Week 4 Process Share Transactions

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Financial Accounting 2B
COFAB2-22
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Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Assessment and quiz information

• Course guide
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• Assessments tile
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Week 4 Scope
Week 4 Scope
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A business entity requires funds to start and continue running a business.

This chapter concentrates on the acquisition of funds by a company through its
shareholders.
These funds can be obtained from any of the following:
Raising funds from owners (shares);

Making profits (an internal source); and
Borrowing through loans or debentures (an external source).
How are the owners?
In a partnership, the owners would be referred to as partners.

In a close corporation, the owners would be referred to as members. (Please note that
close corporations still exist but are being phased out since the introduction of the
new Companies Act of 2008).
In companies, the owners would be referred to as shareholders
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A share issued by an entity to a shareholder is:

an equity instrument to the entity (or, in some cases, a financial liability); and
a financial asset to the shareholder.
An equity instrument is defined as:

Any contract that results in a residual interest in the assets of an entity
After deducting all of its liabilities. (E = A-L)
There are two basic classes of shares that a company may issue:
Ordinary shares (also called common stock); and
Preference shares (also called preferred stock)
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Accounting of ordinary and preference shares
• Ordinary shares are riskier from an investor perspective than preference shares but they usually
outperform preference shares on the stock markets.
• Ordinary shareholders are NOT GUARANTEED to receive dividends because ordinary dividends are
DEPENDENT on both the PROFITABILITY of the company and its CASH FLOW
• A dividend should only be recognised once the company has a present obligation to pay the
dividend. This obligation arises when the dividends are declared
• (e.g. a final ordinary dividend for the year ended 31 December 2002 that is declared in January 2003,
should be recorded in the financial statements for the year ended 31 December 2003, since there
was no obligation before the date of the declaration).
• Preference shareholders have preference over the ordinary shareholders in the case of the company
being liquidated.
• Preference shareholders generally receive a fixed preference dividend annually. The dividend is
based on the coupon rate.
Account for changes in share capital
Rights issues are the offering of a certain number of shares to existing

shareholders in proportion to their existing shareholding at an issue price that is
lower than the market price.
A company may issue shares to existing shareholders entirely for free, and may
even issue shares of one class to shareholders of another class
When issuing a share:

•The bank increases (i.e. an increase in assets) and
•Since there is no obligation to return the funds to the shareholder
(i.e. there is no increase in liabilities), equity increases, thus making it an
equity instrument.
Debit: Bank (SFP) (i.e. an increase in assets)
Credit: Share Capital (SCE) (i.e. equity increases)
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Dividends
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Dividends
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Dividends
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Dividends
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Dividends
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Dividends
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Share split
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Process share transactions
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What's next
This week
• Quiz 2
• Deferred test 1
• Textbook
Next week
• Pre-reading for week 5 Process
share transactions
• Quiz 3 Deferred online test 2
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Week 4 Process Share Transactions

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2024/06/22

Assessment and quiz information

A business entity requires funds to start and continue running a business.

These funds can be obtained from any of the following:

Raising funds from owners (shares);

How are the owners?

In a partnership, the owners would be referred to as partners.

A share issued by an entity to a shareholder is:

An equity instrument is defined as:

Accounting of ordinary and preference shares

Account for changes in share capital

Rights issues are the offering of a certain number of shares to existing

When issuing a share:

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

Process share transactions

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