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Form 5 · Chapter 5

Accounting for Companies Limited by Shares

Perakaunan untuk Syarikat Berhad Menurut Syer

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What this chapter covers

Form 5 Chapter 5, Accounting for Companies Limited by Shares, introduces you to the most complex form of business in the SPM Principles of Accounting syllabus. After sole proprietorships and partnerships, a company limited by shares brings one important new idea: the business as a legal entity separate from its owners. The owners are called shareholders, capital is raised through the issue of shares, and profits are distributed as dividends. You need to understand the characteristics of a company, the types of capital and shares, how to record the issue of shares, how owners' equity is arranged, and how to calculate and record cash dividends.

This chapter matters because it brings together almost every skill you have learned in Form 4 and Form 5 (double entry, ledger accounts, the trial balance, the income statement and the statement of financial position) and applies them to a larger company. You need to know new terms such as ordinary shares, preference shares, issued share capital, paid-up share capital, reserves, retained earnings and dividends. A single wrong term can cost marks, so use each term precisely.

In the accounting cycle, this chapter sits near the end, in the preparation of financial statements for a specific type of entity. It assumes you already know how to close accounts and prepare an income statement. The focus here is the equity section of a company's statement of financial position, which looks very different from the capital section of a sole trader. The chapter also shows how companies in Malaysia prepare their accounts.

Content Standards

14.1 Introduction to Companies Limited by Shares

Pengenalan kepada Syarikat Berhad Menurut Syer

Learning Standards (official DSKP wording, in Malay)

  • 14.1.1Menerangkan tatacara penubuhan Syarikat Berhad Menurut Syer mengikut Akta Syarikat 2016
  • 14.1.2Menyatakan kandungan Perlembagaan Syarikat Berhad Menurut Syer
  • 14.1.3Membandingkan ciri Syarikat Persendirian dan Syarikat Awam
  • 14.1.4Memberikan: (i) contoh Syarikat Persendirian; dan (ii) contoh Syarikat Awam yang tersenarai dalam Bursa Malaysia

14.2 Types of Capital and Issue of Shares

Jenis modal dan terbitan syer

Learning Standards (official DSKP wording, in Malay)

  • 14.2.1Menerangkan: (i) jenis modal syer (ii) ciri Syer Biasa dan Syer Keutamaan bersifat kumulatif
  • 14.2.2Mengira modal diterbitkan dan berbayar penuh
  • 14.2.3Merekod terbitan syer dalam Jurnal Am
  • 14.2.4Memindahkan catatan daripada Jurnal Am ke lejar
  • 14.2.5Mengusulkan tindakan sekiranya modal diterbitkan tidak habis dilanggan atau terlebih langganan dalam tempoh yang ditetapkan. Kuiz Tiada Modal Berdaftar Rujuk Seksyen 74, Akta Syarikat 2016

14.3 Owners' Equity of a Company Limited by Shares

Ekuiti Pemilik Syarikat Berhad Menurut Syer

Learning Standards (official DSKP wording, in Malay)

  • 14.3.1Menunjukkan komponen Ekuiti Pemilik dalam Penyata Kedudukan Kewangan
  • 14.3.2Membezakan komponen Ekuiti Pemilik bagi Syarikat Berhad Menurut Syer, Pekongsian dan Milikan Tunggal

14.4 Cash Dividends

Dividen tunai

Learning Standards (official DSKP wording, in Malay)

  • 14.4.1Menerangkan maksud dividen tunai
  • 14.4.2Menjelaskan jenis dividen tunai
  • 14.4.3Mengira: (i) dividen interim dan dividen akhir (ii) dividen syer keutamaan dan syer biasa bagi beberapa tahun kewangan
  • 14.4.4Membincangkan sebab berlakunya dividen tertunggak
  • 14.4.5Merumuskan hak pemegang syer keutamaan bersifat kumulatif terhadap dividen tertunggak

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

Key ideas in this chapter

What a Company Limited by Shares Is

A company limited by shares is a legal entity separate from its owners, formed under the Companies Act. This means the company can own assets, owe debts, sue and be sued in its own name, not in the name of the shareholders. Its key feature is limited liability, meaning shareholders are only responsible up to the amount unpaid on their shares. If the company is wound up, the personal property of shareholders cannot be taken to pay the company's debts.

