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Today, we're going to learn about the types of shares that can be issued by a joint stock company. Can anyone tell me what the two main types of shares are?
I think they are equity shares and preference shares.
Correct! Equity shares have no fixed dividend, while preference shares offer a fixed rate of dividend and priority in payment. Remember this with the acronym 'E for Equity, P for Preference,' which highlights their key characteristics.
Why does preference have priority?
Great question! Preference shareholders are paid dividends before equity shareholders, which reduces risk for those shareholders. It's important to understand how share types affect dividend distribution.
In summary, equity shares are at the mercy of profits, while preference shares promise a fixed return.
Let's cover some basic terms related to shares. Who can define 'face value' for me?
Isn't face value the original value of a share?
Exactly! Now, what about 'issue price'?
I think it's the price at which shares are sold.
That's right! Shares can be issued at par, premium, or discount. Remember these terms with the mnemonic 'PID: Par, Issue, Discount' to help recall these options. Each affects the company's accounting in different ways.
Lastly, 'calls' are amounts to be paid in installments. Think of 'CALLS as CO-PAYments'. They're crucial for understanding share acquisition.
Now that we know the types of shares and key terms, let's talk about accounting for shares issued at par, premium, and the processes of forfeiture and reissue. Can anyone explain what happens when shares are issued at par?
I think it means the shares are sold for the same value as their face value?
Exactly! So, for a ₹10 share issued at ₹10, the journal entries would first be: Bank A/c Dr. To Share Application A/c during application.
And what happens after that?
On allotment, we debit Share Application A/c and credit Share Capital A/c. Now, what if the shares are issued at a premium?
We would credit the Securities Premium Account with the excess.
Exactly! For example, if a ₹10 share is issued at ₹12, we would have extra ₹2 in the Securities Premium Account. In summary, remember: 'At par, simple entries; at premium, add a bonus!'
Great work! Now, let's discuss what happens if a shareholder defaults on payments. What do we call that?
That's called forfeiture, right?
Yes! Forfeiture occurs when calls are not paid. Reissued shares can occur, sometimes even at a discount, which cannot exceed the amount forfeited. How can we remember this?
How about the phrase 'Forfeit and Reissue—cover what you lose'?
That's a clever way to remember! So, when shares are reissued, we need to account for the original forfeiture. Any other questions?
What if the reissue price is higher than the forfeited amount?
That's an important consideration, and it’s always best to consult the defined procedures. Today's key takeaway is: 'Hold onto assets but be ready to adjust.'
Equity shares, wild and free, pay dividends only when dividends be.
Imagine a merchant with two bags—one labeled 'Equity' and the other 'Preference.' One bag offers sweet candy (profits), and you only get them when the profit is good, while the other promises candy regularly, giving you a feel of security.
Remember 'FIPS: Face, Issue, Premium, Securities' to track share pricing terms.
Think of 'EPE' for Equity, Preference, and Entry to guide your understanding of share types.
Term
What are equity shares?
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Term
What is the significance of the Securities Premium Account?
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Term
What does forfeiture of shares imply?
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Shares that do not have a fixed rate of dividend; dividends depend on the company's profits.
Shares that have a fixed rate of dividend and have priority over equity shares in dividend payments.
The nominal or original value of a share stated on the share certificate.
The price at which a share is issued, which can be at par, premium, or discount.
Amounts that shareholders are required to pay in installments.
The cancellation of shares due to a shareholder's failure to pay calls.
An account representing the premium received on the issue of shares above face value.
This section discusses the various types of share issues, their accounting treatment, and the procedures involved in the issue of shares by a joint stock company.
The section outlines the types of shares (equity and preference), the basic terms associated with share issues, and details the accounting treatment for issuing shares at par, at a premium, and the process of forfeiture and reissue of shares. Understanding these concepts is crucial for the preparation of accurate and compliant financial statements for joint stock companies.
This section focuses on the accounting for the issue of shares by a joint stock company, emphasizing its importance in proper financial reporting. It begins by categorizing shares into Equity Shares with variable dividends and Preference Shares which provide fixed dividends.
When shares are issued at their face value, such as a face value of ₹10 being issued at ₹10, specific journal entries are made for application and allotment, reflecting the movement of funds and obligations in the company's accounting books.
Shares may also be issued at a price above their face value. For example, a face value of ₹10 being issued at ₹12 results in the excess being credited to the Securities Premium Account.
Occasionally, shares may be forfeited if shareholders fail to meet payment calls; these can then be reissued, possibly at a discount, ensuring the original amount forfeited is not exceeded.
This comprehensive overview of share issues provides the foundational knowledge necessary for understanding joint stock company accounts.