What Is Share Capital?
Contents
Types of Share Capital – The term “share capital” is often used to mean slightly different things depending on the context. When discussing the amount of money a company can legally raise through the sale of stock, there are several categories of share capital. Accountants have a much narrower definition.
Is equity share capital an asset? – No, equity share capital is not an asset. But the investor who buys equity shares of the company brings in cash in exchange for the shares given. This increases the assets of the company. Equity shares can also be issued to vendors in the exchange of the supplies or raw material provided by them.
When learning how to calculate equity share capital, you must look at shareholders equity along with the company’s liabilities and assets.3 min read Share capital involves money and property that a company receives through equity financing. It’s important because it reflects how much the business earned through equity shares during the initial public offering (IPO).
For instance, a company had an IPO six years ago and began to sell equity shares to the general public. The company sourced $1 million in capital. Since then, its market value increased to $5 million. However, since it raised only $1 million in equity financing six years ago, the balance sheet reflects the same amount and not $5 million.
If the company issued new shares of stock for $0.5 million, then the balance sheet would reflect $1.5 million. Share capital does not deal with the company’s market value. No matter what the market value is, the balance sheet specifies what the company earned at the time of the IPO,
It only considers the issued price. If a company issues 10,000 shares at $10, the capital is $100,000. After five years, the market price becomes $100; the capital is still $100,000 until the company issues new shares. To determine the share capital formula, there are several formulas you can consider.
Keep in mind that the par value is the minimum amount of price a shareholder pays to gain one share of the company. Also, paid-in capital is the amount that is the excess of par value. Deducting par value from the issue price gives you extra paid-in capital.
Formula 1: Share capital equals the issue price per share times the number of outstanding shares. Formula 2: Share capital equals the number of shares times the par value of stock plus the paid in capital in excess of par value.
In another example, a company issues 100,000 shares at $10 per share. The par value is $1 per share. The total capital is $1 million because you multiply 100,000 shares times $10. The total par value is $100,000 because you multiply $1 times 100,000 shares.
Issue bonds. Take a debt from a bank or financial institution. Use equity shares, Raise capital.
When a company issues equity or preferred shares, the company receives cash, which is an asset. Since the company is liable to the shareholders, the share capital is a liability. If the company records the cash as an asset or debits it, and records it as a liability or credits the share capital, the company can balance both the assets and liabilities.
What is Equity Capital? – Equity Capital is the total amount of funds invested by the owners in their business. The equity of a company gets divided into several units, and each unit is called a share. The owners can sell some of these shares to the general public to raise funds. The shares are of two types – Equity shares and Preference shares. Here is a brief description of the two terms:
Equity Shares – These are ordinary shares of a company that the owners sell in the open market. Investors purchase these shares and become stakeholders in the organisation with ownership rights. They hold voting rights to select the company’s management. They get a percentage of the company’s profits, but only after preference shareholders get their dividend. Preference Shares – Preference shares allow shareholders to receive dividends before equity shareholders. They are entitled to a fixed rate of compensation whenever the company declares a dividend. They also have the right to claim repayment of capital if the company dissolves.
The main differences between Debt and Equity Capital are as follows:
| Debt Capital | Equity Capital |
| Definition | |
| Debt Capital is the borrowing of funds from individuals and organisations for a fixed tenure. | Equity capital is the funds raised by the company in exchange for ownership rights for the investors. |
| Role | |
| Debt Capital is a liability for the company that they have to pay back within a fixed tenure. | Equity Capital is an asset for the company that they show in the books as the entity’s funds. |
| Duration | |
| Debt Capital is a short term loan for the organisation. | Equity Capital is a relatively longer-term fund for the company. |
| Status of the Lender | |
| A debt financier is a creditor for the organisation. | A shareholder is the owner of the company. |
| Types | |
| Debt Capital is of three types:
Term Loans Debentures Bonds |
Equity Capital is of two types:
Equity Shares Preference Shares |
| Risk of the Investor | |
| Debt Capital is a low-risk investment | Equity Capital is a high-risk investment |
| Payoff | |
| The lender of Debt Capital gets interest income along with the principal amount. | Shareholders get dividends/profits on their shares. |
| Security | |
| Debt Capital is either secured (against the surety of an asset) or unsecured. | Equity Capital is unsecured since the shareholders get ownership rights. |
The term “share capital” refers to the amount of money the owners of a company have invested in the business as represented by common and/or preferred shares, Share capital is different from shareholders’ equity because it does not include retained earnings: It is made up only of the equity owners have put into the company by purchasing shares.
