A company requires money in its starting up phase, and later on for expansion if necessary. The people that buy these shares in exchange for cash are known as shareholders. A public company carries out a process called Cash Issue of Shares - the general public is invited to apply for shares in exchange for cash to raise the capital the business needs. Capital is the term used for the money contributed by shareholders.

E.g. If the Company requires $300,000, it could be divided into 200,000 shares of $1.50 each 100,000 shares of $3 each 50,000 shares of $6 each The 'issue price' is the value the directors decide the value of the share to be when it is first issued. Below the step-by-step process of the cash issue of shares is discussed.

Step 1: A Share Offer Document is distributed to the Public

A Share Offer Document (previously known as a Prospectus) is issued to the public, inviting them to purchase shares or debentures from the company. This document contains all necessary information to assist potential investors to make a decision about their relations with the company. The Share offer document contains an Application form that investors can return to the company should they wish to apply for the shares. This step does not require an Accounting Entry.

Step 2: Application of Shares

The closing date to apply for the shares is called Application. The Application contains the number of shares individuals have applied for and the money for it. E.g. If an individual applies for 10,000 shares at an issue price of $0.50 per share, they would have to send in payment for $5,000 in the application.

For the company's entry:

• Debit the Cash at Bank (Asset) to increase the money in the account received from Application.

• Credit the Application (Liability) to increase the amount in the account received from Application. The amount recorded is the number of shares applied for multiplied by the issue price.

Step 3: Allotment of Shares

The company directors decide how to allocate the shares amongst the people who applied and distribute share certificates. Unsuccessful applicants get their money refunded. After the Allotment date, successful applicants become shareholders.

For the company's entry:

• Debit Application (Liability) to reduce decrease the original application money from this account. This money is transferred to the Ordinary Share Capital account.

• Credit Ordinary Share Capital (Equity) to increase the account by the new contributed capital (contributions from shareholders) received.

Step 4: Payment of Share Issue Costs

Share issue costs are the costs associated with printing the Share Offer Document, Share Certificates and stockbroker fees. These costs are treated as a DECREASE in Equity and is ultimately shown as a decrease in the Share Capital.

For the company's entry:

• Debit the Share Issue Costs ( - Equity) account.

• Credit the Cash at Bank (Asset) to decrease the account from the amount paid for the share issue costs. Offset the Share Issue Costs against the Share Capital.

• Credit the Share Issue Costs ( - Equity) to decrease the amount in this negative equity account to be transferred to the Share Capital account.

• Debit the Ordinary Share Capital (Equity) to decrease the account by the Share Issue Costs.

Step 5: Preliminary Expenses

Preliminary expenses, also called Formation costs, are the costs of forming the company (e.g. legal fees, ASIC registration fees). These costs are to be treated as EXPENSES and are written off in the first year of the company's profit calculation.

For the company's entry:

• Debit the Preliminary Expenses (Expense) account to increase the amount in this account.

• Credit Cash at Bank (Asset) to decrease the amount in this account to record payment of the expense.