BBS 1st year account Accounting for shareholders equity

Accounting for Shareholders’ Equity, Financial accounting and analysis, Prepared by Tr. Pralhad Sapkota, Sapkota Academy on you tube
Chapter – 11(BBS) : Accounting for Shareholders’ Equity

Concept Shareholders’ / Stockholders’ Equity
Shareholders' equity (or business net worth) shows how much
the owners of a company have invested in the business—either by
investing money in it or by retaining earnings over time. It is the
amount of assets remaining in a business after all liabilities have
been settled. It is calculated as the capital given to a business by
its shareholders, plus donated capital and earnings generated by
the operation of the business, less any dividends issued.

Components/Elements Shareholders’ Equity
1. Common Share/stock:
Common stock = Number of shares issued x Par value per share
2. Preferred stock/Preference share
Preferred stock=Number of preferred shares issued x Par per share
3. Additional paid in capital/share premium/paid in capital in
excess of par (APC)
APC = No. of issued shares x(Issue price – Par per share)

4. Contributed Capital/Capital stock:
It is the amount of shareholders’ equity the shareholders have
contributed to the company. The company received capital
amount from the sale of share(CS or PS) to the shareholders.
Contributed capital = Common & Pref. stock + Additional paid in capital
Or Contributed capital=No of issued shares x Issue price

5. Retained Earning/Undistributed profit / Accumulated earning
/ The amount of not paid as dividend:
RE for the end of a period = Net income–Dividend Paid
6. Treasury stock/Reacquired the co.’s own stock/buy back
share/repurchase shares:
Methods of retirement (purchase and reissue of TS): Negotiation,
Tender price, Open security market price, cost price and par value

Balance Sheet Presentation of Shareholders’ Equity:
Partial balance sheet of ……Company Ltd. as on 31st ….
Particulars Amount Amount
Liabilities and Shareholder’s Equity:
Contributed capital & shareholders’ fund:
…….. % Preferred stock/Preference share capital (Old +…… share issued x Par ) (PSC)
Common stock ( Old +……. Share issued x par) (CSC)
Additional paid in capital {Old + …. Share issued x (issue price – par)} PS if (APC—PS)
Additional paid in capital {Old +…. Share issued x (issue price – par)} CS if (APC—CS)
Total contributed capital
Retained Earnings ending (Beg. RE + NI –Dividend paid): RE
xxx
xxx
xxx
xxx
xxx
xxx
Total contributed capital and Retained Earning
Less: Treasury stock If any (No. of TS x repurchase price)
Total Shareholders’ Equity or Net worth (TSE or TSF)
xxxx
xxx
xxxx
Statement of shareholders’ equity or shareholders’ equity account

Analyzing the management of shareholders’ equity/Owners’ Equity
1. Total Shareholders’ equity/ Fund= Total contributed capital + RE – TS = Rs. …….
2. Total Shareholders’ equity = PSC+ CSC + APC +GR+ RE- TS = Rs. …….
3. Total SE= Assets- Liabilities or Debt (ie, Assets = Liabilities or Debt + Equity) = Rs. …….
4. Number of Shares:
No. of authorized/Registered shares = …… shares
No. of issued shares =
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑎𝑡 𝑝𝑎𝑟
𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
= ………… shares
No. of common share outstanding (N) = no of issued shares- no of treasury shares
5. Par value or face value or recorded value in paper share certificate but now DEMAT is use.
Par value per share =
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑛𝑜 𝑜𝑓 𝑖𝑠𝑠𝑢𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
= Rs. ….

DEMAT:
Companies have started keeping their shares in electronic form
instead of paper share certificates that is associated with
share transfer. These are known as DEMAT or dematerialized
(converted from physical to electronic) shares. Thus making
share trading easy for the users during online trading.

6. Book Value Per Share (BVPS)=
𝑇𝑜𝑡𝑎𝑙 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦
𝑁
or BVPS =
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝐸𝑞𝑢𝑖𝑡𝑦−𝑃𝑟𝑒𝑓. 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑁
= Rs ….
7. Market value per share (MVPS or MPS or P0): MPS is determined from the interaction between
demand and supply of the share in the share market. It is currently trading/selling price.
8. Return on Assets (ROA)=
𝑁𝑃𝐴𝑇+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
x 100=…… %
9. Return on Common Equity (ROCE)=
𝐸𝐴𝐶𝑆
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝑒𝑞𝑢𝑖𝑡𝑦
x 100 = ……%
or, ROCE =
𝑁𝑃𝐴𝑇 −𝑃𝑑
𝑇𝑆𝐸−𝑃𝑆𝐸
x 100 = ……%
And, Return on Equity (ROE) =
𝑁𝑃𝐴𝑇
𝑇𝑆𝐸
x 100 = ……%