What is Share Capital? – The Capital raised by a company through the issue of shares is known as Share Capital. There is no separate Capital Account for each individual or institution even after they contribute varying sums to the company’s capital. There is one Consolidated Capital Account called the Share Capital Account.
- The kinds of Share Capital are as follows: 1.
- Authorised, Registered, or Nominal Capital: The amount, which is stated in the Memorandum of Association is termed Authorised Capital.
- Authorised, Registered or Nominal Capital is the maximum capital for which a company is authorised to issue shares during its lifetime.2.
Issued Capital: That part of Authorised Capital, which is actually offered to the public for subscription is known as Issued Capital. The remaining part of the Authorised Capital, which can be issued later, is known as ‘Unissued Capital’.3. Subscribed Capital: That part of the capital that has been subscribed for by the public is known as Subscribed Capital.
- Subscribed and fully paid up
- Subscribed but not fully paid up
- (i) Subscribed and fully paid up:
- When the entire or nominal (face) value of a share is called by the company, and also paid up by the shareholders, it is known as Subscribed and Fully paid-up Capital.
- (ii) Subscribed but not fully paid up:
- When the company has called up the full nominal value of the share, but the shareholder has not paid some part of the nominal value of the share, and when the company has not called up the full nominal value of the share, the shares are said to be Subscribed and not fully paid-up.
Illustration: The Authorised Capital of Jordan Ltd. is Rs.15,00,000 divided into 1,50,000 equity shares of Rs.10 each. Out of these shares, the company issued 1,00,000 equity shares to the public. The public applied for 90,000 equity shares and all the money was duly received. 
Terms like Called-up and Paid-up are also used in the case of ‘Share Capital’. Called-up Share Capital: The part of the face value of a share which is called by the directors from the shareholders is known as Called-up Share Capital. For example, if the directors call at the rate of ₹ 50 per share on 1,000 shares of ₹100 each, ₹50,000 will be the called up Capital.
The remaining ₹ 50 per share will be uncalled share capital. Paid-up Share Capital: That portion of called-up capital that has been actually received from the shareholders is known as Paid-up Share Capital. The only point of difference between called-up capital and paid-up capital is that some shareholders may not have paid the amount of calls.
The unpaid amount is called Calls in Arrear. For example, ₹ 4 has been paid against the called-up amount of ₹10, then ₹4 is the paid-up amount. Paid-up Amount = Capital – Amount of Calls in Arrear 4. Reserve Capital: That portion of the increased nominal capital or uncalled share capital of an organisation which shall not be called up, except in the event of winding up is known as Reserve Capital.
It is not necessary to create Reserve Capital. Reserve Capital is not shown in the Balance Sheet of a Company. A firm can use Reserve Capital only at the time of winding up of the Company.5. Capital Reserve: The reserves which are created out of the Capital Profits of a firm are known as Capital Reserves.
Here, capital profits are the profits that are not earned during the normal course of the business. However, an organisation can not utilise the capital reserve for the distribution of dividends. The items that give rise to the Capital Profits and ultimately Capital Reserves of an organisation are as follows:
- Profit on Sale of Fixed Assets.
- Profit on Revaluation of Fixed Assets.
- Profit on Redemption of Debentures.
- Profit earned by a company prior to its corporation.
- Profit on forfeiture and re-issue of shares.
- Premium on Issue of Shares and Debentures.
Lower risk of bankruptcy – Share capital provides greater levels of confidence that a limited company has a lower risk of running out of capital and hence becoming bankrupt. Whereas creditors, such as banks and suppliers, can actively seek to make a company bankrupt that is not repaying its debts, this is not the case for shareholders.
