receive application money from applicants — debit Bank, credit Share Application Account.
  2. Step 2: Transfer application money to Share Capital Account — debit Share Application Account, credit Share Capital Account.
  3. Step 3: Record allotment money due — debit Share Allotment Account, credit Share Capital Account.
  4. Step 4: Receive allotment money — debit Bank, credit Share Allotment Account.
  5. Step 5: Record call money due (first call, second call, etc.) — debit Share Call Account, credit Share Capital Account.
  6. Step 6: Receive call money — debit Bank, credit Share Call Account.
💡 The Share Application Account is a temporary account — it must be closed by transferring to Share Capital or refunding/rejecting excess.
Oversubscription with Pro-rata Allotment
  1. Step 1: Receive application money on all applications — debit Bank, credit Share Application Account.
  2. Step 2: Calculate pro-rata ratio: Shares Offered / Shares Applied.
  3. Step 3: Transfer application money on allotted shares to Share Capital — debit Share Application, credit Share Capital.
  4. Step 4: Adjust excess application money towards allotment — debit Share Application, credit Share Allotment.
  5. Step 5: If any excess remains after adjustment, refund it — debit Share Application, credit Bank.
  6. Step 6: Record allotment money due (net of adjustment) — debit Share Allotment, credit Share Capital.
  7. Step 7: Receive allotment money — debit Bank, credit Share Allotment.
💡 The excess application money is first adjusted towards allotment; only the remaining excess is refunded.
Calls in Arrears
  1. Step 1: When call money is due, record the call — debit Share Call Account, credit Share Capital Account.
  2. Step 2: When call money is received except for defaulting shareholders — debit Bank (amount received), debit Calls in Arrears Account (unpaid amount), credit Share Call Account (total due).
  3. Step 3: If interest is chargeable on calls in arrears, record interest due — debit Calls in Arrears Account or Interest on Calls in Arrears Account, credit Sundry Shareholder's Account.
  4. Step 4: When defaulting shareholder pays later — debit Bank, credit Calls in Arrears Account and credit Interest on Calls in Arrears Account.
💡 Calls in Arrears is shown as a deduction from called up capital in the Notes to Accounts of the Balance Sheet.
Calls in Advance
  1. Step 1: Receive advance payment from shareholder — debit Bank, credit Calls in Advance Account.
  2. Step 2: When the call becomes due, adjust the advance — debit Calls in Advance Account, credit the respective Share Call Account.
  3. Step 3: If interest is payable on calls in advance, record interest due — debit Interest on Calls in Advance Account, credit Sundry Shareholder's Account.
  4. Step 4: Pay interest — debit Sundry Shareholder's Account, credit Bank.
💡 Calls in Advance is shown as a current liability in the Balance Sheet, not added to paid-up capital.
Forfeiture of Shares
  1. Step 1: Transfer the unpaid amount from the respective call accounts — debit Share Capital Account (with called up amount per share × number of shares forfeited), credit Share Forfeiture Account (with amount already paid by the shareholder), and credit the respective call accounts (with unpaid amount).
  2. Step 2: The Share Forfeiture Account now holds the amount forfeited from the defaulting shareholder.
💡 The Share Capital Account is debited with the called up amount, not the face value, because only the called up amount was due.
Reissue of Forfeited Shares
  1. Step 1: Record the reissue — debit Bank (with amount received on reissue), debit Share Forfeiture Account (with discount allowed on reissue, if any), credit Share Capital Account (with called up amount per share × number of shares reissued).
  2. Step 2: Transfer the remaining balance in Share Forfeiture Account (related to reissued shares) to Capital Reserve — debit Share Forfeiture Account, credit Capital Reserve Account.
💡 The discount on reissue cannot exceed the amount forfeited on those shares. The profit on reissue (forfeited amount minus discount) is transferred to Capital Reserve.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Called up Capital with Paid up Capital
✗ Paid up capital is the amount the company has asked shareholders to pay.
→ Called up capital is the amount asked to pay; paid up capital is the amount actually received. They are equal only if there are no calls in arrears.
✓ Paid up capital is that portion of the called up capital which has been actually received from the shareholders. It is equal to called up capital minus calls in arrears.
⚠ Forgetting to Close Share Application Account
✗ Students leave the Share Application Account with a balance or treat it as a permanent liability.
→ Share Application Account is a temporary account. After allotment, it must be closed by transferring the application money on allotted shares to Share Capital, adjusting excess towards allotment, and refunding any remaining excess.
✓ After allotment, pass the entry: Share Application A/c Dr. To Share Capital A/c (for allotted shares), To Share Allotment A/c (for excess adjusted), To Bank A/c (for refund). The Share Application Account should have a zero balance.
⚠ Treating Calls in Advance as Part of Paid up Capital
✗ Calls in advance is added to share capital in the balance sheet.
→ Calls in advance is a liability of the company (money received before it is due). It is shown under current liabilities, not as part of share capital.
✓ Calls in advance is shown as a separate item under 'Other Current Liabilities' in the Balance Sheet. It is not added to paid-up capital.
