These notes explain how limited companies record share transactions in ledger accounts, focusing on cash issues of ordinary shares and the transfer entries needed for rights issues and bonus issues.

Why these ledger entries matter

When a limited company issues shares, the accounting records must show both the source of finance and the effect on equity. The most important distinction is between ordinary share capital, recorded at nominal value, and any extra amount received, which is recorded separately.

In exam questions, success usually depends on identifying:

• whether the company receives cash

• whether the shares are issued at par or at a premium

• whether a reserve transfer is needed instead of a cash entry

• which ledger accounts must be debited and credited

Main accounts used

Most questions on this topic use some or all of the following accounts:

• Bank

• Ordinary Share Capital

• Share Premium

• Retained Earnings or another reserve named in the question

The key skill is to read the wording carefully and decide whether the transaction is:

• a cash issue of shares, or

• a capitalization of reserves

Ordinary share issue at par

A share issue is at par when the issue price is exactly equal to the nominal value of each share.

For an ordinary share issue at par:

• Bank is debited with the total amount received

• Ordinary Share Capital is credited with the same total amount

• Share Premium is not used

This is because the whole amount received represents nominal share capital. No part of the issue price is above nominal value, so there is no premium to record.

A common exam mistake is overcomplicating this entry. If the issue is clearly at par, the double entry is simply between Bank and Ordinary Share Capital.

Ordinary share issue at premium

When shares are issued for more than their nominal value, the extra amount is called share premium.

For an ordinary share issue at premium:

• Bank is debited with the full proceeds

• Ordinary Share Capital is credited with the nominal value of the shares issued

• Share Premium is credited with the excess over nominal value

The crucial point is that ordinary share capital is never credited with the full issue price unless the shares are issued at par. It is credited only with nominal value. The premium element must be separated into its own account.

This distinction is often the main source of marks in share issue ledger questions.

Rights issues

A rights issue gives existing shareholders the right to buy additional shares, usually in proportion to their current holdings.

From the ledger point of view, a rights issue is still a share issue for cash.

The entries therefore depend on whether the shares are issued at par or at a premium.

If the rights issue is at par:

• debit Bank

• credit Ordinary Share Capital

If the rights issue is at a premium:

• debit Bank with the total cash received

• credit Ordinary Share Capital with nominal value

• credit Share Premium with the premium amount

So, the term rights issue describes who receives the offer, not a special double entry method. The accounting treatment follows the same rules as any other issue of ordinary shares for cash.

When answering questions, do not miss the word existing shareholders, but also do not let it distract you from the main accounting requirement: record the cash received and split it correctly between share capital and share premium where necessary.

Bonus issues

A bonus issue gives existing shareholders extra shares without any new cash being paid to the company.

Because no cash is received, Bank is not part of the entry.

Instead, a reserve is reduced and Ordinary Share Capital is increased.

The ledger entry for a bonus issue is:

• debit the reserve or reserves named in the question

• credit Ordinary Share Capital with the nominal value of the bonus shares issued

The reserve used may be:

• Share Premium

• Retained Earnings

• another reserve specified in the question

A bonus issue does not create a premium on the new shares because the shares are not sold. It is simply a transfer within equity from reserves to share capital.

If the question states that more than one reserve is used, each reserve is debited for its part of the transfer, and the total nominal value is credited to Ordinary Share Capital.

Exam technique for ledger accounts

To prepare these entries accurately, follow a short routine:

• identify the number of shares

• identify the nominal value per share

• identify the issue price per share

• decide whether cash is received

• identify whether any amount belongs in Share Premium

• for a bonus issue, identify the reserve being capitalized

You should also check for these signals in the wording:

• at par means no share premium entry

• at premium means separate credits to share capital and share premium

• rights issue usually means a cash issue to existing shareholders

• bonus issue means a reserve transfer with no cash entry

In ledger questions, precise account names matter. Keep the entries clear, use the correct side of each account, and make sure the total debits equal the total credits.