understand and distinguish between issued, called-up and paid-up share capital

Section 5 – Limited Companies: Share Capital (IGCSE 0452)

Learning Objectives (AO1‑AO3)

• Identify and explain the main elements of a company’s share capital (ordinary vs. preference, redeemable vs. non‑redeemable).
• Distinguish between issued, called‑up, paid‑up and unpaid (calls in arrears) share capital.
• Record share‑capital transactions correctly in the journal and post them to the ledger.
• Present share‑capital amounts accurately in the statement of financial position and the statement of changes in equity.
• Analyse how share‑capital transactions affect key financial ratios.
• Apply the fundamental accounting concepts (going‑concern, prudence, consistency) to share‑capital matters.

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1. The Fundamentals of Accounting (Syllabus Unit 1)

• Purpose of accounting – to provide reliable, comparable information for users (investors, creditors, management, tax authorities).
• Accounting equation – Assets = Liabilities + Owner’s equity. In a limited company, “Owner’s equity” is called **Equity** and consists of share capital, share premium, retained earnings and other reserves.
• Double‑entry bookkeeping – every transaction affects at least two accounts; total debits = total credits.
• Books of prime entry – sales journal, purchases journal, cash book, journal proper, and the general ledger.

Key terminology

Term	Definition (AO1)
Asset	Resource controlled by the company from which future economic benefits are expected.
Liability	Present obligation arising from past events, settlement of which is expected to result in an outflow of resources.
Equity	Residual interest in the assets after deducting liabilities; in a limited company it is mainly share capital and reserves.
Going‑concern	Assumption that the entity will continue to operate for the foreseeable future.
Prudence	Do not overstate assets or income and do not understate liabilities or expenses.

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2. Sources & Recording of Data (Syllabus Unit 2)

• Primary source documents – invoices, receipts, bank statements, purchase orders, credit notes, debit notes, share certificates.
• Journalising – apply the rules of debit and credit:
  • Increase assets → Debit; decrease assets → Credit.
  • Increase liabilities or equity → Credit; decrease → Debit.
  • Expenses increase → Debit; revenue increase → Credit.
• Posting – transfer journal entries to the appropriate ledger accounts.
• Trial balance – list of all ledger balances; used to check that total debits equal total credits (AO2).

Example – Issue of shares (full payment)

Date  Account      Debit Credit
1 Jan Cash / Bank     $10 000
    Share capital – issued    $10 000
(issued 10 000 ordinary shares @ $1 each, fully paid)

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3. Verification of Accounting Records (Syllabus Unit 3)

• Trial balance – prepares the first check on the arithmetic accuracy of the books.
• Bank reconciliation – adjusts the cash‑book balance for items not yet recorded (outstanding checks, deposits in transit, bank charges).
• Control accounts – summary accounts (e.g., Debtors Control, Creditors Control) that reconcile subsidiary ledgers.
• Error types that do NOT affect the trial balance (AO2):
  • Errors of omission
  • Errors of commission
  • Errors of principle
• Error types that DO affect the trial balance – transposition errors, single‑sided entry, posting to the wrong side.

Simple bank‑reconciliation worksheet

Cash‑book balance
+ Deposits in transit	+$500
- Outstanding checks	-$300
± Bank errors	+$20
Adjusted cash‑book balance	$1 220

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4. Accounting Procedures (Syllabus Unit 4)

• Capital vs. revenue items
  • Capital expenditure creates or improves an asset (e.g., purchase of machinery) – recorded in the balance sheet.
  • Revenue expenditure is incurred in the ordinary course of business (e.g., repairs) – recorded in the profit‑and‑loss account.
• Depreciation – allocation of the cost of a tangible asset over its useful life.
  • Straight‑line: Annual charge = (Cost – Residual value) / Useful life
  • Reducing‑balance: Charge = Book value × Depreciation rate
• Irrecoverable debts – written off when there is no reasonable prospect of recovery; journal entry: Dr Bad‑debt expense / Cr Debtors.
• Provision for doubtful debts – estimated amount of debts that may become irrecoverable; journal entry: Dr Bad‑debt expense / Cr Provision for doubtful debts.
• Inventory valuation – lower of cost and net realisable value (NRV). If NRV < cost, write‑down: Dr Loss on inventory / Cr Inventory.

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5. Share Capital – Core Concepts (AO1‑AO3)

5.1 Key Terminology

Term	Definition (AO1)
Nominal (par) value	Face value printed on the share certificate; the amount that is “called‑up”.
Share premium	Amount received over the nominal value; shown separately in equity.
Ordinary (ordinary) shares	Carry voting rights, variable dividends and residual claim on assets.
Preference shares	Usually no voting rights; fixed dividend; priority over ordinary shareholders for dividends and capital repayment.
Redeemable preference shares	Company must repurchase them at a pre‑determined date/price.
Non‑redeemable preference shares	Remain part of equity permanently.

