Company Account Notes - 1
Company Account Notes - 1
Meaning of Company
Is a body corporate or an incorporated business organization registered under the Company Act.
SHARE CAPITAL
• Share capital means the capital of a company divided into “shares”. So, share capital is
basically the contributions made by all the shareholders of a firm.
• From an accounting point of view, there are certain categories of share capital. They are as
follows
TYPES OF SHARES
A. PREFERENCE SHARES
A preference share is one which carries two exclusive preferential rights over the other
type of shares, i.e. equity shares. These two special conditions of preference shares are
• A preferential right with respect to the dividends declared by a company. Such
dividends can be at a fixed rate on the nominal value of the shares held by them.
So, the dividend is first paid to preference shareholders before equity shareholders
• Preferential right when it comes to repayment of capital in case of liquidation of
the company. This means that the preference shareholders get paid out earlier than
the equity shareholders.
• Preference share is of the following types:
i. Cumulative preference share: In case of these shares arrears of dividend
go on accumulating till they are paid.
ii. Non-Cumulative preference share: In case of these shares’ dividend is
not allowed to accumulate. The right to claim dividend will lapse if there
are no sufficient profit to pay dividends in a particular year.
iii. Participating preference shares: The holder of these shares is entitled to
(a) a fixed dividend, and (b) a share in the surplus profit remaining after
paying dividend to the equity share holder up to a certain limit.
iv. Non participating preference shares: The holder of these shares is
entitled to a fixed dividend and not share in the surplus profits.
v. Convertible preference shares: The holder of these shares have a right to
get their preference shares converted into equity shares within a certain
period.
vi. Non-Convertible preference shares: These preference shares do not
carry the right of conversion into equity shares.
vii. Redeemable preference shares: The shares which can be redeemed after
a fixed period or after giving the prescribed notice, as desired by the
company.
viii. Irredeemable preference shares: Shares which cannot redeemed during
the life time of the company
B. EQUITY SHARES
• Shares which are not preference shares, are termed as equity shares. These shares
do not carry any preferential right. They only enjoy equity, i.e. ownership in the
company.
• The dividend given to equity shareholders is not fixed. It is decided by the Board
of Directors according to the financial performance of the company. And if in a
given year no dividend can be declared, the shareholders lose the dividend for that
year, it does not cumulate.
• Equity shareholders also have proportional voting rights according to the paid-up
capital of the company. Essentially it is one share one vote system. A company
cannot issue non-voting equity shares, they are illegal. All equity shares must
come with full voting rights.
Illustration 01:
Supposed one million ordinary shares with a nominal value of TZS 4,000 each are
to be issued to the public. Application together with necessary money are received
for exactly one million shares received and shares allotted to the applicants.
Required:
Write the journal entries to record these transactions.
Illustration 01:
Suppose one million shares with nominal value of TZS 400 each are to be issued
to for TZS 500 each. Thus, a premium of TZS 100 per share has been charged.
Application and money are received for exactly one million shares and the shares
allotted to the applicants.
Required:
Write journal entry to record those transactions.
Illustration 01:
Suppose one million shares with a nominal value of TZS 400 each are to issued to
for TZS 350 each. Thus, a discount of TZS 50 per share has been allowed.
Application and money are received for exactly one million shares and the shares
are allotted to the applicants.
Required:
Write journal entries to record those transactions.
OVERSUBSCRIPTION AND UNDER SUBSCRIPTION FOR SHARES
• When a Company decides to go public or issue new shares, it does so via IPO (Initial
Public Hearing). That Company asks for applications from buyers, and based on that; it
allots shares.
• However, in realistic scenarios, it is improbable that a firm receives the same number of
applications equal to the shares issued. It is either oversubscribed or undersubscribed.
i. Under Subscription of shares
• Is a situation where by the number of shares applied is less than the number of
shares which has been issued to the public to subscribe to.
• A company may not receive applications for all the shares offered by it to the public.
For example, it might offer 8,000 shares to the public but applications might have
been received only for 6,000 shares, in this case, entries for application, allotment,
and calls will be made only for 6,000 shares.
Illustration 01:
Suppose 1M ordinary shares of nominal value TZS 400 each are issued. The terms
of payment are as follows:
• TZS 80 payable at the application stage
• TZS 120 payable at allotment stage
• TZS 200 payable at the first and final call stage
Required: Write journal entries to record these transactions
II. Shares issued at a premium and paid in installment
Illustration 01:
Supposed a company is issuing 1M shares of nominal value TZS 400 each at TZS
500 each payable as follows:
• TZS 100 at application
• TZS 200 (including premium) at the allotment and
• TZS 200 at first and final call
Required: Write journal entries to record these transactions
III. Shares issued at a discount and paid in installment
Illustration 01:
Supposed a company is issuing 1 M shares of the nominal value of TZS 400 each
at TZS 350 each payable as follows;
• TZS 100 per share at application
• TZS 150 per share at allotment
• TZS 100 at first and final call.
