In the world of corporate finance, raising funds is essential for growth and sustainability. Companies raise capital through various means, including the issuance of shares and debentures. These financial instruments are fundamental to a corporation’s capital structure and play a key role in its financing activities.

This article aims to delve deep into the accounting for share capital and debentures, covering their definitions, types, issuance processes, accounting treatments, and examples. We will also discuss their impact on a company’s financial statements and explain how they fit into the broader context of corporate financing.

1. Share Capital: Definition and Types

A. What is Share Capital?

Share capital refers to the funds raised by a company through the issuance of shares to investors, also known as shareholders. These shares represent units of ownership in the company, and shareholders are entitled to dividends and other benefits, including voting rights, depending on the type of shares they hold.

Share capital is classified into two main types:

1. Equity Share Capital (Ordinary Shares): This represents the ownership stake of equity shareholders in the company. Equity shares typically come with voting rights, and dividends are paid based on the company’s profitability. Equity shareholders are considered the ultimate risk-takers, as they get paid dividends only after other claims (like those of debenture holders and preference shareholders) are met.
2. Preference Share Capital: Preference shares provide shareholders with a fixed dividend payout before equity shareholders. Preference shareholders do not typically have voting rights unless their dividend payments are in arrears. In the event of liquidation, they have priority over equity shareholders when it comes to the repayment of capital.

B. Types of Shares

1. Authorized Share Capital: The maximum amount of share capital a company is allowed to issue as per its memorandum of association.
2. Issued Share Capital: The portion of authorized capital that the company has offered to the public for subscription.
3. Subscribed Share Capital: The part of the issued capital that investors have agreed to buy.
4. Paid-up Share Capital: The amount of money a company has received from shareholders who have paid for their shares. This can be lower than the subscribed share capital if shares are partly paid.

C. Features of Share Capital

1. Permanent Capital: Equity share capital remains with the company until liquidation, providing it with a stable funding source.
2. Residual Claims: Equity shareholders are the last to be paid in case of liquidation, after all debts and liabilities, including those to debenture holders and preference shareholders, have been settled.
3. Ownership and Control: Issuing shares gives investors ownership stakes, meaning control and decision-making powers (e.g., voting rights) are tied to the number of shares held.

2. Debentures: Definition and Types

A. What are Debentures?

A debenture is a form of long-term debt instrument that companies issue to raise funds from the public. It is a form of loan where the company promises to repay the principal along with periodic interest. Unlike shares, debentures do not grant ownership in the company. Instead, debenture holders are considered creditors.

Debentures are characterized by the following:

1. Fixed Interest Payment: Debenture holders receive interest payments at regular intervals, irrespective of the company’s profitability.
2. Priority in Repayment: In case of liquidation, debenture holders are repaid before shareholders.

B. Types of Debentures

1. Convertible Debentures: These debentures can be converted into equity shares after a specified period or under certain conditions.
2. Non-Convertible Debentures (NCDs): These cannot be converted into shares and are purely debt instruments.
3. Secured Debentures: These are backed by the company’s assets as collateral, offering protection to debenture holders in the event of default.
4. Unsecured Debentures: These are not backed by any collateral, making them riskier than secured debentures.
5. Redeemable Debentures: The company is obliged to repay the principal amount to debenture holders after a specified period.
6. Irredeemable Debentures: These are not required to be repaid within a fixed timeframe, but they may be repayable on the company’s liquidation.

3. Accounting for Share Capital

A. Issuance of Shares

When a company issues shares, it records the funds received as equity on its balance sheet. Shares can be issued at:

1. Par (face value): The nominal value of the shares.
2. Premium: Shares issued at a price higher than their nominal value.
3. Discount: Shares issued at a price lower than their nominal value (this is rare and subject to strict regulatory provisions).

Accounting Entries for Issuing Shares at Par

1. Bank A/c (Debit): For the amount received from shareholders.
2. Share Capital A/c (Credit): For the nominal value of shares issued.
3. Example: A company issues 10,000 shares at ₹10 par value.
4. Entry: Bank A/c Dr. ₹1,00,000
5. To Share Capital A/c ₹1,00,000

Accounting Entries for Issuing Shares at Premium

When shares are issued at a premium, the excess amount over the par value is credited to a Securities Premium Account.

