Shares for Consideration Other Than Cash: Journal Entries

A company needs a machine. The seller agrees to accept shares instead of a bank payment. Has the company received anything? Yes, a machine. Has the seller received anything? Yes, an ownership interest in the company.

That is the idea behind issue of shares for consideration other than cash. The company receives value, but the value does not arrive as money in its bank account.

These questions become much easier when you separate two things: what the company received and how it settled the amount due. Once you do that, vendors, promoters and underwriters fit into the same basic pattern.

What does consideration other than cash mean?

Consideration is what a company receives in exchange for issuing shares. It might be a machine, a business, formation services or underwriting services.

The recipient gets shares because something of value has been supplied or an obligation is being settled. This is different from a bonus issue, where reserves are capitalised for existing shareholders.

For the worked examples below, assume the transactions are duly authorised, the stated values are agreed, and the shares are issued as fully paid. The focus is on recording the transactions given in an accountancy question.

Recipient	What the company receives	Account normally debited when the amount becomes due
Vendor selling a machine	Machinery	Machinery Account
Vendor selling a business	Assets and agreed liabilities taken over	Individual asset accounts, with the acquisition adjustment where needed
Promoter providing formation services	Services connected with establishing the company	Formation Expenses or Incorporation Expenses Account
Underwriter earning commission	Underwriting services	Underwriting Commission Account

First get the share calculation right

Keep these three amounts separate:

• Face value: the nominal amount of each share credited to Share Capital.
• Premium per share: the amount above face value credited to Securities Premium.
• Issue price: face value plus premium, used to settle the amount payable.

For a question in which the settlement amount is given:

Number of shares = Amount to be settled through shares / Issue price per share

Then calculate:

Share Capital = Number of shares × Face value

Securities Premium = Number of shares × Premium per share

Suppose Rs. 2,40,000 is payable through shares of Rs. 10 each issued at a premium of 20%. The premium is Rs. 2 per share, so the issue price is Rs. 12.

The company issues 2,40,000 / 12 = 20,000 shares. Share Capital increases by Rs. 2,00,000 and Securities Premium by Rs. 40,000.

If you divide by Rs. 10 instead, you get 24,000 shares. But those shares, issued at Rs. 12, would settle Rs. 2,88,000. That is Rs. 48,000 more than the company owes. Multiplying your answer back by the issue price catches this mistake immediately.

If the question instead gives the number of shares, reverse the calculation. For 3,000 shares of Rs. 10 issued at Rs. 14, the settlement value is Rs. 42,000, comprising Rs. 30,000 capital and Rs. 12,000 premium.

Shares issued to a vendor: recognise, then settle

A vendor is the seller. The vendor’s account connects the purchase with its payment.

When a company buys an asset, debit the asset and credit the vendor. When shares are issued to settle the amount, debit the vendor and credit Share Capital, together with Securities Premium if applicable.

This two-step approach makes it clear why Bank does not appear in an entirely non-cash settlement.

Example 1: machinery purchased and paid for at par

Aster Ltd purchases machinery from Meera Traders for Rs. 1,80,000. It settles the amount by issuing fully paid equity shares of Rs. 10 each at par.

Number of shares = 1,80,000 / 10 = 18,000 shares.

Particulars	Debit (Rs.)	Credit (Rs.)
Machinery A/c Dr.	1,80,000
To Meera Traders A/c		1,80,000

Being machinery purchased from Meera Traders.

Particulars	Debit (Rs.)	Credit (Rs.)
Meera Traders A/c Dr.	1,80,000
To Equity Share Capital A/c		1,80,000

Being 18,000 equity shares of Rs. 10 each issued as fully paid in settlement.

Meera Traders has a credit and a debit of Rs. 1,80,000, so its balance becomes zero. Machinery and share capital both increase. Cash stays unchanged.

Example 2: a premium does not increase the agreed asset price

Cedar Ltd purchases equipment for Rs. 3,00,000. The supplier accepts shares of Rs. 10 each issued at Rs. 15.

• Shares issued: 3,00,000 / 15 = 20,000.
• Share Capital: 20,000 × 10 = Rs. 2,00,000.
• Securities Premium: 20,000 × 5 = Rs. 1,00,000.

Record Equipment A/c Dr. Rs. 3,00,000, To Vendor A/c Rs. 3,00,000. Then record the settlement:

Particulars	Debit (Rs.)	Credit (Rs.)
Vendor A/c Dr.	3,00,000
To Equity Share Capital A/c		2,00,000
To Securities Premium A/c		1,00,000

Being 20,000 equity shares issued at a premium of Rs. 5 each to settle the equipment purchase.

