Share application monies are converted to equity capital of an entity after allotment of shares to qualifying applicants. This means that the share application money becomes equity after the completion of the allotment process. It may, therefore, be recorded as equity share capital on the balance sheet as it awaits issue of stock. The shares are allotted after the minimum subscription is reached.
Chapter 1: Accounting for Share Capital
- It is the money received in respect to an initial public offering of shares.
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- However as per my opinion shares should be allotted against the share application money within a reasonable time period say 6 months.
- Before the amendment mentioned above there was no provision regarding the receipt and time period and purpose for utilization of Share Application Money.
- The shares are allotted after the minimum subscription is reached.
A temporary share holding account is used to record money received on application and allotment. The capital raised by a company by way of issuing shares is known as Share Capital. In general, the share capital of a company is largely distributed. The minimum number of members in a private company is 2 and the maximum is 200. However, the minimum number of members required to incorporate a public company is 7 and there is no limit on the maximum number of members.
Chapter 2: Reconstitution of a Partnership Firm: Change in Profit Sharing Ratio
Now, Section 42 of the Companies Act, 2013 puts prohibition over the said practice. W.e.f 01-April 2014, Companies accepting Share Application money under private placement have to allot the securities against the Share Application money received within 60 days. If the securities are not allotted within a period of 60 days, the whole application money is required to be refunded within 15 days from the date of completion of 60 days. If the company fails to repay the application money within the said 60 days period, it shall be liable to repay that money with interest @ 12% p.a. If a company gets over subscription for the issued shares, it has to reject some applications in full, accept some partially, and accept some applications in full.
Applicant paid money into your bank and you transferred their accounts to total shareholders capital account. All monies received in respect of the share issue were posted to the bank account and a share issue holding account until the shares were allotted. After the prospectus is issued, the prospective investors can then apply for shares. The companies act states that there are mainly two types of shares. (3) All monies payable on subscripttion of securities shall be paid through cheque or demand draft or other banking channels but not by cash.
Accounting for Share Capital: Issues of Shares for Cash
Once the allotment letter is sent to the applicants, the allotment money becomes due on the allotment and becomes a part of share capital. In case company fails to allot securities against the share application money within the period of 60 days, it shall repay the application money within 15 days thereafter without interest. Before the amendment mentioned above there was no provision regarding the receipt and time period and purpose for utilization of Share Application Money.
One more notable thing in case of a Private Company is that above Rules are not applicable to a Private Company. Hence position in case of a Private Company shall remain same as it was applicable share application account is to a Public company before the above mentioned amendment. Get answers to the most common queries related to the CBSE Class 11 Examination Preparation. Explore our bestselling accounting ebooks to enhance your knowledge.
Application and Allotment Account
- A company first issues a prospectus, receives an application for it, and then allots shares.
- (ii) for the repayment of monies where the company is unable to allot securities.
- All monies received in respect of the share issue were posted to the bank account and a share issue holding account until the shares were allotted.
- Applicant paid money into your bank and you transferred their accounts to total shareholders capital account.
- Investors choose shares for long-term and short-term investments as they are a good source of long-term wealth generation from an investor.
The applicants who are allotted shares are sent a Letter of Allotment, which indicates the number of shares allotted and the amount due on allotment. However, the applicants who are not allotted shares are sent a Letter of Regret along with a cheque for the refund of the application money. An investor buying a company’s shares usually pay in installments. They usually pay a certain amount with an application form as an offer to purchase the shares (on application). The company responds the offer by sending the investor a letter of allotment and requesting further payment (on allotment).
A company incurs different types of expenses on the issue of shares. For example, stationery expenses, postage expenses, bank expenses, printing expenses, etc. The expenses incurred on the issue of shares are the capital expenditure of the company.
It is in respect to this that the share application money can be an asset on the balance sheet. Share application money is not a part of share capital because it is only application money and is not share capital. In view of this, share application money pending allotment should be treated as current liability in books of accounts and should be disclosed as a current liability and not as a part of share capital.
(5) No company offering securities shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer. The call letter of the company must specify the amount of the call, mode of remitting money, address to which call money is required to be sent, and the last date for sending the money. Company is receiving money here in the form of application money.
The minimum amount payable on the application of every share should not be less than 5% of the nominal value of the share. Share application money is the amount received by a company from applicants who wish to purchase its shares. It is the money received in respect to an initial public offering of shares.
A right issue is an issue on a certain date that is fixed by the issuer. These shares are usually offered to the existing shareholders before it is listed for trading on stock markets. Then you should balance liabilities by giving credit to capital account- liabilities increase by 1000₹. Meantime, any dividend paid, retained earnings will be debited. Here, Share application money is transferred to bank- assets increase by 1000₹.
Regarding time limit to convert such share application money into capital the law was completely silent. Practically speaking allotment of shares cannot be kept pending indefinitely. It would also not be proper for a company to indefinitely hold up allotment of shares. However as per practice and keeping in view the Reporting of FDI provisions in FEMA, professionals used to allot share with 6 months 180 days of the receipt of application money.