A Guide to Share Capital in Xero

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What is Share Capital?

‘Share Capital’ is the name given to the formal raising of capital (normally in the form of cash) by a company.

Each ‘Share’ bought in a company entitles the buyer to part-ownership of the company, generally in proportion to the number of shares in total.

In addition to the purchase of shares made directly from the company issuing the shares, shares can also be bought and sold by individuals and companies within a secondary market.

Different rights may be attached to shares issued, such as:

  • Voting rights
  • Entitlement to dividends

 

The specifics will be noted in the company’s formal documentation.

Which type of businesses can have share capital?

Limited Companies can issue share capital. There are 2 main categories of Limited Company:

Public Limited Companies (PLCs) trade their shares on a formal market/stock exchange.

Private Limited Companies (LTDs) cannot trade their shares on an open market, and therefore shares in such companies are held by individuals who are generally known to each other. Most small businesses that have incorporated as a company are LTDs.

Note that Self Employed individuals (i.e. Sole Traders and Partners) cannot issue share capital as the individuals behind those businesses are the same legal entity as the business.

Are there different types of share capital?

Limited Companies can issue different classes of share capital.

Each class of share capital can have different rights attached to them (e.g. voting rights & entitlement to dividends being the most commonly adjusted rights).

You may have heard of ‘Alphabet Shares’, which are commonly used to separate shareholders into separate classes of shares.

For example, Ordinary A Shares, Ordinary B Shares, Ordinary C Shares etc

A class of ‘Preference Shares’ is sometimes created when investors require a fixed rate of dividend return engrained into the investment agreement.

Can a director hold share capital in the same company?

In a word, yes.

A director is an office holder within a company that helps to manage the day-to-day operations, or overall direction of the company.

There is nothing stopping a director of a company also owning shares in the same company. In fact, this is the case for most small companies.

Is all money introduced by a shareholder share capital?

No, not necessarily.

Shareholders, especially if they are also a director, often inject money into their company in the form of a loan transaction. Take a look at our guide to the director’s loan account in Xero for detailed information.

Money injected into the company can only be classed as share capital if it has been formally documented through an issue of share capital via Companies House.

How do I record share capital introduced in Xero?

Step 1 – From the Dashboard in your Xero account, head to the Bank Reconciliation screen by clicking the ‘Reconcile xx items’ button.

Screenshot of the Reconcile button being clicked on

Step 2 – Scroll down until you find the desired payment.

Screenshot of a share capital transaction being located in the Bank Reconciliation Screen

Step 3 – You need to fill out each field in the box opposite. In the ‘Who’ field, enter the name of the contact who provided the share capital.

Screenshot of 'Bethan Bloggs' being entered into the Who field

Step 4 – In the ‘What’ field, select the desired account – in this example, we want to use the ‘Capital – Ordinary Shares’ account. You can find this by either typing in the account’s code in the search bar (950), or by using the drop-down menu.

Screenshot of the 'Capital - Ordinary Shares' account being chosen from the drop-down menu in the What field

Step 5 – In the ‘Why’ field, you can write a short description for the transaction.

Screenshot of the text 'Paid in by Bethan' being entered into the Why field

Step 6 – Ensure that ‘No VAT’ is selected.

Screenshot showing that No VAT has been selected

Step 7 – Once you’re done, click ‘OK’ to reconcile the transaction.

Screenshot of OK button being clicked in order to reconcile the transaction

How do I record share capital introduced by multiple shareholders in Xero?

Step 1 From the Dashboard in your Xero account, head to the Bank Reconciliation screen by clicking the ‘Reconcile xx items’ button.

Screenshot of the Reconcile button being clicked on

Step 2 – Scroll down until you find the first share capital payment that you would like to record. In this example, two separate contacts have each transferred £50 of share capital – below is the first payment of £50 from Ben Bloggs.

Screenshot of a share capital transaction being located in the Bank Reconciliation Screen

Step 3 – Fill out each field in the box opposite the transfer.