Required: Write journal entries to record the above figures.
B. CALL IN ARREARS
The shareholder may not pay the call when it becomes due. The amount unpaid has to be
debited to a “Call in arrears account”
FORFEITURE OF SHARES
• Forfeiture of shares may be defined as the termination of membership and taking away of
the shares because of default in payment by the shareholder.
• The shareholder, whose shares have been forfeited, shall cease to be a member of the
company. If the articles of the company permit, the company can sue him for unpaid calls
even after the forfeiture. In such a case the ex-shareholder will be liable as ordinary debtor
and not as a contributory.
• The following points should be taken into account while passing an accounting entry for
forfeiture of shares:
i. The amount called up on the shares forfeited.
ii. The amount unpaid on various calls (including allotment) on the shares
forfeited.
iii. The amount received on the shares forfeited.
• Forfeiture of shares results in the reduction of share capital and therefore the share capital
account should be debited with the amount called up on these shares so far.
• The various unpaid calls account should now be canceled and therefore they should be
credited and the balance representing the amount received on the shares forfeited should
be credited to a new account termed as “Forfeited shares account”
Illustration 01:
Suppose a company issues 1M shares of nominal value of TZS 400 each at TZS 500 each to the
public on September 2011. The mode of payment was TZS 100 per share at application, TZS 200
(including premium) at the allotment, and TZS 200 per share at the first and final call. By the end
of November 2011, 100,000 shares were not paid for at allotment and final call money. By the end
of December 2011, the company directors decided to forfeit all the shares in arrears.
Required: Write journal entries to record these transactions.
Illustration 01:
Suppose a company issues 1M shares of nominal value of TZS 400 each at TZS 500 each to the
public on September 2011. The mode of payment was TZS 100 per share at application, TZS 200
(including premium) at the allotment, and TZS 200 per share at the first and final call. By the end
of November 2011, 100,000 shares were not paid for at allotment and final call money. By the end
of December 2011, the company directors decided to forfeit all the shares in arrears. 100,000 shares
forfeited by the end of December 2011 were reissued on 1st February 2012 by TZS 350.
Required: Write up journal entries to record these transactions.
Illustration 02:
MINOBE Ltd Company has a nominal share capital of TZS 200,000,000 comprising 200,000
ordinary shares of TZS 1,000 each. The whole of the capital was issued at par on the following
terms:
Per share “TZS”
Payable on application 150
Payable on allotment 200
First call 300
Second call 350
Applications were received for 250,000 shares and it was decided to allot the shares on the basis
of four for every five for which application had been made. The balance of application monies was
applied to the allotment, and no cash was refunded. The balance of allotment monies was paid by
the members.
The calls were made and paid in full by the members, with the exception of one who failed to pay
the first and second calls on the 10,000 shares allotted to him. A resolution was passed by the
directors to forfeit the shares. The forfeited shares were later issued to L. Mkalawa at TZS 800
each.
Required:
i. Show the ledger accounts recording all the above transactions and
ii. The relevant extracts from a statement of financial position after all the transactions has
been completed.
Illustration 03:
The authorized and issued share capital of Diobbah Ltd was TZS 75,000,000 divided into 75,000
ordinary shares of TZS 1,000 each, fully paid. On 2nd January 2020, the authorized capital was
increased by a further 85,000 ordinary shares of TZS 1 each to TZS 160,000,000. On the same
date, 40,000 ordinary shares of TZS 1,000 each were offered to the public at TZS 1250 per share
payable as follows; TZS 600 on application (including the premium), TZS 350 on allotment and
TZS 300 on 6th April 2020.
The list was closed on 10th January 2020, and by that date, applications for 65,000 shares had been
received. Applications for 5,000 shares received no allotment and the cash paid in respect of such
shares was returned. All shares were then allocated to the remaining applicants pro rata to their
original application, the balance of the monies received on applications being applied to the
amount due on allotment.
The balances due on allotment were received on 31st January 2020, with the exception of one
allottee of 500 shares and these were declared forfeited on 4th April 2020. These shares were
reissued as fully paid on 2nd May 2020, at TZS 1,100 per share. The call due on 6th April 2020 was
fully paid by the other shareholders.
Required:
i. To record the above-mentioned transactions in the appropriate ledger accounts; and
ii. To show how the balances on such accounts should appear in the company’s SOFP as at
31st May 2020
Illustration 04:
During the year to September 30, 2020, Mugisha plc made a new offer of shares. The details of
the offers were as follows:
1. 100,000 ordinary shares of TZS 1,000 each were issued payable in installments as follows:
Required:
i. To record the above-mentioned transactions in the appropriate ledger accounts; and
ii. To show how the balances on such accounts should appear in the company’s SOFP.