⚠ Incorrect Calculation of Pro-rata Adjustment
✗ Students calculate excess application money per share and directly refund without adjusting allotment.
→ The excess application money must first be adjusted towards the allotment money due. Only the remaining excess (if any) is refunded.
✓ First calculate the number of shares allotted to each applicant. Then, the excess application money = (Shares Applied – Shares Allotted) × Application Money per share. This excess is adjusted towards allotment. If allotment money is less than the excess, the balance is refunded.
⚠ Forfeiture Entry — Debiting Full Face Value Instead of Called up Amount
✗ Share Capital A/c Dr. (with face value per share × number of shares forfeited)
→ The Share Capital Account should be debited only with the called up amount per share, not the full face value, because only the called up amount was due from the shareholder.
✓ Share Capital A/c Dr. (with called up amount per share × number of shares forfeited). The credit goes to Share Forfeiture A/c (amount already paid) and the respective call accounts (unpaid amount).
⚠ Transferring Entire Share Forfeiture Balance to Capital Reserve
✗ After reissue, the entire balance of Share Forfeiture Account is transferred to Capital Reserve.
→ Only the balance related to the reissued shares (after deducting discount allowed on reissue) is transferred to Capital Reserve. The balance related to shares not yet reissued remains in Share Forfeiture Account.
✓ Only the profit on reissue (forfeited amount on reissued shares minus discount allowed on reissue) is transferred to Capital Reserve. The remaining forfeited amount (if any) stays in Share Forfeiture Account for future reissue.
Compare & Contrast
Nature of amount
Calls in Arrears
Calls in Advance
Calls in Arrears is the amount not paid by shareholders on due date (debit balance, deducted from called up capital). Calls in Advance is the amount paid by shareholders before it is due (credit balance, shown as a current liability).
Right to dividend
Preference Shares
Equity Shares
Preference shares carry a preferential right to a fixed dividend before any dividend is paid to equity shareholders. Equity shares have no fixed dividend; they receive dividend only after preference shareholders are paid.
Amount of capital
Authorised Capital
Issued Capital
Authorised capital is the maximum amount a company can raise as per its Memorandum of Association. Issued capital is the part of authorised capital actually offered to the public for subscription.
Purpose of calling
Reserve Capital
Uncalled Capital
Uncalled capital is the portion of subscribed capital not yet called up, which can be called anytime. Reserve capital is a part of uncalled capital that can only be called in the event of winding up of the company.
Exam Focus
Marks pattern: 1-2 MCQs (1 mark each), 1-2 Very Short Answer Questions (1-2 marks), 1 Short Answer Question (3-4 marks), 1 Long Answer Question (6-8 marks) — total approximately 12-16 marks.
Most asked: Journal entries for issue of shares at par and at premium · Oversubscription and pro-rata allotment with adjustment of excess application money · Forfeiture and reissue of shares (including transfer to Capital Reserve) · Calls in arrears and calls in advance with interest · Preparation of Notes to Accounts for Share Capital
Don't skip: A comprehensive problem involving issue of shares, oversubscription, pro-rata allotment, calls in arrears, forfeiture, and reissue — typically 8 marks.; Journal entries for forfeiture and reissue of shares with calculation of amount transferred to Capital Reserve — typically 6 marks.
One-Line Revision (read aloud before the exam)
  1. A company is an artificial person created by law, with separate legal entity and limited liability.
  2. Authorised capital is the maximum capital a company can raise as per its Memorandum of Association.
  3. Issued capital is the part of authorised capital actually offered to the public.
  4. Subscribed capital is the part of issued capital actually taken up by the public.
  5. Called up capital is the amount the company has asked shareholders to pay on their shares.
  6. Paid up capital is called up capital minus calls in arrears.
  7. Calls in arrears is the amount not paid by shareholders on the due date.
  8. Calls in advance is the amount paid by shareholders before it is due, shown as a current liability.
  9. Minimum subscription must be at least 90% of the issued amount; if not received, the entire amount must be refunded within 130 days.
  10. Oversubscription occurs when applications exceed the number of shares offered; excess application money is adjusted towards allotment or refunded.
  11. Forfeiture cancels shares of a defaulting shareholder; the amount already paid is credited to Share Forfeiture Account.
  12. On reissue of forfeited shares, the discount allowed cannot exceed the amount forfeited on those shares.
  13. Profit on reissue (forfeited amount minus discount) is transferred to Capital Reserve.
  14. Preference shares have preferential right to dividend and repayment of capital on winding up.
  15. Equity shares do not have any preferential right; dividend depends on profits.
  16. Share premium is the excess of issue price over face value, credited to Securities Premium Reserve.
  17. Reserve capital is uncalled capital that can only be called on winding up.
  18. Interest on calls in arrears is charged at a rate not exceeding 10% per annum (Table F).
  19. Interest on calls in advance is paid at a rate not exceeding 12% per annum (Table F).
  20. The Share Application Account is a temporary account that must be closed after allotment.

