The Share Capital

The share capital

We mentioned earlier that a distinction exists between the Publisherized capital and the issued capital. The former is the maximum limit in the total value of shares of different classes which a company is permitted to issue under the conditions of its registration; the latter is the actual value of shares of different classes which have been issued. The reason why companies do not establish the value of the Publisherized capital greatly in excess of their anticipated requirement lies in the taxes imposed on the value of the Publisherized capital, which deter promoters from incurring unnecessary expenses.

The financial accounting procedures applied to the treatment of the share capital may be said to have two main objectives:

(a) recording the issue of shares and the consideration received in respect of such shares;

(b) providing information about the share capital in a balance sheet.

We do not propose to deal with the procedures applied to the redemption of redeemable preference shares, or those applied to the issue of bonus shares, since these procedures are not essential to the thesis of this book. It may be mentioned, however, that bonus shares are commonly issued free of cost to existing shareholders in proportion to their shareholdings by way of distribution of accumulated income.

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Read on: Gearing and the Capital Structure

Gearing and the capital structure

The nature of the capital structure has important implications for financial management purposes, and in this respect, the gearing is an important consideration.

The gearing expresses the relationship between the proportion of fixed interest (loan capital) and fixed dividend (preference shares capital) to ordinary shares. A company with a large proportion of fixed interest and fixed dividend bearing capital to ordinary capital is said to be highly geared.

The importance of the gearing is that fluctuations in net income may have disproportionate... see: Gearing and the Capital Structure