Authorized Share Capital, Issued Share Capital

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Financial Statement Analysis-FIN621

Lesson-27

TYPES OF BUSINESS ORGANIZATIONS

(Continued)

Authorized Share Capital

The maximum amount with which a company gets registration/incorporation is called authorized share

capital of that company.

This capital can be increased with the prior approval of security and exchange commission. This capital

is further divided in to smaller denominations called shares. Each share usually has a face value equal to

Rs. 10. According to Companies Ordinance, this face value can be increased but can not be decreased.

The value of share written on its face is called face value or par value or nominal value

Issued Share Capital

When a company issues its shares to general public at large, the amount raised by the company with

such an issue is called issued share capital. This is also called Paid up Share Capital.( total amount

received by the company). Accounting entry is recorded for issued share capital; no such entry is

recorded for authorized share capital.

Preliminary Expenses

All expenses incurred up to the stage of incorporation of the company are called Preliminary Expenses.

All these expenses are incurred by subscribers of the company.

The maximum amount with which a company gets registration/incorporation is called authorized share

capital of that company. This capital can be increased with the prior approval of security and exchange

commission. This capital is further divided in to smaller denominations called shares. Each share

usually has a face value equal to Rs. 10. According to Companies Ordinance, this face value can be

increased but can not be decreased. The value of share written on its face is called face value.

Shares are issued for cash as well as for any asset. For example, if any member of the company sell

his/her land to the company. In return, company issue him/her fully paid shares instead of paying cash.

Those shares are also part of paid up capital because company has received the benefit of that amount.

Share Certificate

Share Certificate is the evidence of ownership of the number of shares held by a member of the

company. When a company issue more than one share to its member, it does not issue that number of

shares to him/her. Instead, it issues a certificate under the stamp of the company that a particular number

of shares are issued to members of the company.

Shares Issued At Premium

When a company has a good reputation and earns huge profits, the demand of its shares increases in the

market. In that case, the company is allowed by the Companies Ordinance 1984, to issue shares at a

higher price than their face value. Such an issue is called Shares Issued at Premium. The amount

received in excess of the face value of the shares is transferred to an account called "Share Premium

Account". This account is used to:

· Write off Preliminary Expenses of the company.

· Write off the balance amount, in issuing shares on discount.

· Issue fully paid Bonus Shares.

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Financial Statement Analysis-FIN621

Shares Issued On Discount

When a company is not making huge profits, rather it is sustaining loss, the demand of its shares

decreases in the market. If the company needs extra funds, then it is allowed by the Companies

Ordinance 1984, to issue shares at lesser price than their face value. Such an issue is called Shares

Issued on discount.

The difference of face value and the amount received is met by share premium account, if available. If

there is no share premium account available, this difference is shown in the profit and loss account of

that period, in which shares are issued as loss on issue of shares at discount.

Capital stock: This signifies ownership of a corporation in the form of shares issued or sold for cash

and sometimes in exchange of assets like land, buildings etc., and services (e.g. legal), using market

value of shares issued in exchange. It includes common and preferred stock. When only one type of

stock is issued, the words "common stock" is used. It is the amount invested by stockholders i.e. paid-

in-capital. It is also called "Outstanding Shares" i.e. shares in the hands of stockholders.

Stockholders' equity

Rs.

Cumulative 8% preferred stock, convertible

Rs.100 par value callable or redeemable

at Rs.110, authorized 20,000 shares;

Issued 10,000 shares.

1,000,000

Common stock Rs.10

Par/stated value, authorized 100,000 shares,

Issued and outstanding 50,000 shares.

500,000

Paid-in-capital

1,500,000

Plus additional paid-in-capital+ donated

Capital/assets at market value + Retained

Earning (or minus accumulated losses).

Retained earning transferred to B/Sheet= Opening balance + Net Profit for the year Dividends.

Additional paid-in-capital: shows excess amount received, when stock is sold for more

than par value. Underwriters, (banks, investment companies etc) make profit by selling share at higher

prices. Retained earnings is an element of stockholders equity, does not indicate the form in which these

resources are currently held. These may have been invested in land, building, equipment or any other

assets, or might have been used in liquidating debts.

Balance Sheet as on June 30

Assets

Rs. _____

Current assets.

1,000,000

Fixed assets.

1,692,000

Total assets.

2,692,000

Liabilities & Stockholders' equity

Liabilities

Current.

112,000

12% long-term Notes payable

200,000

Outside liabilities.

312,000

Paid-in-capital (from previous slide)

1,500,000

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Financial Statement Analysis-FIN621

Additional Paid-in-Capital, Common stock.

750,000

Retained earnings

130,000

Total Stockholders' equity.

2,380,000

Total Liabilities & Stockholder equity.

2,692,000

Dividend

Profit distributed to the share holders for their investment in the company is called Dividend. Dividend

is approved by the share holders in the annual general meeting at the recommendation of the directors.

Dividend is paid out of profits. If, in any year, company could not make any profit. No dividend will be

paid to share holders. Dividend is paid to registered share holders of the company. Registered share

holders are those members of the company, who are enlisted in the register of share holders of the

company.

Subscribers / Sponsors Of The Company

Subscribers / Sponsors are the persons who sign articles and memorandum of the company and

contribute in the initial share capital of the company.

Issuance Of Further Capital

Where a company wants to issue further capital (called raising the capital), shares are first offered to

current shareholders. The issuance of further capital to Present Shareholders is called Right Issue. This

issue is in proportion to current shares held by the shareholders. The shareholders can accept or reject

the offer. If shareholders refuse to accept these shares then these are offered to other people.

Journal Entries

Shares issued against cash

Debit:

Cash / Bank Account

Credit:

Share Capital Account

Shares issued against transfer of asset:

Debit:

Asset Account

Credit:

Share Capital Account

This is called issuance of asset in kind.

Bonus Shares

This is another way of distributing dividend. When a company decides, not to give cash to the share

holders as dividend, it issued shares called bonus shares, to the share holders for which it receives no

cash. These are fully paid shares.

Financial Statements Of Limited Companies

In Pakistan, Financial Statements of limited companies are prepared in accordance with:

· International accounting standards adopted in Pakistan.

· Companies Ordinance 1984.

In case of conflict the requirements of Companies Ordinance would prevail over Accounting Standards.

Components Of Financial Statements

Components of companies' financial statements are as follows:

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Financial Statement Analysis-FIN621

Balance Sheet

Profit and Loss Account

Cash Flow Statement

Statement of Changes in Equity

Notes to the Accounts

Comparative figures of Previous Period

Equity

Equity is the total of capital, reserves and undistributed profit. That means the amount contributed by

share holders plus accumulated profits of the company. Equity, therefore, represents the total of

shareholders fund in the company.

Statement Of Changes In Equity

The statement of changes in equity shows the movement in the shareholders equity (capital and

reserves) during the year. We can say that it replaces profit and loss appropriation account of

partnership business.

FORMAT OF STATEMENT OF CHANGES IN EQUITY

Name of the Company

Statement of Changes in Equity

For Year Ended June 30, 2002

Reserves

Profit & Total

Capital

Premium

Loss A/c

Account

Balance On Jun 30, 2000

Movements During the Year

Balance On Jun 30, 2001

Movements During the Year

Balance On June 30, 2002

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