Question

When a company issues fully paid shares to promoters for their services, the journal entry will be:

• A. Bank A/c Dr.
  To Share Capital A/c
• B. Incorporation Costs A/c Dr.
  To Share Capital A/c
• C. Promoters Personal A/c Dr.
  To Share Capital A/c
• D. Promotion Expenses A/c Dr.
  To Share Capital A/c

Hint:

Remember that "Promotion Expenses" is a broader term, but "Incorporation Costs" specifically refers to the legal and administrative fees of bringing a company into existence, which is the primary service provided by promoters.

Answer 1

The Correct Option is B

Concept: Promoters are individuals who undertake the necessary steps to form a company, such as preparing legal documents and securing initial capital. Often, instead of receiving cash, they are compensated for these pre-incorporation services through the allotment of fully paid-up shares.

Step 1: Identifying the nature of the transaction.
The services provided by promoters are considered part of the cost of setting up the company. These costs are technically known as Incorporation Costs or Formation Expenses. Since the company is issuing shares, the Share Capital Account must be credited to reflect the increase in equity.

Step 2: Determining the Debit and Credit entries.
Debit: The expense or asset created by the promoters' work. In accounting standards, this is debited to the Incorporation Costs Account (or sometimes the Goodwill Account). Credit: The Share Capital Account, as the company is fulfilling its obligation by providing ownership stakes. The most precise entry is: \[ \text{Incorporation Costs A/c \dots Dr.} \] \[ \text{\hspace{1cm} To Share Capital A/c} \]