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Class 12 Accountancy Chapter 6 Accounting for Share Capital — Formulas & Key Points
Class 12 Accountancy Chapter 6 focuses on Accounting for Share Capital — a foundational topic for understanding how companies raise funds through equity. Share capital represents the ownership stake issued to shareholders and is crucial for corporate accounting. This formula sheet covers all key concepts, journal entries, and balance sheet treatments needed to master this chapter. Whether you're preparing for board exams or internal assessments, these formulas and key points will strengthen your understanding of share capital accounting and help you solve practical problems with confidence.
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Key takeaways
- ✓Share Capital accounts include Equity Share Capital, Preference Share Capital, Share Application, Share Allotment, and Share Calls with distinct journal entries for each stage.
- ✓Forfeiture of shares involves cancelling shares for non-payment, with specific entries to transfer amounts to Forfeited Shares Account reducing Share Capital.
- ✓Reissue of forfeited shares can occur at par, premium, or discount, with Capital Reserve credited for any profit on reissue after adjusting discount.
- ✓Calls-in-Arrears and Calls-in-Advance are contra accounts shown as deductions and current liabilities respectively in the Balance Sheet.
- ✓Discount on issue of shares is a capital loss shown under 'Miscellaneous Expenditure' on the assets side, while Securities Premium is a capital reserve.
- ✓The maximum discount on reissue of forfeited shares cannot exceed the amount forfeited on those specific shares.
- ✓Under-subscription, partial allotment, pro-rata allotment, and over-subscription require different treatment of application money and adjustment entries.
What is Share Capital? Definition & Components
Share capital is the amount of money invested by shareholders in a company in exchange for ownership rights. As per NCERT Accountancy Part II, it comprises two main parts: Authorised Capital (maximum capital a company can issue) and Issued Capital (capital actually issued to shareholders). Paid-up Capital is the amount shareholders have actually paid against issued shares. Understanding these three components is essential before solving any accounting entry related to share capital.
Types of Shares: Equity and Preference Shares
NCERT Chapter 6 explains two main types of shares: Equity Shares (ordinary shares with voting rights and variable dividends) and Preference Shares (with fixed dividends and priority over equity shares in repayment of capital). Preference shares may be cumulative (unpaid dividends accumulate) or non-cumulative. These distinctions affect accounting treatment and balance sheet presentation. Equity shares represent permanent capital, while preference shares occupy a middle position between equity and debt.
Journal Entries for Issue of Shares at Par Value
When shares are issued at par (face value), the journal entry is: Dr. Bank A/c | Cr. Share Capital A/c (same amount). If shares are issued partly paid, the entry becomes: Dr. Bank A/c | Cr. Share Capital A/c (for amount received) and the balance remains outstanding as Calls Pending. When final call is made and received, Dr. Bank A/c | Cr. Calls Pending A/c. These basic entries form the foundation of share capital accounting in Chapter 6.
Accounting for Shares Issued at Premium or Discount
When shares are issued above par value (premium), the entry is: Dr. Bank A/c | Cr. Share Capital A/c (at par) | Cr. Share Premium A/c (excess amount). For shares issued below par (discount — rare, as per NCERT), Dr. Bank A/c | Dr. Discount on Issue of Shares | Cr. Share Capital A/c. Share Premium is a capital reserve and cannot be distributed as dividend. Discount on issue reduces the credit side of balance sheet, appearing as a deduction from assets.
Calls in Arrears and Calls in Advance — Accounting Treatment
Calls in Arrears occur when shareholders fail to pay dues on allotment or calls. They appear as a current asset (receivable) in the balance sheet. Calls in Advance happen when shareholders pay more than called-up capital; these appear as a current liability. Per NCERT, Calls in Arrears are shown as a deduction from Called-up Capital, while Calls in Advance are shown as an addition to Paid-up Capital. Both require separate disclosure on the balance sheet for transparency.
Forfeiture of Shares: Journal Entries & Balance Sheet Impact
Share Forfeiture occurs when shareholders fail to pay calls and the company cancels their shares. Journal entry: Dr. Share Capital A/c | Dr. Calls in Arrears A/c | Cr. Forfeited Shares A/c. When forfeited shares are reissued, Dr. Bank A/c | Cr. Forfeited Shares A/c (reissue price) | Cr. Share Capital Reserve A/c (if reissued at higher price). Forfeited Shares appears as a deduction from Issued Capital. Any gain on reissue goes to Share Capital Reserve, not Share Premium.
