When a company decides to raise (additional) capital
through the capital market or stock exchange, it issues out shares. It does
this by advertising in a prospectus. The prospectus will detail out the
available number of shares to be subscribed for, and the issuing price of the
shares.
Prospective buyers who wish to be shareholders of the
company can now subscribe to the offer made by buying the shares. Buyers are
expected to pay for the number of shares they indicate interest in. once they
pay through participating banks, they are thereafter issued share certificates
which confirm to them that they are now shareholders in the company.
Bookkeeping Entries
When shares are offered and are subscribed for, two
basic bookkeeping actions are taken. These are explained below
1.
When
prospective buyers pay and cash is received. A bank account will have to be
opened to receive the cash and application account will need to be opened to
record the applications received.
The accounting bookkeeping
(accounting) entries are
Debit Bank Account and
Credit Application Account
2.
The
next action is to close the application/allotment account and move the records
to share capital account.
The bookkeeping
(accounting) entries required to do this are
Debit
Application/Allotment Account and Credit Share Capital Account.
This will close the application/allotment account and
the fund will now be shown in the share capital account to signify the amount
of additional capital raised through this exercise.
If the issuing price (selling price of the shares) is
greater than the nominal value of the shares, it means that share premium
account will have to be opened as well.
Assuming shares are oversubscribed for, forfeited or
paid for instalmentally, it means that additional bookkeeping entries will be
needed.
The following examples buttress the two steps explained
above.
Question1
5,000 ordinary shares of N1 each are issued and paid for
at N2.50k each. The accounting entries will be appear as follows
Workings
\
\
To close the application/allotment account as the
exercise has closed, we have step2 as follows
The balance sheet extract for the above transaction will
appear thus
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