Issue Of Shares -
Company Accounts

Issue of shares is the process of raising funds by passing new shares to new or existing shareholders both individuals and corporate bodies.

However, some distinction may be chalked out between passing new shares or allotment of share and a share transfer. Through allotment of shares, shares are created and issued by the company to the people who eventually become the company's shareholders. A share transfer, on the other hand, involves transfer of existing shares from an existing shareholder to someone else.

Reasons For Issue Of Shares:

The main reason for issue new shares is to raise money to finance the business.

  1. With the incorporation of the company, shares are normally issued that enables the company to trade.
  2. Shares may be issued in order to repay some or all of the company's liability.
  3. New shares may be issued for expansion of the business both verticle and horizontal.
  4. New shares may be issued to finance a particular project that requires significant capital.
  5. A share issue could be used to fund the purchase of another company.
  6. The company can make a bonus issue of shares to existing shareholders. Thus the company may utilize its own resources or profits to fund the allotment instead. This also helps to reduce the the issue price of shares which makes them more marketable to investors.
  7. If shareholders prefer not to receive a cash dividend, the company may allot shares of the same value as the cash dividend.

Accounting Treatment For Issue Of Shares:

(A) Issue of Shares For Consideration Other Than Cash:

Sometimes shares are issued to the promoters of the company in lieu of the services provided by them during the incorporation of the company. The issue price of these shares is normally debited to 'Goodwill A/c' and journal entry is made as follows:

Goodwill A/c..............Dr.

  To Share Capital A/c

(Being shares issued is lieu of cash as payment for the services provided by the promoters)

Also there may be case when a company does not have sufficient funds for the purchase of fixed assets or for payment to creditors at that juncture, the company may offer and allot its shares to vendors/ creditors in lieu of cash. Any allotment of shares against which cash is not to be received is called 'Issue Of Shares For Consideration Other Than Cash'.

For instance, machinery purchased and payment made by issuing shares.

In case such case, the following journal entry may be passed:

1. Assets A/c ............Dr.

  To Vendors A/c

(Being machinery acquired)

2. Vendors/Creditors A/c..........Dr.

  To Share Capital A/c

(Being xx number of shares @ xx each issued as fully paid in discharge of liabilities)

(B) Issue of Shares For Cash:

Journal Entries: 1. For Receipt Of Application Money:

Bank A/c.........Dr.

  To Share Application A/c

(Being application money received for xx number of shares @ Rs. x)

2. For Allotment of Shares:

Share Application A/c.............Dr.

  To Share Allotment A/c

(Being application money received transferred to share capital account on allotment of shares)

3. If The Excess Application Money Refunded On Rejected Application:

Share Application A/c...........Dr.

(with actual refund)

  To Bank A/c

(Being the excess application money refunded on rejection)

4. If Excess Application Money Adjusted Towards Allotment Money Due:

Share Application A/c............Dr.

  To Share Allotment A/c

(Being the excess application money adjusted towards the allotment due amount)

5. For Making Allotment Money Due (Rising Of Account):

Share Allotment A/c..............Dr.

  To Share Capital A/c

(Being allotment money @ Rs. X on xx numbers of shares made due as per Boards Resolution No. ... Dated ...)

6. For Receipt Of Allotment Money:

Bank A/c..........Dr.

  To Share Allotment A/c

(Being allotment money received on xx number of shares @ Rs. X per share)

7. For Making First Call Money Due (Rising Of Account):

Share First Call And Final A/c..............Dr.

  To Share Capital A/c

(Being first call money @ Rs. X on xx numbers of shares made due as per Boards Resolution No. … Dated …)

8. For Receipt Of First Call Money:

Bank A/c.............Dr.

  To Share First Call A/c

(Being first call money received on xx number of shares @ Rs. X per share)


Similar entries will be passed for second call, third and final call, if any.