EQUITY

ACC 1101 FINANCIAL ACCOUNTING AND REPORTING 1

Overview
 What is equity?
• Equity is the residual interest (leftover) in the assets of the entity
after deducting all its liabilities.
• Equity is the capital that shareholders contribute to have a share
ownership in the entity in the form of shares
 Two Types of Equity
1. Capital
• Capital is funds contributed by owners of the entity, normally called
share capital for companies.
• in the form of shares; shareholders are the owners of the entity

2. Reserve
• Reserve is an equity account attributable to the owners of the entity
other than the amounts directly contributed by the owners.
• It is an amount set aside for future contingencies (unforeseen events)
and/or reinvestment for future growth
 Two types of reserve
REVENUE
• Reserve that is created from
revenue profits that an entity
earns from the daily business
operations
• % of profits set aside / not
distributed as dividends
• Example: Retained Earnings;
General Reserves
CAPITAL
• Reserve that is created to meet
a specific purpose such as to
maintain the entity’s capital
structure or to redeem long
term debt such Debentures
• Example: Capital Redemption
Reserves; Sinking Fund Reserves
- Non-distributable reserves
 Share Capital
• 2 main types of shares
a) Ordinary Shares
b) Preference Shares

• Shares differ in their:

- voting rights;
- priority to receive dividends;
- the return on invested capital in the event of liquidation or
winding up of the company.
 Terms in share capital
• Authorized capital
maximum share capital that a company can legally issue as stated in memorandum of
association of the company. It can be changed later by shareholders’ approval.
• Issued capital
share capital that has been successfully issued to shareholders regardless of payment
received from shareholders.
• Unissued capital
share capital that is not yet issued.
• Paid-up capital
issued capital which has been paid by successful applicants. This capital includes
capital paid in advance (call in advance) although it is not yet called for payment (in
the case of payment by stages).
 Ordinary Shares
• Give rights to ownership (effective owners)
• Carry voting rights
• Bear the greatest risk but stand to receive the highest return
• Dividends received are not fixed
• Dividends entitlement ranked last
• Distribution of assets upon liquidation ranked last
 Preference Shares
• Dividend is fixed
• Carry preferential rights
- dividend payment ranked before payment to ordinary
shareholders
- priority in distribution of assets upon liquidation
• Carry no voting rights
 Deferred Shares
• known as founder shares
• given as a gift/token to founders to appreciate their efforts in
founding/forming the company
• last priority to receive dividend and capital repayment on liquidation
(i.e., after ordinary shareholders)
Equity Vs Liability instruments
 Issuance of shares
• Initial public offering (IPO)
• the first sale/offer of shares made to public investors.
• main purpose: to raise capital
• companies listed on the stock exchange (Bursa Malaysia) can issue
shares to public, provided in compliance with Securities Commission’s
(SC) requirements
• as at August 2009, two markets in Bursa Malaysia – Main Market and
ACE Market (Access, Certainty and Efficiency)
 Accounting entries for issuance of shares
1. Issue of ordinary shares

Debit Cash/Bank XX
Credit Ordinary Shares Capital XX

2. Issue of preference shares

Debit Cash/Bank XX
Credit Preference Shares Capital XX
 Changes in capital structure
• Movement in share capital can be due to:
1. Bonus (Script) issue
2. Rights issue
 Bonus Issue
• shares issued to existing shareholders free of charge (FOC)
• often, in proportion to shareholdings
• example: Bonus Issue = Basis of 2 for 5 meaning that, shareholders will be
given 2 shares ‘FOC’ for every 5 shares held
• there is no cash impact (inflow/outflow of funds) BUT only dilution of net
asset value
• recommended when has large accumulated profits but does not
wish/unable to distribute them as cash dividends (e.g. due to company’s
policy)
• all reserves can be utilised for bonus issue purposes (e.g. share premium,
retained profit, general reserves etc.)
 Illustration on bonus issue
• ABC Bhd has in issue 100,000 units ordinary shares at RM2 per share.
The company plan to issue bonus share of 2 per 5 unit held. Thus,
Bonus shares = (100,000 / 5) x 2 = 40,000units

• Revised total units of Issued ordinary shares:

Bal in the beginning of the year = 100,000 Bonus issue = 40,000
Revised value of shares per unit
= RM200,000 / 140,000 = RM1.43
 Accounting entries for bonus issue

DR Bonus Shares
CR Ordinary Shares
(Issuance of bonus share)

DR Reserves
CR Bonus Shares
(Bonus shares derived from the reserve)
 Rights Issue
• main purpose: to raise additional capital
• an invitation to existing shareholders to purchase additional shares in proportion
to their shares held
• Right issue is made at a price that is lower than the market price
• The shareholders may decide to:
a) accept the offer to take up the shares;
b) sell the ‘rights’ to a third party;
c) renounce the ‘rights’ in favour of the company, whereby the company
may offer the shares in the open market
• accounting entries:
DR Cash XX
CR Ordinary Share Capital XX
 Dividends
• Distribution of profits to shareholders of a company
• Section 131 and 132 of the Companies Act 2016 state that cash dividends
may only be paid to shareholders from the profit of the business if the
company is solvent.
• Cash dividends from distributable reserves (retained earnings)
• Share dividends from other reserves (capital reserve)
• Dividends paid on equity instruments are treated as appropriation of profits
• Dividends declared should not be treated as liability until approved in AGM
• Interim and final dividends
Three dividend dates are relevant

• The board of directors announces the intention

Declaration to pay the dividend, and a liability is created.
date

• This is the date the corporation records the

Date of stockholders that will receive dividend checks.
record

• This is the date the dividend is paid to the

Payment stockholders.
date

13-20
 Accounting entries for dividend
1. When dividends are declared (liability is created)
Dr Dividends
Cr Dividends payable

2. When dividends are paid

Dr Dividends payable
Cr Cash