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Accounting for Companies-I

Notes Share capital may also be used to describe the number and types of shares that compose a
company's share structure. The legal aspects of share capital are mostly dealt with in a
jurisdiction's corporate law system. An example of such an issue is that when a company allocates
new shares, it must do so in a way that does not inequitably dilute existing shareholders.

1.1 Meaning and Categories of Share Capital

A share is a single unit into which the entire capital of a company is divided. A share is a
fractional part of the share capital. On the basis of number of shares the ownership of a person
is formed. The persons who contribute the money through shares are called shareholders.
Probably the best description of a share is given in Borland’s Trustees vs. Steel by Farewell, J.
where he defines a share as “the interest of a shareholder in the company, measured as a sum of
money, for the purpose of liability in the first place, and of interest in the second, but also
consisting of a series of mutual covenants entered into by all the shareholders inter se.” Even
though many people contribute varying sums to the company’s share capital, there is no separate
capital account for each shareholder. Therefore, a consolidated capital account called share
capital account is maintained. The share capital of the company is divided into the following
categories:
1. Registered, Nominal or Authorised Capital: The maximum amount of capital with which
the company intends to be registered, is called registered capital. It is stated in the
Memorandum of Association, which is registered with the Registrar of Companies. It is
the maximum amount which the company is authorised to raise by the way of public
subscription. Therefore, it is also called authorised share capital.
2. Issued Capital: The part of Authorised capital which is issued by the company to public
for subscription in cash including shares allotted to vendors or promoters for consideration
other than cash is called issued capital. The remaining part which is not issued, is called
unissued capital. This part can be issued later on.

3. Subscribed Capital: That part of issued capital which is subscribed or applied by the
public, is called subscribed capital. This capital can be more, less or equal to issued capital.
If it is more than issued capital, the excess is returned back to the subscriber. The directors
of the company can allot only upto the extent of issued capital. If the whole issued capital
is not subscribed, the balance of the issued capital is called unsubscribed capital.

4. Called-up Capital: Generally, the full amount of share is not called at one time but for the
convenience of shareholder and according to the requirement of the company, the amount
is called in different instalments. The amount of share which is actually demanded by the
company is known as called-up capital.
5. Paid up Capital: The part of called-up capital that is actually paid by the subscribers to the
company is known as paid up capital. The paid up capital can be more, less or equal to
called-up capital. If paid up capital is less than called-up capital, this difference is known as
call-in-arrear or unpaid calls. However, some shareholders may also pay the amount for
those calls which are not made. Such amount is known as calls-in-advance.
6. Reserve Capital: It is that part of the uncalled capital which, by passing a special resolution,
can be called up only in the event of winding up of a company. This capital cannot be
converted except with the leave of the court; it cannot be changed by directors. Therefore,
this capital is left for the protection of the company’s creditors.

1.2 Classes of Shares

Those companies which are formed after the commencement of the Companies Act 1956, are
permitted to issue only preference shares and equity shares, not deferred shares.

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