Other features include perpetual succession (the company continues even if a shareholder dies or sells their shares), management by a board of directors, and ownership divided into small units called shares. As a simple example, if Maju Berhad issues 100,000 shares and Mr Ali buys 5,000 shares, Mr Ali owns 5 percent of the company but his house remains safe from the company's creditors.

Private and Public Companies

There are two main types. A private company (Sdn. Bhd.) has a limited number of shareholders, does not offer shares to the public, and transfer of shares is restricted. A public company (Berhad or Bhd.) may offer shares to the public and its shares can be traded more openly. Both remain separate entities with limited liability.

This distinction matters when you answer structured questions asking you to distinguish the features of the two types of company, or to compare a company with a sole proprietorship and a partnership. For example, Kedai Buku Ilmu Sdn. Bhd. cannot sell shares on the stock market, while Pengangkutan Sejahtera Berhad may do so after meeting certain conditions.

Ordinary and Preference Shares

A company's capital is divided into two main types of share. Ordinary shares give their holders voting rights and the right to receive a dividend that varies with the company's profit; ordinary shareholders bear the highest risk but can also receive the greatest reward. Preference shares give a dividend at a fixed rate and take priority over ordinary shares when dividends are distributed.

For example, if Aman Berhad declares a dividend, the holders of 6 percent preference shares receive their fixed dividend first, then the balance is distributed to the ordinary shareholders. The fixed rate of preference shares means that even if the company makes a large profit, preference shareholders only receive the set rate, for example 6 percent on the paid-up preference share capital.

Types of Share Capital

You must distinguish the capital terms precisely. Issued share capital is the value of shares issued to shareholders. Paid-up share capital is the amount of money received from shareholders for those shares. Under the Companies Act 2016 in Malaysia, par value and authorised capital have been abolished, so shares are issued at an issue price with no par value.

As an illustration, if Bijak Berhad issues 200,000 ordinary shares at RM1 each and all money is received, then the issued share capital and the paid-up share capital are both RM200,000. A difference only arises when part of the money is still outstanding, in which case paid-up capital is lower than issued capital.

Issue of Shares and Double Entry

When a company issues shares for cash, the basic effect is that an asset (bank) increases and equity (share capital) increases. The entry is Debit Bank and Credit Share Capital. The type of share capital account depends on the type of share issued, namely Ordinary Share Capital or Preference Share Capital.

Example of issuing ordinary shares: Sinar Berhad issues 150,000 ordinary shares at RM1 each and receives all the money. Entry: Debit Bank RM150,000, Credit Ordinary Share Capital RM150,000. Example of issuing preference shares: the same company issues 50,000 6 percent preference shares at RM1 each. Entry: Debit Bank RM50,000, Credit Preference Share Capital RM50,000. Each type of share needs its own share capital account in the ledger.

Owners' Equity of a Company

The owners' equity of a company limited by shares consists of three main components: share capital, reserves, and retained earnings (also called accumulated profit). Share capital is the money raised from shareholders. Retained earnings are the accumulated profits not yet distributed as dividends and kept within the company to grow the business.

Example arrangement of the equity section: Ordinary Share Capital RM200,000, 6 percent Preference Share Capital RM50,000, General Reserve RM20,000, Retained Earnings RM35,000, giving total owners' equity of RM305,000. This total must equal the company's net assets, in line with the accounting equation: Assets = Liabilities + Equity.

Capital Reserves and Revenue Reserves

A reserve is a profit or surplus set aside for a particular purpose. Revenue reserves arise from ordinary operating profits and can be distributed as dividends, for example the General Reserve and Retained Earnings. Capital reserves arise from non-operating transactions and normally cannot be distributed as cash dividends.

