- December 22, 2021 at 3:51 pm #644703MichelleJMember
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I have three questions I would be grateful if a tutor can answer.
1. What does “private company limited by shares and guarantee” mean?
2. What is capital maintenance and what it is created?
3. Is it true that share premium account is used to write-off the Expenses and commision paid on new shares?
Secondly, what does write-off really mean by in accounting?January 13, 2022 at 11:12 am #645846MikeLittleKeymaster
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Really, technically speaking this is a private company limited by guarantee that also has a share capital. the members’ liability in the event of an insolvent liquidation is restricted to the amount that they have individually guaranteed. But if I guarantee £100 and you guarantee just £5, would it be ‘fair’ for us to have equal voting power?
So such a company can make more fair the voting rights by issuing shares – not for the purposes of liability limitation but in order to give greater voting power (as measured by the shares held) to those members that have greater risk by way of guarantee
Capital maintenance is a concept to ensure that unscrupulous directors of a company are unable to reduce a company’s net assets below the ‘buffer fund’ ie below the aggregate of share capital plus undistributable reserves. In theory, that should allow all creditors of a company to be paid in full out of those net assets
One of the four (and only four) uses of share premium account is to write of the expenses of, commissions paid on and the discounts allowed on any issue of shares or debentures
The double entry would be:
Dr Share Premium Account
Cr Share Issue Expenses Account
Before that, of course, there would have been the entry to record the proceeds of the share issue say 100 shares issued at £1.30 with £20 share issue expenses
Dr Cash £130
Cr Share Capital £100
Cr Share Premium £ 30
Dr Share Issue expenses £20
Cr Cash £20
Now we can write off those expenses:
Dr Share Premium £20
Cr Share Issue expenses £20
All clear now?
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