MCQs — 10 Questions with Answers

Q1. Which of the following is NOT a feature of a company?

  • A. Separate legal entity distinct from its members
  • B. Limited liability of members
  • C. Unlimited perpetual existence
  • D. Direct management by all shareholders ✓

Answer: D — A company is managed by a Board of Directors elected by shareholders, not by direct management of all shareholders; this distinguishes it from partnerships.

Q2. What is the primary meaning of Limited Liability in a company?

  • A. The company can only borrow a limited amount
  • B. Members' liability is restricted to unpaid amount on their shares ✓
  • C. The company cannot be sued in court
  • D. Directors' liability is limited to their salary

Answer: B — Limited liability protects members from personal asset claims; creditors can only recover up to the unpaid share value, not from private property.

Q3. A Private Company must have at least _____ members and not more than _____ members (excluding employees).

  • A. 1, 100
  • B. 2, 200 ✓
  • C. 3, 500
  • D. 5, 200

Answer: B — According to the Companies Act, 2013, a private company requires minimum 2 members and maximum 200 members (excluding employee members).

Q4. Which statement about Perpetual Succession is correct?

  • A. A company must wind up if one member dies
  • B. A company continues to exist regardless of changes in its membership ✓
  • C. Perpetual succession applies only to public companies
  • D. A company's life is equal to the average life of its members

Answer: B — Perpetual succession means a company's legal existence is unaffected by member death, insolvency, or retirement; it survives membership changes.

Q5. The Common Seal of a company serves which purpose?

  • A. To store company's financial documents safely
  • B. As the official signature of the company on legal documents ✓
  • C. To prevent shareholders from selling their shares
  • D. To mark attendance of directors in board meetings

Answer: B — The common seal is the company's official signature; documents lacking it are not legally binding on the company since it cannot sign by itself.

Q6. What is One Person Company (OPC)?

  • A. A company owned by government
  • B. A company with only one shareholder who must be an Indian citizen and resident ✓
  • C. A partnership converted into a company
  • D. A company managed by a single director

Answer: B — OPC is a distinct legal entity with a single natural person member who must be an Indian citizen and resident, with specified capital and turnover limits.

Q7. Authorized Capital differs from Issued Capital in that:

  • A. Authorized capital is always equal to issued capital
  • B. Authorized capital is the maximum capital a company can issue; issued capital is what has actually been offered to shareholders ✓
  • C. Issued capital cannot be changed but authorized capital can be increased
  • D. They are the same thing with different names

Answer: B — Authorized capital is specified in the Memorandum of Association as the ceiling; issued capital is the portion actually offered, and issued ≤ authorized always.

Q8. Which is NOT a classification of companies based on liability?

