Coupon Accepted Successfully!


Calculation of Profit on Re-Issue of Forfeited Shares

Students will appreciate that the credit balance of forfeited shares account cannot be considered a surplus until the shares forfeited have been re-issued, because the company may, on re-issue, allow the discount to the new purchaser equivalent to the amount held in credit in this regard in the forfeited shares account.

Issue of Shares (securities) at Premium [Section 78]

The securities premium may be utilised or applied for the following four purposes:

(i) In paying up unissued securities of the company to be issued as fully-paid bonus securities

(ii) In writing off preliminary expenses of the company

(iii) In writing off discount on issue of debentures of the company

(iv) In providing for the payment of premium payable on redemption of any preference securities or of any debentures of the company.

Thus securities premium account cannot be utilised for paying up partly paid up securities. Similarly terms like miscellaneous expenditure or debit balance in profit and loss account cannot be written off against securities premium account.

The utilisation of securities premium account for the above stated four purposes will not amount to reduction in shares capital.


Issue of Shares at a Discount [Section 79]

Section 79 permits the issue of shares at a discount if the following conditions are fulfilled:

(i) The shares to be issued at a discount are of class which has already been issued previously at full nominal value.

(ii) At least one year must have elapsed since the company was entitled to commence business.

(iii) The issue of shares at a discount has been authorised by a resolution of the shareholders in its general meeting.

(iv) The sanction of the Company Law Board is obtained.

(v) The resolution must specify the minimum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the face value. The rate may exceed 10% only of the Company Law Board has sanctioned a higher rate in special circumstances. (20%).

(vi) The shares are issued within two months of the sanction by the Company Law Board. The Company Law Board may, however, extend this time.


Issue of Shares to Vendors

Such shares may be issued either at: (i) par, or (ii) at a premium, or (iii) at a discount. The accounting entries in such a case will be as follows:

(a) On purchase of assets

Sundry Assets Account (Individually)


[With the purchase price of the assets]

To Vendor’s Account

(b) On issue of fully paid shares at par


Vendor’s Account


[With the nominal value of shares capital]

To Equity (or Preference) Share

Capital Account

(c) On issue of fully paid shares at a premium


Vendor’s Account


[With the purchase price]

To Equity (or Preference) Share

Capital Account


[With the nominal value]

To Securities Premium Account


[With the amount of premium]

(d) On issue of fully paid shares at a discount

Vendor’s Account


[With the amount of discount]

Discount on Issue of Shares Account


To Equity (or Preference) Share

[With the nominal value]

Capital Account

Issue of Shares for Consideration other than Cash

A company may issue shares in a direct exchange for land, buildings or other assets. Shares may also be issued in payment for services rendered by promoters, lawyers in the formation of the company. In the balance sheet, these shares should be shown separately.

Alteration of Share Capital by Sub-Division or Consolidation of Shares

If authorised by its articles, a company may, in a general meeting, decide to sub-divide or consolidate the shares into those of a smaller or higher denomination than that fixed by the memorandum of association, so long as the proportion between the paid up and unpaid amount, if any, on the shares continues to be the same as it was in the case of the original shares.

Differences between Reserve Capital and Capital Reserve


Basis of Distinction

Reserve Capital

Capital Reserve

1. Meaning

It refers to that portion of uncalled share capital which shall not be capable of being called up except in the event and for the purpose of the company being wound up. (Sec.99)

It refers to those amounts which are not regarded as free for distribution by way of dividend through Profit and Loss Account.

2.Creation–Optional Mandatory

It is not mandatory to create Reserve Capital.

It is mandatory to create Capital Reserve in case of profit on forfeited shares.

3. Disclosure in Balance Sheet

It is not disclosed in the company’s Balance Sheet.

It is required to be disclosed as the 1st item under the head ‘Reserves and Surplus’ on the liabilities side of the Balance Sheet.

4. Time when it can be used

It can be used only at the time of winding up.

It can be used during the life of the company.

5. Realised vs. Unrealised

It refers to the amount which has neither been called up nor been received.

It (excluding items like revaluation profit) refers to that amount which has already been realized.

6. Can be used to write off capital losses?

It cannot be used to write off capital losses.

It can be used to write off capital losses.

7. Can be used to declare share bonus?

It cannot be used to declare a share bonus.

It (excluding items like revaluation profit) can be used to declare a share bonus.


Test Your Skills Now!
Take a Quiz now
Reviewer Name