Share Capital in Class 12 Accounts: Understanding Issued Shares

Study Notes

In the realm of finance, we often encounter the term 'Share Capital' when studying business entities like companies limited by shares. As you delve into advanced accounting courses such as those offered in India's Class 12 syllabus, understanding share capital takes center stage due to its importance in comprehending corporate structure and financial statements.

To begin our exploration, let's break down what share capital is within the context of accounting for private and public companies. Share capital refers to the portion of a company's equity financed through the issuance of common stocks to investors—in other words, it represents the total sum invested by all shareholders upon purchasing company stock.

Now, one critical concept pertaining to share capital lies with the issue of share capital. This process involves two central components:

Authorization: When a company desires to raise funds via issued shares, the board of directors authorizes this initiative through passing a resolution known as the Memorandum & Articles of Association or M&A. Once approved, the company has legal authority to sell these authorized shares and record them as part of their share capital account(s) during closing entries.
- Note: Companies may choose to partially or fully utilize authorized shares depending upon their fundraising needs. If unused, they will remain unissued until a future time when they could potentially be sold.
Allotment and Issue: During the actual issuing of shares, the company allots the appropriate number of shares to individual buyers after receiving payment. Subsequent to the completion of formalities like enlistment and settlement, these purchased shares are officially recorded as issued shares.

The following points summarize key aspects related to share capital issues:

There exists a distinction between authorized and issued share capital up to the point where shares have been legally transferred from the entity to investors.
While authorized share capital serves merely as potential available resources, issued share capital constitutes tangible assets held by owners.
Authorized shares can only become issued shares once they have been completely paid for; any unsold remaining shares continue to function solely as potential claims against the company, regardless of whether they were initially granted free or not.

Understanding how share capital relates to your learning objectives requires diligence and attention to detail as shareholdings and distributions thereof play significant roles in determining numerous facets encountered in more advanced areas of study – including accounting principles, management theories, risk assessment methodologies, and strategic decision making processes.

Description

Explore the concept of share capital and delve into the intricacies of issuing shares in finance and accounting. Learn about the authorization and allotment processes that are integral to understanding the dynamics of share capital in corporate structures and financial statements.