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1. EQUITYEQUITY
Part 1Part 1
Financial Accounting and Reporting 1 - Pearson

2. Learning OutcomesLearning Outcomes
After studying this chapter, you should be able to:
• Explain the types of organizations and the various forms of
owners’ equity
• Explain the functions of Memorandum and Articles of
Associations
• Differentiate between ordinary shares and preference shares,
and their embedded rights and privileges
• Differentiate between authorized, issued, and paid up share
capital
• Describe issuance of share on application
• Explain various types of reserves
Financial Accounting and Reporting 1 2

3. Owners’ EquityOwners’ Equity
Investment made by owners in a
business or organization
Investment made by owners in a
business or organization
Financial Accounting and Reporting 1 3

4. Owners’ Equity of an EnterpriseOwners’ Equity of an Enterprise
Sri Asnat Enterprise
Statement of Owners’ Equity
For the Year Ended December 31, 2013
RM
Capital, January 1 20,000
Add: Net Profit 3,400
23,400
Less: Drawings 1,800
Capital, December 31 21,600
Financial Accounting and Reporting 1 4

5. Example of Owners’ EquityExample of Owners’ Equity
Statement of a CompanyStatement of a Company
Note RM000 RM000
2010
2009
Share capital 10 1,050 1,020
Share premium 11 140 120
Other reserves 12 110 100
Retained earnings 13 1,610 1,540
Shareholders’ equity 2,910 2,780
Minority interest 20 10
Total 2,930 2,790
Financial Accounting and Reporting 1 5

6. Criteria of BusinessCriteria of Business
OrganizationsOrganizations
Sole Proprietor Partnership Company
Capital Small Pooled among partners Large
Ownership Individual Partners Shareholders
Legal entity No No Yes
Liability Unlimited Jointly unlimited Limited
Business tax No No Yes
Owners’ equity Simple – one owner Simple – pooled Complex
Financial Accounting and Reporting 1 6

7. Financial Accounting and Reporting 1 7
Forms of Corporate Organizations
Public Company Private Company
Share Capital Issued to public Issued to related
persons
Shareholders Unlimited Limited to 50 persons
Designation Bhd Sdn Bhd

8. Memorandum and Articles of AssociationMemorandum and Articles of Association
 Memorandum and Articles of Associations are the
fundamental documents of a company.
 Memorandum of Associations regulate external
affairs of a company such as company’s name, its
registered office and objectives of its
incorporation.
 Articles of Associations deal with internal affairs of
a company such as issuance of shares, general
meetings and directors.
 In the case of conflicting statements,
Memorandum of Associations shall prevail.
 Memorandum and Articles of Associations are the
binding contract between the company and its
shareholders.
Financial Accounting and Reporting 1 8

9. Share Capital StructureShare Capital Structure
Generated from the amount of authorized share
capital that being issued and paid, valued at
nominal price. Two main forms of share capital:
o Ordinary shares
o Preference shares
Financial Accounting and Reporting 1 9

10. Ordinary Share CapitalOrdinary Share Capital
• Main component of capital structure in a
company
• Holders of ordinary shares:
o are the owners of the company.
o have the right to attend general meetings and
vote on the election of its directors and other
resolutions.
o enjoy preemptive rights upon the issuance of
new shares.
o are liability bearer in the case of liquidations.
o Are the last groups to receive dividend at no
fixed rate.
Financial Accounting and Reporting 1 10

11. Financial Accounting and Reporting 1 11
Preference Share Capital
 In general, preference shareholders have
some preferential rights such as:
 privilege to receive dividends.
 Capital refund in the case of liquidations.
 Fixed rate of dividend
 But no voting rights.
 Types of preference shares
 Cumulative preference shares
 Eligible to receive fixed annual dividends even when the
company cannot pay dividends for a particular year, by
way of accumulating that dividends to the following year.