For increasing the paid-up share capital of a company, new shares must be issued and allocated at a Board Meeting with the consent of all the Members of Board of the company. The return of distribution should be conveyed to the concerned Registrar of Companies of the Companies Act, 2013.
What is the difference between capital and assets?
Let us take for example a plot of land. A company, let’s call that X buys that plot of land in exchange of money to be used in production activities. In this case, land is a resource – as in, the land is the source from which benefit is produced. The benefit here is the land being used for productive purposes.
The land becomes an asset for the company. An asset is is a resource that is controlled by the person/company from which one can expect to receive future benefits. By future benefit, I mean the revenue that is generated by the operation of the business in the land. The capital is the money that is used to buy the plot of land.
In other terms, the capital can also be explained as the amount that is invested to run the business. In simple terms, asset creation requires capital. To sum it up, resource is the source of profit. When controlled, resource becomes an asset; and the money used to purchase the asset is the capital.
Share capital refers to the funds a company receives from selling ownership shares to the public. A company that issues 1,000 shares of stock at $50 per share receives $50,000 in share capital. Even if the value of the shares increases or decreases, the value of the share capital remains as what the company received from the initial sale, or $50,000.
- The two types of share capital are common stock and preferred stock,
- Companies that issue ownership shares in exchange for capital are called joint stock companies.
- A joint stock company can be a corporation, which is a separate legal entity from any person involved with the company, or a limited liability company, which protects shareholders by limiting their risk to the amount invested in the company.
Joint stock companies raise share capital by selling ownership shares to the general public. The most common type of ownership share in a company is common stock. The company’s memorandum of association defines the characteristics of its common stock, such as:
Whether shareholders are allowed to form a board of directors and vote on company decisions. Whether shareholders may vote to determine a course of action in the event of a hostile takeover, Whether, if the company is liquidated, holders of common stock are entitled to their share of company assets if there is money left after the company pays its creditors and preferred stock holders.
Companies also procure share capital from selling preferred stock. Like common stock, this type of stock also allows members of the public to take ownership of a company. However, preferred stock confers different benefits. Owners of preferred stock typically cannot vote on company decisions or elect board members.
However, they have a higher claim than common stock owners on company assets. They also receive fixed cash payments, known as dividends, at regular intervals. A preferred stock pays a cash dividend to shareholders. Its amount, known as the dividend yield, is expressed as a percentage of share value. For example, a preferred stock with a 3% dividend yield that trades for $100 pays a shareholder $3 for every share they own.
This money is paid while they own the stock, in addition to the proceeds they receive when they sell it. If a company is forced to declare bankruptcy or liquidate its assets, preferred stock owners receive their share of company assets before common stockholders.
- Additionally, no dividends may be paid to common stockholders until all preferred stockholders have received their agreed-upon dividend.
- Selling stock and receiving share capital in return is known as equity financing,
- This type of financing is a popular alternative to debt financing, in which companies obtain capital by seeking loans that must be paid back with interest.
Those who provide share capital to a company do not receive repayment with interest on a fixed schedule. Instead, they share in the company’s profits when they own company stock.
Types of Share Capital – The different types of share capital are as follows:
- Authorised Capital – It is the total amount of share capital that a company can issue to investors. It is also known as Normal or Registered Capital. This amount is present in the Memorandum of Association of that Company. They can increase or decrease the Authorised Capital after following the provisions mentioned in the Companies Act. The company doesn’t have to issue shares for the entire amount at once. They can do it in tranches based on their need for funds.
- Issued Capital – It is part of the Authorised Capital that the company has asked for investment from the general public for a subscription via shares. The leftover part is known as Unissued Capital. The company can issue that amount at a later date.
- Subscribed Capital – Subscribed Capital is a part of the Issued Capital which the investors have taken via shares.
- Called-up Capital – The portion of Subscribed Capital that the company has asked its shareholders to pay is the Called-up Capital. They can ask investors to pay the total amount or a part of the face value of shares.
