CHAPTER 9 STOCKHOLDERS’ EQUITY 9 1 Overview of equity 9 2 Share Capital 9 3 Reserves in Business 9 4 Dividend 9 5 Presentation and Disclosure FINANCIAL ACCOUNTING 2 64 CHAPTER 9 STOCKHOLDERS’ EQUITY O[.]
64 CHAPTER STOCKHOLDERS’ EQUITY 9.1 Overview of equity 9.2 Share Capital 9.3 Reserves in Business 9.4 Dividend 9.5 Presentation and Disclosure FINANCIAL ACCOUNTING 65 CHAPTER STOCKHOLDERS’ EQUITY OBJECTIVE: After studying this chapter, you should be able to: Identify types of equity Recognition and accounting for shares and other reserves in business Identify types of dividends and accounting treatment for dividends Understand the requirement of disclosure of Equity FINANCIAL ACCOUNTING 9.1 Overview of equity 9.1.1 Types of organization 9.1.2 Types of equity 9.1.1 TYPES OF ORGANIZATION 67 Types of business organisation Sole traders MAI ANH PHAM, ACCA, MCs Partnerships Limited liability companies 6.2018 68 9.1.1 TYPES OF ORGANIZATION Types of business Limited liability companies: incorporate to take advantage of : limited liability MAI ANH PHAM, ACCA, MCs Sole trader: who work for themselves Partnerships: two or more people decided to share the risks and rewards 6.2018 9.1.2 TYPES OF EQUITY Equity in the Sole trader • equity capital is represented simply by ‘capital’ • A company's equity is introduced by an individual, called sole trader or owner (proprietor) • Any expenditures for owner’s personal purpose is treated as a drawing from equity 9.1.2 TYPES OF EQUITY Equity in the Limited company includes: Share capital and Premium share, other reserves • equity capital is represented by share capital and reserves • A company's initial capital is divided into units of equal size, known as shares, issued to individuals or companies, called shareholders • The total capital raised is referred to as equity share capital • Ownership of a share entitles the shareholder to receive payment of a share of profit, or dividend • By law, shares must have a par value 9.1.2 TYPES OF EQUITY Equity in the Partnership • A partnership agreement contains the terms of the partnership, in particular the financial arrangements between partners and how profit/loss should be appropriated • Capital: Each partner puts in a share of the capital Any minimum fixed amount should be stated • Drawings Partners can withdraw profits from the business just like sole traders • Profit-sharing ratio (PSR) Partners can agree to share residual profits and losses after interest and salaries in any profit-sharing ratio they choose 9.2 Share Capital 9.2.1 Types of shares 9.2.2 Accounting for share capital 9.2.1 TYPES OF SHARE Equity – Share capital Ordinary share Preference share Right issues Stock split Share repurchase 9.2.2 ACCOUNTING FOR SHARE CAPITAL Equity - Accounting for preference share When shares are issued at their par value and they are fully paid: DEBIT Cash CREDIT Preference share (par value) £ X £ X When shares are issued at a premium to their par value, and the full amount is paid: £ £ DEBIT Cash CREDIT Preference share (par value) CREDIT Share premium (excess over par value) X X X When shares are issued at their par value but an amount remains uncalled by the company £ X £ DEBIT Cash X CREDIT Preference share (called-up amount of issued shares) When shares are issued and called-up at their par value but an amount remains £ £ unpaid: DEBIT Cash X Other receivables (unpaid capital) X CREDIT Preference share (par value) X 9.2.2 ACCOUNTING FOR SHARE CAPITAL Equity – Right issue Accounting treatment Amounts from retained earnings and share premium may be reclassified as share capital in a bonus issue: DEBIT: Share premium DEBIT: Retained earnings CREDIT: Share capital 9.3 Reserves in Business 9.3.1 Types of reserves 9.3.2 Accounting for Retained earning 9.4.3 Accounting for other reserves 9.3.1 TYPES OF RESERVES A company might have a number of different reserves, each set up for a different purpose, including the following which are examinable in Accounting: retained earnings share premium other reserves 9.3.1 TYPES OF RESERVES Retained earnings: A reserve used to accumulate the company's retained earnings Retained earnings comprise the income (profits and gains less losses) that the company retains within the business, ie, income that has not been paid out as dividends or transferred to any other reserve These are profits earned by the company and not appropriated by dividends, taxation or transfer to another reserve account Provided that a company is earning profits, this reserve generally increases from year to year, as most companies not distribute all their profits as dividends Dividends can be paid from it: even if a loss is made in one particular year, a dividend can be paid from previous years' retained earnings ... interest and salaries in any profit-sharing ratio they choose 9 .2 Share Capital 9 .2. 1 Types of shares 9 .2. 2 Accounting for share capital 9 .2. 1 TYPES OF SHARE Equity – Share capital Ordinary share... and accounting treatment for dividends Understand the requirement of disclosure of Equity FINANCIAL ACCOUNTING 9. 1 Overview of equity 9. 1.1 Types of organization 9. 1 .2 Types of equity 9. 1.1... Retained earnings CREDIT: Share capital 9. 3 Reserves in Business 9. 3.1 Types of reserves 9. 3 .2 Accounting for Retained earning 9. 4.3 Accounting for other reserves 9. 3.1 TYPES OF RESERVES A company