Reduction of share capital

A Company has obtained a share capital increase.

A company may issue shares in the form of convertible bonds, which directly represent ownership of the business and may be converted into shares of the issuer. For example, the terms of a convertible bond may provide that the bondholder may convert the bond into an equivalent number of shares of the issuer’s stock at a price per share equal to the current market price of the issuer’s stock on the date when the bond originally was issued.

Home » Accounting Blog » Accounting Concepts: Normal Balance

Feb 26, 2021
Accounting Blog by audit site

The meaning of normal balance in accounting is something one would learn at the very beginning of their bookkeeping and accounting studies. Let’s find out what it is all about and what role it plays in bookkeeping records.

Definition

Normal balance is defined as the increase side of a bookkeeping account. Depending on its classification, an account is increased either on the debit or credit side. As you might already know, credit is how much is recorded on the right side of a T-account, while debit is how much is recorded on the opposite side.

Accordingly, Assets will normally have a debit balance and Liabilities – credit. When it comes to the Owner’s Equity, things can get a little confusing because it has a number of components. Just like Liabilities, the Owner’s Equity normally has a credit balance. So, anything that increases the Owner’s Equity will also have a credit normal balance. At the same time, anything that reduces this account will have normal debit balances.

To maintain the balance, the left side (debits) has to equal the right side (credits). So, if you a debit entry, you are going to have to have a credit entry to equal it. There might be transactions that require one debit entry and two credit entries, which must add up to the same amount as that one debit entry.

Using the Normal Balance

What is the significance of the normal balance? Knowing the normal balance of each account is key to being able to records the transactions correctly and maintain the balance in the accounting equation. This information is also valuable when it comes to spotting any inconsistencies. For example, if a Liability account has a debit balance, then it is necessary to check if no errors were made in the bookkeeping records.

At the same time, just because the normal balance of a particular account is debit (or credit), it does not mean the account’s balance will be debit (or credit). Normal balance is just a way of telling which side the transaction would increase and which side it would decrease.{“@context”:”https://schema.org”,”@type”:”FAQPage”,”mainEntity”:[{“@type”:”Question”,”name”:”Why does a company reduce its share capital?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” A company reduces its share capital to raise money.”}},{“@type”:”Question”,”name”:”How do you account for reduction in share capital?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” The company has reduced its share capital by £1,000,000.”}},{“@type”:”Question”,”name”:”What is the difference between buy back and reduction of share capital?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” A buy back is when a company buys its own shares from the market. A reduction of share capital is when a company reduces the number of shares it has in circulation.”}}]}

Frequently Asked Questions

Why does a company reduce its share capital?

A company reduces its share capital to raise money.

How do you account for reduction in share capital?

The company has reduced its share capital by £1,000,000.

What is the difference between buy back and reduction of share capital?

A buy back is when a company buys its own shares from the market. A reduction of share capital is when a company reduces the number of shares it has in circulation.