1. Bank A/c (Debit): For the total amount received.
2. Share Capital A/c (Credit): For the par value.
3. Securities Premium A/c (Credit): For the premium amount.
4. Example: A company issues 10,000 shares at ₹12 (₹2 premium).
5. Entry: Bank A/c Dr. ₹1,20,000
6. To Share Capital A/c ₹1,00,000
7. To Securities Premium A/c ₹20,000

Calls in Arrears and Calls in Advance

1. Calls in Arrears: If a shareholder fails to pay any installment of the share capital, the amount due is treated as “calls in arrears.”
2. Entry: Calls in Arrears A/c Dr.
3. To Share Capital A/c
4. Calls in Advance: If a shareholder pays money before it is demanded, the amount is treated as “calls in advance.”
5. Entry: Bank A/c Dr.
6. To Calls in Advance A/c

B. Forfeiture of Shares

If a shareholder fails to pay the required money on shares, the company may forfeit the shares.

1. Entry for Forfeiture:
2. Share Capital A/c Dr.
3. To Forfeited Shares A/c
4. To Calls in Arrears A/c
5. Entry for Re-issue of Forfeited Shares:
6. Bank A/c Dr.
7. Forfeited Shares A/c Dr.
8. To Share Capital A/c

4. Accounting for Debentures

A. Issuance of Debentures

Debentures can be issued at par, premium, or discount. The accounting treatment for issuing debentures follows the same principles as shares.

Issuing Debentures at Par

1. Bank A/c (Debit): For the amount received from investors.
2. Debentures A/c (Credit): For the nominal value of debentures issued.
3. Example: A company issues 1,000 debentures at ₹1,000 each.
4. Entry: Bank A/c Dr. ₹10,00,000
5. To Debentures A/c ₹10,00,000

Issuing Debentures at Premium

When debentures are issued at a premium, the excess amount over the nominal value is credited to a Premium on Debentures A/c.

1. Bank A/c (Debit): For the total amount received.
2. Debentures A/c (Credit): For the nominal value.
3. Premium on Debentures A/c (Credit): For the premium amount.
4. Example: A company issues 1,000 debentures at ₹1,100 each (₹100 premium).
5. Entry: Bank A/c Dr. ₹11,00,000
6. To Debentures A/c ₹10,00,000
7. To Premium on Debentures A/c ₹1,00,000

Issuing Debentures at Discount

Debentures can be issued at a discount, meaning they are sold below their nominal value. The discount is recorded as a loss in the Discount on Issue of Debentures A/c.

1. Bank A/c (Debit): For the amount received.
2. Discount on Issue of Debentures A/c (Debit): For the discount amount.
3. Debentures A/c (Credit): For the nominal value of debentures.
4. Example: A company issues 1,000 debentures at ₹900 each (₹100 discount).
5. Entry: Bank A/c Dr. ₹9,00,000
6. Discount on Issue of Debentures A/c Dr. ₹1,00,000
7. To Debentures A/c ₹10,00,000

B. Interest on Debentures

Debenture holders are entitled to interest payments, which are recorded as expenses for the company.

1. Entry for Interest Payment:
2. Debenture Interest A/c Dr.
3. To Bank A/c (for interest paid)
4. Entry for Tax Deducted at Source (TDS):
5. Debenture Interest A/c Dr.
6. To TDS Payable A/c
7. To Bank A/c (net payment after tax)

C. Redemption of Debentures

Debentures are redeemed (repaid) either at par, premium, or discount, depending on the terms of the debenture issue.

1. Entry for Redemption at Par:
2. Debentures A/c Dr.
3. To Bank A/c
4. Entry for Redemption at Premium:
5. Debentures A/c Dr.
6. Premium on Redemption A/c Dr.
7. To Bank A/c

Conclusion

Accounting for share capital and debentures is an essential aspect of corporate finance that impacts a company’s financial structure. Both share capital and debentures serve as significant sources of funds, with shares representing ownership stakes and debentures representing debt obligations. Properly accounting for these instruments is crucial for ensuring transparency and accuracy in financial reporting.

While share capital affects the equity portion of a company’s balance sheet, debentures impact the liabilities section. Understanding the nuances of issuing, accounting, and managing these instruments helps businesses make informed decisions regarding their financing strategies and growth prospects.