Companies raise money from the public for running business. The amount of issue is not some ad hoc amount, but a carefully calculated amount based on business requirements.
Suppose you have to buy a dress, which costs ru. pees 1000. If you have rupees 800 only can you buy the dress? The answer is no. Similarly suppose a company has issued shares to public for rupees 100 crore and if gets only Rs 80 crores, can it run the business. The answer again is No. It means there is no point in keeping rupees 80 crores with the company.
So SEBI (Securities and Exchange Board of India) has made provisions for getting minimum subscription which are as follows :
In the case of public issue of shares, unless 90% of the sum payable on application for shares issued to the public for subscription is received by the company., shares cannot be allotted. In such case, application money shall be refunded within 15 days from the closer of the issue.
Journal Entries on receiving application money :
Bank A/c Dr..
To Share Application A/c
Journal Entry for refund in case minimum subscription not received :
Share Application A/c Dr..
To Bank A/c
It is to be noted that the amount of minimum subscription should be clearly mentioned in the prospectus.