Issue of Shares for consideration other than cash | Shares | Class 12 | Accounts | Part 4

Summary

In this educational video, the speaker delves into the critical topic of share issuance, focusing on the concept of consideration in cash transactions. The lesson outlines the basic principles of accounting entries when purchasing assets, highlighting key scenarios such as acquiring a running business. Through detailed explanations and examples, viewers learn to navigate the complexities of share issuance and premium calculations. Emphasis is placed on the importance of determining the number of shares issued, with practical insights on accounting entries and net worth considerations. The video aims to equip students with a solid understanding of financial transactions related to shares.

Takeaways

• 😀 The issuance of shares can occur for consideration other than cash, such as assets or services.
• 😀 Consideration in legal terms refers to the exchange of value in transactions, which is crucial in share issuance.
• 😀 There are two main cases when issuing shares: purchasing an asset directly or acquiring a running business.
• 😀 When an asset is purchased, the accounting entry typically involves debiting the asset account and crediting the vendor account.
• 😀 If shares are issued as consideration, the entry is modified to debit the vendor account and credit the share capital account.
• 😀 Always calculate the number of shares issued based on the purchase consideration divided by the issue price.
• 😀 The premium on shares affects how the entries are made in accounting; it must be accounted for separately.
• 😀 Goodwill may arise when purchasing a business for more than its net asset value, requiring careful accounting treatment.
• 😀 Understanding the net worth of a business is essential when determining the fair price during acquisition.
• 😀 Continuous practice and application of these concepts through examples are vital for mastering share issuance and accounting entries.

Q & A

What is the primary topic discussed in the transcript?

The primary topic discussed is the issue of shares, specifically focusing on the consideration for shares issued for cash.

What does 'consideration' mean in the context of shares?

In the context of shares, 'consideration' refers to the payment or exchange involved when shares are issued, which can include cash or other assets.

What are the two cases mentioned for purchasing an asset?

The two cases mentioned are: purchasing a standalone asset and purchasing a running business.

How is the accounting entry structured when an asset is purchased with shares?

The accounting entry is structured as: Asset Account Debit to Vendor Account (if purchased with cash) or to Share Capital Account (if shares are issued instead).

What formula is used to calculate the number of shares issued?

The formula used is: Number of Shares Issued = Purchase Consideration / Issue Price.

What is the significance of calculating the number of shares issued?

Calculating the number of shares issued is significant as it determines how much capital is raised and how the ownership is distributed among shareholders.

What happens when a running business is purchased?

When a running business is purchased, the entry is recorded as: Assets Account Debit to Liabilities and the net worth is calculated to assess the fair value.

How is goodwill accounted for in business purchases?

Goodwill is accounted for when the purchase price exceeds the net asset value; it is recorded as a debit in the accounting entries.

What is meant by 'capital reserve' in the context of gains from business acquisitions?

A capital reserve is created when a profit from acquiring a business is recognized, indicating a gain that is not part of regular revenue.

How does the concept of premium affect share issuance?

When shares are issued at a premium, the entry includes not only the share capital but also a security premium, which reflects the additional amount paid over the nominal value.