How to Record Journal Entries for Issue of Shares with Examples
The issue of shares is a fundamental concept in Accounting and Business Studies. It refers to the process by which companies offer new shares to investors. These investors can be individuals or corporate entities who purchase shares at a specific price, thereby becoming shareholders and part-owners in the company. This process is governed by laws and guidelines to ensure fair distribution and protect investor interests.
A share acts as a unit of ownership in a company and is considered an asset. Shareholders may receive a share of the company’s profits as dividends. Companies issue shares to raise funds for various business needs, such as expanding operations, repaying borrowings, or acquiring new businesses.
The Companies Act sets out the steps that companies must follow to issue shares to the public. The main types of shares are ordinary (equity) shares, which grant voting rights, and preference shares, which offer preferred dividends but typically no voting rights. Other types include redeemable, deferred, non-voting, management, and alphabet shares, each with distinct features and rights for shareholders.
Meaning and Example of Issue of Shares
When a company issues shares, it distributes portions of ownership to those who invest money. For example, if Company XYZ has a capital of ₹6,00,000 divided into 6,000 shares of ₹100 each, anyone wishing to invest can buy one or more shares at ₹100 each and become a shareholder.
Key Steps in the Issue of Shares
The issue of shares generally follows these steps:
- Issue of Prospectus: The company issues a prospectus announcing its need for funds and inviting the public to apply for shares. The prospectus contains details of the company's objectives, financials, and terms of the offer.
- Receiving Applications: Investors fill out applications and deposit the required money in a scheduled bank. The details of application amounts and procedures are given in the prospectus.
- Allotment of Shares: Once the minimum subscription is achieved, shares are allotted to applicants. If there is over-subscription, shares may be allotted on a pro-rata basis. Applicants who receive shares get a letter of allotment.
Why Companies Issue Shares
Companies issue shares mainly to raise capital for business growth, repay borrowings, or make acquisitions. Sometimes shares are issued in situations like:
- Raising new funds for business expansion
- Funding acquisitions or purchases of other companies
- Strengthening the company’s financial position after economic slowdowns
- Providing shares in place of dividends (scrip dividend)
- Allotting to employees or directors as part of incentive schemes
Types of Shares Commonly Issued
| Type of Share | Key Features |
|---|---|
| Ordinary (Equity) Shares | Carry voting rights and variable dividends linked to profits |
| Preference Shares | Get fixed dividends, paid before equity shares; usually no voting rights |
| Deferred Shares | Limited rights; dividends paid only after preference and ordinary shareholders |
| Redeemable Shares | May be bought back by the company after some period |
| Non-voting Shares | Do not allow holders to vote, but give ownership and possible dividends |
| Management Shares | Carry special voting privileges for company management |
| Alphabet Shares | Different classes of shares with varying rights, often labeled A, B, etc. |
Step-by-Step Legal Procedure for Issue and Allotment of Shares
- Board Resolution: The company’s board agrees to issue new shares.
- Passing Special or Ordinary Resolution: Required as per company law and Articles of Association.
- Filing of Necessary Forms: Company files statutory forms and returns as per regulations.
- Approval of Registrar of Companies (ROC): ROC grants approval and the shares are officially allotted.
Minimum Subscription and Dilution of Ownership
A public issue of shares must receive a minimum subscription, typically set at 90% of the total issue amount. If not met, the company refunds the application money to investors. When new shares are issued, existing shareholders' ownership percentage may decrease unless they buy new shares, a process known as dilution.
Rights Issue and Private Placement
A Rights Issue allows existing shareholders to purchase additional shares in proportion to their holding, usually at a discount, to protect against ownership dilution. Private placement is the offer of shares to a select group of investors, not the general public, typically making the process quicker and requiring less compliance.
