ISC Class 12 Accountancy: Company Shares Issue Explained

Why does a company issue shares?

Ever wondered how a business gets the cash to grow? One easy way is to sell a piece of ownership – that piece is called a share.

💡 In Simple Words: When a company needs money, it can create shares and sell them to people. Those people become owners and the company gets cash to use.

What is a share?

A share is a unit of ownership in a company. Think of a pizza cut into slices. Each slice is a share. If you own a slice, you own a part of the whole pizza.

Key terms you need to know

• Share capital: The total money a company raises by issuing shares. It’s like the pile of cash you collect after selling all the pizza slices.
• Equity shares: Also called ordinary shares. They give voting rights and a right to dividends (profit share).
• Preference shares: These don’t usually carry voting rights, but they get a fixed dividend before equity shareholders.
• Allotment: The act of assigning shares to applicants. It’s like handing out the pizza slices after people order.
• Prospectus: A brochure that tells potential investors about the company and the shares on offer. Similar to a menu that lists ingredients and prices.

Steps to issue shares (the basic process)

Issuing shares isn’t random; it follows a clear sequence. Below is a simple flowchart that shows the main steps.

Worked example: ABC Ltd. issues equity shares

Let’s say ABC Ltd. wants to raise Rs. 10 lakh. Each share has a face value (the nominal price) of Rs. 10. How many shares does the company need to create?

Number of shares = Required capital ÷ Face value = 10,00,000 ÷ 10 = 1,00,000 shares.

Now follow the steps:

1. Board resolution: Directors agree to issue 1,00,000 equity shares.
2. Prospectus: Since it’s a public issue, they publish a prospectus with details.
3. Application: Investors fill in forms and pay the amount.
4. Allotment: Shares are allotted proportionally to applicants.
5. Share certificate: Each shareholder receives a certificate showing their ownership.
6. Entry in books: Share capital account is credited with Rs. 10 lakh.

Notice how the cash comes in first, then the ownership record follows. That’s why the cash account is debited and share capital is credited.

Types of shares – quick comparison

Common mistakes to avoid

• Skipping the prospectus for a public issue – it’s a legal must.
• Confusing face value with market price – face value is just the nominal amount, market price can be higher or lower.
• Not updating the share capital account after allotment – the books must reflect the new capital.

📝 Likely Exam Questions

1. Explain the term ‘share capital’ with a suitable example.
   Answer: Share capital is the total amount raised by a company through issuing shares. Example: If a company issues 5,000 shares of Rs. 10 each, its share capital is Rs. 50,000.
2. List the steps involved in issuing equity shares.
   Answer: (i) Board resolution, (ii) Preparation of prospectus (for public issue), (iii) Invitation to apply, (iv) Allotment of shares, (v) Issue of share certificates, (vi) Credit share capital in the books.
3. Differentiate between equity shares and preference shares.
   Answer: Equity shares carry voting rights and variable dividends; preference shares usually lack voting rights but have fixed dividends and priority in liquidation.
4. ABC Ltd. wants to raise Rs. 2 lakh by issuing 5,000 preference shares of Rs. 40 each. Show the journal entry for the issue.
   Answer:
   Dr. Bank A/c Rs. 2,00,000
   Cr. Preference Share Capital A/c Rs. 2,00,000
5. Why is a prospectus mandatory for a public issue?
   Answer: It provides essential information to investors, ensuring transparency and protecting them from fraud. The Companies Act makes it compulsory.