Lecture on Company Accounts: Issue of Shares

Introduction

• Focus: How to account for the issue of shares in company accounts.
• Encouragement to subscribe to channel.

Types of Companies

By Liability

1. Limited by Shares
2. Limited by Guarantee
3. Unlimited Companies (rare)

By Ownership

1. Public Company
   • Can issue shares to public.
2. Private Company
   • Cannot issue shares to public.
   • Limited number of shareholders (1-50 in Ghana).

Key Characteristics of Companies

• Limited Liability
• Formation typically involves multiple individuals pooling funds.
• Differences from Partnerships (e.g., nature, operations).

Accounting for the Issue of Shares

Share Concepts

• Share: Right to ownership in the company.
• Authorized Share: Maximum shares a company can issue, registered with the registrar.
• Par Value Shares: Shares with a value attached at registration.
• No Par Value Shares: Shares without a value at registration, value assigned when issued.

Share Types in Accounting

1. Authorized Share Capital
   • Maximum limit of shares a company can issue.
2. Issued Share Capital
   • Portion of authorized shares issued to the public.
3. Unissued Share Capital
   • Portion of authorized shares not yet issued.
4. Subscribed Share Capital
   • Portion of issued shares bought by the public.
5. Unsubscribed Share Capital
   • Portion of issued shares not yet bought by the public.
6. Paid-up Share Capital
   • Portion of subscribed shares that have been paid for.
7. Unpaid-up Share Capital
   • Portion of subscribed shares yet to be paid for.
8. Called-up Share Capital
   • Portion of subscribed shares that shareholders are asked to pay.
9. Uncalled Share Capital
   • Portion of subscribed shares shareholders are yet to be asked to pay.

Share Issue Process

• Application: Applying and paying part of share value.
• Allotment: Assigning shares formally to shareholders.
• Calls: Requesting additional payments via installments (e.g., first call, final call).

Accounting Entries for Share Issue

1. Cash Entries: Receiving Money

   • Application: Debit Bank, Credit Application Account.
   • Allotment: Debit Bank, Credit Allotment Account.
   • First Call: Debit Bank, Credit First Call Account.
   • Second Call: Debit Bank, Credit Second Call Account.

2. Closing Temporary Accounts

   • Transfer balances from Application, Allotment, and Call Accounts to Stated Capital Account.
   • Temporary Accounts: No balance carry down. Transfer to Stated Capital Account.
   • Stated Capital and Bank: Closed with balance carry down.

Example Problem

Problem Statement

• Leonardo Limited issued 20,000 ordinary shares at $2 each, payable as follows:
  • Application: $0.50/share
  • Allotment: $0.80/share
  • First Call: $0.30/share
  • Second & Final Call: $0.40/share
• Applications were received for all shares. Prepare necessary ledger accounts and financial position extract.

Solution Steps

1. Workings

   • Application Receipts: 20,000 shares x $0.50 = $10,000
   • Allotment Receipts: 20,000 shares x $0.80 = $16,000
   • First Call: 20,000 shares x $0.30 = $6,000
   • Second Call: 20,000 shares x $0.40 = $8,000

2. Double Entries

   • Application: Debit Bank $10,000, Credit Application Account $10,000
   • Allotment: Debit Bank $16,000, Credit Allotment Account $16,000
   • First Call: Debit Bank $6,000, Credit First Call Account $6,000
   • Second Call: Debit Bank $8,000, Credit Second Call Account $8,000

3. Transferring Temporary Accounts to Stated Capital

   • Application: Debit Application $10,000, Credit Stated Capital $10,000
   • Allotment: Debit Allotment $16,000, Credit Stated Capital $16,000
   • First Call: Debit First Call $6,000, Credit Stated Capital $6,000
   • Second Call: Debit Second Call $8,000, Credit Stated Capital $8,000

Final Balances

• Bank Account Balance: $40,000
• Stated Capital Account Balance: $40,000

4. Statement of Financial Position Extract
   • Assets: Bank $40,000
   • Equity: Stated Capital $40,000

Next Steps

• Upcoming Part 2 will cover over-subscription, forfeiture of shares, reissue of forfeited shares, and shareholders' accounts.