Equity Shares Issue Bookkeeping Accounting
Table of Contents
Shares that are not preference shares are equity shares. The balance of profit after appropriating dividends to preference shares may be distributed as a dividend to equity shareholders. At the time of winding up, the payment is made to creditors; then preference share capital is returned, and thereafter, whatever remains to belong to equity shareholders.
Explain the issue of debentures at a discount
If debentures are issued at a discount or redeemable at a premium, such a discount or premium is a capital loss. This loss should be written off during the life of debentures.
The total loss should be allocated over a period during which debentures are alive and the appropriate amount should be transferred to the profit and loss account each year. Loss on the issue of debenture may be written off by adopting one of the following methods :
- Fixed Instalment Method: Under this method, total loss on issue of debentures (discount on issue + premium on redemption) is divided by the number of years during which debentures continue and loss is written off in equal Instalment every year. This method is suitable when total debentures are redeemed on a specific date.
- Fluctuating Instalment Method: under this method loss is written off in the ratio of the outstanding balance of debentures each year. This method is suitable when debentures are redeemed in installments over a period. When debentures are redeemed in installments, funds raised by debentures are not utilized equally each year. Hence, the burden of loss on the issue of debentures also should not fall on the profits each year equally. Therefore, loss on the issue of debentures is allocated in the ratio of the amount utilized each year.
Debenture is the source of obtaining long-term finance for a company. When a company needs funds for a long period. It has various option loan from financial institutions. Fixed deposits from public or issue of debenture company has to pay interest on debenture company has to pay interest on debentures.
Although the word ‘debentures’ is used widely, there is no specific statutory defined of debenture. As per section 2(12) of the companies act, 1956 debentures has been defined as “debentures includes debenture stock, bonds and any other securities of company, whether constituting a charge on the assets of the company or not”.
Kinds of Debenture
- Simple or Mortgage Debentures : Simple debenture do not have any security. These debentures are unsecured. But mortgage debentures are secured debentures and have charge on the property of the company.
- Redeemable or Perpetual Debentures : Redeemable debentures are repaid after a certain period. Usually such debentures are redeemable after 5 to 7 years. But amount taken against perpetual debentures are not refunded during the life time of company. Such debenture are paid back only on the liquidation ofthe company.
- Bearer or Registered Debenture : Bearer debenture are transferable by delivery only. The name of barer debenture holders are not recorded in the book ofthe company. Registered debenture are transferable only throughthe company.
A record of registered debenture holders is kept by company. When debenture is sold, it has to sent tothe company for registered the name of the purpose. Normally only registered debentures are issued by companies.
- Convertible or Non-convertible Debentures : Convertible debentures are converted into share after sometime. After conversion the status of debenture holders is changed to shareholders. Such debenture are very popular. Non-convertible debentures remain as debentures during its full tenure. These are not converted in shares.
Issue of Debentures
The subject of issue of debentures may be studied from the following point of view :
- From Consideration Point of View :
- Issued for cash
- Issued for a consideration other than cash.
- Issued as a collateral security.
- From Price Point of View :
- Issue at par.
- Issue at a premium.
- Issue at a discount.
- From Redemption Point of View :
- Redeemable at par.
- Redeemable at a premium.
- Redeemable at a discount.
Interest on Debentures
BBA Study Material Equity Shares Issue
BBA Bookkeeping Discuss Briefly Profit & loss Balance sheet:-
The company has to pay interest on debentures at a specified date. Usually, interest is payable at six-monthly intervals interest is charged against profits and debited to the profit and loss accounts. If the date of interest payment and date of closing the accounting year is different, entry for outstanding interest for the period from the preceding date of closing the book will be made.
Further interest is payable on the nominal value of debentures. If debentures have been issued at a premium discount. Interest is payable on the nominal value. However, in this case, the effective rate of interest will change.
Redemption of Preference Shares
A company limited by shares may issue redeemable preference shares to be redeemed at a fixed date or after a certain period. For redemption of preference shares following conditions as per provisions of section 80 of the companies Act, 1956 (as amended) are to be complied with :
- The articles of association of the company must provide for the issue of redeemable preference shares.
- These shares may be redeemed only out of the profits available for dividend or out of the proceeds of a fresh issue of shares (equity or preference) made for the purpose of redemption.
- These shares must be fully paid before redemption.
- Id shares are redeemable at a premium, it (premium on redemption) must have been provided for out shares or security premium account or out of profits.
- Where shares are redeemable out of the profits available for dividend a sum equal to the nominal amount of the preference shares redeemable shall be transferred out of profits to the capital redemption reserve account. This reserve cannot be used for any purpose except for issuing fully paid bonus shares to the company’s members. It means capital redemption reserve is to be or will the treated as paid-up capital.
- The redemption of preference shares by a company shall not be taken as reducing the amount of its authorized share capital.
- If new shares are issued for the purpose of redemption of preference shares. It will not be treated as an increase of capital but a replacement of capital.
- For redemption, no fixed asset should be sold for arranged cash required.
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