Day 141 The accounting process of issuing new shares

The accounting process of issuing new shares

As we know, the ordinary shares are issued by company through direct and indirect method. Where the direct method allows investors to purchase the shares directly. On the other hand, under the in-direct method the company issue new shares to an under-writer who acts as a financial intermediary. This method is commonly used for the public listed companies. When the entity decides to place an offer, it needs to develop the prospectus that determines the share price, volume and business introduction. The price is largely affect by the business performance, expected dividend payments or market anticipation. So as a financial accountant participant, how do we record this process? 

At first, we should understand the three major stages of public share offering. To illustrate, the application, allotment and call are the proceeding steps of the issue of stock. Once the company announced its prospectus, the investors may apply for the shares. This process is the application, and the corporation will deposit the cash received into a trust account. The reason for this account is there is possible over the subscription problem, especially for the popular stock. Thus if the money is put into the company’s account, it automatically established a contract which all applications must be full filled. In order to avoid it, accountants must record a debit in cash trust and credit the application account. After the application ceased, the company will decide the allocation of shares to each applier. For instance, the company may only issue 1000 shares, but there are 1500 subscriptions. Thereby,before the company can allocate the shares, it must return the over the subscribed amount. In this case, those 500 applications should be refunded. Which is debit application account and credit cash trust. Once it is done, the allotment stage will start. The entity will debit application and allotment account and credit share capital ledger. The total amount of this entry represents the partially paid ordinary share capital. And of course the receipt of payment is also required to be recorded. Hence, the entry should be: debit cash at bank and credit allotment account. For the application, we simply transfer the money in the trust account to the company’s cash account. At last, the company will call for the remaining value to be paid bu investors. The accounting entry is relatively the same as the allotment, where the call account is debited, and share capital is credited. Upon the receipt of payment, the call account will be cleared, and money deposited into the bank account. 

This is the most straight-forward approach of recording the issue of shares. We should comprehend it since it provides the fundamental understanding of the overall process.