10. Preference dividend (Pd)=Preference share capital x given preference dividend rate.
11. Earning per share (EPS)=
𝐸𝐴𝑆𝐶
𝑁
= Rs….
or, EPS =
𝑁𝑃𝐴𝑇 −𝑃𝑑
𝑁𝑜 𝑜𝑓𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
= Rs….
12. Earning available to common shareholders (EASC) = Net Income (NI) = NPAT-Pd = Rs…
13. Dividend Per Share (DPS) =
𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝑁𝑜 𝑜𝑓𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
= Rs….
or DPS =
𝑇𝐷
𝑁
= Rs….
14. Dividend Payout Ratio( D/P or D/E ratio or DPR) =
𝐷𝑃𝑆
𝐸𝑃𝑆
x 100= …. % or,
𝑇𝐷
𝑁𝐼
x 100= …. %
15. Price Earning Ratio (P/E Ratio) =
𝑀𝑃𝑆
𝐸𝑃𝑆
= … times or ……. X 100= ….%

Source: Kriti Publication:

Source: Asmita Publication:

Accounting entries for issuance of shares/stock (Journal Entries)
1. Share /stock issued for cash:
a. If issued at Par:
Bank a/c …….. Dr. xxx
To Common/Preferred stock a/c xxx
(No of issued shares x Par per share)
(Being …. common / preference shares issued at Rs…. each)
b. If issuance of no par stock or issuance of stated value stock or issued at no par price:
Bank a/c …….. Dr. xxx
To Common/Preferred stock a/c xxx
(No of issued shares x issued price per share)

c. If issued at Premium/APC or issue price is more than par:
Bank a/c (No of issued shares x Issue price per share) …….. Dr. xxx
To Common/Preferred stock a/c (…..shares x Par each) xxx
To Additional Paid in Capital a/c – CS or PS (….shares x prem. each) xxx
d. If issued at discount or issue price is less than par:
Bank a/c (No of issued shares x Issue price per share) …….. Dr. xxx
Discount on issue of ….. Stock a/c(…Share x dis. Rs.. each …. Dr. xxx
To Common/Preferred stock a/c (No of shares x Par per share) xxx

2. Share /stock issued for non cash consideration (other than cash):
Building (Assets individually) a/c Dr. xxx
Discount on issue a/c (if) Dr. xxx
To Common stock a/c (…. Share x Par each) xxx
To Preferred stock a/c (…. Share x Par each) xxx
To APC – CS a/c (…issued shares x prem--CS) (if) xxx
To APC – PS a/c (…issued shares x prem--PS) (if) xxx
(Being issuance of common / preference stock for purchase of building….)

2. Share /stock issued on subscription basis or contract basis purchase:
When an investor purchases share on a subscription basis
prior to incorporation of the business entity, a partial payment
is received and the share is not issued until the final payment
is made. The offer specify the part of the share price payable
at the time of buying for share and require that the balanced
amount be paid when share are issued whether it is on
contract basis or subscription basis.

On agreement/signing date:
Cash or Bank a/c (Partial amt. if) Dr. xxx
Subscription Receivable a/c Dr xxx
To Common stock subscribed a/c (…. Share x Par each) xxx
To APC – CS a/c (..issued shares x prem. - CS) (if) xxx
(Being issuance of common stock on subscription basis)
On amount receiving date:
Cash or Bank a/c Dr. xxx
To Subscription Receivable a/c xxx
(Being subscription receivable amount received)

Source: Asmita Publication

Source: Kriti Publication: IIlustration 9:
On Feb. 1, Help corporation signs a contract with an investor to issue 100 shares of stock with a
par value of Rs. 10 for Rs. 80 per share in one month. The buyer has to make a down payment of
Rs. 800 at the signing date. And subscription balance was paid on march 1.
Required: Journal Entries with effect on balance sheet.
Solution: On Feb 1: Bank a/c Dr 800
Subscription Receivable a/c Dr 7200
To Common stock subscribed a/c (100 Share x Rs. 10 each) 1000
To APC – CS a/c (100 shares x 70) 7000
(Being issuance of common stock on subscription basis)
On March 1: Bank a/c Dr 7200
To Subscription Receivable a/c 7200
(Being subscription receivable amount received)