The equipment remains recorded at the agreed Rs. 3,00,000. Premium divides the equity credit; it is not an extra Rs. 1,00,000 added to the equipment cost.

If you want another explanation of the capital-premium split, revisit share issues at par and premium.

Part cash and part shares: subtract cash first

Example 3: a mixed settlement

Orchid Ltd buys furniture for Rs. 2,70,000. It pays Rs. 30,000 through the bank and settles the balance with shares of Rs. 10 issued at a premium of 20%.

The share-settled portion is 2,70,000 - 30,000 = Rs. 2,40,000. The issue price is Rs. 12, so the company issues 20,000 shares.

First record Furniture A/c Dr. Rs. 2,70,000, To Vendor A/c Rs. 2,70,000.

The combined settlement entry is:

Particulars	Debit (Rs.)	Credit (Rs.)
Vendor A/c Dr.	2,70,000
To Bank A/c		30,000
To Equity Share Capital A/c		2,00,000
To Securities Premium A/c		40,000

Being the vendor settled partly through bank and partly through 20,000 fully paid shares issued at Rs. 12 each.

You may also show separate entries for the bank payment and share issue. Either way, the vendor’s total debit must equal Rs. 2,70,000.

Do not divide the entire purchase price by Rs. 12. That would treat the cash-paid portion as if it also needed to be paid in shares.

Purchase of a business: calculate net assets separately

A business purchase may include several assets and liabilities. In a standard school-level acquisition question:

Net assets = Agreed value of assets taken over - Agreed liabilities taken over

Compare that figure with the agreed purchase consideration:

• Purchase consideration above net assets gives a goodwill debit.
• Net assets above purchase consideration gives a capital reserve credit.

This comparison and the share calculation answer different questions. The first explains the acquisition difference. The second explains how the vendor is paid.

Example 4: goodwill with a premium share issue

Maple Ltd takes over the following from a vendor:

Item	Agreed value (Rs.)
Machinery	4,20,000
Inventory	1,50,000
Trade receivables	90,000
Trade payables taken over	1,20,000

Purchase consideration is Rs. 6,00,000, settled by shares of Rs. 10 issued at Rs. 12.

Total assets = 4,20,000 + 1,50,000 + 90,000 = Rs. 6,60,000.

Net assets = 6,60,000 - 1,20,000 = Rs. 5,40,000.

Goodwill = 6,00,000 - 5,40,000 = Rs. 60,000.

Particulars	Debit (Rs.)	Credit (Rs.)
Machinery A/c Dr.	4,20,000
Inventory A/c Dr.	1,50,000
Trade Receivables A/c Dr.	90,000
Goodwill A/c Dr.	60,000
To Trade Payables A/c		1,20,000
To Vendor A/c		6,00,000

Being the business taken over at agreed values for a purchase consideration of Rs. 6,00,000.

Now calculate the shares: 6,00,000 / 12 = 50,000 shares.

Particulars	Debit (Rs.)	Credit (Rs.)
Vendor A/c Dr.	6,00,000
To Equity Share Capital A/c		5,00,000
To Securities Premium A/c		1,00,000

Being 50,000 fully paid shares of Rs. 10 each issued at Rs. 12 to the vendor.

Notice that Rs. 5,40,000 is not the amount used to calculate the shares. The company agreed to pay Rs. 6,00,000, and that is the obligation it must settle.

What if purchase consideration were lower?

Keep the same net assets of Rs. 5,40,000, but suppose purchase consideration is Rs. 4,80,000.

There would be Capital Reserve of Rs. 60,000, not Goodwill. The acquisition entry would debit the three assets for Rs. 6,60,000 and credit Trade Payables Rs. 1,20,000, Vendor Rs. 4,80,000 and Capital Reserve Rs. 60,000.

At an issue price of Rs. 12, settlement would require 40,000 shares: Rs. 4,00,000 capital and Rs. 80,000 premium.

Capital Reserve here comes from the acquisition difference. Securities Premium comes from issuing shares above face value. They are not interchangeable.

Shares issued to promoters for services

Promoters help bring a company into existence. When a question states that shares are issued for formation services, identify the service cost first and settle the promoter’s account second.

Example 5: formation services settled through shares

Willow Ltd owes promoters Rs. 72,000 for formation services. It issues shares of Rs. 10 at Rs. 12 in settlement.