Balance Sheet Presentation of Share Capital — NCERT Format
NCERT Accountancy prescribes a specific balance sheet format for share capital under Equity and Liabilities. It shows: Authorised Capital, Issued Capital, Subscribed Capital, Called-up Capital, Less: Calls in Arrears, Paid-up Capital, plus Calls in Advance. Preference Share Capital and Equity Share Capital are shown separately with their respective premiums. Forfeited shares are deducted from issued capital. This presentation ensures complete disclosure and compliance with accounting standards for Class 12 examinations.
Key Formulas for Share Capital Calculations
Essential formulas: Issued Capital = Authorised Capital (or less) | Subscribed Capital = Amount offered to public | Called-up Capital = Subscribed Capital × Rate per share called | Paid-up Capital = Called-up Capital − Calls in Arrears + Calls in Advance | Share Premium = (Issued Price − Par Value) × No. of Shares | EPS (basic) = Profit ÷ Weighted Avg. Equity Shares Outstanding. These formulas are repeatedly used in practical problems throughout NCERT Chapter 6.
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Common Mistakes & Exam Tips for Share Capital Questions
Common errors: Confusing Authorised Capital with Issued Capital | Treating Share Premium as income (it's a capital reserve) | Showing Calls in Arrears incorrectly on balance sheet | Forgetting Calls in Advance adjustment | Writing forfeiture entry incorrectly. Exam tips: Always create a T-account for Share Capital A/c to track all movements | Double-check the balance sheet format used in your NCERT | Distinguish between preference and equity share treatments | Practice 5–6 forfeiture & reissue problems before the exam. These tips significantly improve answer accuracy.
Frequently asked questions
What is the difference between Authorised Capital and Issued Capital?+
Authorised Capital is the maximum capital a company can legally issue as per its Memorandum of Association. Issued Capital is the actual amount offered to the public. Issued Capital cannot exceed Authorised Capital. For example, if Authorised is ₹10 lakhs, Issued can be ₹7 lakhs, but never more than ₹10 lakhs.
Why can't Share Premium be distributed as dividend?+
Per NCERT and Companies Act rules, Share Premium is a capital reserve and is intended to strengthen the company's capital base, not for distribution. It can only be used for issuing bonus shares, writing off preliminary expenses, or redeeming debentures — ensuring long-term financial stability of the firm.
Does CBSETUTOR.ai offer free trial access for Accountancy students?+
Yes, CBSETUTOR.ai offers a free trial period for new users to explore our AI tutoring platform, including full access to Accountancy Chapter 6 formulas, video explanations, and practice problems. Sign up on our website to activate your free trial and start learning immediately without payment.
Is Share Capital accounting content available in Hindi medium on CBSETUTOR.ai?+
Absolutely. CBSETUTOR.ai supports both English and Hindi-medium CBSE students with full Chapter 6 Accountancy content, including formula sheets, journal entries, and solved examples in Hindi. Our AI tutors are available 24/7 to answer doubts in your preferred language.
What is the journal entry when shares are forfeited for non-payment of calls?+
Dr. Share Capital A/c (at par) | Dr. Calls in Arrears A/c (amount due) | Cr. Forfeited Shares A/c. This cancels the shareholder's investment and removes them from the register. When reissued, the new entry credits Forfeited Shares and either Share Premium or Share Capital Reserve, depending on reissue price.
How are Calls in Advance shown in the balance sheet?+
Calls in Advance are shown as an addition to Paid-up Capital in the Equity & Liabilities section of the balance sheet. They represent amounts received from shareholders beyond the called-up capital and are treated as a liability until actually called and adjusted.
Can preference shares have voting rights under NCERT accounting rules?+
NCERT specifies that preference shares are normally non-voting, granting priority only in dividend and capital repayment. However, in specific cases (e.g., if dividend is not paid for 2+ years), preference shareholders may gain voting rights as per Companies Act, a detail sometimes tested in board exams.
What is the purpose of Share Capital Reserve created on reissue of forfeited shares?+
Share Capital Reserve is created when forfeited shares are reissued at a price higher than original issue price. This capital reserve strengthens equity and cannot be distributed as dividend, maintaining the company's permanent capital base in line with NCERT accounting conventions.
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