Shares are one of the most important instrument to raise capital at all stages of business. Issue of shares seems to be a simple process and most of the people know about it in its general form only. But the picture is not as it seems to be. There are various means and purposes of issuing shares. There are many purposes for which they’re issued. In this article, we will understand the concept of issue of shares for consideration (other than cash).
Means of Issue of Shares
There are 2 generally two means of the issue of shares:
- For Cash
- For Consideration Other than Cash
In case of issue of shares for cash, the company provides the shares to the investor in exchange of cash as consideration. It is the most general means of the issue of shares. Such kind of issuing is done for the general public. The Company calls such total cash consideration in certain parts or installments.
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Introduction
When an asset is acquired by a company, the payment of asset price can be made by the issue of shares or in cash to the vendor. Moreover, when shares are given against the purchase price, it is known as ‘Issue of shares for consideration other than cash’. In this case, shares are not open to the general public.
As the term clear itself, issue of shares for consideration other than cash means shares of the company are issued to somebody for anything which is not cash.
Accounting Treatment
Purchase of assets or complete business and issue of shares against the purchase are 2 different transactions. Hence separate entries are entered in the journal for each of the two transactions.
1. In case of Purchase of Assets
The company does the following Journal entry for recording the purchase of Asset:
| Date | Particulars | L.F. | Amount Dr. | Amount Cr. |
| Sundry Assets A/c Dr. | | With the price of individual asset | |
| To Vendor’s A/c | | | |
| (Being the purchase of the asset from the vendor) | | | |
2. In Case of Purchase of Business
When a company purchases the business of another company, it takes over the assets as well as the liabilities of the company at a predetermined price. Moreover, the difference in the prices of the assets and liabilities which is taken over is called ‘Net Assets’. The journal entry which is passed is:
| Date | Particulars | L.F. | Amount Dr. | Amount Cr. |
| Sundry Assets A/c Dr. | | XXX | |
| Goodwill A/c Dr. | | XXX | |
| To Sundry Liabilities A/c | | | XXX |
| To Vendor’s A/c | | | XXX |
| To Capital Reserve A/c | | | XXX |
| (Being the purchase the business takes place) | | | |
On Issue of Shares
| Date | Particulars | L.F. | Amount Dr. | Amount Cr. |
| At Par | Vendor’s A/c Dr. | | XXX | |
| To Share Capital A/c | | | XXX |
| At Premium | Vendor’s A/c Dr. | | XX | |
| To Share Capital A/c | | | XXX |
| To Securities Premium Reserve A/c | | | XXX |
| At Discount | Vendor’s A/c Dr. | | XXX | |
| Discount on Issue of Shares A/c Dr. | | XXX | |
| To Share Capital A/c | | | XXX |
Question onIssue of Shares for Consideration
Question: VermaLtd. purchased a Machinery from Satish for Rs 1,00,000 payable in fully paid shares of Rs 10 each. Pass necessary journal entries if shares are issued at Par.
Solution: Following Journal entries are made in this case:
| Date | Particulars | L.F. | Amount Dr. | Amount Cr. |
| Machinery A/c Dr. | | 1,00,000 | |
| To Satish | | | 1,00,000 |
| Satish Dr. | | 1,00,000 | |
| To Share Capital A/c | | | 1,00,000 |
FAQs
When an asset is acquired by a company, the payment of asset price can be made by the issue of shares or in cash to the vendor. Moreover, when shares are given against the purchase price, it is known as 'Issue of shares for consideration other than cash'. In this case, shares are not open to the general public.
What is the concept of issue of shares? ›
What is Issue of Shares? The issue of shares is the procedure in which enterprises allocate new shares to the shareholders. Shareholders can be either corporates or individuals. The enterprise follows the rules stipulated by Companies Act 2013 while circulating the shares.
What are shares for consideration? ›
What does Consideration shares mean? Shares in the buyer which are issued directly to the seller as part of the consideration for the acquisition of the target company/target business.
Which shares issued to promoters for consideration other than cash is debited to? ›
The company debits this amount to the Goodwill Account as it will derive the benefit of these services for a long period of time. Hence, it treats this expense as a capital expenditure. It thus needs to show the 'shares issued for consideration other than cash' separately under the heading 'Share Capital'.
What does it mean to issue shares for cash? ›
Companies issue shares to the public to raise money. They initially sell a set number of shares to investors, and then those same shares can be traded among investors on a secondary market. Issued shares are those that the founders or BofD have decided to sell in exchange for cash.
What do you mean by issue of shares for consideration other than cash? ›
When an asset is acquired by a company, the payment of asset price can be made by the issue of shares or in cash to the vendor. Moreover, when shares are given against the purchase price, it is known as 'Issue of shares for consideration other than cash'. In this case, shares are not open to the general public.
What does issue my shares mean? ›
In economics and law, issued shares are the shares of a corporation which have been allocated (allotted) and are subsequently held by shareholders. The act of creating new issued shares is called issuance.
What does consideration for the shares mean? ›
Answer. Firstly, the Consideration Paid is the amount the new Shareholder will pay in exchange for the shares. The Amount Paid, as recorded in ASIC, is the original value of the Shares when they were originally issued.
What is non cash consideration for shares? ›
A company can issue shares for consideration other than cash. Common examples include issuing shares in return for property, assets the company needs or (e.g. in a takeover) shares in another company.
Can you issue shares without consideration? ›
The corporation cannot issue a share until it actually receives full consideration (payment) for that share. This consideration is generally in the form of money, although it can also be in the form of services or property given to the corporation.
Goodwill A/c. Capital reserve A/c.
When stock is issued for assets other than cash? ›
Answer and Explanation:
The stocks issued other than cash are recorded at the market value of the company's stock or the market value of the assets exchanged. The capital account is credited. The asset account is debited.
What is the journal entry for issue of shares to promoters? ›
Journal Entry:
| Date | Particulars | |
|---|
| 1. On the issue of shares to the promoters | Preliminary Expenses A/c | Dr. |
| Goodwill A/c | Dr. |
| To Share Capital A/c | |
| (Being fully paid up shares issued to promoters for preliminary expenses incurred and services rendered by them) | |
For example, if a company issues a share of nominal or face value of ₹10 at ₹11, it issues it at 10% premium. A company may call the amount of premium from the applicants or shareholders at any stage, i.e. at the time of application, allotment or calls.
Are shares better than cash? ›
Historically shares have had more short-term volatility and higher long-term returns. Historically bonds have had less short-term volatility and lower long-term returns. Cash has no volatility and the lowest long-term returns. The million-dollar question is why a long-term investor would invest in anything but shares.
Is it good to buy right issue shares? ›
The discounted price offered during a rights issue presents shareholders with an attractive opportunity to expand their investment at a lower rate than the prevailing market price. This discounted acquisition can positively influence the overall average cost of their investment.
What is the concept of right issue of shares? ›
A rights issue is when a company invites its current shareholders to buy more shares at a discount. Shareholders get rights to purchase these new shares at a lower price than the market rate, which helps the company raise more money without bringing in new outside investors.
What is the concept of issue? ›
something that is sent out or put forth in any form. a quantity of something that is officially offered for sale or put into circulation at one time: a new issue of commemorative stamps; a new bond issue. a point in question or a matter that is in dispute, as between contending parties in an action at law.
What is the basic concept of shares? ›
Shares represent units of ownership in a corporation or financial asset owned by investors who exchange capital in return for these units. Common stock shares enable voting rights and possible returns through price appreciation and dividends.
What is the main use of issue shares? ›
Companies issue shares to raise money from investors who tend to invest their money. This money is then used by companies for the development and growth of their businesses.