-In the ‘Who’ field, enter the contact who made the payment.

-In the ‘What’ field, select the desired account – we recommend using the ‘Capital – Ordinary Shares’ account (the code for this is 950).

-Finally, in the ‘Why’ field you can enter a description for the transaction.

Screenshot of the Who, What and Why fields being filled in the opposite section

Step 4 – Ensure that ‘No VAT’ is selected.

Screenshot showing that No VAT has been selected

Step 5 – Once you’re done, click ‘OK’ to reconcile the transaction.

Screenshot of OK being clicked in order to reconcile the transaction

Step 6 – Locate the other payment that you would like to record. In this example, the other £50 making up this share capital payment was transferred by another contact, Toby Bloggs.

As before, you need to enter the relevant information in the box opposite. In the ‘What’ field, be sure to enter the same account that you used for the previous transaction.

Screenshot of second share capital payment's fields being filled out

Step 7 – Ensure that ‘No VAT’ is selected.

Screenshot showing that No VAT has been selected

Step 8 – Once you’re done, click ‘OK’ to reconcile the transaction.

Screenshot of OK being clicked to reconcile the transaction

How do I record share capital paid in excess of the nominal value of the shares in Xero?

Step 1 From the Dashboard in your Xero account, head to the Bank Reconciliation screen by clicking the ‘Reconcile xx items’ button.

Screenshot of the Reconcile button being clicked on

Step 2 Scroll down until you find the desired payment. Because this share capital payment of £5000 exceeds the nominal value (£100) of our example shares, £4900 needs to be allocated to a Share Premium Account.

Screenshot of share capital transaction being located in Bank Reconciliation screen

Step 3 To set up a Share Premium Account, you’ll first need to head over to the Organisation drop-down menu and click Settings.

Screenshot of Settings being selected from Organisation drop-down menu

Step 4 – Scroll down and choose ‘Looking for advanced settings?’

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Step 5 – Select ‘Chart of accounts’

Screenshot of Chart of Accounts being chosen

Step 6 Click ‘Add Account’

Screenshot of Add Account option being chosen

Step 7 – Fill out each of the fields in the pop-up window.

-Under ‘Account Type’, select Equity from the drop-down menu.

-Under ‘Code’, enter a unique number for the account, ideally one that is close to your ‘Capital – Ordinary Shares’ account.

-Finally, enter a title for the account in the ‘Name’ field.

Screenshot of the Account Type, Code, and Name fields being filled out.

Step 8 – Click ‘Save’. The account will now be ready for use.

Screenshot of Save button being clicked

Step 9 – Head back to the share capital payment on the Bank Reconciliation screen and click ‘Add details’.

Screenshot of Add Details option being chosen

Step 10 – You’ll now be brought to a pop-up window. In the ‘From’ field, enter the name of the shareholder (the ‘Date’ field will be filled in automatically).

Screenshot of the From and Date fields being filled out

Step 11 You need to change the first line of this transaction to ensure that the nominal value of the share capital is allocated to the ‘Capital – Ordinary Shares’ account. 

Screenshot of Unit Price column being edited on first row to read £100 instead of £5000
Screenshot of Account column being edited on first row so that the Capital -Ordinary Shares account is chosen

Step 12 – You now need to allocate the money that was paid in excess of the nominal share value to the Share Premium Account.

You can do this by creating a new line and inputting the amount under the ‘Unit Price’ column, and then selecting the Share Premium Account under the ‘Account’ column.

In this example, we’ve allocated the remaining £4900 to our Share Premium Account.

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Step 13 – Once you’re done, click ‘Save Transaction’.

Screenshot of the Save Transaction button being clicked

Step 14 – Finally, click ‘Reconcile’.

Screenshot of Reconcile button being clicked

How do I record unpaid share capital in Xero?

Step 1 – Click the ‘+’ icon found at the top-right of the screen, then select ‘Manual Journal’ from the drop-down menu.

