ISC Class 12 Accountancy – Issue of Shares Explained

Ever wondered how a company turns its ideas into cash by selling tiny pieces of itself? That’s the magic of issuing shares.

💡 In Simple Words: When a company needs money, it can cut its ownership into small units called shares and sell them to people. Those buyers become part‑owners and get a claim on future profits.

What does ‘issuing shares’ actually mean?

Issuing shares is the process a company follows to create and sell new shares to investors. A share is a unit of ownership – think of a pizza sliced into many pieces. Each slice (share) gives the holder a right to a slice of the profit (dividend) and a say in big decisions.

Why do companies issue shares?

• Raise capital: Money comes in without taking a loan.
• Spread risk: More owners share the business risk.
• Improve credibility: A public share issue can boost the company’s image.

Key steps to issue shares (the usual route)

Most companies follow a set of steps that look a lot like a recipe. Here’s the basic sequence:

Step‑by‑step breakdown

1. Board resolution: The directors meet and decide how many shares to issue and at what price. It’s like the chef deciding the size of the pizza.
2. Prospectus / offer letter: A document that tells potential buyers the details – price, number of shares, purpose of the issue. Think of it as the menu.
3. Application & money collection: Investors fill out an application form and pay the amount. The company’s bank account gets the cash.
4. Allotment: The company matches applications with available shares. If more people apply than shares, a lottery or proportional allotment may happen.
5. Share certificate & entry: Each successful applicant receives a share certificate (like a receipt). The company records the issue in its books – this is where the journal entries come in.

Journal entries for a typical share issue

Remember, a journal entry is the accountant’s way of writing down a transaction in two columns – debit (left) and credit (right). The rule is: total debits must equal total credits.

Example: Issue of 1,000 equity shares at Rs.10 each, with a premium of Rs.2 per share

Premium is the extra amount paid over the face value (the basic price of a share). It’s like paying Rs.12 for a pizza slice that’s officially worth Rs.10.

• Cash received = 1,000 × Rs.12 = Rs.12,000
• Share capital (face value) = 1,000 × Rs.10 = Rs.10,000
• Share premium = 1,000 × Rs.2 = Rs.2,000

Journal entry:

If the shares are issued at a discount (price below face value), the discount is shown as a debit to “Discount on Issue of Shares” and later written off to the profit & loss account.

Types of share issues you’ll meet in exams

• Public issue: Shares are offered to the general public, often through a stock exchange.
• Rights issue: Existing shareholders get the right to buy new shares in proportion to what they already own – like a loyalty discount.
• Preferential (or private) issue: Shares are sold to a selected group, such as promoters or institutional investors.
• Bonus issue: Free shares issued to existing shareholders out of the company’s reserves – similar to getting an extra slice because the pizza was already baked.

Worked example – Rights issue

Imagine a company has 10,000 equity shares of Rs.10 each (so share capital is Rs.100,000). It decides on a 1:5 rights issue at Rs.8 per share (a discount to the face value). That means for every 5 shares a shareholder owns, they can buy 1 new share.

How many new shares will be issued?

• New shares = 10,000 ÷ 5 = 2,000 shares

Cash to be received = 2,000 × Rs.8 = Rs.16,000

Journal entry:

Notice the discount of Rs.2 per share (Rs.10 – Rs.8) multiplied by 2,000 shares, giving Rs.4,000. This discount is later written off to the profit & loss account.

Quick summary – what to remember

• Issue of shares = creating new ownership units and selling them.
• Key steps: board resolution → prospectus → application → allotment → certificate & entry.
• Journal entry always balances cash received with share capital and any premium or discount.
• Public, rights, preferential, and bonus issues are the main varieties you’ll see.

📝 Likely Exam Questions

1. Explain the term ‘share premium’ and show its journal entry when shares are issued at a premium.
   Answer: Share premium is the excess amount received over the face value of a share. Journal entry – Debit Cash, Credit Share Capital (face value) and Credit Share Premium Account (excess).
2. List the steps involved in issuing shares and illustrate them with a flowchart.
   Answer: Steps – Board resolution, prospectus/offer letter, invitation of applications, receipt of money, allotment, issue of share certificates. (A flowchart similar to the one in the article may be drawn.)
3. A company issues 5,000 equity shares of Rs.10 each at a discount of Rs.2 per share. Prepare the journal entry.
   Answer: Cash = 5,000 × Rs.8 = Rs.40,000. Discount = 5,000 × Rs.2 = Rs.10,000. Journal – Debit Cash Rs.40,000, Debit Discount on Issue of Shares Rs.10,000, Credit Share Capital Rs.50,000.
4. Differentiate between a rights issue and a public issue.
   Answer: Rights issue is offered only to existing shareholders in a predetermined ratio, usually at a discount. Public issue is offered to anyone in the market, often through a stock exchange, and may be at face value or a premium.
5. Why is a prospectus required before a public issue?
   Answer: It provides essential information about the company, the purpose of the issue, risk factors, and financial details, helping investors make an informed decision and ensuring regulatory compliance.