BDFA 2103

Financial Accounting and Reporting I

TOPIC 8
Accounting for Liability and Owner’s Equity
 Extract from
Gamuda Berhad
 Extract from
Gamuda Berhad
LIABILITIES

▹ Liabilities represent an obligation of an entity

▹ This obligation needs to be satisfied by the entity

through payment of cash or the surrendering of
entity's assets or services.

▹
LIABILITIES
…cont’ Malaysian accounting standard FRS 101-Presentation of Financial
Statement :
 CURRENT
LIABILITIES
Current liabilities are obligations by an entity that need to be settled
using current assets or by creating another current liability

within a period of one year

 Account Payable
Bank Loans
• Daily operations dealing with purchasing or
receiving goods or services • notes payable represent borrowing made by
businesses.
• Nature on the credit side
• Debited upon payment • Borrowings can be long term or short term. Short
• Transaction recorded base don date of inv term paid within a period of one year.

• Borrowings are subjected to interest.

• Interest rate is normally quoted per annum

Bank Overdraft

• facility given by banks to current account holders

• draw cheques larger than the holder's bank balance.

• indicated by a credit balance in a firm's cash account

• Bank will charge firm fixed interest rate for the

overdraft amount.

• The original amount plus the interest must be paid by

the current account's holder
Bill Payable
 NON-
CURRENT ▹ Long term liabilities are obligations of an entity that need to be settled in a
LIABILITIES period of more than twelve months than the date of reporting.

▹The obligation is settled by giving up (sacrificing) the entity's current assets.

NON-CURRENT LIABILITIES

involves securing loan

against an asset
issued by an entity in
borrowings that needs to
order to finance its in the event that the
be paid within a period of
activities borrower cannot pay the
more than twelve months amount, the lender can
sell off the assets
secured
Bonds and ▹another way to secure bigger funds instead of going to a bank
Debentures
▹normal for a business that requires a large expansion or
substantial funds to finance a mega project.

▹in the early days of the Malaysian bond market :

- heavy reliance on financial institutions

- 1997-1998 Asian financial crisis which really hit
financial institutions and had a domino effect on
corporation had forced the government to pursue the
development of a corporate bond market to divert the
over-reliance on bank loans Prakash, 2013.
Comparison between Bonds and Debentures
DEFINITION OF
EQUITY ▹Statement of Financial Position and the Statement of Changes in
Equity

▹book value of shareholder capital

▹value that is attributable to the owners of a business

▹derived from the difference between all of the business assets

and liabilities on the face of the companies' balance sheet.

For example, a company bought a machine for a cost of

RM500,000. The machine is acquired through a bank loan of
RM300,000 and the balance amount is financed by the business
owners equity
 The Equity of a Single Proprietorship

• will have only one account i.e. Capital account

• balance of capital account represents

original amount contributed by the owner

any increase or decrease as a result of profits or losses

any increase as a result of additional contribution by owner

any decrease as a result of drawings made by owner

1
3

2
The Equity of a
Partnership

separate the capital and drawings

accounts of partners because :

 owners might not contribute capital in

equal amounts,

 make equal amounts of drawings;

 Do not share profits the

same way
Reporting equity of a
partnership
Equity for
Company
 defined as having an independent legal entity

 formed by a group of people to incorporate association,

which is an artificial person

 formation has perpetual succession, a common seal, a

common share capital comprising transferable shares, and
carries limited liability in relation to its members.
The Equity of
a Company
composition of owners' equity of
company :

1. shareholder's fund

2. retained earnings

3. reserves
 composition of
equity of a
company buying and selling of
shares are done in two
Shareholders Fund different markets.

large funds to finance a project, company may offer its shares

and invite the public to buy the shares via a prospectus.

The prospectus is a document which contains information

about the company operations and shares offered.
The shares can be offered by the company based on its
required price
A share has a par value assigned by the company that issued it
For example, a company may set its share at a par value of
RM1 but the sales price might be set at RM2.
2. Retained
Earnings
 accumulation of company's net
earnings (profit) after
tax after distributions to shareholders
and/or reserves.
 Earning after tax will increase
retained earnings,
 while net losses will decrease the
retained earnings' balance
single proprietorship and partnership :
 the business is not taxed for the profit
it makes
 the individual will need to report the
profit of the business as its income,
and will be taxed individually.
Company :
 the company will have to pay tax on
their income or profit.
 Therefore, the income statement of
company will include an additional
item of expense which is tax expense
2. Retained
Earnings
 reported in the balance sheet is net after deducting dividend
and transfer of earnings to reserves

 Two type of dividend:

 Interim dividend - declared and paid during the current

financial year,

 Final dividend - Final dividend is declared at the end of the

current financial year and will be paid in the next financial
period
1. Shareholders
Fund Ordinary Shares
 Holders of common shares are the
true owner of a company.
 They have the rights to vote.
 Ordinary shareholders' right to
dividend is after preference
shareholders.
 Ordinary share's dividend amount
is not fixed
 company do not have an
obligation to declare dividends
for ordinary shares.
Preference Shares
 do not have the rights to vote.
 rights to receive dividends before
ordinary shareholders
 rights to the residual assets before
ordinary shareholders
 dividend amount is fixed.
 obligation to pay this dividend
regardless whether business is good
or bad.
 in ratio analysis, preference shares
are treated as liabilities rather than
equity
3. Reserves
funds from earning set aside for

 to cover themselves from future loses

 to buy fixed assets;

 to repay liabilities

 to buy back their shares.

 common reserve created is the general reserves, and this will be reported
in the equity section of the balance sheet
Equity component of a company Format of statement of retained earnings
End Of Topic 8

Thank you!