Share capital and debentures – iGCSE Accounting Edexcel Revision

Definition

Share capital is the money invested in a company by shareholders in exchange for shares, which represent a portion of ownership in the company.

Ordinary Shares

This is the most common type of share and gives the holder the right to vote at general meetings and to a dividend, the value of which is variable and determined by the directors of the company.

Preference Shares

Holders of these shares have a right to a fixed dividend before any payment is made to ordinary shareholders. However, they usually do not have voting rights.

Issue of Shares

When a company wants to raise more money, it can issue additional shares. This process dilutes the ownership of existing shareholders.

Rights Issue

This is when additional shares are sold to existing shareholders, often at a discount to the market price.

Capital Maintenance

The company must protect the share capital for the benefit of creditors. This means that the company cannot generally return capital to shareholders except in certain circumstances.

Accounting for Share Capital

When shares are issued, the amount received is credited to the company’s share capital account.

Debentures

Definition

A debenture is a way of borrowing money for a company. It is a document that either creates a debt or acknowledges it.

Characteristics

Debentures can earn a fixed rate of interest and are usually repaid after a fixed period of time.
They can be secured on the company’s assets or they can be unsecured.
The holders of debentures are creditors of the company, not shareholders, and have first claim on profits before shareholders.

Interest on Debentures

The rate of interest to be paid to debenture holders is stipulated within the debenture agreement.
The interest is paid before dividends are distributed to shareholders.

Issuing and Redeeming Debentures

Companies issue debentures to borrow money. When the debt is paid off, the debentures are redeemed.
The debenture’s value at issuance is recorded as a liability on the company’s balance sheet.

Accounting for Debentures

When a company issues debentures, it records a credit to the debentures account.
When debentures are redeemed, they are debited from the debentures’ account.