Share Capital
Share capital, also known as equity capital, refers to the funds that a company receives from issuing shares to its shareholders. This capital represents the ownership stake that shareholders have in the company. The funds from share capital are crucial for the company as they can be used for various purposes, including expanding operations, funding new projects, and managing day-to-day operations.
Examples of Share Capital
- Initial Public Offering (IPO): When a company goes public, it issues shares to the public for the first time. The money received from selling these shares forms part of the share capital.
- Rights Issue: A company might need additional funds and decide to offer more shares to existing shareholders. The funds raised from this issuance add to the company’s share capital.
- Private Placement: A company may issue additional shares to a specific group of investors, such as venture capitalists, raising more share capital.
Frequently Asked Questions
What is the difference between issued share capital and authorized share capital?
Issued share capital refers to the total value of shares that have been allotted to shareholders, whereas authorized share capital is the maximum amount of capital that a company is allowed to issue, as specified in its corporate charter.
Can a company operate without share capital?
No, share capital is essential for a company as it provides the initial funding required to start the operations and also reflects the ownership interest of the shareholders.
What is called-up share capital?
Called-up share capital is the portion of the subscribed share capital that the company has demanded (called-up) for payment from the shareholders.
How does paid-up share capital differ from called-up share capital?
Paid-up share capital is the amount that shareholders have actually paid for the shares they have subscribed to, whereas called-up share capital is the portion that has been demanded by the company but may not yet be fully paid.
Is share capital the same as shareholders’ equity?
Share capital is a component of shareholders’ equity. Shareholders’ equity includes share capital plus retained earnings and other reserves.
- Authorized Share Capital: The maximum amount of capital that a company is authorized to raise through the issuance of shares.
- Called-up Share Capital: The amount of share capital that the company has requested from shareholders to be paid.
- Issued Share Capital: The portion of authorized capital that has been allotted to shareholders.
- Paid-up Share Capital: The amount of called-up capital that shareholders have actually paid.
Online References
Suggested Books for Further Studies
- Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey F. Jaffe
- Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston
- Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Accounting Basics: “Share Capital” Fundamentals Quiz
### Share capital is obtained through which of the following methods?
- [x] Issuing shares to owners or shareholders
- [ ] Taking out a loan from a bank
- [ ] Issuing bonds to the public
- [ ] Selling company assets
> **Explanation:** Share capital is obtained through the issuance of shares to the company's owners or shareholders in exchange for funds.
### What does authorized share capital represent?
- [x] The maximum amount of capital a company is allowed to issue
- [ ] The minimum amount a company must issue to operate
- [ ] The total amount of shares currently issued
- [ ] The amount of capital on hand
> **Explanation:** Authorized share capital is the maximum amount of capital that a company is authorized to raise through the issuance of shares, as specified in its corporate charter.
### Which of the following terms indicates the actual payment received from shareholders for shares issued?
- [ ] Authorized share capital
- [ ] Called-up share capital
- [x] Paid-up share capital
- [ ] Reserve capital
> **Explanation:** Paid-up share capital refers to the amount that shareholders have actually paid for the shares that have been issued and called-up.
### A company issues 1,000 shares with a face value of $10 each but has only received payment for 600 shares. What is the paid-up share capital?
- [x] $6,000
- [ ] $10,000
- [ ] $16,000
- [ ] $1,000
> **Explanation:** Paid-up share capital is calculated by multiplying the number of shares paid for by the face value. Therefore, $10 x 600 shares = $6,000.
### What is called-up share capital?
- [x] The portion of subscribed capital that the company has demanded for payment
- [ ] The total capital authorized by the company
- [ ] The actual payment received from shareholders
- [ ] The leftover capital that hasn't been utilized
> **Explanation:** Called-up share capital is the part of subscribed capital that the company has called for payment from shareholders.
### Share capital forms part of which section in the balance sheet?
- [x] Shareholders' equity
- [ ] Long-term liabilities
- [ ] Current assets
- [ ] Revenue
> **Explanation:** Share capital is a component of shareholders' equity on the balance sheet.
### What is the difference between issued share capital and paid-up share capital?
- [x] Issued share capital refers to allotted shares, while paid-up share capital refers to actually paid-for shares.
- [ ] Issued share capital is the same as authorized share capital, while paid-up share capital is not.
- [ ] There's no difference; both terms mean the same.
- [ ] Paid-up share capital includes dividends received, while issued share capital does not.
> **Explanation:** Issued share capital is about the shares allotted to shareholders, whereas paid-up share capital is the amount that has been paid by shareholders.
### Can share capital of a company change?
- [x] Yes, through new share issuance or buybacks.
- [ ] No, it is fixed once the company is incorporated.
- [ ] Only in case of mergers or acquisitions.
- [ ] Only in case of liquidation.
> **Explanation:** Share capital can change if a company issues more shares to raise additional funds or buys back shares from shareholders.
### What happens when a company issues shares at a premium?
- [ ] The excess amount is credited to the share capital account.
- [x] The excess amount is credited to the share premium account.
- [ ] The excess amount is considered as issued share capital.
- [ ] The excess amount is distributed among existing shareholders.
> **Explanation:** When shares are issued at a price higher than their nominal value, the excess or premium amount is transferred to the share premium account.
### Which term closely relates to how much capital can be "drawn down" from shareholders?
- [ ] Authorized share capital
- [x] Called-up share capital
- [ ] Paid-up share capital
- [ ] Reserve capital
> **Explanation:** Called-up share capital refers to the portion of subscribed capital that the company can demand payment for from shareholders.
Thank you for exploring this comprehensive accounting term and challenging yourself with our specialized quiz. Keep honing your financial acumen!