Summary Table: Key Differences Between Equity and Preference Shares
| Particulars | Equity Shares | Preference Shares |
|---|---|---|
| Voting Rights | Yes | No (generally) |
| Dividend | Variable | Fixed, priority |
| Repayment Priority | After preference shares | Before equity shares |
| Redemption | Not redeemable | Can be redeemable |
Practical Example: Share Issue Process
Suppose a company issues 5,000 shares at ₹10 each. The company receives applications for all shares, collects application money, then allots shares and sends out allotment letters. If some shares are not subscribed, but the minimum subscription is reached, only those who apply are allotted shares.
Next Steps for Learners
- Review more solved examples and stepwise processes on share issue and allotment.
- Practice journal entries based on real scenarios and share types.
- Explore additional resources on class notes and solved questions on Accountancy and related Commerce subjects.
Understanding the issue of shares helps you analyze real-world company practices, prepare for exams, and build foundational knowledge for business management and finance.
FAQs on Issue of Shares in Company Accounts for Class 12
1. What is meant by issue of shares?
Issue of shares refers to the process by which a company offers its ownership units (shares) to investors in exchange for money. This helps a company raise capital for its business operations or growth. The process involves offering, accepting applications, allotting shares, and following legal and accounting procedures as per the Companies Act, 2013.
2. What are the three main steps in the procedure for issuing shares to the public?
The three main steps in the share issue procedure are:
1. Issue of Prospectus: The company invites the public to subscribe.
2. Receiving Applications: Investors apply and deposit application money.
3. Allotment of Shares: Shares are allotted after ensuring minimum subscription and compliance with regulatory requirements.
3. What is a 'share' in a company and what are its main types?
A share is a unit of ownership in a company, giving the holder certain rights like receiving dividends and attending general meetings. The main types of shares are:
- Equity (Ordinary) Shares: Provide voting rights and variable dividends.
- Preference Shares: Offer a fixed dividend and preferential rights during liquidation, but usually no voting power.
4. What is meant by issue of shares at par, at premium, and at discount?
Issue at Par: Shares are issued at their face value (e.g., ₹10 share issued at ₹10).
Issue at Premium: Shares are issued above face value (e.g., ₹10 share issued at ₹12).
Issue at Discount: Shares are issued below face value (e.g., ₹10 share at ₹9). As per Companies Act 2013, discount issues are generally prohibited except for sweat equity shares.
5. What is minimum subscription and why is it important?
Minimum subscription is the minimum amount that must be raised from investors (usually 90% of the issued amount) for a valid allotment of shares. If not met, the issue fails and all application money must be refunded to applicants as per SEBI norms and Companies Act, 2013.
6. What is the difference between equity shares and preference shares?
Equity shares provide variable dividends, voting rights, and represent true ownership but are paid last during liquidation. Preference shares receive fixed dividends and have priority over equity shares for dividends and repayment, but usually lack voting rights.
7. What are the journal entries for issue of shares at premium?
For shares issued at a premium, the basic entries are:
- Bank A/c Dr. (total amount received)
- To Share Capital A/c (face value portion)
- To Securities Premium Reserve A/c (premium portion)
This records the collection and correct allocation of funds in compliance with Companies Act.
8. Why might a company issue new shares instead of taking a loan?
Companies issue new shares to raise permanent capital without creating a debt repayment obligation. This avoids fixed interest payments, strengthens the balance sheet, lowers financial risk, and supports long-term expansion.
9. What legal framework governs the issue of shares in India?
The Companies Act, 2013 and rules by the Ministry of Corporate Affairs regulate share issuance. For listed/public offers, SEBI regulations also apply to ensure fair and transparent practices in accordance with the latest guidelines.
10. How does a private placement differ from a public offer?
A public offer invites the general public to subscribe for shares via prospectus and follows strict regulations. A private placement involves offering shares to a selected group of investors (up to 200 in a year), is quicker, and has fewer compliance requirements.
11. What is a Rights Issue of shares?
A Rights Issue is when existing shareholders are given the right to buy additional shares, typically at a discounted price, in proportion to their current holdings. This allows them to maintain their percentage ownership and avoid dilution.
12. What happens to existing shareholders' ownership when new shares are issued?
When a company issues new shares, the total number of shares increases, causing dilution of existing shareholders' ownership percentage unless they buy more shares in the new issue.