12. Preference Share CapitalPreference Share Capital
o Non-cumulative preference shares
• Have no right to claim any unpaid dividends, in the future.
o Participating preference shares
• Have rights to receive additional dividends over and above
the specified dividend rate.
o Convertible preference shares
• Can be converted into ordinary shares after a predetermined
date.
o Callable preference shares
• Allows the issuing company to buy back the shares and retire
them.
o Redeemable preference shares
• Allows the issuing company to buy back the shares at a
specified maturity date.
Financial Accounting and Reporting 1 12

13. Authorized Share CapitalAuthorized Share Capital
• Number of units of shares registered and written in
Articles of Associations.
• It sets the limit to which the company can issue
shares.
Financial Accounting and Reporting 1 13

14. Reporting Authorized Share CapitalReporting Authorized Share Capital
Authorized share capital RM
1,000,000 ordinary shares at RM 1 1,000,000
200,000 preference shares at RM 2 400,000
1,400,000
Issued and paid-up share capital
600,000 ordinary shares at RM 1 600,000
50,000 ordinary shares at RM 2 100,000
700,000
Financial Accounting and Reporting 1 14

15. Financial Accounting and Reporting 1 15
Issued Share Capital
 Company invites the public to buy shares.
 Anybody who is interested to buy the shares
will express his interest by applying to the
company with full payment for the shares.
 Shares will be allotted to successful
applicants, while unsuccessful applicants will
be refunded.
 The total shares allotted are known as issued
share capital.

16. ExampleExample
Assume Medaniaga Bhd issues 40,00 shares
at RM 1 each during the year ended 31
December 2008. The applications are
received with full payment on October 31,
2008 for 100,000 shares. The shares are
subsequently allotted on December 31, 2008
to the successful applicants, while
unsuccessful applicants are refunded at the
same date. The entries to record the
transactions are as follows:
Financial Accounting and Reporting 1 16

17. Journal EntriesJournal Entries
Financial Accounting and Reporting 1 17
Step 1 : Upon Application
Date Details Ref Debit Credit
31/10 Cash 100,000
Share application 100,000
(record share
application)

18. Journal EntriesJournal Entries
Date Details Ref Debit Credit
31/12 Share application 40,000
Ordinary share capital 40,000
Share application 60,000
Cash 60,000
Financial Accounting and Reporting 1 18
Step 2 : Upon Allotment

19. Financial Accounting and Reporting 1 19
Issuance of Share at Par
 Refers to the face value of the shares as
registered in the Articles of Associations.
 If the par value is RM1 each, the subscriber of
100,000 units of shares should pay
RM100,000.

20. Journal entryJournal entry
Date Details Ref Debit Credit
Cash 100,000
Ordinary share capital 100,000
(Being ordinary share
issued at par)
Financial Accounting and Reporting 1 20

21. Financial Accounting and Reporting 1 21
Issuance of Share at Par
Authorized share capital RM
1,000,000 ordinary shares at RM 1 1,000,000
200,000 preference shares at RM 2 400,000
1,400,000
Issued and paid-up share capital
100,000 ordinary shares at RM 1 100,000
Authorized share capital RM
1,000,000 ordinary shares at RM 1 1,000,000
200,000 preference shares at RM 2 400,000
1,400,000
Issued and paid-up share capital
100,000 ordinary shares at RM 1 100,000

22. Financial Accounting and Reporting 1 22
Issuance of Share at Premium
 Issue shares at the price higher than the face
value of the shares.
 If the par value of a share is RM1 but the
company issues 100,000 shares at the price of
RM1.40 per share, that additional 40 cents per
share is considered as premium.

23. Journal entryJournal entry
Date Details Ref Debit Credit
Cash 140,000
Ordinary share capital
Share Premium
100,000
40,000
(Being ordinary share issued at premium)
Financial Accounting and Reporting 1 23

24. Financial Accounting and Reporting 1 24
Issuance of Share at Premium
Authorized share capital RM
1,000,000 ordinary shares at RM 1 1,000,000
200,000 preference shares at RM 2 400,000
1,400,000
Issued and paid-up share capital
100,000 ordinary shares at RM 1 100,000
Reserves
Share premium 40,000
Total share capital and reserves140,000
Authorized share capital RM
1,000,000 ordinary shares at RM 1 1,000,000
200,000 preference shares at RM 2 400,000
1,400,000
Issued and paid-up share capital
100,000 ordinary shares at RM 1 100,000
Reserves
Share premium 40,000
Total share capital and reserves140,000

25. Financial Accounting and Reporting 1 25
Issuance of Share at Discount
 Issue shares at the price lower than the face
value of the shares.
 If the par value of a share is RM1 but the
company issues 100,000 shares at the price of
RM0.80 per share, that 20 cents per share is
considered as discount.

