Introduction to Company Accounts

Issue of Shares for Consideration (Other than Cash)

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).

issue of shares for consideration

Means of Issue of Shares

There are 2 generally two means of the issue of shares:

  1. For Cash
  2. 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 on Issue of Shares for Consideration

Question: Verma Ltd. 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
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