Screenshot of Manual Journal being selected form the drop-down + menu

Step 2 – You’ll now be brought to the ‘New Manual Journal’ screen. In the ‘Narration’ field, type in ‘Unpaid Share Capital’, then input the current date in the ‘Date’ field.

Screenshot of the Narration and date fields being filled out. 'Unpaid Share Capital' has been entered into the Narration field.

Step 3 – You now need to fill out the first line of the journal. In the Description column, type in ‘Unpaid Share Capital’.

Screenshot of the words 'Unpaid Share Capital' being entered into the Description column on the first line.

Step 4 – In the Account column, select the ‘Capital – Ordinary Shares’ account.

Screenshot of the Capital - Ordinary Shares account being selected in the Account column on the first row

Step 5 – In the Credit column, enter the amount of money that has been issued as share capital. In this example, we’ll set this figure at £100.

Screenshot of £100 being entered into the Credit column on the first line.

Step 6 – We now want to show that the amount hasn’t been paid yet. To do this, we first need to create a debtor account. On the next line down under the Account column, select ‘Add new account’ from the drop-down menu.

Screenshot of New Account option being selected from drop-down menu of the Account column, second row.

Step 7 – In the ‘Account Type’ field, select ‘Current Asset’.

Screenshot of 'Equity' being chosen from Account drop-down menu in the Add New Account window

Step 8 – Enter a unique code for the account in the ‘Code’ field.

Screenshot of the number 450 being entered into the Code field

Step 9 – Enter a short title for the account in the ‘Name’ field.

Screenshot of Unpaid Share Capital - J Bloggs being entered into the Name field

Step 10 – Ensure that ‘No VAT’ is selected.

Screenshot of No VAT being selected

Step 11 – Click ‘Save’.

Screenshot of Save button being clicked

Step 12 – Click ‘Post’.

Screenshot of Post button being clicked

How do I record different classes of share capital in Xero?

Step 1 Head over to the Organisation drop-down menu and select ‘Settings’.

Screenshot of Settings being selected from Organisation drop-down menu

Step 2 – Scroll down and choose ‘Looking for advanced settings?’

blank

Step 3 – Select ‘Chart of accounts’

Screenshot of Chart of Accounts being chosen

Step 4 Click ‘Add Account’

Screenshot of Add Account option being chosen

Step 5 – You’ll now be brought to the ‘Add New Account’ pop-up window. Under ‘Account Type’ choose ‘Equity’ from the drop-down menu.

Screenshot of 'Equity' being chosen from Account drop-down menu in the Add New Account window

Step 6 – Enter a unique code for the account in the ‘Code’ field, ideally one that is close to your ‘Capital – Ordinary Shares’ account.

Screenshot of the number 951 being entered into the Code field

Step 7 – In the ‘Name’ field, enter a title for the account that corresponds to the type of shares you would like to allocate to it – for example, ‘Ordinary A Shares’.

Screenshot of Ordinary A Shares being entered into the Name field

Step 8 – Ensure that ‘No VAT’ is selected.

Screenshot of 'No VAT' being selected

Step 9 – Click ‘Save’. The account will now be ready for use, so you’ll be able to allocate incoming shares of the appropriate class to it.

Screenshot of Save button being clicked

How do I record dividends paid to shareholders in Xero?

Shareholders of a company are often paid dividends.

Small company owners often use the receipt of dividends from their company as a tax-efficient way of drawing out profits into their personal bank account.

Our Which Xero account should I use for dividends? article looks at how to correctly record the payment of dividends to shareholders in Xero.

What is Xenon Connect?

Our cloud software, called Xenon Connect, connects to Xero and analyses your business bookkeeping. It provides you with a specific checklist of issues that should be reviewed. It also provides instructions on how to fix the issues – or it does it automatically for you at the click of a button.

Have you found out what your bookkeeping health check score is yet?

Take Xenon Connect for a test drive today!

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Xenon Connect

Xenon Connect detects and cleans up bookkeeping errors in Xero and provides powerful financial insight to keep you firmly in control of your business.

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