26. Journal entryJournal entry
Date Details Ref Debit Credit
Cash
Share Discount
80,000
20,000
Ordinary share capital 100,000
(Being ordinary share issued at discount)
Financial Accounting and Reporting 1 26

27. Financial Accounting and Reporting 1 27
Issuance of Share at Discount
Assets RM
Share discount 20,000
Owners’ Equity
Authorized share capital
1,000,000 ordinary shares at RM 1 1,000,000
200,000 preference shares at RM 2 400,000
1,400,000
Issued and paid-up share capital
100,000 ordinary shares at RM 1 100,000
Assets RM
Share discount 20,000
Owners’ Equity
Authorized share capital
1,000,000 ordinary shares at RM 1 1,000,000
200,000 preference shares at RM 2 400,000
1,400,000
Issued and paid-up share capital
100,000 ordinary shares at RM 1 100,000

28. ReservesReserves
• Part of owners’ equity
• Comprise of capital reserve and revenue
reserve.
Financial Accounting and Reporting 1 28

29. Capital ReserveCapital Reserve
• statutory non-distributable reserve and cannot be
distributed as dividends to shareholders.
• Share premium and capital redemption reserve are
examples of capital reserves required by the
Companies Act.
• Share premium is the excess value of shares above
their nominal price.
• capital redemption reserve is required for specific
purpose, normally transferred from either the share
premium or the company’s retained earnings.
Financial Accounting and Reporting 1 29

30. Financial Accounting and Reporting 1 30
Revenue Reserve
 Normally represented by the accumulated retained
earnings and can be distributed as dividends.
 Examples are general reserve and dividend reserve.
 Both reserves are transferred from retained earnings for
particular reason.
 General reserve is meant for reducing the amount of
dividends paid out during booms and acts as financial
preparation for periods of crisis when a lot of funds are
needed.
 Dividend reserve is maintained to ensure that a similar
amount of dividends can be distributed to shareholders
even during periods of low profit.

31. Shares Issued with Other Securities
Two methods of allocating proceeds:
 Proportional method.
 Incremental method.
LO 3 Explain the accounting procedures for issuing shares.
EquityEquityEquityEquity

32. LO 3
EquityEquityEquityEquity
Number Amount Total Percent
Ordinary shares 300 x 20.00$ = 6,000$ 40%
Preference shares 100 x 90.00 9,000 60%
Fair Market Value 15,000$ 100%
Allocation: Ordinary Preference
Issue price 13,500$ 13,500$
Allocation % 40% 60%
Total 5,400$ 8,100$
Proportional
Method
BE15-4BE15-4:: Ravonette Corporation issued 300 shares of $10 par value
ordinary shares and 100 shares of $50 par value preference shares for
a lump sum of $13,500. The ordinary shares have a market value of
$20 per share, and the preference shares have a market value of $90
per share.

33. LO 3 Explain the accounting procedures for issuing shares.
EquityEquityEquityEquity
Cash 13,500
Preference shares (100 x $50) 5,000
Journal entry (Proportional):
Share premium - preference 3,100
Ordinary shares (300 x $10) 3,000
Share premium - ordinary 2,400
BE15-4BE15-4:: Ravonette Corporation issued 300 shares of $10 par value
ordinary shares and 100 shares of $50 par value preference shares for
a lump sum of $13,500. The ordinary shares have a market value of
$20 per share, and the preference shares have a market value of $90
per share.

34. BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10
par value ordinary shares and 100 shares of $50 par value preference
shares for a lump sum of $13,500. The ordinary shares have a market
value of $20 per share, and the value of preference shares are unknown.
LO 3 Explain the accounting procedures for issuing shares.
EquityEquityEquityEquity
Number Amount Total
Ordinary shares 300 x 20.00$ = 6,000$
Preference shares 100 x -
Fair Market Value 6,000$
Allocation: Ordinary Preference
Issue price 13,500$
Ordinary (6,000)
Total 6,000$ 7,500$
Incremental
Method

35. LO 3 Explain the accounting procedures for issuing shares.
EquityEquityEquityEquity
Cash 13,500
Preference shares (100 x $50) 5,000
Journal entry (Incremental):
Share premium - preference 2,500
Ordinary shares (300 x $10) 3,000
Share premium - ordinary 3,000
BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10
par value ordinary shares and 100 shares of $50 par value preference
shares for a lump sum of $13,500. The ordinary shares have a market
value of $20 per share, and the value of preference shares are unknown.

36. Shares Issued in Noncash Transactions
The general rule: Companies should record shares
issued for services or property other than cash at the
 fair value of the goods or services received.
 If the fair value of the goods or services cannot be
measured reliably, use the fair value of the shares
issued.
LO 3 Explain the accounting procedures for issuing shares.
EquityEquityEquityEquity

37. LO 3 Explain the accounting procedures for issuing shares.
EquityEquityEquityEquity
Illustration: The following series of transactions illustrates the
procedure for recording the issuance of 10,000 shares of $10
par value ordinary shares for a patent for Marlowe Company,
in various circumstances.
1. Marlowe cannot readily determine the fair value of the
patent, but it knows the fair value of the shares is $140,000.
Patent 140,000
Share Capital—Ordinary 100,000
Share Premium—Ordinary 40,000

38. LO 3 Explain the accounting procedures for issuing shares.
EquityEquityEquityEquity
2. Marlowe cannot readily determine the fair value of the
shares, but it determines the fair value of the patent is
$150,000.
Patent 150,000
Share Capital—Ordinary 100,000
Share Premium—Ordinary 50,000

39. Financial Accounting and Reporting 1 39
Disclosure of Owners’ Equity
The Companies Act 1965 requires the following disclosure of
owners’ equity:
 the amount of authorized capital
 the particulars of issued capital
 redeemable preferences shares
 any share capital on which interest has been paid out of capital during
the financial year and the rate at which interest has been so paid
 separate disclosure of the following reserves:
i. share premium account
ii. revaluation surplus
iii. balance of profit and loss account
iv. other reserves

40. Financial Accounting and Reporting 1 40
Disclosure of Owners’ Equity
According to MFRS 101 paragraph 76, Presentation of Financial
Statements, an enterprise should disclose the following, either on
the face of the balance sheet or in the notes:
 For each class of share capital:
- the number of authorized shares
- the number of shares issued and fully paid, and issued but not fully paid
- par value per share, or that the shares have no par value
- a reconciliation of the number of shares outstanding at the beginning and at
the end of the year
- the rights, preferences, and restrictions attaching to that class including
restrictions on the distribution of dividends and the repayment of capital
- shares in the enterprise held by the enterprise itself or by subsidiaries or
associates of the enterprise
- shares reserved for issuance under options and sales contracts, including the
terms and amounts.

41. Financial Accounting and Reporting 1 41
Disclosure of Owners’ Equity
 A description of the nature and purpose of each reserve within
owner’s equity.
 When dividends have been proposed but not formally approved
for payment, the amount included (or not included) in liabilities.
 The amount of any cumulative preference dividends not
recognized.
An enterprise without share capital, such as partnership, should disclose
information equivalent to that required above, showing movements during the
period in each category of equity interest and rights, preferences, and restrictions
attaching to each category of equity interest. The standard further emphasizes
that equity capital and reserves are analyzed showing separately the various
classes of paid-up capital, share premium, and reserves.

42. ConclusionConclusion
• Owners’ equity represents the ownership
of a company.
• Owners’ equity of a company normally
arises from the investment of shareholders
and retained earnings.
• It is mandatory for a company to report
owners’ equity on the balance sheet as
highlighted in FRS 101, Presentations of
Financial Statements.
Financial Accounting and Reporting 1 42