How is the share capital accounted for?

November 07, 2018

The accounting treatment of share capital depends on the type of company and the applicable accounting standards in the jurisdiction where the company is incorporated. Here is a general overview of how share capital is accounted for:

1. Initial Issuance: When a company issues shares to investors during its initial public offering (IPO) or through private placements, the proceeds received from the sale of shares are recorded as share capital on the balance sheet. This represents the amount of capital contributed by shareholders to the company in exchange for ownership rights.
2. Common Stock and Preferred Stock: Share capital is typically classified into different categories based on the types of shares issued. Common stock and preferred stock are the two most common types of shares. Common stock represents equity ownership in the company and usually carries voting rights. Preferred stock may have preferential rights over common stock, such as priority in dividend payments or liquidation preferences.
3. Par Value and Additional Paid-in Capital: In some jurisdictions, shares may have a par value, which is the nominal value assigned to each share by the company. The par value represents the minimum amount that shareholders must pay for each share. The amount received from investors in excess of the par value is recorded as additional paid-in capital or share premium. This represents the premium paid by investors for the shares over and above their nominal value.
4. Treasury Stock: If a company repurchases its own shares from the market, the cost of repurchased shares is recorded as treasury stock on the balance sheet. Treasury stock is deducted from total shareholders’ equity and is considered as a contra-equity account. Treasury stock can be reissued or retired in the future, depending on the company’s capital management strategy.
5. Accounting Standards: The accounting treatment of share capital is governed by generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) in most jurisdictions. These standards provide guidelines on how to account for share issuance, share repurchases, stock dividends, and other transactions related to share capital.
6. Disclosure Requirements: Companies are required to disclose relevant information about their share capital in the financial statements and accompanying notes. This includes details of share issuances, repurchases, dividends, stock splits, and other changes in share capital during the reporting period.

Overall, the accounting treatment of share capital involves recording the initial issuance of shares, tracking changes in share capital over time, and complying with applicable accounting standards and disclosure requirements.