Share Capital

Ever wondered what the shareholder’s funds of the equity’s and liabilities consists of? It also has a minute part in indicating the financial health of a company. Using the shareholder’s equity ROE- Return on equity is calculated by dividing the net income by shareholder’s equity to decide if the business is efficiently using its equity to generate profit.

Equity and liabilities

  1. Shareholders fund
  2. Share application money pending allotment
  3. Non-current Liabilities
  4. Current Liabilities

Share holder’s Fund

  • Share Capital
  • Reserves and surplus
  • Money received against share warrants

Two types of shareholders – Preferential & Equity shareholders.

Both these shareholders have got a stake in a company’s ownership.Equity shares are commonly issued more than preferential shares that’s why its also called as common shares.

There’s a fixed dividend for preferred shareholders. It sounds safe, but most investors don’t prefer it because when interest rates go up than the fixed dividend rate, the par value becomes low.

And at the time of liquidation of the company, the preference shareholders are paid out before equity shareholders.So investors who seek fixed income with less risk prefer preference share.Where as the payment of dividends is based on the profitability of the company.

Share Capital

It’s a convenient way to raise money to expand and grow a business and equip more by issuing shares in the stock market. In simple terms, it’s the amount of revenue from the sale of shares.

The sources of share capital are listed below.

1. Authorized capital-

It is the maximum amount of capital that a company can issue for subscription. It can be split up into numbers. It is stated under capital clause.

2. Issued Capital-

It’s that part of authorized capital, which is issued till now. It can be less or equal to authorized capital, but more and equal to subscribed capital.

3. Subscribed Capital-

It is that part of issued capital which has been subscribed for the issued shares.

Subscribed and fully paid-up, When the company has called the nominal value of the shares and received the entire called up amount.

Subscribed and not fully paid-up,

  • The company has called the full nominal value of the share but has not received the entire called up amount.
  • The company has not called the full nominal value of the share.

1,00,000 shares of rs.10 each, for Rs.8

Subscribed but not fully paid 1,50,000 shares of rs.10 each, for Rs.8 Less:Calls-in- Arrears (5000 x 2)    12,00,000/ 10,000

4.Forfeited Shares:

When issued shares are not fully Paid up, they are reissued at discount.

Disclosure of share capital in a company’s balance sheet

                            In the Balances Sheet of xyz Company as on …….

1.Share Capital
Authorised Capital
xxxx Equity shares of Rs. yy each,
  xxxx Preference shares of Rs. yy each,  
Issued Capital
xxxx Equity shares of Rs. yy each, 
xxxx Preference shares of Rs. yy each,   
Subscribed Capital
Subscribed and fully paid-up
xxxx Equity shares of Rs. yy each,
  xxxx Preference shares of Rs. yy each,
Subscribed and not fully paid-up
xxxx Equity shares of Rs. yy each, Rs. yy called-up
Less: Calls-in- Arrears
xxxx Preference shares of Rs. yy each, Rs. yy called-up
Less: Calls-in- Arrears
Add: Forfeited Shares  
Amount to be shown in the Balance sheet.     

General Equation of how to calculate the equity

Assets = Liabilities+  Shareholder’s Equity

Which means the capital. It’s the book value of the company. It’s also a liability because at the time of winding up of the company, it is paid back to the shareholders.

Equity is the degree of residual ownership, which means paying back the leftover after paying all the debts.

 It is a simple indicator of the company’s financial health.

When, Asset <  Liabilities &  Shareholders Equity, its negative,

  Asset > Liabilities &  Shareholders Equity, its positive.

Shareholder’s formula on Equity

Shareholders’ Equity = Share Capital + Retained Earnings – Treasury Stock

Retained earning – it’s the amount of earning left out after distributing the dividends

Treasury Stock – It’s the number of outstanding stocks which are bought back by the company in fear of acquisition by the competing organisation.

Movements in equity

Under the statement of changes in equity the movement of shareholder’s equity is observed. A reconciliation of the opening balance and closing balance of the accounting year. It depicts the gains and loses between accounting periods.

The difference between equity of the current year with its previous accounting year. These details are not available in financial statements. These details will be helpful for an investor to make decisions

Opening Equity balance + Net profit during the period – Dividends +/- Other Changes = Closing balance of Equity

You have to keep a check and revise the balance sheet as when the shares are issued, it will definitely have an impact on the balance sheet, when the entity issues the shares the shareholders equity increases.

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