Shareholders' Equity Flashcards
What is Shareholders’ Equity?
Shareholders’ Equity refers to the ownership interest of shareholders in a private limited company.
How are the transactions of a private limited company treated according to the accounting entity theory?
The transactions of a private limited company are separate from that of the shareholders.
How can shareholders contribute to a private limited company?
Shareholders can contribute cash to the business through the buying of more shares.
What happens to profits in a private limited company?
Profits are accumulated as retained earnings and reinvested in the business. A portion may also be declared as dividends.
Can a private limited company declare dividends during losses?
Yes, a private limited company can declare dividends out of its retained earnings even when it incurs losses.
What are the two line items in the equity section of a private limited company?
The equity section consists of share capital and retained earnings.
What is the claim by the shareholders on net assets of the private limited company?
Shareholders equity
What is share capital?
Cash raised by issuing shares to shareholders
What are retained earnings?
Accumulation of profits and losses that has not been distributed to shareholders yet since operation.
To be renamed as accumulated losses when the value becomes negative.
What is the definition of profits (or losses)?
Total profits earned and losses incurred from previous years and current year.
What are dividends?
A portion of retained earnings that was distributed to shareholders.
How is shareholders’ equity calculated?
Shareholders’ equity = Share capital + Retained earnings
= Share capital + Profits (or - Losses) - Dividends
How is share capital calculated?
Share capital = Total number of shares issued x Issued price per share ($)
How are dividends calculated?
Dividends = Total number of shares issued x Declared dividends per share ($)
What can cause changes in shareholders’ equity?
Changes in shareholders’ equity can be due to issuance of new shares, declaration of dividends, and profit or loss for the period.
What happens to shareholders’ equity when a private limited company issues new shares?
Increase
What happens to shareholders’ equity when the business makes a profit for the period?
Increase
What happens to shareholders’ equity when a private limited company declares dividends?
Decrease
What happens to shareholders’ equity when the business incurs a loss for the period?
Decrease