Accounting entries for treasury share/stock (Journal Entries)
1. Purchase of treasury share /stock:
Treasury Stock a/c Dr xxx
To Cash or bank a/c xxx
(Being purchase of …. shares of treasury stock at Rs…. each)
2. Re sale or Release or Re issue of treasury share / stock:
a. Sale / re issue of treasury stock at cost
Cash or Bank a/c Dr xxx
To Treasury stock a/c xxx
(Being sale of …. Shares of TS at cost of Rs….each)

b. Sale / re issue of treasury stock above cost
Cash or Bank a/c (No of TS x Re issue price) Dr xxx
To Treasury stock a/c (No of TS x Cost price) xxx
To APC a/c – TS (No of TS x above price) xxx
(Being sale of …. Shares of TS at above cost of Rs….each)
c. Sale / re issue of treasury stock below cost
Cash or Bank a/c (No of TS x Re issue price) Dr xxx
Retained Earning or APC-TS a/c (No of TS x below price) Dr xxx
To Treasury stock a/c (No of TS x Cost price) xxx
(Being sale of …. Shares of TS at below cost of Rs….each)

3. Retirement of treasury share / stock:
i. On cost method:
a. Retirement of treasury stock at cost equal to originally issued at par:
Common stock a/c Dr xxx
(Being retirement of …. shares of TS)
b. Retirement of treasury stock at cost above than par:
Common stock a/c (No of TS x par) Dr xxx
Retained Earning or APC-TS a/c (No of TS x above price) Dr xxx
To Treasury stock a/c (No of TS x cost price) xxx
(Being retirement of …. Shares of TS )

c. Retirement of treasury stock at cost below than par:
Common stock a/c (No of TS x par) Dr xxx
To Treasury stock a/c (No of TS x cost price) xxx
To Retained Earning or APC-TS a/c (No of TS x below price) xxx
(Being retirement of …. Shares of TS)
ii. On par value method:
Common stock a/c Dr xxx
(Being retirement of …. shares of TS)

Source: accountingformanagement.org
The American company issued 5,000 shares of its Rs. 5 par value
common stock at Rs. 8 per share. Later, the company bought back
1,000 shares at Rs. 12 per share and immediately retired them.
Required: Prepare journal entries for retiring the shares
assuming the company accounts for treasury stock related
transactions using:
1. Cost method.
2. Par value method.

Solution: 1. When 1,000 shares are retired – Under cost method:
Common Stock a/c (1000 x 5) Dr 5000
Additional Paid in Capital–TS a/c* Dr 3000
Retained earning a/c** Dr 4000
To Treasury stock a/c (1000 x 12) 12000
(Being retirement of 1000 shares of TS at cost)
*Additional paid in capital associated with 1,000 shares:
1,000 × (Rs. 8 – Rs. 5)= Rs. 3,000
**Retained earnings account has been debited with the remaining amount:
(Rs. 12,000 – Rs. 5,000 – Rs. 3,000= Rs. 4,000)

Solution: 2. When 1,000 shares are retired
– Under Par value method:
Common Stock a/c (1000 x 5) Dr 5000
To Treasury stock a/c (1000 x 5) 12000
(Being retirement of 1000 shares of TS at par)

Dividend / Distributed earning
It is the return on common stockholder after distribution to
bondholder and preferred stockholders. It is part of profit.
If a company has sufficient cash available and adequate
retained earning dividend may be declared. It is not
expenses, it is liabilities on the date of declaration.
Types:
1. Cash Dividend
2. Stock Dividend/Bonus share

1. Cash Dividend:
Cash dividend is cash distribution of accumulated earning by a
company to its shareholders. There are various types of cash
dividend payment policy. BOD may apply one policy to declare
dividend after approval of resolution.
Generally cash dividend amount can be calculated from the following:
Amount of cash dividend = Total par value of CS x Div. Rate
= N x Par per share x Div. Rate= Rs…

Accounting Entries for Cash Dividend (Journal Entries):
1. At the time of dividend declaration:
Retained Earning a/c Dr xxx
To Cash dividend payable a/c xxx
(Being record for declaration of cash dividend)
2. At the time of dividend payment:
Cash dividend payable a/c Dr xxx
To cash or bank a/c xxx
(Being record the payment of cash dividend)

Effect of cash dividend on shareholders equity and Balance Sheet
• Decrease the cash or bank (asset) equal by dividend amount
• Decrease the amount of retained earning equal by dividend
amount (ie, New RE= old RE – dividend)
• Decrease the Value of the firm equal by total dividend
• Decrease the MPS equal by DPS.
Where,
Adjusted price of a stock or MPS after cash dividend
= MPS before cash dividend - DPS

