recording of shares and debentures

Recording shares and debentures

Section 9 Objective 6Prepare journal entries to record the issue of shares and

debentures

Recording shares and debentures

• The capital of a company is raised by the sale of shares. In – public companies shares are sold or offered

to the public through stock exchanges– private companies they are sold to immediate

family members, business partners and employees

Recording of shares and debentures

• The two main categories of shares issued in companies are ordinary shares also known as common shares and preference shares known as preferred shares.

• Both categories of shares carry an attached dollar value to each share. This value is known as ‘par value’

• The dollar value is the legal amount that a share is authorised to be sold.

Recording shares and debentures

• When a corporation is formed a decision has to be made on the full amount of capital (including the types of shares) which the company is legally authorised to raise. This is known as authorised (nominal or registered) capital

• The capital (that is ordinary and preference shares) of the company actually raised is called issued share capital

Recording of shares and debentures

Recording shares and debentures

• Ordinary shares or equity shares – features:– Have a face (nominal or par) value– Owners of ordinary shares receive an annual

payment called dividend.– The amount of dividend paid to owners of ordinary

shares will depend on how much profit the company makes and on how much the board of directors feel the company can afford to pay

Recording shares and debentures

• Dividends are paid to the ordinary shareholders after preference shareholders have been their dividends

• Owners of ordinary shares have voting rights. Their voting rights enable them to exercise control over the business

Recording shares and debentures

Recording shares and debentures• Preference shares –• features

– Have a face (nominal or par) value– The owners of preference shares receive an annual

payment called dividend– The amount of dividend paid to the shareholder is a fixed

percentage of the amount invested to the business– The shareholders are entitled to receive the fixed

percentage dividend as long as the company has a profit

Recording shares and debentures

• Preference shareholders dividends are allocated before the allocation of ordinary shareholders dividend

• Preference shareholders have no voting rights and control of the company

Recording shares and debentures

• Preference shares – • features• There are two types of preference shares,

cumulative and non-cumulative• If there are no funds to pay dividend to

cumulative preference shareholders the dividend will accumulate and will be paid to them when cash is available

Recording shares and debentures

• Recording the issue of shares – Journal entry to record capital

• Depending factors considered for the amount of shares issued are– The face value of the shares– The number of shares issued– Whether the company is able to issue

shares above the face value

Recording shares and debentures

• If the company issues shares above the face value, the excess received is called the share premium or paid in additional capital

• For each type of share that is being sold, it is important to keep separate capital accounts for each type of share at face value and the share premium (paid in additional capital) account

Recording shares and debentures

• The key accounting names used to post to the journal for the issue of shares are as follows:–Dr Cash Cr Ordinary Share Capital Cr Preference Share Capital Cr Share Premium

Recording shares and debentures

• Steps for recording the issue of shares

Recording shares and debentures

• Example of journal entries for the issue of shares:

Recording shares and debentures

Recording shares and debentures

• Debentures – • Features

– A company can raise finance for a business by issuing debentures

– Debentures are long terms loans given to a company by individuals or other businesses

– Individuals or other businesses who gave the loans are long term creditors and not owners of the company.

– Debentures are long term loans which carry a fixed rate of interest

Recording shares and debentures

• Debentures – • Feature

– Loans are repayable at a specific date– The company must pay the interest each year

whether the company• Has sufficient cash funds available• Is making a profit

– Debenture interest is charged to the income statement

Recording shares and debentures• The key accounting terms used to record the

issuing of debentures are as follows:

– Dr bank– Cr % debentures (year)

Recording shares and debentures• Example of journal entry to record the

issue of debentures