Companies issue shares to shareholders in exchange for becoming a part-owner. These shares constitute equity in a company’s financial statements. Apart from the ownership in the company, the shareholders also get voting rights. Similarly, they also get the right to receive dividends if the company distributes its profits among them.
For companies, the equity received from shareholders constitutes finance received for operations. This finance becomes a part of a company’s stockholders’ equity in the balance sheet. However, it may fall into various headings. Usually, companies show their equity finance through the share capital account. There are several types of share capital that companies may have. However, it is crucial to understand what share capital is first.
What is Share Capital?
Share capital on the balance sheet refers to the amount invested in a company by its shareholders. There are several other names that companies may use for this amount. For example, companies in the US refer to it as capital stock. Share capital represents the portion of a company’s equity derived through the issue of shares to shareholders.
Share capital can also refer to the number and types of shares that constitute a company’s share structure. Some companies choose to represent this amount in the balance sheet on their own. Others may break it into different types of equity. Usually, it refers to the par value of the total number of outstanding shares a company has distributed.
In accounting, share capital represents the par value of all issued shares. However, it does not denote the actual finance received by companies. In some cases, companies may allot shares for a premium or a discount. However, the share capital account will only hold the par value of those shares and not the actual receipt. The difference usually ends up on other accounts.
For companies newly incorporated, the only asset will include cash received from initial investors. These companies will only have a cash balance in assets, while shareholders’ equity consists of share capital. This account differs from other types of equity accounts. For example, the share premium account will include any excess balance received for shares issued for a premium.
Overall, share capital is a crucial account in a company’s balance. It represents the par value of the total number of outstanding shares the company has issued. This account is highly critical in accounting. Similarly, this account only exists for companies limited by shares. For most companies, the share capital account will be necessary to report their equity.
What are the types of Share Capital?
For most companies, the balance sheet will include one or two types of share capital accounts. However, it may also have other classifications. There are different types of share capital that companies will report. Some of the prevalent types of share capital include the following.
Authorized, Registered or Nominal Share Capital
When a company gets incorporated, it must specify the number of shares it wants to issue. This number comes under the company’s memorandum of association. Companies may use different names to report it in the accounts. Usually, they refer to it as authorized share capital. They may also use the terms nominal or registered share capital in some cases. Overall, it represents the amount of capital a company can raise through share issuance.
Issued Share Capital
While authorized share capital shows how many shares a company can issue, it does not represent the actual numbers in circulation. Instead, companies use the allotted share capital to report the total number of shares a company has circulated. This account also represents the par value of the total number of shares a company has already issued.
Usually, companies issue shares from time to time. They don’t distribute all their stock in the market at the same time. For most companies, the issued capital will differ from the authorized share capital. Similarly, this account cannot exceed the authorized capital at any time due to the limitation. Overall, issued share capital represents the actual shares in issuance rather than the registered number.
Subscribed Share Capital
Sometimes, companies will allow shareholders to subscribe to receive new shares. These subscribed shares fall under the company’s subscribed share capital account. Similarly, they are a part of the issued share capital. For most companies, the number of subscribed and issued shares will be the same. However, they may also differ in some circumstances.
The subscribed share capital cannot exceed a company’s issued share capital. Companies allot shares to each subscriber according to the resolution released by the company directors.
Unissued Share Capital
As mentioned above, companies usually issue shares from time to time. Therefore, their issued and the authorized share capital will differ. The residual amount between both amounts will represent the company’s unissued share capital. This unissued capital represents the number of shares available to a company that it can use to raise finance.
Called-up Share Capital
Called-up capital is a part of a company’s subscribed share capital. This capital represents shares that a company can call up or repurchase. Companies do not call the full amount for each share allotment at once. Therefore, they call up only the amount they need to raise as finance. These represent the shares issued to shareholders with the understanding that they will pay for it later.
Called-up capital represents an amount for which companies have already issued shares. However, it does not denote the actual cash received for those shares. Furthermore, this capital represents shares for which a company is yet to receive funds.
Paid-up Share Capital
Paid-up share capital is a part of a company’s called-up capital. It represents the funds for which its shareholders have paid. Paid-up share capital comes after when companies call for shareholders to pay for them. The paid-up share capital also represents the residual amount after deducting the outstanding calls from the company’s called-up share capital.
Uncalled Share Capital
When companies issue shares to shareholders, they call for them to pay for those shares. However, they may also not do so. Any shares allotted but not called for represent a company’s uncalled share capital. This capital also refers to the contingent liability on those shareholders of shareholders. Overall, it is the residual amount after deducting the called-up capital from the total allotted shares.
Reserve Share Capital
Reserve capital represents shares that a company cannot call unless in case of liquidation. Usually, these shares come after a special resolution with more than three-quarters of majority votes. Similarly, companies cannot alter their articles of association to reverse this decision. Reserve share capital has a specific purpose, which is to facilitate liquidation.
Reserve capital has various limitations placed over it. Companies cannot offer this capital as security or convert them into ordinary capital. However, companies can reverse it through a special court order. Overall, reserve share capital represents the capital not available unless when the company liquidates.
Circulating and Fixed Share Capital
Circulating share capital is a part of a company’s subscribed capital. This capital comes in the form of operational assets, for example, bank reserves, book debts, bills receivable, etc. These include funds that companies use for their core operations. It also closely relates to fixed capital, which consists of a company’s fixed assets.
Share capital represents the amount that relates to funds raised through a company’s shareholders. In accounting, it shows the par value of the total number of outstanding shares for a company. There are several types of share capital that companies may report. These may include authorized, issued, subscribed, unissued, called-up, paid-up capital, etc.