Essential Accounting Entries for Issuing Shares

Every company that wants to raise money by selling shares has to keep a paper trail. Investors send in money in stages, the company records each stage separately, and by the time the shares are fully paid up, the books show exactly who paid what and when. This sequence of entries isn’t just bookkeeping busywork. It is a legal requirement under the Companies Act, 2013, and getting it right is one of the first practical skills a commerce student picks up in corporate accounting.

This post walks through the accounting entries a company passes when it issues shares for cash, from the moment application money lands in the bank to the point where the shares are fully paid up. The same logic applies whether the company is issuing equity shares or preference shares, so we will cover both.

The three stages of collecting share money 🔗

Companies rarely ask shareholders to pay the full face value of a share in one go. Instead, the amount is usually collected in instalments:

• Application money – paid by investors when they apply for shares.
• Allotment money – paid once shares are actually allotted to successful applicants.
• Call money – one or more further instalments (first call, second call, and so on) demanded later, as the company needs funds.

Each stage triggers two accounting entries: one when the amount becomes due, and another when it is actually received. Keeping these separate is what makes the entire system auditable.

Step 1: Receiving and banking application money 🔗

When a company invites the public to subscribe for its shares, it does so through a prospectus. Applicants send their application money to the company’s bankers, not directly to the company. Under Section 39 of the Companies Act, 2013, this money must be kept in a separate bank account until allotment is finalised.

The entry for receipt of application money is:

Why the minimum subscription rule matters 🔗

A company cannot simply allot shares to whoever applies. As per Section 39(1), no allotment can be made unless the minimum subscription amount stated in the prospectus has actually been received. On top of this, application money for each security cannot be less than 5% of its nominal value. If the minimum subscription isn’t reached within the specified period, the company has to refund whatever was collected rather than proceed with allotment. This rule exists to stop companies from starting operations without adequate capital backing.

Step 2: Transferring application money to share capital 🔗

Once allotment is approved, the amount collected on application (for the shares actually allotted) is transferred out of the temporary Share Application account and into Share Capital. This is where the money officially becomes part of the company’s permanent capital.

If the issue was oversubscribed and some applicants were not allotted shares, the excess application money is refunded through a similar entry, debiting Share Application A/c and crediting Bank A/c.

Step 3: Allotment money due and received 🔗

After allotment, the company sends letters asking successful applicants to pay the allotment instalment. This creates a receivable, so the entry when the amount becomes due looks different from the entry when it is actually collected.

When allotment money becomes due:

When allotment money is received:

This due-then-received pattern is what a worked example from ABC Ltd. issuing 10,000 equity shares illustrates well: the company debits Share Allotment and credits Share Capital when the amount falls due, then separately debits Bank and credits Share Allotment when the cash actually comes in.

Step 4: Call money due and received 🔗

If the full face value hasn’t been collected through application and allotment, the company makes one or more calls. Each call follows the exact same due-then-received structure as allotment, just with a different account name – First Call, Second Call, and so on.

When shareholders don’t pay on time 🔗

Not every shareholder pays on the due date. The unpaid portion is called Calls in Arrears. Companies can either let the relevant Call account carry a debit balance for the unpaid amount, or transfer it to a separate Calls in Arrears account. Articles of Association can authorise the company to charge interest on such arrears, and if the Articles are silent, Table F of Schedule I caps this interest at 10% per annum. This is a common exam scenario, so it’s worth remembering that the interest charged is separate from the principal call amount and is usually transferred to the Profit and Loss account.

Putting it together: a simple worked example 🔗

Say a company issues 10,000 equity shares of ₹10 each, payable as ₹3 on application, ₹4 on allotment, and ₹3 on first and final call. If the issue is fully subscribed and every shareholder pays on time, the entries would run as shown below, based on the standard treatment used across corporate accounting coursework:

By the end, the Share Capital account shows the full ₹1,00,000, matching the number of shares issued multiplied by their face value. Every rupee is traceable back to which stage it came from.

Equity shares versus preference shares 🔗

The accounting mechanics are identical whether the company is issuing equity or preference shares. The only real difference is naming: entries for preference shares simply replace the word “Equity” with “Preference” in each account title – for example, Preference Share Application A/c instead of Equity Share Application A/c. This distinction matters because equity and preference shareholders carry different rights (voting, dividend priority, and repayment priority on winding up), and keeping the accounts separate helps the company report each class of capital accurately in its balance sheet, as required under Schedule III of the Companies Act.

It’s also worth noting that once allotment is made, the company must file a return of allotment with the Registrar of Companies. This filing requirement, under Section 39(4) read with Form PAS-3, is a compliance step that sits alongside the accounting entries and reinforces why accuracy at each stage matters – the books and the regulatory filing need to tell the same story.

Why this sequence matters beyond the exam hall 🔗

Students sometimes treat these entries as something to memorise for a test. In practice, this sequence protects both the company and its investors. Keeping application money separate until allotment prevents companies from using investor funds before shares are legally allotted. Recording amounts as “due” before recording them as “received” creates a receivable trail that auditors can verify against bank statements. And using separate accounts for application, allotment, and each call means that if something goes wrong, such as a shareholder defaulting on a call, the company can pinpoint exactly which instalment is outstanding rather than dealing with one large, undifferentiated balance.

What do you think? If a company skipped the “due” entry and only recorded amounts when cash was received, what kind of tracking or compliance problems could that create? And how might the calls-in-arrears mechanism change if a company decided not to charge any interest at all on late payments?

References

1. https://www.aubsp.com/section-39-allotment-securities-company/
2. https://www.vedantu.com/commerce/accounting-for-share-capital
3. https://www.geeksforgeeks.org/accountancy/calls-in-arrear-accounting-entries-with-examples-on-issue-of-shares/
4. https://www.geeksforgeeks.org/accountancy/accounting-for-share-capital-issues-of-shares-for-cash/
5. https://www.mca.gov.in/MCA21/dca/help/instructionkit/NCA/Form_PAS-3_help.pdf