At the time of allotment of shares, what happens to the application money received when the company accepted the offer made by the applicants?

It is transferred to the share capital account

The correct answer is option 2- It is transferred to the share capital account.

When applicants accept the share allotment offer, the application money they initially paid becomes a part of the share capital of the company. This money is no longer held separately in the share application account; rather, it is formally recognized as part of the capital structure of the company.

Allotment of Shares
(Implications from accounting point of view)

• It is customary to ask for some amount called “Allotment Money” from the allottees on the shares allotted to them as soon as the allotment is made.

• With the acceptance to the offer made by the applicants, the amount of application money received has to be transferred to share capital account as it has formally become the part of the same.

• The money received on rejected applications should be fully returned to the applicant within period prescribed by law/SEBI.

• In case lesser number of shares have to be allotted, than those applied for the excess application money must be adjusted towards the amount due on allotment from the allottees.

• The effect of the later two steps is to close the share application account which is only a temporary account for share capital transactions.