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
Share Premium
= 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
Share Premium
= 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
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 Price 65 000 * $ 0.50 = $ 32 500 | |
CR Share holding account | ||
2 | On Allotment | |
DR Bank | No of shares issued * Allotment Price 50 000 * $ 0.70 = $ 35 000 | |
CR Share holding account | ||
3 | Nominal Value | |
DR Share holding account | No of shares issued * Nominal Price 50 000 * $ 1 | |
CR Ordinary share capital | ||
4 | Premium on shares | |
DR Share holding account | No shares issued * Premium 50 000 * $ 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 | ||
