Accounting for Shares Capital: Definition, Example, Measurement, Recognition, and Journal Entries

Share capital is the prominent line item under the owner’s equity of a company. It reflects the investment received by the company from shareholders by issuing common stocks.

Share capital can include preferred stocks. It is recognized at par or face value to the issue price of shares. Share capital should be adjusted for any changes in the equity in special cases of buyback stocks or called-up shares.

Let us analyze the share capital, types, and measurement on the balance sheet of a company.

Definition

Share capital is the amount invested by the owners (shareholders) of the company to conduct business. In other words, it is the amount received by the company by issuing shares.

Initially, when a company is incorporated, its only source of funding is equity. These initially issued shares are recorded as share capital on the balance sheet of the company.

Later, the share capital will reflect changes due to the premium paid on issued shares. The share capital amount can also change over time by issuing new shares through an IPO or buyback options.

Accounting for Share Capital

Share capital is a prominent item under the owner’s equity section of a company’s balance sheet. The IAS 32 rule – Financial Instrument Presentation defines the assets, liabilities, and equity.

Under IAS 32 definition, an item is considered equity if it evidences in the interest in assets of a company.

The company issuing shares can then record them under the share capital. Issued shares are recorded at their face values under the share capital. Any excessive amount received above the face value is recorded as additional paid-in capital or share premium.

Initial Share Issued

The company will create a new line item for share capital under the owner’s equity section. The share capital will further require the creation of two accounts.

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Share Capital:        It represents the account for proceeds received through shares issued at par value.

Share Premium:   It represents the account for proceeds received above the par value of the share.

The format for the journal entry for an initial share issue is given below.

ItemDebitCredit
Bank AccountTotal Cash Received 
Share Capital Up to Par Value of Shares
Share Premium Above Par Value of Shares

Any changes to the initial share issue can result in new line items such as preferred stocks.

Line Items of Equity Related to Share Capital

Owner’s equity can take different forms. Thus, each type of equity can be listed as a new line item under the owner’s equity section of the balance sheet.

Here are a few key line items that relate to the share capital.

Common Stocks

These are ordinary shares issued to common shareholders. These are recorded at the par value of the issued shares. Common stocks are the first line item under the share capital sub-section of the owner’s equity.

Preferred Stock

Preferred stocks come with special features for shareholders. These stocks often pay guaranteed dividends to shareholders. However, preference shareholders do not hold any voting rights.

Note: Companies sometimes issue hybrid securities that come with the convertibility feature. These debt instruments can also be classified as preferred stocks in some cases.

Contributed Surplus

Shares are issued at par value to the shareholders. However, companies offer premiums above the par value to attract investment. Any amount above the par value of shares is referred to as contributed surplus or additional paid-in capital.

Treasury Stocks

Treasury stocks referred to the shares bought back by the company. This account works as a contra-equity line item. It means treasury stocks reduce the share capital.

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Share Capital Calculation Formula

Shares can be issued at par value. Sometimes, a company does not define a par value and issues shares at a declared price.

Share capital formula issued at par value:

Share Capital = Number of Shares Issued × Par Value

The share proceeds will also include any premium paid above the par value. That is termed as share premium or additional paid-in capital of the company.

The formula can be adjusted to reflect the share premium as:

Share Capital = Number of Shares Issued × Par Value + Share Premium above par value

In some cases, the company will not specify the par value of the share. In such situations, there will be no line item for additional paid-in capital. All proceeds received from issuing shares will be recorded as share capital only.

The formula for share capital will be equal to the proceeds from issuing of shares without the share premium.

Example

Suppose a company ABC issues 1 million new shares at a par value of $1. It sets the issue price at $1.50. Thus, there exists additional paid-in capital.

Total Share capital = share issued at par × par value + additional paid-in capital

Total Share capital = (1,000,000 × 1) + (1,000,000 × 0.50)

Total Share capital = $1,000,000 + $500,000 = $1,500,000.

The journal entry for the account books for the company ABC will be recorded as below.

ItemDebitCredit
Bank Account$ 1,500,000 
Share Capital $ 1,000,000
Share Premium $ 500,000

The amount of share capital proceeds may not be received on the same date. Hence, the company can record the proceeds as and when received through several journal entries.

Types of Share Capital

Share capital can be categorized into different types.

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Authorized Share Capital

It is the maximum amount of share capital a company is authorized to receive.

Once a company decides to issue new shares to collect funds, it must get approval for the share capital amount. The company can then decide for a nominal or par value of the share to issue the required number of shares.

For example, if a company is authorized to collect up to $10 million, it can issue 10 million shares at a par value of $1.

Issued Share Capital

It is the total number of shares a company issues after approval for the authorized share capital.

The number of issued shares cannot exceed the total authorized share capital.

Called-up Share Capital

In some cases, a company may decide to issue new shares with a deferred payment. Shareholders may subscribe to new shares but commit funds for a later date.

Such deferred and committed share capital is considered called-up capital that has not yet been paid by the shareholders.

Changes in Share Capital

Share capital refers to the shares issued through an IPO or directly to the shareholders. Any changes due to share price movements or trading on the stock market do not affect the share capital of a company.

The share capital will change when the company issues new shares or recalls existing shares. Additional shares issued through an IPO or a Rights Issue at par value will add to the share capital.

A company may issue preference shares as well. New shares issue for common stocks and preferred stocks will add up in the share capital.

A company can decide to purchase its shares back from its shareholders. These are termed treasury stocks as mentioned above. Treasure stocks will reduce the share capital.

Final Thoughts

Share capital is the equity contribution by shareholders of a company. It can take several forms and can be listed through different line items under the equity section of a company’s balance sheet.

Share capital only changes through issuing new shares or purchasing the existing stocks from shareholders.

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