Page 23 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 1.3.2 Issue of Shares at a Discount (Under Section 79)

When a share is issued at a price lower than the face value, par value or nominal value then it is
said it has been issued at discount. For instance, if a share of 100 is issued by a company for
90, it is said that company has issued the share at discount of 10%. To issue the shares at discount
a company has to fulfil the following conditions laid down in Section 79 of the Companies Act.
These conditions are:
(i) The issue of shares at a discount is authorized by a resolution passed by the company in
general meeting and sanctioned by the Company Law Board.

(ii) The resolution must specify the maximum rate of discount at which shares are to be
issued, but the rate of discount must not exceed 10%. The rate may exceed 10% only if the
Company Law Board is of the opinion that a higher percentage of discount may be allowed
in the special circumstances of the case.

(iii) The share of a class that has already been issued.
(iv) At least one year has elapsed since the company was entitled to commerce the business.
(v) The shares are issued within two months from the date of receiving sanction from the
Company Law Board, or within such extended time as the Company Law Board may allow.
Accounting Treatment

Did u know? Discount on issue of shares is a loss of money for a company, therefore, it
must be debited to a separate account called “Discount on Issue of shares.”
It is a loss of capital nature so we should show it in the assets side of Balance Sheet Show under
the heading ‘Miscellaneous Expenditure.’ It is written off over three or four years.
In the absence of any instruction, generally, discount on issue of shares is allowed at the time of
allotment of shares. At this time the journal entry will be:

Share Allotment Account Dr. (with amount due)
Discount on Issue of Shares Account Dr. (with amount of discount)
To Share Capital Account (Total amount)
One more journal entry is passed at the time of writing off the discount on issue of share. This
writing off can be from Profit and Loss Account or Share Premium Account:
Profit and Loss Account Dr. or
Share Premium Account Dr.
To Discount on Issue of Share Account.

Example 4: Final Ltd. issued 1,00,000 shares of 100 each at a discount of 10%. If was
payable as follows:
On Application 20 per share
On Allotment 30 per share
On First Call 15 per share

On the final call the balance amount.

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