Share Capital Vs Common Stock

This represents the amount of capital that has been invested in the company by the shareholders.

1: Types of Shares

  • Ordinary shares/ common stock

Ordinary shares/ common stock is the typical mode of investing in a company. Investors purchase ordinary shares by investing in the company and exercise control through voting rights based on the number of shares held by them. Holders of ordinary shares are entitled to cash dividends or bonus shares besides earning through appreciation in the value of shares due to the company’s performance.

  •  Preference shares

Preference shares are the shares that will have a higher claim on net assets of the company than ordinary shares in case of liquidation of the company but holders of preference shares do not have voting rights. Types of preference shares are discussed in detail later.

2: Authorized Capital

Authorized capital is the maximum approved amount of share capital that a company can raise through the issuance of its shares at a particular point in time. If this limit exhausts then management needs to apply with the regulator for further enhancement of authorized capital.

3: Share Premium

Successful companies or companies with a future earning potential are in a position to issue their shares at a premium ie.in excess of its par value.

For example, if the par value of a company’s shares is USD1/- and it is able to issue 100,000 shares at $ 2.5/- each due to its past performance or future earning potential, the additional $ 1.5 per share which it gets is the share premium. The transaction will be recorded as follows:

Description

Debit

Credit

Bank Account

250,000

 

Share Capital Account

 

100,000

 Share Premium Account

 

150,000

4: Discount on Shares

If a financially deteriorated company wants additional finance to run its operations and there are no external sources of finance available, the company might resort to issuing shares at discount i.e. issuing shares below its par value.

For example, if the par value of a company’s shares is USD1/- and but it issues$ 100,000 shares at $0.75/- each, the additional $0.25 per share is the discount. The transaction will be recorded as follows:

Description

Debit

Credit

Bank Account

75,000

 

Discount on Shares Account

25,000

 

               Share Capital Account

 

100,000

The discount on the issuance of shares is treated as a deferred cost and is amortized over the period.

5: Bonus Shares

A bonus share is a free share given to current shareholders in a company, based upon the number of shares that shareholders already own. The issue of bonus shares increases the total number of shares issued but does not change the shareholding structure as a proportionate number of shares is issued to all shareholders.
For example, if a company announces issuance of 20% bonus shares, every shareholder with 5 shares will be given 1 bonus share. Considering that has 200,000 ordinary shares with a par value of $ 1 per share, 40,000 new shares will be issued and the transaction will be recorded as follows:

Description

Debit

Credit

Retained Earnings

40,000

 

               Share Capital Account

 

40,000

One thought on “Share Capital Vs Common Stock”

  1. rxoc mining says:

    Great article, very useful !!

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