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Ch 8 · Companies · NCERT — Company Accounts and Analysis of Financial Statements

Accounting for
Share Capital

90 MCQs 60 Flashcards NCERT Class 12 Updated May 2026
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Chapter Overview

Chapter 8 is the gateway to Company Accounts. A company is a separate legal person formed by registration under the Companies Act, 2013, with perpetual succession, limited liability and (in public companies) freely transferable shares. The chapter begins with the basic features and types of companies (Public, Private, OPC) and the six tiers of share capital — Authorised, Issued, Subscribed, Called-up, Paid-up and the special Reserve Capital under Section 65.

The bulk of the chapter is the journal-entry treatment of issuing equity (and preference) shares. Issue at par follows the standard Application → Allotment → Calls sequence. Issue at a premium routes the excess to Securities Premium A/c, whose use is restricted to the five purposes in Section 52(2). Issue at a discount is now barred by Section 53, with the only exception being Sweat Equity under Section 54. Sub-topics include Calls in Advance (Section 50, 12% p.a. default) and Calls in Arrears (10% p.a. default), and the handling of over-subscription via pro-rata allotment — where surplus application money is adjusted on allotment (and on calls if AoA permits).

The hardest examinable area is Forfeiture and Re-issue. Forfeiture cancels the shares of a defaulting shareholder; the called-up amount comes off Share Capital, the unpaid call goes to Calls in Arrears, and the amount actually paid is parked in Forfeited Shares A/c. On re-issue, the maximum permissible discount equals the balance in Forfeited Shares A/c relating to those shares; the residual is transferred to Capital Reserve. The chapter closes with issues for consideration other than cash (vendors, promoters, underwriters), Sweat Equity / ESOP awareness, and the Schedule III disclosure of Share Capital on the face of the Balance Sheet.

