The share capital in a limited company consists of number of shares. These shares are denominated in units of monetary value - for example, \$1 or \$2. The value assigned to each share is called the nominal price or par value.

Issued price of a share is the price at which company issues its shares to general public. The shares may be issued at par (nominal price) or at a premium (above par value). For example ordinary shares of \$1 are issued at \$1.20 (Issued price – Nominal value = Premium of \$0.20).

Example 1 – Issue of shares at par

A company issued 100 000 ordinary shares of \$ 0.75 at par.

Ordinary share capital

= Number of shares * Nominal price

= 100 000 shares * \$ 0.75

= \$ 75 000

 General Journal \$ \$ Bank (DR) 75 000 To Ordinary Share Capital 75 000

 Statement of changes in equity for the year ended 31st December 2019 Ordinary Share capital Retained Earnings General Reserve Share Premium Revaluation Reserve Total Balance b/f *** *** *** *** *** *** Issue of shares at par 75 000 75 000

Example 2- Issue of shares at premium

A company issued 80 000 shares of \$ 1 at \$ 1.20

Ordinary share capital

= Number of shares * Nominal price

= 80 000 shares * \$ 1

= \$ 80 000

= Issued price – Nominal price

= \$ 1.20 - \$ 1

= \$ 0.20

 General Journal \$ \$ Bank (DR) [ 80 000 * \$ 1.20 ] 96 000 To Ordinary Share Capital [ 80 000 * \$ 1 ] 80 000 To Share Premium [ 80 000 * \$ 0.20 ] 16 000

 Statement of changes in equity for the year ended 31st December 2019 Ordinary Share capital Retained Earnings General Reserve Share Premium Revaluation Reserve Total Balance b/f *** *** *** *** *** *** Issue of shares at premium 80 000 16 000 96 000

Example 3 – Issue of shares at a premium

A company issued 150 000 shares of \$ 0.80 at a premium of 30%.

Ordinary share capital

= Number of shares * Nominal price

= 150 000 shares * \$ 0.80

= \$ 120 000

Issued Price

= 0.80 * 130/100

= \$ 1.04

= Issued price – Nominal price

= \$ 1.04 - \$ 0.80

= \$ 0.24

 General Journal \$ \$ Bank (DR) [ 150 000 * \$ 1.04 ] 156 000 To Ordinary Share Capital [ 150 000 * \$ 0.80 ] 120 000 To Share Premium [ 150 000 * \$ 0.24 ] 36 000

 Statement of changes in equity for the year ended 31st December 2019 Ordinary Share capital Retained Earnings General Reserve Share Premium Revaluation Reserve Total Balance b/f *** *** *** *** *** *** Issue of shares at premium 120 000 36 000 156 000

The share capital of a company may be subject to certain changes. The nominal price of a share cannot be changed, but the number of shares can be increased by means of

1. Prospectus issue
2. Bonus issue
3. Rights Issue

Prospectus Issue

An investor buying a company’s shares usually pay in installments. They usually pay a certain amount with an application form as an offer to purchase the shares (on application). The company responds the offer by sending the investor a letter of allotment and requesting further payment (on allotment). A temporary share holding account is used to record money received on application and allotment.

The main double entries are:

 Ledger Entries Workings 1 On Application DR Bank No of applications * Application Price CR Share holding account 2 On Allotment DR Bank No of shares issued * Allotment Price CR Share holding account 3 Nominal Value DR Share holding account No of shares issued * Nominal Price CR Ordinary share capital 4 Premium on shares DR Share holding account No shares issued * Premium CR Share premium account 5 Refund unsuccessful applicants DR Share holding [No of applications – No of shares issued] * Application price CR Bank

Worked example

F Limited is a large retail company. On 1 February 2016, the company invited applications for 50 000 ordinary shares of \$ 1 each at an issue price of \$ 1.20. The following terms applied:

Payable on application           \$ 0.50

Payable on allotment              \$ 0.70

Applications were received for 65 000 shares.

All monies received in respect of the share issue were posted to the bank account and a share issue holding account until the shares were allotted.

At the time of allotment, transfers were made to the share capital account and the share premium account and monies were returned to the unsuccessful applicants.

Workings

 Ledger Entries Workings 1 On Application DR Bank No of applications * Application Price65 000 * \$ 0.50 = \$ 32 500 CR Share holding account 2 On Allotment DR Bank No of shares issued * Allotment Price50 000 * \$ 0.70 = \$ 35 000 CR Share holding account 3 Nominal Value DR Share holding account No of shares issued * Nominal Price50 000 * \$ 1 CR Ordinary share capital 4 Premium on shares DR Share holding account No shares issued * Premium50 000 * \$ 0.20 CR Share premium account 5 Refund unsuccessful applicants DR Share holding [Applications – Issued] * Application price[65 000 – 50 000] * \$ 0.50 = \$ 7 500 CR Bank

 DR                                                                      Bank Account                                                                      CR \$ \$ Shareholding – Application 32 500 Shareholding 7 500 Shareholding – Allotment 35 000 Balance c/ d 60 000 67 500 67 500 Balance b/d 60 000 DR                                                              Share Holding Account                                                               CR \$ \$ Ordinary share capital 50 000 Bank – Application 32 500 Share premium 10 000 Bank – Allotment 35 000 Bank 7 500 67 500 67 500 DR                                                       Ordinary share capital Account                                                         CR \$ \$ Balance c/d 50 000 Share holding 50 000 50 000 50 000 Balance b/d 50 000 DR                                                              Share premium Account                                                                CR \$ \$ Balance c/d 10 000 Share holding 10 000 10 000 10 000 Balance b/d 10 000