- Paid-up Capital – Paid-up Capital is the actual amount that the investors have paid to the company. If the shareholders haven’t given a part of the called up amount, it is known as Calls in Arrears.
- Uncalled Capital – It is the part of Subscribed Capital which the company hasn’t asked its shareholders to pay yet. The company can ask for the amount when they require more funding.
- Reserve Capital – Reserve Capital is that part of Uncalled Capital that the company may keep separate and use when it winds up its operations.
Capital is present on the Liabilities side of the Balance Sheet of a company. The reason is that a company is an artificial person, and it owes the Capital amount to its owners and investors. Share Capital is present under the head Shareholders Fund. We will explain how you can display the Share Capital in the Balance Sheet with the help of an example: Question: Zero Ltd.
- Rs.30 per share during application
- Rs.30 per share during allotment
- Rs.40 per share during the first call (it was also the final call)
The company got applications for 30000 shares. Out of those 30000 shares, they did not get the allotment money on 500 shares. They did not make the First Call for those shares. Kindly display the relevant items in the Balance Sheet of Zero Ltd.
- Answer:
- Balance Sheet of Zero Ltd.
- As on,
| Equity and Liabilities | Note to | Current Year (₹) | Previous Year (₹) |
| Shareholder’s Funds: | (1) | 17,85,000 | |
| Assets | |||
| Cash and Equivalents (Cash at Bank) | 17,85,000 |
As per the revised Schedule VI, disclosure related to the Share Capital is provided in Notes to Accounts Notes to Accounts
| Equity and Liabilities | Current Year (₹) | Previous Year (₹) | |
(1) Share Capital:
50000 shares of Rs.100 each 40000 shares of Rs.100 each 30000 shares of Rs.100 each 30000 shares of Rs.100 each Rs 60 per share called up 30000 shares of Rs.100 each Rs 60 per share called up Less: Calls in Arrears (500 shares @Rs.30 per share) |
18,00,000 (15,000) |
|
|
| Total | 17,85,000 |
The share capital account is debited with the full amount that had been previously credited to that account in respect of those shares.
What is Share Capital? – Share capital (shareholders’ capital, equity capital, contributed capital, or paid-in capital) is the amount invested by a company’s shareholders for use in the business. When a company is first created, if its only asset is the cash invested by the shareholders, the balance sheet is balanced with cash on the left and share capital on the right side.
Share capital is a major line item but is sometimes broken out by firms into the different types of equity issued. There can be common stock and preferred stock, which are reported at their par value or face value. Note that some states allow common shares to be issued without a par value. Share capital is separate from other types of equity accounts.
As the name “additional paid-in capital” indicates, this equity account refers only to the amount “paid-in” by investors and shareholders, and is the difference between the par value of a stock and the price that investors actually paid for it. 
Info: 1878 words (8 pages) Essay Published: 2nd Aug 2019 Reference this Jurisdiction / Tag(s): UK Law The power to borrow is of great importance to the company, and corporate borrowing enjoys some unique characteristics. Loan capital and share capital are two types of borrowing money for a company.
- Types of borrowing by loan capital are debentures, mortgage of corporate property and assets, unsecured loans, overdrafts and bills of exchange.
- The share capital represents how much the company is worth.
- Share capital is that part of the company’s capital that is made available by the members who have subscribed for shares in the company, which in truth is usually worth far less than the company’s total assets and should be differentiated from loan capital.
In this case, Black Books plc is considering methods of raising or securing loan capital. There are some advantages for Black Books plc of raising loan capital rather than share capital. First of all, loan capital allows them to maintain the ownership of their property and at the same time assists them in reaching financial aid too therefore the land which is mortgage is owned by them.
- Loan capital unlike share capital, does not share ownership so Black Books plc has the entire ownership.
- The debenture holder is very much more of an outsider.
- Also, there is no necessary for someone to sell or leave his property in order to deposit some money.
- An important point is that interest payments on the mortgage are tax free.
Repayments should be predefined and determined it allows them to plan their budget. Furthermore, lender will monitor the performance of business but will have no control over the business. In addition, once loan capital is repaid, it will benefit to gain profit.