  • A. Limited by Shares
  • B. Limited by Guarantee
  • C. Limited by Members ✓
  • D. Unlimited Companies

Answer: C — Companies are classified as Limited by Shares, Limited by Guarantee, or Unlimited based on member liability; 'Limited by Members' is not a recognized category.

Q9. A Public Company is best defined as:

  • A. A company whose shares are listed on a stock exchange
  • B. A company that is not a private company and not a subsidiary of a private company ✓
  • C. A company with more than 1,000 members
  • D. A company established by the government

Answer: B — Under the Companies Act, 2013, a public company is defined negatively as a company that is neither private nor a subsidiary of a private company.

Q10. ASSERTION: A company has Perpetual Succession. REASON: The company is a separate legal entity created by law. Which is correct?

  • A. Both assertion and reason are correct; reason explains assertion ✓
  • B. Both are correct but reason does not explain assertion
  • C. Assertion is correct but reason is incorrect
  • D. Both assertion and reason are incorrect

Answer: A — Perpetual Succession exists precisely because a company is an artificial legal entity separate from members; membership changes don't terminate a legal entity created by law.

Flashcards

What is a company according to Chief Justice Marshall?

A company is an artificial, invisible, intangible person existing only in the eyes of law, with only those properties granted by its charter of creation.

What is the main difference between a public and private company?

A public company has freely transferable shares with no restrictions, while a private company restricts share transfer rights and limits members to 200 (excluding employees).

What is Limited Liability in the context of a company?

The liability of company members is limited to the extent of unpaid amount on shares held, protecting personal property from company creditors' claims.

Define Perpetual Succession as a feature of a company.

A company continues to exist independently of changes in its membership; death, insanity, or insolvency of members does not affect the company's legal existence.

What is the purpose of a company's Common Seal?

The common seal serves as the official signature of the company on documents; documents without it are not legally binding on the company.

What is a One Person Company (OPC)?

An OPC is a company with only one natural person member who is an Indian citizen and resident, with paid-up capital not exceeding Rs. 50 Lakhs.

What is Authorized Capital of a company?

Authorized capital is the maximum amount of share capital a company is permitted to issue as specified in its Memorandum of Association (also called Nominal or Registered capital).

What is the key characteristic of an Unlimited Company?

An unlimited company has no limit on its members' liability; creditors can claim dues from members' personal property if company property is insufficient.

How is a company formed differently from a sole proprietorship?

A company is formed by law through incorporation and registration under the Companies Act, whereas a sole proprietorship requires no formal legal registration process.

What is meant by Separate Legal Entity of a company?

A company exists as a distinct legal person separate from its members, capable of holding property, entering contracts, and opening bank accounts in its own name.

Important Board Questions

Define 'Separate Legal Entity' of a company with one example. [2 marks]

Explain that a company exists as a distinct legal person separate from its members; example could be that a company can own property, enter contracts, or open bank accounts in its own name independently of shareholders.

Distinguish between a Public Company and a Private Company based on the provisions of the Companies Act, 2013. Give one characteristic of each. [5 marks]

A public company is not a private company and not subsidiary of a private company; a private company restricts share transfer and limits members to 200 (excl. employees). Address definitions, share transferability restrictions, and membership limits with clear examples for each type.

Explain the concept of Limited Liability of a company. How does it differ from the unlimited liability applicable in a partnership? Illustrate with a numerical example involving a shareholder's personal property protection. [6 marks]

Show that company member liability is capped at unpaid share amount, unlike partnership where partners are jointly and severally liable for all firm debts from personal property. Construct a scenario: if a company owes Rs. 10 lakhs and a member holds fully paid shares worth Rs. 2 lakhs, the member's liability is zero (not negative), protecting personal assets; in partnership, the partner's personal property would be at risk.

Assertion-Reason Questions for Accounting for Share Capital

Q1. Assertion (A):

A company can continue to exist indefinitely even if all of its original shareholders die or become insolvent.

Reason (R):

Because a company has the characteristic of perpetual succession as it is an artificial legal person created by law.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both assertion and reason are true. Perpetual succession means the company's existence is not dependent on its members' lives or financial status. The company can only be terminated through legal procedures, not by member actions or circumstances.

Q2. Assertion (A):

A shareholder of a limited company can lose more money than the amount invested in company shares.

