In view of this, share application money pending allotment is of the nature of a current liability and should, therefore, be disclosed as such. Share application money pending allotment should hence be disclosed as a current liability and not as a part of share capital.
22 July 2009
Please go through the useful discussion below:
Question: For how long can share application money be shown in the balance-sheet?
Answer: As per the Contract Act, there should be an offer and acceptance to constitute a contract. The offer should be accepted to enter into a binding contract. Issue of prospectus is merely an invitation to offer and not an offer by itself. Applying for shares is an offer made by the applicant to the company.
Allotment of shares is the acceptance of the offer. Unless shares are allotted, the applicant does not become a shareholder. Once allotment takes place, the applicant becomes a shareholder and is subject to all the risks and rewards of being a shareholder.
An offer can always be withdrawn at any time before it is accepted. A share applicant also enjoys the right to withdraw his application any time before allotment is made. The company is obliged to return the share application money if he prefers to withdraw his application. For the same reason, the lawmakers, in all their wisdom, provided for the company to deposit the share application money in a separate bank account and not to appropriate that money unless allotment is made. Refund of application money to unsuccessful applicants is made out of this bank account.
This also explains the reason why the sequence of entries between application and allotment are different. In case of application, the first entry to be made is:
Bank A/c. Dr. To Share Application A/c. (being the share application money received)
Only upon allotment is the share application account transferred to the share capital account, by passing the entry
Share application A/c. Dr. To share capital account
But in the case of allotment money, the first entry made is
share allotment account Dr. To share capital account.
Subsequently, on receipt of allotment money, the entry will be
Bank A/c. Dr. To share allotment account.
Ever thought of why the sequence of entries between application and allotment is different? In case of application, entry is first made for receipt of money and then transferred to share capital account whereas in case of allotment. The first entry is to raise share allotment account and then to pass the entry for receipt of cash.
General answers given by students for a question like this is that there is no certainty of receipt of applicant money. The same certainty also revolves around allotment money. Is the company so sure of receiving the allotment money?
Book-keeping is a record of transactions. When a prospectus is issued, there is no transaction. The transaction starts with the receipt of application money. Therefore, the receipt of application money is recorded. It is merely an offer from the applicant. Unless allotment is made, the company cannot appropriate the amount. Once the allotment is made, the contract becomes enforceable and the share applicant becomes a shareholder. That is why the share application account gets transferred to the share capital account upon allotment.
Payment of allotment money is one of the terms of contract between the shareholder and the company. The shareholder is liable to pay the allotment money.
Therefore, entry for the amount due on allotment is made once the shares are allotted. Receipt of allotment money follows this. Thus, the sequence of entries has a legal reasoning and a logical sequence. It is not right to say that the company is not sure about the receipt of application money.
In view of this, share application money pending allotment is of the nature of a current liability and should, therefore, be disclosed as such. Share application money pending allotment should hence be disclosed as a current liability and not as a part of share capital.
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