5.2 Definitions of Capital Stages

Stage	What it means	Where it appears in the financial statements	Typical journal entry (AO2)
Issued share capital	Total nominal value of all shares allotted to shareholders (paid or unpaid).	Equity section – “Share capital – issued”.	Dr Cash / Bank Cr Share capital – issued (full nominal amount)
Called‑up share capital	Portion of issued capital for which the company has formally demanded payment (a call).	Equity – “Share capital – called‑up” Liabilities – “Calls in arrears” for any unpaid part.	Dr Cash / Bank Cr Share capital – called‑up
Paid‑up share capital	Cash actually received – i.e. the called‑up amount that has been paid.	Equity – “Share capital – paid‑up”.	Dr Cash / Bank Cr Share capital – paid‑up
Calls in arrears (unpaid)	Called‑up capital that remains unpaid by shareholders.	Current liabilities – “Calls in arrears”.	Dr Share capital – called‑up Cr Calls in arrears

5.3 Visual hierarchy

5.4 Journal entries for typical share‑capital transactions

1. Issue of shares – fully paid (no calls)

   Dr Cash / Bank                            $X
    Cr Share capital – issued              $X
   

2. Issue of shares with a call (e.g., 40 % called‑up, 60 % unpaid)

   Dr Cash / Bank                            $0.40 × Nominal
    Cr Share capital – called‑up            $0.40 × Nominal
   Dr Calls in arrears                       $0.60 × Nominal
    Cr Share capital – issued               $0.60 × Nominal
   

3. Receipt of a later call

   Dr Cash / Bank                            $Amount received
    Cr Calls in arrears                     $Amount received
   

4. Shares issued at a premium

   Dr Cash / Bank                            $Cash received
    Cr Share capital – issued                $Nominal total
    Cr Share premium                         $Premium amount
   

5.5 Presentation in the Statement of Financial Position

When a company has both paid‑up and unpaid called‑up capital, equity is shown as follows (example in $):

Equity	Amount
Share capital – issued (total nominal)	20 000
Called‑up (paid‑up)	16 000
Unpaid (calls in arrears)	4 000
Share premium (if any)	2 500
Retained earnings / reserves	5 300
Total equity	27 800

5.6 Statement of Changes in Equity (required for limited companies)

Item	Opening	Transactions (this year)	Closing
Issued share capital	15 000	+5 000 (new issue)	20 000
Share premium	1 200	+800 (premium on issue)	2 000
Retained earnings	4 500	+1 200 profit – 300 dividend	5 400
Total equity	20 700	+6 000	26 700

5.7 Effect on Financial Ratios (AO3)

• Debt‑to‑equity ratio – increases if share capital is low; a larger paid‑up capital reduces the ratio, signalling lower financial risk.
• Return on equity (ROE) – ROE = Profit ÷ Total equity. Adding share capital (with no immediate profit increase) will lower ROE.
• Current ratio – cash received from calls is a current asset; the ratio improves when calls are paid.

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6. Examination Practice

Question 1 – Calculation (AO1/AO2)

A company has issued 12 000 ordinary shares of $1 each and 8 000 preference shares of $2 each (non‑redeemable). It has called up 75 % of the ordinary shares and 100 % of the preference shares. Shareholders have paid for 80 % of the called‑up ordinary amount and the full called‑up preference amount. Calculate:

1. Issued share capital
2. Called‑up share capital
3. Paid‑up share capital
4. Calls in arrears (if any)

Solution

Issued share capital
= (12 000 × $1) + (8 000 × $2) = $12 000 + $16 000 = $28 000

Called‑up
Ordinary: 12 000 × 0.75 × $1 = $9 000
Preference: 8 000 × 1 × $2 = $16 000
Total called‑up = $9 000 + $16 000 = $25 000

Paid‑up
Ordinary paid = $9 000 × 0.80 = $7 200
Preference paid = $16 000 (full)
Total paid‑up = $7 200 + $16 000 = $23 200

Calls in arrears = Called‑up – Paid‑up = $25 000 – $23 200 = $1 800

Question 2 – Journal Entries (AO2)

On 1 January a company issues 5 000 ordinary shares of $1 each. Only 40 % is called up immediately; the remaining 60 % will be called later. Record the journal entry for the issue and the entry when the second call is received (assume the full amount is paid).

Answer

Issue (40 % called‑up):
Dr Cash / Bank                        $2 000
 Cr Share capital – called‑up         $2 000
Dr Calls in arrears                    $3 000
 Cr Share capital – issued            $3 000

Second call received (remaining 60 %):
Dr Cash / Bank                        $3 000
 Cr Calls in arrears                  $3 000

Question 3 – Conceptual (AO3)

Explain why a company might prefer to issue redeemable preference shares rather than ordinary shares. Discuss at least two advantages and two disadvantages for the company.

Suggested points

• Advantages
  • Fixed dividend provides certainty for investors and can be cheaper than variable ordinary‑share dividends.
  • Redeemable feature allows the company to return the capital when cash flow improves, limiting long‑term dilution of control.
• Disadvantages
  • Redemption creates a future cash‑outflow; failure to meet it may breach solvency requirements.
  • Preference shareholders have priority over ordinary shareholders for dividends and on winding‑up, reducing the amount available to ordinary shareholders.

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7. Summary Checklist (AO1)

Concept	Key exam points
Issued share capital	Total nominal value of all allotted shares; shown as “Share capital – issued”.
Called‑up share capital	Portion of issued capital for which a call has been made; may be less than issued.
Paid‑up share capital	Cash actually received; never exceeds called‑up.
Calls in arrears	Liability on the balance sheet; shown under current liabilities.
Preference vs. ordinary shares	Differences in voting rights, dividend entitlement and capital‑repayment priority.
Redeemable vs. non‑redeemable	Redeemable must be bought back; non‑redeemable stays in equity forever.
Statement of changes in equity	Shows movements in share capital, share premium and reserves; required for limited companies.
Impact on ratios	More paid‑up capital lowers debt‑to‑equity; may lower ROE; calls improve current ratio.

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8. Further Reading & Resources

• Cambridge IGCSE Accounting (0452) – Section 5.3 “Limited Companies”.
• Cambridge IGCSE Accounting Student’s Book – Chapter 5 “Share Capital and Reserves”.
• IAS 1 – Presentation of Financial Statements (for deeper professional insight).
• BBC Bitesize – “Share capital” video tutorial.
• Past paper questions (Cambridge 2022‑2025) – focus on AO2 journal entries and AO3 analysis.