Reason (R):

Because the company has unlimited liability for its debts and may claim from shareholders' personal property.

Answer: D — A is false but R is true — The assertion is false. Limited liability means shareholders can lose only up to their investment amount. The reason is also false — limited companies have LIMITED liability, not unlimited. This is a fundamental misunderstanding some students might have.

Q3. Assertion (A):

The Authorised Capital of a company is always greater than or equal to its Issued Capital.

Reason (R):

Because Authorised Capital is the maximum amount that can be issued as per the Memorandum of Association, while Issued Capital is the actual amount issued.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both assertion and reason are true and correctly related. The reason explains why the assertion must be true — Authorised Capital sets the upper limit for Issued Capital. The company cannot issue more than its authorised amount.

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Case-Based Questions (CBQ) for Accounting for Share Capital

Case Study:

Sunrise Electronics Ltd., a public company, issued 1,00,000 equity shares of ₹10 each at a premium of ₹5 per share. The entire issue was fully subscribed. The company received all money on application, including the premium amount. The company's bank statement shows a credit of ₹15,00,000 on account of share application money received.

Q1. What is the total amount received by the company on the issue of shares?

  • A. ₹10,00,000
  • B. ₹15,00,000 ✓
  • C. ₹5,00,000
  • D. ₹12,00,000

Answer: B

Q2. How will the premium amount be recorded in the books of the company?

  • A. Debit Securities Premium Reserve A/c ₹5,00,000
  • B. Credit Securities Premium Reserve A/c ₹5,00,000 ✓
  • C. Credit Share Capital A/c ₹5,00,000
  • D. Debit Bank A/c ₹5,00,000

Answer: B

Q3. If the company had issued shares at a discount of ₹2 per share instead of a premium, what would be the total amount received?

  • A. ₹8,00,000 ✓
  • B. ₹10,00,000
  • C. ₹12,00,000
  • D. ₹13,00,000

Answer: A

Q4. Which account will be credited for the face value of shares issued?

  • A. Bank A/c
  • B. Share Application A/c
  • C. Share Capital A/c ✓
  • D. Securities Premium Reserve A/c

Answer: C

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Previous Year Questions (PYQ) for Accounting for Share Capital

Real CBSE board exam questions from past papers — free to attempt.

CBSE 2026 · Set 67/3/1 · 1 mark

Paramount Ltd. forfeited 2,000 equity shares of ₹100 each, ₹80 called up, issued at a premium of 10%, for non-payment of first call of ₹20 per share. On forfeiture of these shares, Equity Share Capital Account will be ________ by ________.

  • debited, ₹1,60,000
  • credited, ₹1,60,000
  • debited, ₹2,00,000
  • credited, ₹2,00,000

CBSE 2026 · Set 67/3/1 · 1 mark

A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such uncalled amount is called:

  • Uncalled capital
  • Paid-up capital
  • Called-up capital
  • Reserve capital

CBSE 2026 · Set 67/3/1 · 6 marks

Madhav Ltd. invited applications for issuing 4,00,000 equity shares of ₹10 each at a premium of ₹4 per share. The amount was payable as follows: On Application and Allotment ₹6 per share (including premium ₹2) On First and Final Call ₹8. Applications for 6,00,000 shares were received. Applications for 1,00,000 shares were rejected and the application money was refunded. Shares were allotted on pro-rata basis to the remaining applicants. Excess money received on application and allotment was adjusted towards sums due on first and final call. A shareholder, who had applied for 500 shares, failed to pay the first and final call. His shares were forfeited. Pass necessary journal entries in the books of Madhav Ltd. for the above transactions.

CBSE 2026 · Set 67/3/1 · 1 mark

Diksha Ltd. was registered with an authorised capital of ₹40,00,000 divided into shares of ₹10 each. On 1st April, 2025, the company offered to the public for subscription, 1,20,000 shares. Applications for 1,10,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 10,000 shares failed to pay the second and final call of ₹2 per share. How many shares were offered to the public for subscription?

