Accounting for Ordinary Share Capital Issue

Ordinary Share Capital represents equity of a company and therefore its issuance is recorded as part of the equity reserves in the balance sheet.

Ordinary Shares are also known as common stock and equity shares.

Topic Contents:

1. Initial Issue
2. Example 1
3. Subscription Account
4. Example 2

Initial Issue

Issue of ordinary shares is accounted for by allocating the proceeds between the following accounts:

Share Capital Account	To account for the proceeds from the issue of shares up to their nominal value (face value).
Share Premium Account	To account for the proceeds from the issue of shares over and above their nominal value (face value).

Following journal entries need to be recorded to account for the issue of ordinary shares for cash:

Debit	Bank	The total amount of cash received.
Credit	Share Capital Account	Amount up to nominal value
Credit	Share Premium Account	Amount in excess of nominal value.

Example 1

ABC PLC issued 1 million ordinary shares on 1 January 20X4 having face value of $1 each at an issue price of $1.5 per share.

As per the terms of the issue, $1.25 per share had been received by the Company on 1 January 20X4 while the remaining amount was received in full on 30 June 20X4.

State the journal entries required to account for the above transactions.

Solution

1 Jan 20X4	Debit	Bank	$1,250,000	($1.25 x 1 million)
	Credit	Share Capital	$1,000,000	($1.00 x 1 million)
	Credit	Share Premium	$250,000	($0.25 x 1 million)
30 June 20X4	Debit	Bank	$250,000	($0.25 x 1 million)
	Credit	Share Premium	$250,000	($0.25 x 1 million)

Note

The total amount recognized in the share capital account is $1 million which equates to the nominal value of the issued shares (i.e. $1 per share) whereas the cash proceeds over and above the nominal value amounting $500,000 (i.e. $0.5 per share) has been credited to the share premium account.

Subscription Account

Company law of many jurisdictions such as USA and UK prohibit public companies from issuing shares to investors before all legal requirements for the issuance of shares have been met (e.g. minimum amount of subscription mentioned in the prospectus must be received). If the requirements for the issue of shares are not met, companies are obliged to return the subscription money received from applicants (subscribers).

To account for the shares issue in such cases, it will be necessary to create a temporary liability account (e.g. Subscription Account) in addition to the 2 accounts discussed above in order to account for the cash advanced in respect of the subscription of shares until the date of issuance of shares or the return of subscription money to applicants.

Following journal entries shall be recorded to account for the issue of ordinary shares involving subscription account:

Debit	Bank	The total amount of cash received.
Credit	Subscription Account	The total amount of cash received temporarily recognized as liability. Liability is recognized because the company is obliged to issue shares to applicants or, if the shares are not to be issued, to return the subscription money to applicants.
Credit	Subscription Account	Amount of cash inflow in respect of shares which have either been issued or whose amount has been returned to subscribers (due to for example unsuccessful applications, excess subscription, non-fulfillment of legal requirements for issue of shares, etc).
Credit	Bank	Amount returned to subscribers.
Credit	Share Capital Account	Nominal value of shares issued.
Credit	Share Premium Account	Amount in excess of nominal value of the shares issued.

Example 2

ABC PLC offered 1 million ordinary shares for issue to public on 1 January 20X4 having face value of $1 each at an issue price of $1.5 per share.

ABC PLC requires the equity injection to finance a new project. The minimum amount of subscription necessary for the project is $1,250,000.

As per the terms of the issue of shares, $1.5 per share was to be received in full from the applicants on 30 November 20X3.

A total amount of $3,000,000 was received. The oversubscription of $1,500,000 was returned to unsuccessful applicants on 20 December 20X3.

State the journal entries required to account for the above transactions.

30 Nov 20X3	Debit	Bank	$3,000,000	Total amount received
	Credit	Subscription Account	$3,000,000	(Amount recognized as a temporary liability until issuance of shares or refund to applicants)
20 Dec 20X3	Debit	Subscription Account	$1,500,000	Amount of oversubscription returned to unsuccessful applicants)
	Credit	Bank	$1,500,000
30 June 20X4	Debit	Subscription Account	$1,500,000	(This represents subscription proceeds in respect of which shares have been alloted to succesful applicants.)
	Credit	Share capital	$1,000,000	(Nominal value of issued shares $1 x 1 million)
	Credit	Share Premium	$500,000	(Proceeds from issue of shares in excess of their face value $0.5 x 1 million)

Note:

As with Example 1, $1 million has been recognized in the share capital account which equals to the face value of issued shares (i.e. $1 per share) whereas the excess over the face value amounting $500,000 (i.e. $0.5 per share) has been credited to the share premium account. Both equity accounts have been credited on the date of issuance of shares (i.e. 1 Jan 20X4). The subscription advance received on 30 Nov 20X4 had not been credited directly to equity reserves until the actual issuance of shares.