Application and Allotment Account

Application and Allotment Account Ledger Account Share Capital Shareholders Book-Keeping Entries Allottees Financial Transactions
An essential ledger account in the process of share capital application and allotment, detailing the financial transactions related to the acquisition of shares in a company.
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What is an Application and Allotment Account?

An Application and Allotment Account is a specialized ledger used within the financial process of managing applications and subsequent allotment of a company’s share capital. This account carefully records transactions that occur from when potential shareholders (applicants) express their interest in purchasing shares up until the allocation of shares, transforming them into new shareholders, called allottees.

Key Processes:

  1. Application Process:

    • When a company offers its shares, interested investors submit an application form along with a cheque to cover the cost of the shares. This stage is crucial for collecting necessary data and funds from potential shareholders.
    • Entries:
      • Debit: Bank account (cash received)
      • Credit: Application and Allotment Account

  2. Allotment Process:

    • Upon successful processing of the applications, the company allocates or allots shares to the applicants, making them allottees or the new shareholders.
    • Entries for allotment:
      • Debit: Application and Allotment Account
      • Credit: Share Capital or Share Premium Account

If the total applications exceed the number of available shares, each applicant is scaled down proportionally, and any surplus application funds are returned to the applicants.

Example:

Let’s consider a company, ABC Corp, offering 1,000 shares at $10 each. The company receives applications for 1,200 shares:

  • Total Amount Received: 1,200 shares x $10 = $12,000
  • Application and Allotment Account is initially credited with $12,000.

Upon allocation of shares:

  • Debit the Application and Allotment Account: $12,000
  • Credit Share Capital Account for 1,000 shares x $10 = $10,000
  • Excess amount returned to applicants: $2,000

Frequently Asked Questions (FAQs):

  1. What happens if there are more applications than available shares?

    • Each applicant receives a scaled-down number of shares, and excess funds are returned.

  2. Can the Application and Allotment Account be split?

    • Yes, it can be divided into separate accounts: an Application Account and an Allotment Account for more detailed tracking.

  3. What is the significance of crediting the Application and Allotment Account?

    • It reflects the temporary holding of funds received from applicants before shares are officially allotted.

  4. What is the entry when shares are allotted to applicants?

    • Debit the Application and Allotment Account and credit the Share Capital or Share Premium Account.

  5. Why might an allotment account be necessary?

    • It simplifies the process by distinctly tracking allotted shares and ensuring accurate financial accounting.
  • Ledger Account: A record containing all the debit and credit transactions concerning a specific item or account.
  • Allotment: The process of allocating shares to the applicants.
  • Application Form: A form submitted by potential shareholders to apply for shares.
  • Share Capital: The capital raised by a company through the issuance of shares.
  • Share Premium: The amount received by a company over and above the nominal value of its shares.

References:

Suggested Books for Further Studies:

  1. “Financial Accounting” by Robert Libby, Patricia Libby, Daniel Short
  2. “Accounting for Dummies” by John A. Tracy
  3. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

Accounting Basics: Application and Allotment Account Fundamentals Quiz

### How is the initial receipt of application money recorded in the books? - [ ] Debit Application and Allotment Account; Credit Bank Account - [x] Debit Bank Account; Credit Application and Allotment Account - [ ] Debit Share Capital Account; Credit Bank Account - [ ] Debit Bank Account; Credit Share Capital Account > **Explanation:** Upon receiving the application money, the Bank Account is debited, and the Application and Allotment Account is credited. ### What happens if the applications exceed the number of shares available? - [ ] The company negotiates with each applicant. - [ ] Excess applications are ignored. - [x] Each applicant receives a scaled-down number of shares, and excess funds are returned. - [ ] The company issues more shares to meet the demand. > **Explanation:** When applications exceed the available shares, each applicant’s shares are scaled-down proportionally, and excess funds are refunded. ### What is credited upon receipt of funds for share applications? - [ ] Share Capital Account - [ ] Allottees Account - [x] Application and Allotment Account - [ ] Income Statement > **Explanation:** The Application and Allotment Account is credited to temporarily hold the funds received from throughout the application process. ### What entry is made when shares are finally allotted to applicants? - [x] Debit Application and Allotment Account; Credit Share Capital or Share Premium Account - [ ] Debit Share Capital Account; Credit Application and Allotment Account - [ ] Debit Bank Account; Credit Share Capital Account - [ ] Debit Allottees Account; Credit Bank Account > **Explanation:** When shares are allotted, the Application and Allotment Account is debited, reducing the temporary liability, and the Share Capital or Share Premium Account is credited. ### What term is used for the new shareholders after shares are allotted? - [ ] Allocators - [ ] Subscribers - [x] Allottees - [ ] Beneficiaries > **Explanation:** The applicants become allottees upon receiving their allotted shares, making them new shareholders of the company. ### Why might a company split the Application and Allotment Account? - [x] For detailed tracking of the application and allotment process. - [ ] To reduce taxation. - [ ] To increase share value. - [ ] Because it’s legally required. > **Explanation:** Splitting the account provides a clearer, more detailed tracking of each phase in the share application and allotment process. ### What document do potential shareholders submit to apply for shares? - [x] Application Form - [ ] Shareholding Contract - [ ] Allotment Agreement - [ ] Subscription Form > **Explanation:** Potential shareholders submit an Application Form accompanied by payment to apply for shares. ### Which term refers to the account a company uses to track funds from share applications until allotment? - [ ] Allottees Account - [ ] Bank Account - [x] Application and Allotment Account - [ ] Dividend Account > **Explanation:** The Application and Allotment Account is used to track funds received from applications up until the shares are formally allotted to applicants. ### Upon completion of allotment, what is debited? - [ ] Bank Account - [x] Application and Allotment Account - [ ] Share Premium Account - [ ] Income Account > **Explanation:** The Application and Allotment Account is debited, reflecting the transfer of funds from temporary holding to the company's share capital. ### What entry is made with the excess funds if the applications exceed the available shares? - [ ] Debit Share Premium Account; Credit Bank Account - [ ] Debit Application and Allotment Account; Credit Share Capital Account - [ ] Debit Bank Account; Credit Allottees Account - [x] Debit Application and Allotment Account; Credit Bank Account > **Explanation:** The excess application money is returned, thus the Application and Allotment Account is debited, and the Bank Account is credited accordingly.

Thank you for learning about the accounting process involving Application and Allotment Accounts and for taking the quiz. Keep expanding your financial knowledge for continued success in your accounting endeavors!

Tuesday, August 6, 2024
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Share Capital January 1, 1

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