Shares and debentures

1. Recording shares and
debentures
Section 9 Objective 6
Prepare journal entries to record the issue of shares and
debentures

3. 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

4. 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.

5. 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

6. Recording of shares and debentures

7. 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

8. 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

9. Recording shares and debentures

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Recording shares and debentures
• Steps for recording the issue of shares

17. Recording shares and debentures
• Example of journal entries for the issue of
shares:

18. Recording shares and debentures

19. 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

20. 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

21. Recording shares and debentures
• The key accounting terms used to record the
issuing of debentures are as follows:
– Dr bank
– Cr % debentures (year)

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