Shares = 72,000 / 12 = 6,000.

Particulars	Debit (Rs.)	Credit (Rs.)
Formation Expenses A/c Dr.	72,000
To Promoters A/c		72,000

Being formation services received and the amount due to promoters recognised.

Particulars	Debit (Rs.)	Credit (Rs.)
Promoters A/c Dr.	72,000
To Equity Share Capital A/c		60,000
To Securities Premium A/c		12,000

Being 6,000 shares issued at Rs. 12 each in settlement of formation services.

Some questions use the name Preliminary Expenses or Incorporation Expenses. Use the name appropriate to the stated service and the required format.

Do not debit Goodwill merely because the recipient is a promoter. Goodwill in our business-purchase example arose from comparing purchase consideration with net assets. Formation services are a different transaction.

Also read the wording carefully: if a promoter buys shares by paying cash, that is a cash subscription. The person’s title does not decide the entry; the transaction does.

Shares issued to underwriters for commission

An underwriter undertakes to subscribe for shares not taken up by the public under the agreed arrangement. The commission compensates the underwriter for that service.

There are two amounts that students often mix up:

1. Commission that the company owes the underwriter.
2. Subscription money that the underwriter may owe the company for shares taken up.

Example 6: commission settled entirely in shares

Birch Ltd owes underwriting commission of Rs. 48,000. It settles the commission by issuing shares of Rs. 10 at Rs. 12.

Shares issued for commission = 48,000 / 12 = 4,000 shares.

Particulars	Debit (Rs.)	Credit (Rs.)
Underwriting Commission A/c Dr.	48,000
To Underwriters A/c		48,000

Being underwriting commission due.

Particulars	Debit (Rs.)	Credit (Rs.)
Underwriters A/c Dr.	48,000
To Equity Share Capital A/c		40,000
To Securities Premium A/c		8,000

Being 4,000 fully paid equity shares issued at Rs. 12 each in settlement of commission.

The commission is the consideration for these shares. There is no bank receipt of Rs. 48,000.

A different case: subscription money less commission

Suppose instead an underwriter must take 5,000 unsubscribed shares at Rs. 12 each. The underwriter owes Rs. 60,000. Separately, the company owes commission of Rs. 9,000.

If the agreement permits net settlement, the underwriter pays Rs. 51,000 to the company.

The share subscription still represents Rs. 50,000 capital plus Rs. 10,000 premium. The Rs. 9,000 commission must be recognised separately. It does not reduce Share Capital to Rs. 41,000, and it does not mean that 750 additional shares were issued for commission.

This second arrangement is a subscription obligation settled after an offset. Do not describe it as the same thing as the first arrangement, where a specified number of shares is issued directly in payment of commission.

Three questions about premium, discount and cash flow

Can a non-cash share issue have securities premium?

Yes. Section 52 of the Companies Act addresses premium on shares issued for cash or otherwise. The absence of a bank receipt does not remove the premium credit.

If an exercise asks you to write off eligible issue expenses against Securities Premium, show that as a separate entry. The original commission or formation-service settlement should still be recorded in full. Do not automatically net expenses against premium without the required facts and treatment.

Can ordinary shares be issued at a discount to pay a vendor?

Do not treat a below-face-value issue as a routine option. Section 53 generally prohibits fresh issues at a discount, subject to specific statutory exceptions, including the separately governed sweat-equity provisions and qualifying debt restructuring situations.

A vendor accepting shares instead of cash does not, by itself, create an exception. Reissue of forfeited shares is a different topic and should not be used to justify an ordinary fresh issue below face value.

Does a machine bought entirely with shares appear as a cash purchase?

No. There is no cash movement in that exchange. Relevant non-cash investing and financing information is disclosed separately, rather than invented as a bank payment and receipt. For a fuller example, see non-cash asset purchases through shares or debentures.

A quick checking routine before you finish

Read your answer as a story. What arrived? Who became entitled to payment? What settled that entitlement?

Then check five things:

1. The asset or expense debit matches what the company actually received.
2. Any cash portion has been removed before calculating the shares.
3. Number of shares multiplied by issue price equals the share-settled obligation.
4. Capital plus premium equals that same amount.
5. The vendor, promoter or underwriter account clears if settlement is complete.

If division gives a fraction of a share, do not silently round. Recheck the premium, cash portion and question wording. A residual amount may need a specified cash settlement; inventing one changes the question.

Try these short practice questions

Pause before reading the answers. For each question, find the share count, Share Capital and Securities Premium where applicable.