On the other hand, shareholder will still expect a share of profit. Finally, debenture holder has to release the ownership once loan repaid. On the other hand there some disadvantages of raising loan capital too. Firstly, repayments have to be made separately from of making profit or not. On the other hand shareholder will not receive dividends until business makes a profit.
Interest to be paid, will impact profit. In addition, the company will not be able to sell the land to third party until loan is repaid. Also, the risk of them ending up or losing their property increases drastically. Finally, register security charge. An issue of debenture document which implies to acknowledge a credit arrangement between a company and a creditor.
- A debenture holder is entitled to obtain payment of the sums due to him, whether they are principal or interest; the set holder irrespective of whether or not the debtor company is in profit.
- When a company wishes to raise finance, especially long-term finance, it will almost predictably be obliged to give security for the amount it wishes to borrow.
An action by a secured creditor to realize a security interest will normally be impossible until the debtor company fails to meet its obligations under the terms of the debenture contract. Nevertheless, where a company borrows money by way of an overdraft facility, the overdraft may be expressed to be repayable on demand.
For a mortgage, you borrow money to buy a land, you cannot own the land complete until the debt is repaid, nor can you sell it without the lenders authorization. The mortgage is a form of fixed charge.The fundamental characteristic of any mortgage is that it is a conveyance of an interest in property with a provision for redemption.
A legal mortgage may be created over personal or real property. In the case of a legal mortgage taken over land, the mortgage may only be created in one of two ways. First, it may be created by a transfer of the property for a period of years complete.
Secondly, and in this case, by company act 2006 s 738 allows a legal mortgage of the company’s land in favour of Lender as security for a simultaneous loan of £500,000.With the second method, the mortgagee obtains no estate in the land secured by the mortgage, but, by s 87(1) of the Law of Property Act 1925, should the mortgagor be unsuccessful to make the repayment of sums due under the mortgage, the charge may take control of the mortgaged property.
The floating charge is a mechanism which can only be given as security for a debt incurred by a limited company. The character of a floating charge is such that the charge does not fix itself to an exact corporate asset until an event, ‘crystallization’, arises.
- The floating charge is formed over a class of assets which by their very nature are supposed to not have a degree of stability, thus preventing them being readily identified (i.e.
- The assets are all the time changing nature).
- Black books plc has a first floating charge over the company’s assets to the extent of £100,000.
In Illingworth v Houldsworth (Re Yorkshire Woolcombers Association Ltd) 2 ch.284, Romer LJ tentatively identified the floating charge as possessing some qualities. Firstly it can be a charge on all of a class of assets of the company present and future.
Also a floating charge can include a class of assets which in the ordinary course of a company’s business would be change during time and would allow the company to run its business in the regular way. At the floating charge of Supplier was included a negative pledge clause. Negative clause prevents from creating further charge.
The “negative pledge” clause is where a floating charge over “all the assets and responsibility” of the company is spoken to take priority over all later charges over the same property. Such a clause will in reality only affect later fixed charge, with actual notice of the earlier floating charge and the restriction contained within it (Earle v Hemsworth RDC,
According to CA 2006 s741 charges should be registered to secure the charge. Black Books plc according to Palmer must register an allotment of debentures as soon as practicable and in any event within two months after the date of the allotment. If a company fails to comply with this section, an offence is committed by the company.
If Black Books plc does not registered charges under CA 2006 s874 become unsecure. If a company creates a charge to which section 860 applies, the charge is void against a creditor (Supplier) of the company unless that section is complied with. Automatic crystallization is a clause in a debenture contract that provides for a floating charge to crystallize into an equitable fixed charge on the happening of a specified event without the need for the creditor to make claim to the assets subject to the charge.
- The legal effectiveness of such a clause was once doubted but the judicial acceptance of the automatic crystallization clause is now well established on the premise that the court should seek to give effect to the contractual intention of the parties subject to the charge.
