Oversubscription and Pro-Rata Allotment of Shares

Oversubscription sounds like a difficult company accounts topic, but the idea is actually very simple.

A company offers a fixed number of shares to the public. More people apply than the company can allot. So the company has to decide who gets shares, who gets money back, and how any extra application money will be adjusted.

That is all oversubscription means.

The real confusion starts when the company does not simply reject the extra applications. Instead, it may allot shares proportionately. This is called pro-rata allotment, and it is one of the most important parts of share capital questions.

Once you understand that one line, the entries become much easier. You are not memorising random debits and credits. You are tracking money that came in, money that became share capital, money adjusted against allotment, and money refunded if needed.

What Oversubscription Means

Oversubscription happens when applications are received for more shares than the company has offered.

For example:

Shares offered: 40,000
Applications received: 50,000 shares

Here the company cannot allot 50,000 shares because it offered only 40,000 shares. So the issue is oversubscribed by 10,000 shares.

In a share issue, this is usually a good sign for the company because demand is high. But in Accountancy, it creates a practical question:

How should the application money be treated?

That is why this topic belongs inside the application and allotment stage of share capital.

Three Ways a Company May Handle Oversubscription

When there are too many applications, the directors may choose one of these methods:

Method	What happens
Reject some applications fully	Some applicants get no shares, and their application money is refunded
Make pro-rata allotment to all applicants	Every applicant gets fewer shares in the same proportion
Use a combination	Some applications are rejected, some are accepted fully, and the remaining applicants get pro-rata allotment

The third method is common in longer questions because it tests whether you can separate different groups of applicants.

What Pro-Rata Allotment Means

Pro-rata means proportionately.

If shares are allotted in the ratio of 4:5, it means:

For every 5 shares applied, 4 shares are allotted.

So an applicant who applied for 500 shares will receive:

500 x 4/5 = 400 shares

The applicant paid application money on 500 shares, but received only 400 shares. The application money paid on the extra 100 shares is not ignored. It becomes excess application money.

That excess is usually adjusted against allotment money due.

Why Excess Application Money Arises

Let us continue with the same idea.

Suppose application money is Rs. 3 per share.

An applicant applied for 500 shares and was allotted 400 shares.

Particular	Calculation	Amount
Application money received	500 x Rs. 3	Rs. 1,500
Application money needed for allotted shares	400 x Rs. 3	Rs. 1,200
Excess application money	100 x Rs. 3	Rs. 300

The company has Rs. 300 extra from this applicant.

That Rs. 300 may be:

Treatment	When it is used
Adjusted against allotment money	Most common treatment
Refunded	If the question says refund
Credited to calls in advance	If excess is more than allotment due and the question allows it

The most common school-level treatment is adjustment against allotment.

The Main Logic Behind the Entries

The entries become simple if you separate the money into four parts:

Part	Treatment
Application money on shares actually allotted	Transfer to Share Capital
Excess application money of pro-rata allottees	Adjust against Share Allotment, unless told otherwise
Application money on rejected applications	Refund through Bank
Excess beyond allotment due	Refund or transfer to Calls in Advance, as instructed

This is the heart of the chapter.

When shares are allotted, application money on allotted shares becomes share capital. But any money received for shares not allotted cannot become share capital. It must either reduce the amount still payable on allotment or go back to the applicant.

Basic Journal Entries for Pro-Rata Allotment

Let us first write the general entries.

1. Application Money Received

When application money is received from all applicants:

Particulars	Debit	Credit
Bank A/c Dr.	Total application money received
To Share Application A/c		Total application money received

This entry is based on applications received, not shares allotted.

2. Application Money Transferred and Excess Adjusted

When shares are allotted on a pro-rata basis:

Particulars	Debit	Credit
Share Application A/c Dr.	Total application money received from accepted applicants
To Share Capital A/c		Application money on shares allotted
To Share Allotment A/c		Excess application money adjusted

If some applications are rejected, add this line:

Particulars	Debit	Credit
To Bank A/c		Application money refunded on rejected applications

In a combined entry, the debit is Share Application Account, and the credits may be Share Capital, Share Allotment, Bank, and sometimes Calls in Advance.

3. Allotment Money Due

When allotment money becomes due:

Particulars	Debit	Credit
Share Allotment A/c Dr.	Allotment money due
To Share Capital A/c		Capital amount due on allotment

If shares are issued at a premium and premium is collected on allotment, the entry becomes:

Particulars	Debit	Credit
Share Allotment A/c Dr.	Total allotment due
To Share Capital A/c		Capital part
To Securities Premium Reserve A/c		Premium part

4. Allotment Money Received

When the balance allotment money is received after adjusting excess application money:

Particulars	Debit	Credit
Bank A/c Dr.	Net allotment money received
To Share Allotment A/c		Net allotment money received

Remember, if excess application money has already been credited to Share Allotment Account, the company will receive only the balance amount in cash.

