Share application money is the amount received by a company from applicants who wish to purchase its shares. It is the money received in respect to an initial public offering of shares. This money can be more or less than the actual amount anticipated in respect to the number of shares floated. The recognition of share application money in a balance sheet should be carefully recorded; otherwise, it will lead to misstatement of the financial position of a company. These funds can be represented on a balance sheet in various states.
As Current Liability
Share application money may be reported on a balance sheet as current liability. Usually, during shares subscription, payment is divided into payment on application, on allotment and call payments. The total amounts received on application are carried forward as current liability until such time when stock is allotted. This is because not every subscription is incorporated in the amount of subscribed share capital. The excess of application funds is actually a current liability to a company.
Share application monies are converted to equity capital of an entity after allotment of shares to qualifying applicants. This means that the share application money becomes equity after the completion of the allotment process. It may, therefore, be recorded as equity share capital on the balance sheet as it awaits issue of stock.
A Financing Source Other than Share Capital and Reserves
The share application money awaiting allotment can be represented on the balance sheet separately between the equity capital and reserves. This will express it as distinct from equity and reserves. Any user of the balance sheet information will have a clear view of the extra funds since they are separately identified.
As an Asset
The applicants who wish to buy shares pay their application money to the company’s bank account. This money increases the cash in the company’s bank account, which consequently means that the current assets of the company increase by an amount equal to the share application money. It is in respect to this that the share application money can be an asset on the balance sheet.