Share Capital Accounting Processes

Study Notes

Share Capital Accounting deals with keeping track of all financial events related to the capital stock (shares) issued by companies. When a company issues new shares, it increases its capital — this is called the issuance of shares. This process can have significant implications from both accounting and legal perspectives because it involves changes in the equity balance sheet accounts. Here's how these processes work:

When a company sells additional shares of its own stock, it generates new cash inflows into its account, thereby increasing its total assets on the balance sheet if it receives payment before the transaction officially takes place, as per the accrual basis of accounting. In some cases, when a company issues common stocks, the par value method is used, which leads to two separate entries being posted to increase Retained Earnings and Common Stock. However, most companies nowadays issue their common stock without any stated par value, so only one entry is required.

The sale of additional shares also has tax consequences depending upon whether the new owner will pay dividends at the end of the year or not or whether there is a gain on the resale of the shares within a certain period time after purchase. It may even affect the price earnings ratio since more shares create a lower P/E ratio and vice versa. Furthermore, the number of authorized shares is always higher than the number actually outstanding, so a corporation doesn’t need approval from the shareholders each time it wants to issue fresh stock.

Apart from the issuance of shares, another important aspect of share capital accounting is the concept of share premium. A share premium refers to the excess amount above the nominal value paid for a share, often representing the market rate of the stock—the actual price people were paying for the newly-issued shares. So, while the par value shows what they cost the company to put out, the market value represents what investors thought those shares would be worth once issued. Generally speaking, the total par value equals the sum of all purchasers' contributions plus the general reserves.

In summary, share capital accounting revolves around tracking the issuance of new shares, recording their corresponding values, and maintaining records that demonstrate the movement of money between assets and retained earnings. By understanding these concepts, businesses can make informed decisions regarding their capital structure and ensure compliance with relevant regulations and standards.

Description

Learn about the various aspects of share capital accounting, including the issuance of shares, tax implications, share premium, and the impact on financial statements. Understand how these processes affect a company's equity balance sheet accounts and overall capital structure decisions.