- Hoffman J stated ‘ it seems to me fallacious to argue that once the parties have agreed on some terms which are thought sufficient to identify the transaction as a floating charge, they are then precluded from agreeing to any other terms which are not present in the standard case.’ (At p 427) The approval of the authority of an automatic crystallization clause was again confirmed by Hoffmann J in Re Permanent Housing Holdings Ltd BCLC 563.
Black Books plc can not continue to deal with assets which are the subject of a floating charge because the charge crystallises: see e.g. Re Borax Ch 326. A floating charge over the company’s assets to the extent of £50,000 in favour of Pressing automatic crystallised into a fixed charge in the event of the England Cricket Team which loosed the One Day test series in Australia in January 2011.
- The fixed (registered) charge takes priority over a (registered) uncrystallised floating charge.
- Once the floating charge has crystallised then it will take priority over any later fixed equitable charge).
- But it is not certain that Pressing has priority over Supplier.
- As there was a risk for Supplier of a later fixed charge obtaining priority, he commonly inserts negative pledge clauses in his agreement with Black Books plc.
A negative pledge clause is an express term of the contract which precludes the company from creating a second charge with priority. Supplier will retain priority only if Pressing has notice of the first charge and of the clause. If Pressing searches the register of charges and obtains actual knowledge of the charge and of any restriction registered with the charge, then Supplier claim will take priority over Pressing claim.
The debenture holder, who wishes to realise his security and get his money back, may either exercise remedies given by the debenture trust deed without recourse to the court or take proceedings to enforce his rights. As Lender (debenture holder) is a creditor of Black Books plc he has the normal remedies of an unsecured creditor, due on March 1st 2011 including the right to sue the company for the realisation of the amount due on debenture held by him and appeal for a decree against the company’s property.
Also Lender has the right to present a petition to the court for the compulsory liquidation of the company and the right to present a petition to the court for an administration order. Lender as a secured debenture holder has the additional right to enforce his security.
May take possession of the asset charged and sell it. Lender, the debenture holder, is the holder of a single debenture giving a charge on the assets of the company; he will have an express or implied power of sale. If there is a trust deed, the trustees have power to sell the property of the company.
Any surplus of the proceeds of sale after payment of debts due to debenture-holders is payable to the company. Furthermore, Lender, debenture-holder, may request to the court for distrait, the effect of which is that the borrowers’ interest in the assets charged is completely extinguished and the lenders become the owner of them.
- However, for its proper exercise it is necessary for all the debenture-holders of every class to be parties to the action.
- Lender, the debenture holder, may bring action (called a debenture holder action) on behalf of him and other debenture holders of the same class asking for a declaration that the debenture have a charge on the assets; an account of what is owned to the debenture holders; an order of foreclosure or sale and the appointment of a receiver.
In addition, Lender, debenture-holder, may appoint a receiver or manager to take on his property in this, which is compulsory to do he is so empowered. If Lender lacks the power, he may apply to the court for an appointment. In either case the fact of appointment must be brought to the notice of the registrar within 30 days.
What does 30% equity mean?
You’d own 30% of the company and should get that much of the proceeds after expenses and liabilities once there was an equity event (sell, go public, etc). Typically equity comes into play as distributions of profit. You get paid based on the percentage of distributed profit.
Scope: This section scope includes accounting for the following: (a) Share capital; (b) Share premium; and (c) Merger reserve. This section does not covers-up a detailed analysis of whether the issue of a financial instrument is classified as a debt or equity.
Accounting Policy: Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. The shares held by company are recognised in ‘Total Shareholders’ equity’ as a deduction from retained earnings until they are cancelled.
When such shares are subsequently sold, re-issued or otherwise disposed of, any consideration received is included in ‘Total shareholders’ equity’, net of any directly attributable incremental transaction costs and related income tax effects. Share capital is carried at par value.
- Share capital issued by an entity meets the definition of an equity instrument as defined in IAS 32 ‘Financial Instruments’ when the contract evidences a residual interest in the assets of an entity after deducting all of its liabilities.
- Incremental costs directly attributable to the issue of shares are accounted for as a deduction from consideration received, and are recorded in share premium.
