Financial Accounting, SS 3, Week 1

Topic: Issues of Shares

Content

  • Meaning of Shares
  • Classes of shares
  • Issue of shares

Meaning of Shares

Shares can be defined as the units of capital or ownership of a limited liability company,it is the division of the company’s ownership into numerous equal parts.i.e the interest which a shareholder has in the company. A company cannot commence  business until it raises by selling to the public for subscription.

Classes of Shares

Ordinary shares: These are the shareholders that are entitled to the totality of the profit after all other shareholders have been settled. They are the risk bearer and are not entitled to a fixed rate of interest.they are often known as equities.ordinary shares can be split into two;

  1. Preferred ordinary share:they are entitled to a fixed rate of dividend after payment of the preference shareholders.
  2. Deferred ordinary shares:they share dividend after preferred ordinary shareholders have been paid.

Preference shares: they are those that have preference over other shares,the preference shares have a fixed rate of dividend and normally receive their dividend before any other class of shares. A company can issue redeemable or irredeemable,participating or non-participating,cumulative or non-cummulative.

Issue of Shares

Shares can be issued on the following terms

  1. Shares issued at a discount
  2. Shares issued at a premium
  3. Shares issued at par.

Shares issued at a discount: this means that the shares are quoted below the nominal value.the issuance of shares at a discount must be stipulated by the provisions of the company’s act e.g shares of ₦3 nominal value would be issued for ₦2. The difference between the nominal vale and issuing value is ₦1.

Shares issued at a premium: Shares are issued at a premium when the issuing value is more than the nominal vale.the difference is called premium. The premium will be regarded as capital reserve and will be posted to share premium account.e.g shares of ₦3 nominal vale was issued at ₦5.the premium is ₦2, it occurs as a result of the attractive nature of the shares of the company.

Shares issued at a par: Here, shares are nit issued at a discount or premium but at the actual price,this means that the nominal price is equal to the issuing price.e.g shares of ₦2 nominal value was issued at ₦2.

Accounting Entries

There are two methods of collecting money when shares are issued out

  1. Payable in full on application
  2. Payable by installment

Shares payable in full on application.

This will be treated with respect to the terms mentioned above i.e at a premium,at par and at discount.

  1. Shares issued at par: here, the shares will be issued at par and will be paid in full on application.

Procedures:

Debit: bank account

Credit : application account

On allotment:

Credit ordinary share capital account

Debit: application account.

  1. Shares issued at a premium:shares can be issued at a premium and paid in full on application.this will necessitate the opening of share premium account and the difference between the nominal value and the value they were sold is credited to this account