FAR: Shareholders' Equity part 1: Basic Concepts

Summary

This video introduces shareholders' equity, covering six major topics: basic concepts, original issuance of shares, transactions after issuance, accounting for dividends, retained earnings, and quasi-reorganization. The video focuses on the basics of shareholders' equity, defining it as the residual interest of owners after liabilities are deducted from assets. It also breaks down its components: contributed capital, retained earnings, other comprehensive income, and treasury shares. The lecture explains the difference between share capital, subscribed share capital, and share premium, with an introduction to the two methods of accounting for share capital: memorandum and journal entry.

Takeaways

• 📊 The video discusses the topic of shareholders' equity, which is defined as the residual interest of owners in the net assets of a corporation after liabilities are deducted.
• 📝 There are six major topics under shareholders' equity, each covered in a separate video: basic concepts, original issuance of shares, transactions after issuance, dividends, retained earnings, and quasi-reorganization.
• 💼 Shareholders' equity is measured as the difference between total assets and total liabilities, aligning with the accounting equation: Assets = Liabilities + Equity.
• 🏦 The four main components of shareholders' equity are contributed (paid-in) capital, retained earnings, other comprehensive income, and treasury shares.
• 🧐 Contributed capital has three components: share capital, subscribed share capital, and share premium, with each having distinct definitions and accounting treatments.
• 📜 Share capital represents the value of shares issued, while subscribed share capital refers to shares that are subscribed but not yet fully paid.
• 💰 Share premium accounts for the amount received in excess of the par or stated value of shares issued.
• 🖋 There are two accounting methods for share capital transactions: the memorandum method and the journal entry method, with each having specific journal entries for authorization and issuance.
• 📄 Shares are issued only when fully paid, and subscribed shares do not entitle a shareholder to a share certificate until fully paid.
• 📈 The issuance of subscribed shares after full payment transfers the balance from subscribed share capital to share capital, reflecting ownership in the corporation.

Q & A

What is shareholders' equity?

Shareholders' equity is defined as the residual interest of owners in the net assets of a corporation, measured as the excess of total assets over total liabilities.

What is the accounting equation and how does it relate to shareholders' equity?

The basic accounting equation is 'Assets = Liabilities + Equity.' Shareholders' equity is the difference between a company's assets and liabilities, calculated as 'Assets - Liabilities = Equity.'

What are the four components of shareholders' equity?

The four components of shareholders' equity are contributed (paid-in) capital, retained earnings, other comprehensive income, and treasury shares.

What is contributed capital or paid-in capital?

Contributed capital represents the total par or stated value of the shares issued by a corporation. It includes three components: share capital, subscribed share capital, and share premium.

What is the difference between share capital and subscribed share capital?

Share capital represents shares that have been issued, while subscribed share capital refers to shares that have been subscribed to but not yet fully paid or issued.

What is share premium, and how is it recorded?

Share premium is the portion of the paid-in capital representing the excess over the par or stated value of the shares issued. It is recorded in the share premium account when shares are issued at a price higher than their par or stated value.

How are shares issued and recorded under the journal entry method?

Under the journal entry method, when shares are issued, the corporation records a debit to an asset account (such as cash or non-cash assets) and a credit to share capital and share premium (if applicable) for the excess over par or stated value.

What is the memorandum method of accounting for share capital?

Under the memorandum method, no journal entries are made for the authorization of shares. Instead, a memorandum entry is used to note the authorization and issuance of shares.

What is the difference between ordinary shares and preference shares?

Ordinary shares represent ownership with voting rights and the potential for dividends. Preference shares have certain privileges, such as a fixed dividend, but typically lack voting rights.

When are shares considered 'issued' to shareholders?

Shares are considered 'issued' when they have been fully paid for by subscribers and a share certificate has been issued to the shareholder.