  • ₹10,000
  • ₹20,000
  • ₹80,000
  • ₹1,00,000

CBSE 2026 · Set 67/3/2 · 1 mark

On 1st April, 2024, Mobi Ltd. issued 3,000, 9% Debentures of 1,000 each at a premium of 5%. The total amount of interest due on debentures for the year ended 31st March, 2025 will be:

  • 2,70,000
  • 1,50,000
  • 27,000
  • 15,000

CBSE 2026 · Set 67/3/2 · 1 mark

Paramount Ltd. forfeited 2,000 equity shares of 100 each, 80 called up, issued at a premium of 10%, for non-payment of first call of 20 per share. On forfeiture of these shares, Equity Share Capital Account will be ________ by ________.

  • debited, 1,60,000
  • credited, 1,60,000
  • debited, 2,00,000
  • credited, 2,00,000

CBSE 2026 · Set 67/3/2 · 1 mark

Maya Ltd. was registered with an authorised capital of 30,00,000 divided into shares of 10 each. On 1st April, 2025, the company offered to the public for subscription 1,30,000 shares. Applications for 1,20,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of 3 per share.

Maya Ltd. was registered with an authorised capital of 30,00,000 divided into shares of 10 each. On 1st April, 2025, the company offered to the public for subscription 1,30,000 shares. Applications for 1,20,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of 3 per share. (i) The amount credited to Equity Share Capital Account on allotment will be:

  • 35,000
  • 15,000
  • 50,000
  • 5,000

CBSE 2026 · Set 67/3/2 · 6 marks

Madhav Ltd. invited applications for issuing 4,00,000 equity shares of 10 each at a premium of 4 per share. The amount was payable as follows: On Application and Allotment 6 per share (including premium 2) On First and Final Call Balance Applications for 6,00,000 shares were received. Applications for 1,00,000 shares were rejected and the application money was refunded. Shares were allotted on pro-rata basis to the remaining applicants. Excess money received on application and allotment was adjusted towards sums due on first and final call. A shareholder, who had applied for 500 shares, failed to pay the first and final call. His shares were forfeited. Pass necessary journal entries in the books of Madhav Ltd. for the above transactions.

CBSE 2026 · Set 67/3/3 · 1 mark

Novelty Ltd. issued 3,000, 11% Debentures of ₹500 each at ₹450 per debenture. 11% Debentures Account will be credited by:

  • ₹13,50,000
  • ₹3,00,000
  • ₹15,00,000
  • ₹33,00,000

CBSE 2026 · Set 67/3/3 · 1 mark

Astha Ltd. was registered with an authorised capital of ₹20,00,000 divided into shares of ₹10 each. On 1st April, 2025, the company offered to the public for subscription 1,40,000 shares. Applications for 1,35,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of ₹2 per share.

Astha Ltd. was registered with an authorised capital of ₹20,00,000 divided into shares of ₹10 each. On 1st April, 2025, the company offered to the public for subscription 1,40,000 shares. Applications for 1,35,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of ₹2 per share. What is the amount of forfeiture?

  • ₹5,000
  • ₹50,000
  • ₹40,000
  • ₹10,000

CBSE 2026 · Set 67/3/3 · 1 mark

Astha Ltd. was registered with an authorised capital of ₹20,00,000 divided into shares of ₹10 each. On 1st April, 2025, the company offered to the public for subscription 1,40,000 shares. Applications for 1,35,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of ₹2 per share.

Astha Ltd. was registered with an authorised capital of ₹20,00,000 divided into shares of ₹10 each. On 1st April, 2025, the company offered to the public for subscription 1,40,000 shares. Applications for 1,35,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of ₹2 per share. What is the amount received on application?

  • ₹13,40,000
  • ₹13,00,000
  • ₹13,50,000
  • ₹14,00,000

CBSE 2026 · Set 67/3/3 · 1 mark

Astha Ltd. was registered with an authorised capital of ₹20,00,000 divided into shares of ₹10 each. On 1st April, 2025, the company offered to the public for subscription 1,40,000 shares. Applications for 1,35,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of ₹2 per share.

Astha Ltd. was registered with an authorised capital of ₹20,00,000 divided into shares of ₹10 each. On 1st April, 2025, the company offered to the public for subscription 1,40,000 shares. Applications for 1,35,000 shares were received and allotment was made in full to all the applicants. A shareholder holding 5,000 shares failed to pay the second and final call of ₹2 per share. What is the amount received on allotment?

  • ₹40,000
  • ₹50,000
  • ₹10,000
  • Nil

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