Solved Example 1: Pro-Rata Allotment to All Applicants

Sunbeam Ltd. invited applications for 40,000 equity shares of Rs. 10 each. The amount was payable as:

Stage	Amount per share
On application	Rs. 3
On allotment	Rs. 4
On first and final call	Rs. 3
Total	Rs. 10

Applications were received for 50,000 shares. The company allotted 40,000 shares on a pro-rata basis to all applicants. Excess application money was adjusted against allotment.

Step 1: Find the Allotment Ratio

Shares allotted : Shares applied
= 40,000 : 50,000
= 4 : 5

So every applicant receives 4 shares for every 5 shares applied.

Step 2: Calculate Application Money Received

50,000 shares x Rs. 3 = Rs. 150,000

The company received Rs. 150,000 at the application stage.

Step 3: Find Application Money on Shares Allotted

40,000 shares x Rs. 3 = Rs. 120,000

This amount is transferred to Share Capital.

Step 4: Find Excess Application Money

Rs. 150,000 - Rs. 120,000 = Rs. 30,000

This Rs. 30,000 is adjusted against allotment.

Step 5: Calculate Allotment Due and Cash Received

Allotment due:

40,000 shares x Rs. 4 = Rs. 160,000

Less excess application money already adjusted:

Rs. 160,000 - Rs. 30,000 = Rs. 130,000

So the company will receive only Rs. 130,000 in cash on allotment.

Journal Entries

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 150,000
To Share Application A/c		Rs. 150,000
Share Application A/c Dr.	Rs. 150,000
To Share Capital A/c		Rs. 120,000
To Share Allotment A/c		Rs. 30,000
Share Allotment A/c Dr.	Rs. 160,000
To Share Capital A/c		Rs. 160,000
Bank A/c Dr.	Rs. 130,000
To Share Allotment A/c		Rs. 130,000

Now check Share Allotment Account:

Share Allotment Account	Amount
Debit: allotment due	Rs. 160,000
Credit: excess application adjusted	Rs. 30,000
Credit: bank received	Rs. 130,000

The account is balanced.

Solved Example 2: Some Applications Rejected and Remaining Allotted Pro-Rata

Now let us take the more common exam pattern.

Riverdale Ltd. invited applications for 30,000 equity shares of Rs. 10 each. The amount was payable as:

Stage	Amount per share
On application	Rs. 2
On allotment	Rs. 5
On first and final call	Rs. 3
Total	Rs. 10

Applications were received for 45,000 shares. Applications for 5,000 shares were rejected. The remaining applicants were allotted 30,000 shares on a pro-rata basis. Excess application money was adjusted against allotment.

Step 1: Separate the Groups

Group	Shares applied
Rejected applicants	5,000
Applicants considered for pro-rata allotment	40,000
Shares actually allotted	30,000

Do not calculate pro-rata using 45,000 applications. The rejected group is removed first.

Step 2: Find the Pro-Rata Ratio

Shares allotted : Shares applied by accepted group
= 30,000 : 40,000
= 3 : 4

So the accepted applicants receive 3 shares for every 4 shares applied.

Step 3: Calculate Total Application Money Received

45,000 shares x Rs. 2 = Rs. 90,000

Step 4: Split the Application Money

Particular	Calculation	Amount
Application money on allotted shares	30,000 x Rs. 2	Rs. 60,000
Excess application money from pro-rata applicants	10,000 x Rs. 2	Rs. 20,000
Application money refunded on rejected applications	5,000 x Rs. 2	Rs. 10,000
Total application money		Rs. 90,000

The excess application money is Rs. 20,000 because the accepted group applied for 40,000 shares but received only 30,000 shares.

Step 5: Calculate Allotment Due and Net Cash Received

Allotment due:

30,000 shares x Rs. 5 = Rs. 150,000

Less excess application money adjusted:

Rs. 150,000 - Rs. 20,000 = Rs. 130,000

So Rs. 130,000 will be received in cash on allotment.

Journal Entries

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 90,000
To Share Application A/c		Rs. 90,000
Share Application A/c Dr.	Rs. 90,000
To Share Capital A/c		Rs. 60,000
To Share Allotment A/c		Rs. 20,000
To Bank A/c		Rs. 10,000
Share Allotment A/c Dr.	Rs. 150,000
To Share Capital A/c		Rs. 150,000
Bank A/c Dr.	Rs. 130,000
To Share Allotment A/c		Rs. 130,000

This example is important because it shows all three movements together:

Money type	Treatment
On shares allotted	Transferred to Share Capital
Excess from pro-rata allottees	Adjusted against Share Allotment
On rejected applications	Refunded through Bank

The Applicant-Level Trick in Pro-Rata Questions

Sometimes the question gives one applicant who does not pay allotment or call money. This is where pro-rata becomes more interesting.

Suppose the allotment ratio is 3:4.

An applicant applied for 400 shares.

Shares allotted:

400 x 3/4 = 300 shares

If application money is Rs. 2 per share:

Particular	Calculation	Amount
Application money paid	400 x Rs. 2	Rs. 800
Application money needed for 300 allotted shares	300 x Rs. 2	Rs. 600
Excess application money	100 x Rs. 2	Rs. 200

Now suppose allotment money is Rs. 5 per share.

