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SS 3 Financial Accounting (1st, 2nd & 3rd Term) Financial Accounting

ISSUE OF SHARES

Definition of Shares

Shares can be defined as units of capital of ownership of a limited company. It is an ownership right in a company. A company cannot commence business until it raises capital by selling shares to the public for subscription.

CLASSES OF SHARES

There are three classes of shares in a limited liability company, they are:

  • Ordinary shares
  • Preference shares
  • Founder’s shares

 

  • ORDINARY SHARES: The shareholders of these are entitled to dividend after preference shareholders have settled. They are the owner’s of the company because they bear company risk and their dividend is not fixed. No wonder during the period of prosperity, they receive more dividends. They are often known as equities.
  • PREFERENCE SHARES: The shareholders of these shares are entitled to fixed dividend and they are treated preferentially. They received dividend before any other class of shares. A company can issue redeemable or irredeemable, participating or non-participating, cumulative or non- cumulative preference shares.
  • FOUNDER’S SHARE: These are also called deferred shares. These are shares issued to promoters of the company to compensate them for job well done. And they are entitled to dividend.

 

ISSUE OF SHARES

Shares can be issued in the following terms:

  • Shares issued at a discount
  • Shares issued at a premium
  • Shares issued at par

EXPLANATION OF ISSUE OF SHARES

  • Shares issued at a discount: Shares of limited liability companies are said to be issued at a discount, when the company share is issued at a price value less than the nominal value of the company share. For example if XYZ plc’s share nominal value is ₦1 but the company share is issued for subscription at 50k per share, the share is said to be issued at discount. The discount is 50k
  • Shares issued at a premium: shares of limited liability companies are said to be issued at a premium, when the company share is issued at a price value above the nominal value of the company’s share. For example if XYZ plc’s share nominal share value is ₦1 but the company share is issued for subscription at ₦2 per share, the share is said  to be issued at a premium. The premium is ₦1.00
  • Shares issued at par: Shares of limited liability companies are said to be issued at par, when the company’s share is issued for subscription at the shares nominal value i.e issued at a price value equal to the nominal value. For example XYZ plc shares nominal nominal value is ₦1, and the company issue the share for subscription at ₦1 per share, the share is said to be issued at par.

 

EVALUATION

  • Define the term shares.
  • Explain the following: Cummulative and non cumulative preference share.

 

ISSUE OF SHARES

NOTE

Shares issued at par, payable in full on application.

 

ACCOUNTING ENTRIES

On receipt of application of money

DEBIT: Bank Account

CREDIT: Application Account

On allotment:

Debit Application Account

Credit Ordinary Share CapitalAccount

Example: On the 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of ₦2 each at par Application together with total amount received for exactly 13,000 shares and the shares were allotted to the applicants. Show the journal entries and ledger accounts

 

Solution:

Journal

Bank Account

Application Account

 

Being money collected on application

 

Dr

26,000

 

 

 

 

26,000

 Cr

 

26,000

 

 

 

 

26,000

Application Account

 

Share capital account

 

Allotment 13,000 ordinary shares at ₦2

Ledger accounts:

                                              ₦

Application                    26,000

Bank account

Application Account

                                            ₦

Share capital                     26,000

                                      ₦

Bank                      26,000

 

                                      ₦

Application                  26,000

 

Ordinary Share Capital Account

Shares issued at a premium payable in full on application: Share can be issued at apremium and paid in full application. This will necessitate the opening of share premium account. The value of the share premium is credited to the share premium account.

 

Accounting entries:

On receipt of application money:

Debit Bank Account

Credit Application Account

On allotment:

Debit Application Account

Credit Share Premium Account

Credit Ordinary Share Capital Account

 

Example 2: On 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of nominal value of ₦2 at ₦3. Application money were received for exactly 13,000 ordinary share.Show the journal entries and the ledger account.

Solution:

Journal

  Dr Cr
 

Bank account

Application account

Being ₦3 collected on 13,000 shares

 

Application account

Share premium account

Ordinary share capital account

Allotment of 13,000 ordinary shares at a premium

39,000

 

 

 

39,000

 

39,000

 

 

 

13,000

26,000

 

 

 

 

Ledger Accounts:

                                                        ₦

application                                 39,000

Bank  Account

                                                   ₦

Share premium                         13,000

Ordinary share capital                26,000

39,000

                           ₦

Bank                  39,000

 

39,000

Application Account

 SharePremium Account

                                                    ₦

Application and allotment a/c      13,000

Ordinary Share Capital Account

                                                ₦

Application                            26,000

 

  • Share issued at a discount payable in full on application: Here, the share is issued at a discount. The difference is debited to discount account opened.

 

Accounting Entries

On receipt of application money:

Debit Bank Account

Credit Application Account

On allotment:

Debit Application Account

Credit Ordinary Share Capital Account

Example 3: On 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of nominal value of ₦2 at ₦1 each.  Application money was received in full,show the journal and ledger account entries.

Solution:

Journal

  Dr Cr
 

Bank Account

Application Account

Being money collected on 13,000 shares

 

Application Account

Share discount account

Ordinary share capital account

Allotment of 13,000 shares at a discount

13,000

 

 

 

13,000

13,000

 

13,000

 

 

 

 

26,000

 

Ledger accounts:

                                       Bank Account

                                                    ₦

Application                                13,000

 

 

Application Account

Ordinary Share Capital        26,000

 

26,000

Bank             13,000

Share discount  13,000

26,000

 

Ordinary Share Capital Account

 ₦

Application         13,000

 

  • Under subscription: this is where fewer shares are applied for than available for sale e.g A company issued out 300 shares but only 250 shares were applied for.
  • Over subscription: This is when the number of shares applied for are more than that number actually offered for subscription.

 

Evaluation

  • What is meant by over-subscription
  • Explain the term under subscription

 

GENERAL EVALUATION

  • What is the effect of understatement of closing stock on : (a) cost of sales (b) gross profit (c) net profit
  • State five causes of a decline in the net profit of a business
  • Differentiate between ‘‘Discount Allowed” and ‘’Discount Received”
  • State five characteristics of the imprest system of keeping petty cash records
  • List four characteristics of each of the following (a) fixed assets (b) current assets (c) intangible assets

WEEKEND ASSIGNMENT

  1. When a company received application for shares fewer than available for sale, the share is said to be a) oversubscribed b) under-subscribed  c)subscription at par (d) forfeited
  2. When a company received application for more than available shares for sales, the share is said to be (a) ever-subscribed (b) under- subscribed (c) over- subscribed (d) cancelled
  3. On shares issued at par on application and fully paid, the accounting entries on receipts of money are (a) debit bank and credit application  (b)debit application and credit bank (c) debit premium and credit bank (d) debit ordinary shares credit bank
  4. Based on question 3 above ,the accounting entries on allotment of shares are (a) debit ordinary share capital account and credit application account  (b)debit application account and credit ordinary shares capital account (c) debit premium  and credit application account(d) debit ordinary shares credit bank
  5. A share issued below the nominal value is said to be issued at (a) discount (b) premium (c) at par (d) loss

 

THEORY

On 1st February 1989 ABC plc makes an issue of 15,000 ordinary shares of nominal value of ₦2 at ₦3. Application money were received for exactly 15,000 shares.

Show:

  1. Journal entries
  2. Ledger accounts

 

See also

THE FINAL ACCOUNTS OF LIMITED LIABILITY COMPANIES

COMPANY ACCOUNTS

DISSOLUTION OF PARTNERSHIP

ADMISSION OF PARTNERS

FINAL ACCOUNTS OF A PARTNERSHIP BUSINESS

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