The Application and Allotment Account is a critical component in the process of issuing a company’s share capital. This accounting mechanism ensures that the process of receiving and allocating shares to potential shareholders is systematically managed. Below is a comprehensive exploration of the term, its historical context, procedures, and implications.
Historical Context
The concept of share capital issuance dates back to the early days of joint-stock companies in the 17th century. As companies sought to raise capital through the public, the need for structured accounting methods became evident. Over time, this led to the development of standardized practices in the form of application and allotment accounts.
Types/Categories
- Application Account: This account records the initial receipt of money from applicants wishing to buy shares.
- Allotment Account: This account deals with the allocation of shares to applicants who then become allottees.
Key Events in the Process
- Issuance of Shares: Company announces the availability of shares.
- Application Process: Potential shareholders submit applications and payment.
- Allocation of Shares: Company allots shares to successful applicants.
- Handling Over-Subscription: In cases of over-subscription, excess funds are returned to applicants.
- Bookkeeping Entries: Entries are made in the company’s ledgers to reflect the transactions.
Detailed Explanations
Application Process:
When a company decides to raise capital, it issues a prospectus inviting the public to subscribe to its shares. Applicants fill out an application form and submit it along with a payment covering the cost of the shares. The company then debits the bank account with the cash received and credits the application and allotment account.
Allotment Process:
After receiving applications, the company reviews them and allots shares accordingly. This involves debiting the application and allotment account and crediting the share capital or share premium account. If the total number of shares applied for exceeds the number available, a pro-rata allotment is conducted, and the excess funds are returned to applicants.
Bookkeeping Entries
On receipt of application money:
1Debit: Bank Account 2Credit: Application and Allotment AccountOn allotment of shares:
1Debit: Application and Allotment Account 2Credit: Share Capital Account / Share Premium Account
Charts and Diagrams
graph TD
A[Potential Shareholders Apply for Shares] -->|Submit Application & Payment| B[Company Bank Account]
B -->|Credit| C[Application and Allotment Account]
C -->|Debit| D[Share Capital Account]
D -->|Shares Allotted| E[New Shareholders]
Importance
This process ensures the accurate and transparent management of capital raised through share issuance, fostering trust and legal compliance. It also provides a clear record for financial statements and audits.
Applicability
The application and allotment account system is applicable in various scenarios, including Initial Public Offerings (IPOs), rights issues, and private placements.
Examples
- Company A issues 1,000 shares at $10 each. Applicants submit applications and payments totaling $15,000. The company allots shares, refunds excess money, and makes the appropriate ledger entries.
Considerations
- Legal Compliance: Ensuring adherence to securities regulations.
- Over-Subscription: Effectively managing and refunding excess application money.
- Timeliness: Prompt processing of applications and refunds.
Related Terms with Definitions
- Share Capital: The total amount of money raised by a company through the sale of shares.
- Allottees: Individuals or entities that receive an allocation of shares.
- Share Premium: The amount received by a company over the nominal value of its shares.
Comparisons
- Application Account vs. Allotment Account: While both are part of the share issuance process, the application account records initial funds received, and the allotment account tracks the allocation of shares.
Interesting Facts
- The first recorded IPO was by the Dutch East India Company in 1602.
- Modern stock exchanges were developed from informal gatherings in the 17th century.
Inspirational Stories
John D. Rockefeller’s rise to prominence in the oil industry began with strategic investments in shares, demonstrating the potential impact of share capital on business growth.
Famous Quotes
- Benjamin Graham: “Successful investing is about managing risk, not avoiding it.”
Proverbs and Clichés
- Cliché: “Don’t put all your eggs in one basket.”
Expressions, Jargon, and Slang
- Hot Issue: A very popular stock issue with high demand.
- Oversubscribed: When demand for a new issuance of shares exceeds the supply.
FAQs
Q: What happens if there are more applications than available shares? A: The company may conduct a pro-rata allotment and return the excess application money to the applicants.
Q: Can the application and allotment account be split? A: Yes, they can be separated into two distinct accounts for detailed tracking.
References
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- “Accounting for Share Capital” in Financial Reporting by ICAEW.
Final Summary
The application and allotment account is fundamental in managing the issuance of a company’s share capital. It ensures transparency, accountability, and legal compliance in the process of raising funds through public or private offerings. By understanding and implementing proper bookkeeping procedures, companies can maintain accurate financial records and enhance investor confidence.