2. Stock Dividend / Bonus Share:
If the company distributes additional share rather than cash as
dividend to it’s existing shareholder with free of cost is called
stock dividend.
Company use stock dividend from the following reason:
• If the company has not sufficient cash available
• To reduce price at reasonable tradable range in the market
for small scale investors
• To make tax benefit for investors

Accounting Entries for Stock Dividend (Journal Entries):
The journal entries for a stock dividend depends on whether the
company is involved in a small stock dividend or a large stock dividend.
The journal entries for both sizes are as follows:
1. Small size stock dividend (up to 25% or less than 25%)
A stock dividend is considered a small stock dividend if the number of
shares being issued is less than 25%. It will have little effect on the
market price and it to be recorded at fair market price.

1. At the time of stock dividend declaration:
Retained Earning (n x MPS) a/c Dr xxx
To CS dividend distributable (n x MPS) a/c xxx
(Being record for declaration of stock dividend)
2. At the time of distribution of stock dividend:
CS dividend distributable a/c (n x MPS) xxx
To Common stock a/c (n x par) xxx
To APC – CS a/c (n x Premium per share) xxx
(Being record the distribution of stock dividend)

2. Large size stock dividend (greater than 25%)
A stock dividend is considered a large stock dividend if the number
of shares being issued is greater than 25%. It will have more
effect on the market price and it to be recorded at par value.
1. At the time of stock dividend declaration:
Retained Earning a/c (n x Par) Dr xxx
To CS dividend distributable a/c (n x par) xxx
(Being record for declaration of stock dividend)

2. At the time of distribution of stock dividend:
CS dividend distributable (n x par) a/c xxx
To Common stock a/c xxx
(Being record the distribution of stock dividend)
Effect of stock dividend on shareholders equity:
Consider: N= no of old shares outstanding = ……. shares
SDR= Stock Dividend Rate (…% Given)
n (No of stock dividend) = N x SDR = …… shares

Effect: 1. Increase the no. of Shares equal by n
:. Total no of shares after stock dividend= N + n = … Shares
or Nx(1+ SDR)=…. Shares
2. Decrease the amount of Retained Earning equal by (n x MPS)
:. New RE= old Retained Earning-(n x MPS) for Small size stock dividend
:. New RE= old Retained Earning-(n x Par) for large size stock dividend
3. Decreased the Retained Earning transferred to Common Stock at par
and Additional paid in Capital at premium.

:.Total amount of new common stock=old CS + n x par per share = Rs ….
or (N + n)x par per share = Rs …..
:. Total amount of New APC= old APC + (n x premium per share)
4. Total value of TS, PS, TSE unchanged.
Or, You can work at chart for small size stock dividend:
n = N x SDR =…….. shares
= Rs…… add in CS
= Rs…… add in APC
x MPS(Po)Rs ….= Rs…… Less from RE

Or, You can work at chart for large size stock dividend:
n = N x SDR =…….. shares
= Rs…… add in CS
= Rs 0 add in APC
X par Rs…. = Rs…… Less from RE
5. MPS, EPS and DPS after stock dividend decreased
:. adjusted price (P1) will decreased
:. P1= Total Market Value of Equity / Total no of Share
=
P0 x N
N +n
or, P1 =
P0
1+ SDR
Where P0 =Currently selling price or existing MPS

Stock Split:
It is the process of increasing the number of share and decreasing the par
and stock’s price in to reasonable tradable range for small scale investors.
The main objective of stock split is to reduce the market price in order to
make attractive to the investors.
Example:
Stock split (Given) Find: split ratio
2 for 1 stock split --- 2/1

Effect and recording of stock split on shareholders equity:
• Increase the no. of share by split ratio.
:. Total no of share after split= N x split ratio= …….. Shares
• Decrease the par, MPS, EPS and DPS by split ratio
:. Par after split =
old par
𝑆𝑝𝑙𝑖𝑡 𝑟𝑎𝑡𝑖𝑜
= Rs….
:. MPS after split =
old MPS
𝑆𝑝𝑙𝑖𝑡 𝑟𝑎𝑡𝑖𝑜
= Rs…
• Total value of CS, APC, RE and TSE unchanged.
:. Common stock( …… share x par) = Rs. ……
# Accounting transaction is not recorded if company declares and executes a stock split.

Source: Asmita Publication: QN 5: Do yourself

Source: Asmita Publication: QN 11: Do yourself

Thank You

BBS 1st year account Accounting for shareholders equity

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