Share premium reflects the proceeds received (net of allowable costs) in excess of the par value. Share premium is the amount by which the fair value of the consideration received for shares exceeds the nominal value of the shares. IAS 1.75 (e) requires that “equity capital and reserves are disaggregated into various classes, such as paid-in capital, share premium and reserves”,
Therefore the premium, whether for cash or otherwise, must be transferred to the share premium account. There are pre-defined rules that relate to the creation of share premium on an issue of shares and also to the way in which that premium may be used. These rules apply to all shares, regardless of how they are classified for accounting purposes.
Where shares are presented as liabilities, the share premium should be presented as part of the liability. For accounting purposes under IFRS, legal share premium has to be analyzed between amounts relating to equity shares and shares that are presented as liabilities.
Once a share premium account has been established, it may only be used for certain specified purposes, including among others to: (a) Pay up fully paid bonus shares; (b) Write-off expenses of the issue of new shares; or (c) Write-off any commission paid on the issue of those shares. Apart from specific uses, the share premium account should be treated as if it were part of the paid-up share capital of the company.
Guidance: Recognition: The timing of initial recognition of issued shares should follow legal and regulatory requirements. Shares should be recognised as issued when the rights of share ownership pass to the holder, usually when the consideration is paid.
Amounts should be credited to share premium the same time as share capital is recognised. Share capital and share premium arising from investments in subsidiaries and associates is eliminated on consolidation. Merger Reserve: The merger reserve is the difference between the cost of investment and the acquired net assets at book value.
The cash payment to settle the liability is accounted for and reflected in the cash flow statement at the date of payment. Under IAS 27 ‘Consolidated and separate financial statements’ an entity is required to record its investments in subsidiaries in its separate financial statements at cost or in accordance with IAS 39,
Share capital refers to the funds a company receives from selling ownership shares to the public. A company that issues 1,000 shares of stock at $50 per share receives $50,000 in share capital. Even if the value of the shares increases or decreases, the value of the share capital remains as what the company received from the initial sale, or $50,000.
The two types of share capital are common stock and preferred stock, Companies that issue ownership shares in exchange for capital are called joint stock companies. A joint stock company can be a corporation, which is a separate legal entity from any person involved with the company, or a limited liability company, which protects shareholders by limiting their risk to the amount invested in the company.
Joint stock companies raise share capital by selling ownership shares to the general public. The most common type of ownership share in a company is common stock. The company’s memorandum of association defines the characteristics of its common stock, such as:
Whether shareholders are allowed to form a board of directors and vote on company decisions. Whether shareholders may vote to determine a course of action in the event of a hostile takeover, Whether, if the company is liquidated, holders of common stock are entitled to their share of company assets if there is money left after the company pays its creditors and preferred stock holders.
Companies also procure share capital from selling preferred stock. Like common stock, this type of stock also allows members of the public to take ownership of a company. However, preferred stock confers different benefits. Owners of preferred stock typically cannot vote on company decisions or elect board members.
However, they have a higher claim than common stock owners on company assets. They also receive fixed cash payments, known as dividends, at regular intervals. A preferred stock pays a cash dividend to shareholders. Its amount, known as the dividend yield, is expressed as a percentage of share value. For example, a preferred stock with a 3% dividend yield that trades for $100 pays a shareholder $3 for every share they own.
This money is paid while they own the stock, in addition to the proceeds they receive when they sell it. If a company is forced to declare bankruptcy or liquidate its assets, preferred stock owners receive their share of company assets before common stockholders.
- Additionally, no dividends may be paid to common stockholders until all preferred stockholders have received their agreed-upon dividend.
- Selling stock and receiving share capital in return is known as equity financing,
- This type of financing is a popular alternative to debt financing, in which companies obtain capital by seeking loans that must be paid back with interest.
Those who provide share capital to a company do not receive repayment with interest on a fixed schedule. Instead, they share in the company’s profits when they own company stock.
What is Share Capital in Business? Every small business owner will have come across the concept of shares. A share refers to a unit of equity ownership in a business. They can be a financial asset ensuring equal distribution of profits in a company. The term “shares” is often used interchangeably with “stock”.