For example, if Harmoni Berhad transfers RM10,000 from retained earnings to the General Reserve, the entry is Debit Retained Earnings RM10,000, Credit General Reserve RM10,000. This transfer does not change the total owners' equity; it merely rearranges accumulated profit into a portion earmarked for future needs.

Cash Dividends: Calculation

A dividend is a portion of profit distributed to shareholders. For preference shares, the dividend is calculated at the fixed rate on the paid-up preference share capital. For ordinary shares, the dividend is usually stated as sen per share or a percentage. Dividends can be an interim dividend (declared during the year) or a final dividend (proposed at the year end).

Example of a preference share calculation: 50,000 6 percent preference shares at RM1 each means the dividend is 6 percent x RM50,000 = RM3,000. Example of an ordinary share calculation: 200,000 ordinary shares with a dividend of 5 sen per share means the dividend is 200,000 x RM0.05 = RM10,000. Always use paid-up capital, not the number of issued shares, if some shares are not fully paid.

Cash Dividends: Entries and Presentation

When a dividend is declared and paid in cash, the effect is that retained earnings decrease and bank decreases. For a dividend that has been paid, the entry is Debit Dividend (or Retained Earnings) and Credit Bank. For a final dividend that is proposed but not yet paid at the reporting date, it is shown as a current liability, namely Dividend Payable.

Example: Cahaya Berhad pays an ordinary share dividend of RM10,000 in cash. Entry: Debit Ordinary Share Dividend RM10,000, Credit Bank RM10,000. At the end of the period, the dividend account is transferred to retained earnings, reducing the balance of accumulated profit.

Common mistakes

Study plan for this chapter

  1. Start with the features of a company: memorise and understand separate legal entity, limited liability, perpetual succession, and the difference between a private and a public company.
  2. Learn the vocabulary: list the terms ordinary shares, preference shares, issued capital, paid-up capital, reserves, retained earnings, and dividends, each with its precise meaning.
  3. Practise share issue entries: work through at least five examples of issuing ordinary and preference shares for cash until Debit Bank, Credit Share Capital becomes automatic.
  4. Practise dividend calculations: calculate preference dividends at the fixed rate and ordinary dividends at sen per share, always using paid-up capital as the basis.
  5. Build a complete equity section: arrange share capital, reserves, and retained earnings in the statement of financial position format until you can prepare it without referring to an example.
  6. Review common mistakes: make a list of your own errors, especially treating dividends as an expense and confusing paid-up with issued capital, then correct each one.
  7. Do past structured and essay questions: answer within the set time and compare your answers with the correct format to get used to presenting answers that earn full marks.

FAQ

What is the difference between ordinary and preference shares?
Ordinary shares give voting rights and a dividend that varies with profit, with higher risk. Preference shares give a dividend at a fixed rate and take priority over ordinary shares when dividends are distributed. For example, 6 percent preference shares on RM50,000 capital always receive RM3,000 first.
Is a dividend the same as an expense?
No. A dividend is a distribution of profit to shareholders, not an operating expense. It is not included in the income statement; instead it reduces retained earnings in the equity section. The basic entry is Debit Dividend, Credit Bank when paid in cash.
What is the difference between issued and paid-up share capital?
Issued share capital is the value of shares issued to shareholders, while paid-up share capital is the amount of money received. If all the money has been received, the two are equal. Always use paid-up capital as the basis for calculating dividends.
How do I present the owners' equity of a company?
Arrange three components: share capital (ordinary and preference separately), reserves (such as the General Reserve), and retained earnings. The total of the three is the owners' equity, which must equal assets minus liabilities according to the accounting equation.
Where can I get extra help for this chapter?
You can practise on your own with past papers, or get 1-to-1 guidance from an experienced teacher. A paid one-hour trial class (from RM50 an hour) can be arranged through WhatsApp.

Learning materials for this chapter

Other chapters

Analysis and Interpretation of Financial Statements for Decision Making

Chapter 1

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Incomplete Records

Chapter 2

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Accounting for Internal Control

Chapter 3

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Accounting for Partnerships

Chapter 4

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Accounting for Clubs and Societies

Chapter 6

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Cost Accounting

Chapter 7

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