Understanding Accounting for Share Capital: A Guide for Class 12 Students

Welcome to your guide on Accounting for Share Capital, a crucial topic in Class 12 Accountancy Part 2, Chapter 1. This chapter delves into the essential concepts of share capital, providing you with a solid foundation for understanding how companies manage their finances. Let’s break down this topic to make it easier for you to grasp.

What is Share Capital?

A company, as an artificial person, cannot generate its own capital. Instead, it must obtain funds from various individuals or entities, known as shareholders. The amount of money that these shareholders contribute is termed as share capital. This capital is vital for the company to start operations, expand, or manage day-to-day activities.

Types of Share Capital

There are different types of share capital that you need to know about:

1. Authorized Capital (or Nominal Capital): This is the maximum amount of share capital that a company is allowed to issue as per its Memorandum of Association. It’s like a cap on how much the company can raise.

2. Issued Capital: This refers to the portion of authorized capital that the company has actually issued to shareholders. It represents the shares that are currently in circulation.

3. Subscribed Capital: This is the part of the issued capital that has been accepted by the shareholders. It shows how much of the issued capital the shareholders have agreed to take.

4. Paid-up Capital: This is the amount of money that shareholders have paid for their shares. It is a subset of subscribed capital, representing the actual cash or assets the company has received.

How Share Capital is Raised

Companies can raise share capital in various ways:

• Initial Public Offering (IPO): When a company issues shares to the public for the first time.
• Rights Issue: Offering additional shares to existing shareholders at a discounted rate.
• Private Placement: Selling shares directly to a select group of investors rather than the public.

Importance of Share Capital

Share capital is crucial for several reasons:

• Funding Operations: It provides the necessary funds for the company to operate and grow.
• Financial Stability: Adequate share capital enhances the company’s financial stability and credibility.
• Growth and Expansion: It enables companies to invest in new projects, technologies, or expand their business.

Accounting for Share Capital

In your accounting records, share capital is documented through various accounts:

• Share Capital Account: Records the total amount of share capital issued and paid-up.
• Share Application Account: Keeps track of applications for shares before they are allotted.
• Share Allotment Account: Records the amount due on allotment of shares.

Example: If a company issues 1,000 shares at ₹10 each, the total share capital would be ₹10,000. If the shareholders pay ₹5 on application and ₹5 on allotment, the Share Application Account and Share Allotment Account would each reflect ₹5,000.

Conclusion

Understanding share capital is fundamental to grasping how companies manage their finances and operations. As you dive into this topic, remember that share capital is not just about numbers—it’s about understanding how companies raise and utilize funds to achieve their business goals.

Feel free to revisit this guide as needed, and good luck with your studies!