Day 5 - Chapter 14 Flashcards
What is the capital equation?
opening capital
+ cap introducted
+ profit/(loss)
- drawings
= closing cap
Equity
share cap
share premium
revaluation surplus
retained earnings
preference share capital
Retained Earnings
retained earnings
= accumulated profits- + losses from day one
What must companies do to profit?
pay tax
What is a SOCIE?
shows the movement of equity balances in the year
What are the two types of share capitals?
ordinary share capital
preference share capital
What are ordinary share capital?
voting rights
dividends paid at discretions of directors
dividends are paid after preference dividends
the dividends are quoted as pence per share
What are preference share capital?
no voting rights
preference dividends must be paid before ordinary dividends
preference dividends must be paid to preference shareholders
preference dividends calculated as:
preference share capital x dividend (%)
Preference dividends equation
preference share capital x dividend (%)
What are the two preference shares?
redeemable or irredeemable
Redeemable
brought back by company in future
more liability
Irredeemable
not brought back
equity shares
What are the two values of share capital?
nominal value
market value
Nominal value
legal value - lowest and decided when made and not changing
Market value
issue price - increase and decrease based on market
What are companies forbidden to do regarding share capital?
company is not allowed to sell shares lower than nominal value
What are the double entries to issue ordinary shares?
DR cash. - issue price x no. shares
CR share capital - nominal value x no. shares
CR share premium. - excess over nominal value x no. shares = balancing figure
How is share premium calculated?
excess over nominal value (issue price- nominal value) x number of shares issued
it is the balancing figure
How is share capital calculated?
nominal value x no of shares issues
How to determine cash entry when issuing ordinary shares?
issue price x no of shares
What is a rights issue?
rights issue is the offer of new shares to existing shareholders in proportion to their existing share holding at started price
normally below market value and always about nominal value
How is a rights issue accounted for?
same way normal share issue is accounted for
What does 1 for 5 rights issue mean?
for every 5 shares a shareholder owns, they are entitled to buy one more
How do you account for a 1 for 5 shares? if we start with 1000 shares
1000/5 = 200 shares
DR cash. (200x0.75) = 150
CR share capital (200x0.5) = 100
CR share premium = 50
What is bonus issue?
issue of new shares to existing shareholders in proportion to their existing shareholding. no cash is received from bonus issue.
it is funded from reserves - can be a non-distributable reserves such as share premium account
if this balance is in sufficient then excess would normally be debited to retained earnings
What is the double entry for a bonus issue?
DR share premium - nominal value
(or other reserve)
CR share capital - nominal value
What is retained earnings?
all profits and losses to date
RE b/f - x
Net profit - x
Dividends - (x)
= retained earnings for the year
Where does the dividends come from on an ordinary share and irredeemable preference share?
dividends come from retained earnings
Where does the dividends come from on a redeemable preference share?
it is deducted from the profits in p/l as a finance cost
redeemable preference share is a liability
What are dividends?
distribution of profits - usually paid in cash to share holders therefore come out of retained earnings
What is a SOCIE?
statement in changes of equity
shows how the balances making up equity in statement of financial position have changes over the course of the year
What movement is reported in SOCIE?
profit in year
dividends paid
transfers between reserves
share issues
How does profit affect RE?
profit increase RE
loss decreases RE
How does dividends affect RE?
decrease RE
How does share issues affect SOCIE?
increase share capital
increase share premium
How does bonus issues affect SOCIE?
increase in share capital
decreases share premium
What is the structure of SOCIE?
What is a loan note?
companies can raise money by issuing loan notes from the bank
there is an interest - an expense - finance costs
What is the double entry for a loan note?
DR cash
CR non-current liabilities
What is the double entry to record interest on loan note?
DR finance costs
CR cash/loan note
What is a provision?
type of liability to third party of uncertain timing and/or amount
- ei. law suits and refunds
When do you recognise a provision?
present obligation
more than 50% chance they need to pay
How do you account for provisions?
DR relevant expense account
CR provisions
How do you account for paying provisions?
DR provision
CR cash at bank
What happens if the amount for the provision is different?
expense if its more
income if its less
How does a company deal with tax at the year end?
company calculates net profit then estimates tax liability
then company accounts for tax liability by
DR tax expense
CR tax payable
What’s the double entry to account for year end tax liability?
DR tax expense - p/l
CR tax payable - current liability
What happens if the company pays the actual tax bill? What is the double entry for this?
DR tax payable
CR cash
What happens if the payment for tax is more than liability accrued at the year end of the previous year?
it is said that we have under-provided tax and the following double entry is required?
DR tax expense
CR tax payable
What happens if the payment for tax is less than liability accrued at the year end of the previous year?
DR tax payable
CR tax expense
What is the short cut for paying tax double entries?
DR amount b/f
DR/CR under/over provision tax expense - balancing
CR amount actually paid
What is the tax expense short cut?
tax expense = current year tax estimate +/- under/overprovisions of tax for last year