Questions

1. Machinery worth Rs. 3,60,000 is paid for through shares of Rs. 10 at par. How many shares are issued?
2. A vendor is owed Rs. 4,50,000, settled through shares of Rs. 10 at Rs. 15. Find all three figures.
3. A purchase of Rs. 5,20,000 is settled with Rs. 40,000 cash and the balance through shares of Rs. 10 at a 20% premium. Find the share count and equity split.
4. Assets of Rs. 8,00,000 and liabilities of Rs. 1,80,000 are taken over for Rs. 6,80,000. Find the acquisition difference and shares required at Rs. 20 each.
5. Promoters receive 2,500 shares of Rs. 10 issued at Rs. 16 for formation services. What is the service amount?
6. Commission of Rs. 36,000 is settled through Rs. 10 shares issued at Rs. 12. What are the two equity credits?
7. An underwriter owes subscription money of Rs. 84,000 and is owed commission of Rs. 14,000. What cash is received if these amounts are offset?
8. Net assets acquired are Rs. 7,50,000 and purchase consideration is Rs. 7,20,000. Which acquisition adjustment is required?

Answers and reasons

1. 36,000 shares. Share Capital is Rs. 3,60,000; there is no premium.
2. 30,000 shares. Capital is Rs. 3,00,000 and premium is Rs. 1,50,000. Together they settle Rs. 4,50,000.
3. 40,000 shares. The share-settled amount is Rs. 4,80,000. Divide by Rs. 12. Capital is Rs. 4,00,000 and premium is Rs. 80,000.
4. Goodwill Rs. 60,000; 34,000 shares. Net assets are Rs. 6,20,000. Divide purchase consideration of Rs. 6,80,000 by Rs. 20 for the share count. A capital-premium split needs the face value too.
5. Rs. 40,000. The equity credits are Rs. 25,000 capital and Rs. 15,000 premium.
6. Capital Rs. 30,000; premium Rs. 6,000. The commission is settled by 3,000 shares.
7. Rs. 70,000. The subscription and commission remain distinct amounts even though the bank receives only the net balance.
8. Capital Reserve Rs. 30,000. Net assets exceed purchase consideration; there is no goodwill debit.

Sources and further reading

The examples above use original names and figures. For the underlying treatments, consult:

• NCERT: Accounting for Share Capital, section on consideration other than cash, for the vendor settlement and share-count method.
• Guru Jambheshwar University: Corporate Accounting, for the teaching treatment of vendor, promoter and underwriter entries.
• ICAI: accounting treatment of expenditure connected with authorised capital, for the distinction between preliminary expenditure and share issue expenses.
• Companies Act, 2013: sections 52 and 53, for securities premium and the general prohibition on discounted fresh issues.

Frequently asked questions

What is issue of shares for consideration other than cash?

It is an issue in exchange for something other than money, such as machinery or services, or to settle an obligation arising from that value received.

Why do we divide by issue price rather than face value?

Issue price is the value each share contributes towards settlement. Face value determines only the Share Capital credit. If shares have a premium, using face value overstates the number required.

Why is the vendor’s account debited when shares are issued?

The original purchase created a credit balance payable to the vendor. Debiting the vendor records settlement of that obligation.

Are shares issued to promoters always non-cash shares?

No. Promoters may subscribe by paying cash. Shares issued for formation services are a non-cash settlement because services, rather than cash, provide the consideration.

Should formation services always be debited to Goodwill?

No. Use the relevant formation or incorporation expense account for the stated services. Do not create goodwill merely because shares are issued to a promoter.

Is underwriting commission the same as money due from underwriters?

No. Commission is payable by the company for the service. Subscription money is payable to the company for shares taken up. The two may be offset when the arrangement allows, but they retain their separate meanings.

Are fully paid non-cash shares free shares?

No. Fully paid means no further amount is payable on those shares under the stated issue. The consideration has been satisfied through the asset, service or obligation settled.

Does securities premium arise without a cash receipt?

Yes. A non-cash issue above face value also has a premium. Credit Share Capital with face value and Securities Premium with the excess.

Should I add liabilities taken over to the number-of-shares calculation?

Not automatically. Calculate shares from the agreed consideration payable to the vendor through shares. Liabilities assumed are recorded separately and are used when calculating net assets.

What is the quickest final check for my answer?

Multiply the share count by issue price and compare it with the amount settled through shares. Then check that capital plus premium equals the same amount and that every journal entry balances.