Issues & Classes of Shares SS2 Financial Accounting Lesson Note

Shares can be defined as the units of capital or ownership of a limited liability company.

CLASSES OF SHARES

1. Ordinary Shares

This class of shares makes the holders the real owner of the business. This class of shares has no fixed rate of return. They rank after preference shares as regards dividends and returns on capital but carry voting rights.

Ordinary shares are also called Equities and a key component of the balance sheet. Ordinary shares can be divided into Deferred shares and preferred ordinary shares.

i. Deferred Ordinary Shares: This is also known as Founders’ Shares. They are usually issued to the founders or promoters of the business.

ii. Preferred Ordinary Shares: This class of ordinary shares confer on the holders the right to receive dividends after the preference shares have been paid.

2. Preference Shares

This is a class of shares that have a fixed rate of returns.

ISSUING PRICES

Shares can be issued on the following terms:

1. Shares issued at par
2. Shares issued at a premium
3.  Shares issued at a discount

i. Shares Issued At Par

Shares are issued at par when the nominal price is equal to the issuing price. Shares are issued at the actual price. For example; shares of #1 nominal value were issued at #1.

ABC Limited makes an issue of #5000 ordinary shares of #1 each at #1.

ii. Shares Issued At Premium

Shares are issued at a premium when the issuing value is more than the nominal value.

iii. Shares Issued At Discount

Shares are issued at a discount when the issuing value is less than the nominal value. For example; shares of #1 nominal value were issued at 80 kobo. The difference of 20 kobo is regarded as a Discount.

LEDGER ACCOUNTS

Under the issue of shares, the following accounts will be prepared;

1. Cashbook/Bank Account
2. Application Account
3.  Allotment Account
4. First Call Account
5. Second and Final Call Account
6. Share Capital Account, etc.

ILLUSTRATION

ABC Limited registered with an Authorized Share Capital of #200,000, consisting of 200,000 ordinary shares of #1 each. The shares were issued and payable on the following terms:

1. #0.40 on application
2. #0.35 on allotment
3.  25 kobo on the first and final call.
4. All the shares were fully subscribed and paid for.

You are required to prepare relevant ledger accounts.

SOLUTION

Workings:

Application: 0.40 × 200,000 =80,000

Allotment: 0.35 × 200,000 = 70,000

First & final call : 0.25 × 200,000 = 50,000