Allotment due from this applicant:

300 x Rs. 5 = Rs. 1,500

But Rs. 200 has already been adjusted from excess application money.

So if this applicant does not pay allotment money, the unpaid amount is:

Rs. 1,500 - Rs. 200 = Rs. 1,300

This matters in forfeiture questions. The applicant may appear to have failed to pay the full allotment amount, but part of it was already covered by excess application money.

Pro-Rata Allotment When Shares Are Issued at Premium

Pro-rata allotment can also appear when shares are issued at a premium.

The rule remains the same:

1. Find the shares actually allotted.
2. Transfer application money on allotted shares to Share Capital or to Share Capital and Securities Premium Reserve if premium is included in application.
3. Adjust excess application money against allotment.
4. Record allotment due, separating capital and premium if premium is collected on allotment.

For example, suppose a Rs. 10 share is issued at Rs. 12, and the payment schedule is:

Stage	Amount per share
Application	Rs. 4
Allotment	Rs. 5, including Rs. 2 premium
First and final call	Rs. 3
Total	Rs. 12

When allotment becomes due, Share Allotment Account is debited with the full Rs. 5 per share. But the credit side is split:

Credit account	Amount per share
Share Capital	Rs. 3
Securities Premium Reserve	Rs. 2
Total allotment due	Rs. 5

If excess application money is adjusted, it reduces the cash to be received on allotment. It does not remove the need to credit Securities Premium Reserve if premium has become due.

A Clean Working Note Format

Before writing the journal entries, make a small working note like this:

Step	Working
1	Shares offered
2	Applications received
3	Applications rejected, if any
4	Applications considered for pro-rata allotment
5	Shares allotted to that group
6	Pro-rata ratio
7	Application money received
8	Application money transferred to Share Capital
9	Excess application money adjusted
10	Application money refunded
11	Allotment due
12	Net allotment money received

This may look like extra work, but it saves time because you stop guessing during the entries.

For a numerical question, your rough work should answer these three questions clearly:

How many shares were applied for?
How many shares were actually allotted?
What happened to the money on shares not allotted?

If these three answers are clear, the journal entries usually fall into place.

Common Mistakes in Oversubscription Questions

Mistake	Why it is wrong	How to avoid it
Transferring full application money to Share Capital	Share capital is recorded only for shares allotted	Transfer only application money on allotted shares
Forgetting rejected applications	Rejected applicants receive no shares	Refund their application money
Calculating pro-rata ratio using total applications even after rejection	Rejected applications are removed first	Use only the accepted pro-rata group
Receiving full allotment money in cash	Excess application money may already be adjusted	Deduct adjusted excess from allotment due
Ignoring excess application money for a defaulting applicant	The applicant may have already paid part of allotment through adjustment	Calculate excess for that applicant separately
Mixing premium with share capital	Premium is credited separately	Split capital and premium according to the payment schedule

Quick Summary

Oversubscription means the company receives applications for more shares than it offered.

In pro-rata allotment, applicants receive shares proportionately. If the ratio is 4:5, an applicant who applied for 500 shares receives 400 shares.

Application money on allotted shares is transferred to Share Capital. Excess application money is usually adjusted against allotment. Money on rejected applications is refunded.

When allotment money is due, Share Allotment Account is debited and Share Capital is credited. If premium is due on allotment, Securities Premium Reserve is also credited.

When allotment money is received, only the balance amount is received in cash after adjusting excess application money.

The most important habit is to prepare a working note before journal entries. Find the allotment ratio, split the application money, and then write the entries.

Frequently Asked Questions

What is oversubscription of shares?

Oversubscription means applications are received for more shares than the company offered. For example, if a company offers 40,000 shares but receives applications for 50,000 shares, the issue is oversubscribed.

What is pro-rata allotment?

Pro-rata allotment means shares are allotted proportionately. If allotment is made in the ratio of 4:5, applicants receive 4 shares for every 5 shares applied for.

What happens to excess application money in pro-rata allotment?

Excess application money is usually adjusted against the allotment amount due. If the excess is more than allotment due, the remaining amount may be refunded or transferred to Calls in Advance, depending on the question.

Is application money on rejected applications transferred to Share Capital?

No. Rejected applicants do not receive shares, so their application money cannot become share capital. It is refunded through Bank Account.

How do I find the pro-rata ratio?

Use this formula:

Shares allotted : Shares applied by the pro-rata group

If 30,000 shares are allotted among applicants who applied for 40,000 shares, the ratio is 30,000:40,000, or 3:4.

What if an applicant who received pro-rata allotment does not pay allotment money?

First calculate the allotment money due on the shares actually allotted. Then deduct the excess application money already adjusted. The balance is the unpaid allotment amount.

Does pro-rata allotment change the share capital amount?

No. Share Capital is based on the number of shares actually allotted and their face value. Pro-rata allotment only decides how many shares each applicant receives and how excess application money is treated.

What is the biggest mistake in pro-rata allotment questions?

The biggest mistake is treating all application money as share capital. Only application money on shares actually allotted becomes share capital. The rest is adjusted, refunded, or transferred as instructed.