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Accounting 3% exam weight

Issue of Shares

Part of the CA Foundation study roadmap. Accounting topic accoun-008 of Accounting.

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Issue of Shares

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Issue of Shares is the mechanism through which a company raises share capital by offering new equity or preference shares, governed by Sections 39–44 of the Companies Act, 2013 and SEBI ICDR Regulations, 2018 for listed entities. Every share has a Face Value (par) fixed in the Articles and an Issue Price at which it is offered to the public. The gap between the two is Securities Premium (Face Value + Premium = Issue Price), which is parked in a separate account under Section 52 and cannot be used for dividend distribution.

Three commercial patterns dominate CA Foundation papers: issue at par, issue at a premium, and issue at a discount — the last being prohibited under Section 53 except for sweat equity. Calls in Arrears (defaulted instalments) and Calls in Advance (money received before due date) require adjustment entries on the Share Capital account itself. Forfeited shares can be reissued, and any surplus after discounting moves to Capital Reserve (a free reserve, not a revenue reserve).

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Core Concepts

A share is allotted only after application money is received and banked. Three instalments normally follow: Application, Allotment, and one or more Calls (First Call, Second Call, Final Call). Each instalment is recorded through its own journal: Bank A/c is debited, Share Capital A/c is credited at face value, and Securities Premium A/c is credited for any premium collected.

When over-subscription occurs, the company either rejects applications and refunds the money, or makes pro-rata allotment — issuing fewer shares than applied for and adjusting the excess application money against allotment and calls. The adjustment entry on Allotment is:

Share Capital A/c Dr. (excess shares × adjusted rate) To Calls in Arrears A/c (already-short balance) To Securities Premium A/c (premium on excess shares) To Share Allotment A/c (balance figure)

Forfeiture cancels a shareholder’s membership. The entry debits Share Capital at face value already paid-up, credits the Forfeited Shares Account by the amount actually received (premium portion excluded), and credits Calls in Arrears for the unpaid balance.

Reissue Mechanics

When forfeited shares are reissued at a discount, the loss is absorbed from the forfeited balance. The transfer to Capital Reserve is calculated as:

Capital Reserve = Amount Forfeited – Discount Allowed on Reissue – (Pro-rata premium already credited) – (Calls in Arrears adjusted from forfeited sum)

ScenarioEntry Pattern
Issue at parBank Dr. → Share Capital
Issue at premiumBank Dr. → Share Capital + Securities Premium
Calls in ArrearsShare Capital Dr. → Calls in Arrears
ForfeitureShare Capital + Called-up Arrears Dr.; Forfeited Shares + Calls-in-Arrears Cr.
ReissueBank Dr. + Forfeited Shares Dr.; Share Capital + Securities Premium Cr.; Capital Reserve Cr. (balance)

Common Question Patterns

CA Foundation asks 1–2 questions (4–6 marks) per paper. Classic formats: pro-rata allotment with arrears adjustment, forfeiture-and-reissue with discount, and calls-in-advance treatment with interest.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Edge Cases and Exam Traps

  1. Calls in Arrears vs. Calls in Advance ordering: Adjustment on the Share Capital account follows chronological due dates — excess from application goes first to arrears on the earliest call, then the next. Examiners test whether students netted advance against arrears or treated them separately.

  2. Premium credited but not received: In pro-rata cases, application money is insufficient even to cover the premium component. The uncollected premium is not debited to Calls in Arrears — Section 52 bars dividend from share premium, so the shortfall is technical.

  3. Issue expenses and discount: Issue expenses (legal, printing, underwriting) and discount allowed on reissue form the total loss on share issue. They cannot be debited to Securities Premium or Share Capital under Schedule III.

  4. Minimum Subscription (SEBI): 90% of the issued amount must be subscribed, failing which the issue lapses and application money is refunded within 130 days.

Forfeiture connects directly to Issue of Debentures (similar forfeiture logic for non-payment) and to Company Final Accounts (Forfeited Shares balance appears as a current liability only until reissue). Reissue of forfeited shares threads into Capital Reserve, then into Schedule III balance sheet presentation as part of “Reserves and Surplus”.

Worked Mini-Example

A company issues 5,000 shares at ₹10 face, ₹3 premium, payable as ₹3 on application, ₹7 on allotment (including premium), ₹3 first call. Ramesh applies for 100 shares, is allotted 80 (pro-rata), and fails to pay allotment. He later forfeits the shares (₹250 already received) and they are reissued at ₹9 per share as fully paid. Bank on forfeiture-reissue = 80 × 9 = ₹720. Discount allowed = (80 × 10) − 720 = ₹80. Capital Reserve transfer = 250 − 80 = ₹170.

Practice Prompts

  • Q1: 2,000 shares at ₹10 par, ₹4 premium, payable ₹4 + ₹2 premium on application and ₹8 on allotment. Rakesh applies 100, gets 60, pays full allotment. Pass journal entries till allotment.
  • Q2: Forfeited shares reissued at a discount — calculate Capital Reserve when premium was partially collected and calls in arrears had been adjusted.

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