Company Accounts: Issue of Shares – Types, Methods, and Accounting

TAKEAWAYS:

• Shares are units of ownership in a company, issued to raise capital.
• Issue at par, premium, or discount affects the company’s capital and profit.
• Public vs. private issue determines how shares are sold and to whom.
• Journal entries record share issues, premiums, and allotments.
• Over-subscription means more demand than shares available, handled via pro-rata allotment.
• NEB exams test calculations, journal entries, and conceptual understanding.

1. What Are Shares?

Shares represent ownership in a company. When a company needs money, it issues shares to investors. The shareholder becomes a part-owner and may receive dividends (profits) or voting rights.

Types of Shares

mindmap
  root((Shares))
    Equity Shares
      Ownership: Full control
      Dividend: Variable (depends on profits)
      Repayment: No fixed repayment
    Preference Shares
      Dividend: Fixed (priority over equity)
      Repayment: Returned before equity in liquidation
      Types:
        Cumulative (unpaid dividends accumulate)
        Non-cumulative (no arrears)
        Participating (extra dividends if profits are high)
        Redeemable (can be bought back by the company)

Why Issue Shares?

• Raise long-term capital without debt.
• No repayment obligation (unlike loans).
• Improves company reputation and investor trust.

2. Issue of Shares at Different Prices

Shares can be issued at:

1. Par Value (Face Value) – The nominal value printed on the share (e.g., Rs. 100).
2. Premium (Above Par) – Issued for more than par (e.g., Rs. 120 for a Rs. 100 share).
3. Discount (Below Par) – Issued for less than par (rare, requires legal approval).

Journal Entries for Share Issues

Example 1: Issue at Par

• A company issues 10,000 shares of Rs. 10 each at par.

  Cash A/c Dr. 100,000
  To Share Capital A/c 100,000
  

Example 2: Issue at Premium

• A company issues 5,000 shares of Rs. 10 at Rs. 12.

  Cash A/c Dr. 60,000
  To Share Capital A/c 50,000
  To Securities Premium A/c 10,000
  

Example 3: Issue at Discount

• A company issues 2,000 shares of Rs. 10 at Rs. 8 (discount of Rs. 2 per share).

  Cash A/c Dr. 16,000
  To Share Capital A/c 14,000
  To Discount on Issue of Shares A/c 2,000
  

3. Methods of Share Issue

Companies issue shares in two main ways:

A. Public Issue (Open Subscription)

• Shares are offered to the general public via stock exchanges or advertisements.
• Steps:
  1. Company announces the issue (prospectus).
  2. Investors apply with money.
  3. Company allots shares (may reject oversubscription via pro-rata).
  4. Unpaid shares are forfeited if not called.

Example: Oversubscription & Pro-Rata Allotment

• A company issues 10,000 shares at Rs. 10 (Rs. 5 called up).
• Applications received: 15,000 shares (50% oversubscribed).
• Pro-rata allotment: Allot 2/3 of applications (10,000 shares).

  Cash A/c Dr. 50,000 (10,000 × Rs. 5)
  To Share Application A/c 50,000
  

B. Private Placement (Direct Issue)

• Shares are sold directly to selected investors (banks, institutions, or individuals).
• No public advertisement required.
• Faster and cheaper than public issue.

Comparison Table

4. Over-Subscription & Allotment

When demand exceeds shares available, the company uses pro-rata allotment (fair distribution).

Example: Over-Subscription

• Shares offered: 5,000 at Rs. 10 (Rs. 5 called up).
• Applications: 7,500 shares (50% oversubscribed).
• Allotment: 2/3 of applications (5,000 shares).

  Cash A/c Dr. 25,000 (5,000 × Rs. 5)
  To Share Application A/c 25,000
  

Excess Applications Money:

• If applicants pay more than called-up amount, the excess is refunded.

  Share Application A/c Dr. 10,000 (excess money)
  To Cash A/c 10,000
  

5. Forfeiture of Shares (If Applicable)

If shareholders fail to pay allotment/call money, their shares are forfeited (cancelled).

Journal Entry for Forfeiture:

Share Capital A/c Dr. (Called-up amount)
To Share Forfeiture A/c (Called-up amount)

Example:

• A shareholder fails to pay Rs. 5 (out of Rs. 10) on 100 shares.

  Share Capital A/c Dr. 500
  To Share Forfeiture A/c 500
  

(Note: Forfeiture is covered in Unit 6, but NEB may link it here.)

6. Real-World Example: Share Issue in Nepal

Nepal Bank Limited (NBL) IPO (2019)

• Issue Type: Public (via Nepal Stock Exchange).
• Shares Offered: 100 million at Rs. 100 each.
• Premium: Rs. 20 (issued at Rs. 120).
• Oversubscription: 15 times (high demand).
• Allotment: Pro-rata (1 share per applicant).

flowchart TD
    A["कम्पनीले शेयर जारी गर्ने निर्णय"] --> B["प्रस्ताव जारी गर्ने"]
    B --> C["अर्जी पाउने"]
    C --> D{"अर्जी > शेयर?"}
    D -->|"हाँ"| E["प्रो-रेटा बाँडफाँड"]
    D -->|"नहुने"| F["सबै अर्जीदारलाई शेयर"]
    E --> G["अधिक भुक्तानी फिर्ता"]
    G --> H["पहिलो कुरा"]
    H --> I["अन्तिम कुरा"]
    I --> J["शेयरको हस्तान्तरण"]
    F --> H

Journal Entry (Simplified):

Cash A/c Dr. 12,000,000,000 (100M × Rs. 120)
To Share Capital A/c 10,000,000,000 (100M × Rs. 100)
To Securities Premium A/c 2,000,000,000 (100M × Rs. 20)

Exam Tip: How NEB Tests This Unit

1. Journal Entries (Most Common)

   • Issue at par, premium, or discount.
   • Oversubscription and pro-rata allotment.
   • Marks: 5–10 per question.

2. Calculations

   • Determine premium/discount amounts.
   • Allotment ratios in oversubscription.
   • Marks: 3–5 per question.

3. Conceptual Questions

   • Difference between public and private issue.
   • Why issue shares at premium?
   • Marks: 2–4 per question.

4. Short Notes

   • Define: Share capital, premium, discount, forfeiture.
   • Marks: 1–2 per question.

NEB-Style Questions (Practice These!)

Q1. Journalize the following transactions:

• A company issues 20,000 shares of Rs. 10 at Rs. 12 (premium Rs. 2).

Q2. What is oversubscription? How is it handled?

Q3. Distinguish between public and private issue of shares.

Q4. A company issues 10,000 shares at Rs. 5 (called-up). Applications for 15,000 shares are received. Journalize the allotment.