Accounting entries, Under Subscription, Over Subscription

Accounting entries

An accounting journal entry is a formal recording of transaction where debit and credit of transaction recorded into the general ledger. This is a written record of a commercial transaction.

Types of Accounting Journal Entries

There are three types of accounting journal entries which are as follow:-

1. Transaction Entry

Transaction entry is basic account entry for any event in business. For example bill receipt from a customer, the bill presented from a supplier for payment, cash receipt entries from a customer and other cash payment has done which is an expense for the company. Transaction entry is cash basis and accrual basis.

2. Adjusting Entry

Adjusting Entry is a journal entry done at the end of an accounting period. It is based on accrual basis accounting. The accounting journal entry is required at the end to adjust various balances in various ledger accounts which done to meet the financial position of the business as per accounting principle like as per GAAP i.e. generally accepted accounting principle. In short, it is basically align reported result.

3. Closing Entry

Closing entry is a journal entry which is done at the end of the accounting period. This type of entry is posted to shift ending to retain earning account from all temporary accounts like loss account, gain account, expense account and revenue account. This is done to transfer information to the next accounting period.

Accounting entries for the transaction are done through accounting software where one doing transaction will not know he is creating an accounting entry e.g. creating customer invoice. Accounting entries record all commercial transactions formally.

Under and Over Subscription

A company issues shares to the general public for subscription. It receives the applications along with the application money so that it can allot the shares to the applicants. It may hardly happen that it receives the applications equal to the number of shares issued. Thus, there may be either under subscription or oversubscription.

UNDER SUBSCRIPTION OF SHARES

A company offers shares to the public inviting applications for their subscription. When the number of shares applied for by the public is less than the number of shares issued by the company, it is a situation of under-subscription.

Generally, a company that is newly set up or does not have a good reputation in the market receives under-subscription. Usually, such companies opt for underwriting of the shares.

However, if a company receiving under-subscription receives the minimum subscription, it can allot the shares for which it receives the application.

OVERSUBSCRIPTION OF SHARES

When a company receives applications for shares more than the number of shares it has offered to the public, it is known as over-subscription of shares. Usually, the companies with strong financial background or good reputation in the market or profitable future prospects receive over-subscription of shares.

According to the guidelines of SEBI, a company cannot out-rightly reject any application. However, it can do so where the information is incomplete, the signature is not there or the application money is insufficient.

In this case, it is not possible for the company to allot shares to every applicant in the number that he desires. Thus, the company needs to allot the shares in a proper manner. The company has the following three alternatives:

(i) Reject some applications totally.

(ii) Accept some applications in full.

(iii) Make Pro-Rata Allotment to the remaining applicants.

Pro-rata allotment implies the allotment of shares in proportion of the shares applied for. In the case of pro-rata allotment, the company adjusts the excess money received at the time of application towards the allotment and refund the excess.

However, it can transfer the excess amount to Calls-in Advance A/c if its articles of association permit and takes the consent of the applicant by a separate letter or by inserting a clause in the Prospectus.

For example, JM Ltd. offers 20000 shares to the public. It receives applications for 40000 shares. When the company decides to allot the shares at pro-rata basis, then it has to allot 20000 shares to the applicants of 40000 shares. Thus, the ratio will be 40000:20000 i.e. 2:1. Hence, each applicant for 2 shares will receive 1 share. This is Pro-rata allotment.