What You'll Learn
Key Concepts
Definition
Company concept
A voluntary association incorporated under the Companies Act, 2013 — separate legal entity with perpetual succession and limited liability.
Capital tiers
6 Types of Share Capital
Authorised → Issued → Subscribed → Called-up → Paid-up. Plus Reserve Capital under Section 65, callable only on winding-up.
Classes
Equity vs Preference
Equity = residual owners with vote and variable dividend. Preference (Sec 43) = fixed dividend with priority + priority on capital repayment.
Premium
Securities Premium uses
Section 52(2): bonus shares, write-off preliminary expenses, write-off issue expenses, premium on redemption, buy-back. NOT for dividend.
Calls
Calls in Advance / Arrears
Advance (Sec 50): pay 12% interest, no dividend rights. Arrears: charge 10% interest, deducted from Called-up Capital.
Allotment
Pro-rata allotment
Used in over-subscription. Allotment ratio = Issued : Applied. Surplus application money first adjusted on allotment, then calls (if AoA permits).
Default
Forfeiture entries
Share Capital Dr (called-up) / To Calls in Arrears (unpaid) / To Forfeited Shares A/c (paid-up). Cancel premium if not received.
Re-issue
Re-issue + Capital Reserve
Max discount on re-issue = balance in Forfeited Shares A/c. Residual after re-issue → Capital Reserve A/c.
Non-cash
Issue for consideration other than cash
To vendors (purchase consideration), promoters (Goodwill A/c Dr) and underwriters (commission). Premium goes to Securities Premium A/c.
Special
Sweat Equity / ESOP
Sweat Equity (Sec 54): equity to directors/employees for know-how, 3-year lock-in. ESOP: option to subscribe at pre-set price after vesting.
Sample MCQs
Q1. Paid-up Capital is calculated as:
A. Subscribed Capital plus Calls in Advance
B. Issued Capital minus Reserve Capital
C. Authorised Capital minus Unissued Capital
D. Called-up Capital minus Calls in Arrears
Paid-up Capital = Called-up Capital − Calls in Arrears. Calls in Advance are NOT part of Paid-up Capital — they are shown separately as a current liability.
Q2. AB Ltd forfeited 300 shares of ₹10 each (fully called), on which ₹6 per share had been received. They were later re-issued at ₹9 per share fully paid-up. The amount transferred to Capital Reserve is:
A. ₹1,500
B. ₹2,700
C. ₹900
D. ₹1,800
Forfeited Shares A/c balance = 300 × ₹6 = ₹1,800. Discount on re-issue = (₹10 − ₹9) × 300 = ₹300. Capital Reserve = ₹1,800 − ₹300 = ₹1,500.
Q3. M Ltd issued 50,000 shares of ₹10 each. Applications were received for 75,000 shares. Application money was ₹3 per share. Pro-rata allotment is made to all. Surplus application money to be adjusted on allotment is:
A. ₹75,000
B. ₹2,25,000
C. ₹1,50,000
D. ₹50,000
Application money received = 75,000 × ₹3 = ₹2,25,000. Application money attributable to shares allotted (50,000) = 50,000 × ₹3 = ₹1,50,000. Surplus to be adjusted on allotment = ₹2,25,000 − ₹1,50,000 = ₹75,000.
Frequently Asked Questions
What are the different types of Share Capital?
There are six categories: (1) Authorised (Nominal) Capital — the maximum amount stated in the MoA; (2) Issued Capital — portion of Authorised offered to the public; (3) Subscribed Capital — portion of Issued for which applications are received; (4) Called-up Capital — portion of Subscribed that the company has called for payment; (5) Paid-up Capital — Called-up minus Calls in Arrears; and (6) Reserve Capital — the uncalled portion that, by special resolution under Section 65, can be called only on winding-up. The relationship Authorised >= Issued >= Subscribed >= Called-up >= Paid-up always holds.
What is Securities Premium and what can it be used for?
Securities Premium is the excess over the face value charged on the issue of shares. It is a CAPITAL receipt and is shown under Reserves and Surplus in Schedule III. Section 52(2) restricts its use to five purposes only: (a) issue of fully paid-up bonus shares; (b) writing off preliminary expenses; (c) writing off discount/expenses on issue of shares or debentures; (d) providing premium payable on redemption of preference shares or debentures; (e) buy-back of own securities under Section 68. It cannot be used to pay any kind of dividend or to write off operating losses.
What is the difference between Calls in Advance and Calls in Arrears?
Calls in Advance is money received from a shareholder before the call falls due — allowed only if the AoA permits (Section 50). It is shown as a separate liability (not part of Share Capital), and the company pays interest on it at up to 12% p.a. (Table F default). The shareholder is NOT entitled to dividend on this advance. Calls in Arrears is money due but not yet paid by a shareholder — shown as a deduction from Subscribed and Called-up Capital in the Notes to Accounts. The company can charge interest at up to 10% p.a. (Table F default).
How is forfeiture of shares accounted for?
Forfeiture is the compulsory cancellation of shares for non-payment of calls, authorised by the Articles. The journal entry is: Share Capital A/c Dr (called-up amount on those shares) / To Calls in Arrears A/c (unpaid amount) / To Forfeited Shares A/c (amount already received). If the shares were issued at premium and the premium was NOT received, Securities Premium A/c is also debited (cancelled) for the unpaid premium. If the premium had been received, the Securities Premium A/c is left untouched. Until re-issue, the Forfeited Shares A/c balance is added to Subscribed and Paid-up Capital in the Balance Sheet.
What is the maximum discount allowed on re-issue of forfeited shares?
The maximum discount on re-issue is the amount lying in the Forfeited Shares A/c in respect of those shares. So if the company has forfeited 100 shares of face value ₹10 on which ₹4 had been paid, the Forfeited Shares A/c carries ₹400, and the maximum discount on re-issue of those 100 shares is ₹400 (i.e., they can be re-issued for as low as ₹6 per share fully paid). After re-issue, the unused balance in Forfeited Shares A/c is transferred to Capital Reserve A/c.
Can equity shares be issued at a discount under the Companies Act 2013?
No. Section 53 of the Companies Act, 2013 expressly prohibits a company from issuing shares at a discount, and any such issue is VOID. The only carve-out is Sweat Equity Shares issued under Section 54 (to directors or employees for know-how / IP / value additions), which are subject to a 3-year lock-in and require valuation by a registered valuer. The earlier provision in Section 79 of the Companies Act, 1956 (which allowed discount issue with conditions) has been repealed.