Key Terms
Key Terms: Accounting for a Company Limited by Shares
This chapter is full of precise terms that must be understood, not just memorised. Each core term below comes with a short meaning, a memory hook and how it is tested in the exam.
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Company Limited by Shares, Companies Act 2016 & the Constitution
- A Company Limited by Shares is a separate legal entity registered with the Companies Commission of Malaysia (SSM) under the Companies Act 2016; members' liability is LIMITED to the amount unpaid on their shares. Memory hook: 'Berhad' means 'limited liability', so owners' personal assets cannot be claimed for the company's debts.
- Incorporation steps in brief: (i) apply for the company name, (ii) lodge the incorporation documents with SSM, (iii) SSM issues the Notice of Registration. Exams often ask you to LIST the steps in order or name the registering body (SSM); do not confuse it with the tax authority (LHDN) or Bursa Malaysia.
- The company Constitution (formerly the Memorandum & Articles) is an optional document setting the internal rules: name, the company's objects/powers, the rights attached to each class of shares, and rules on meetings and appointing directors. Structured questions often ask you to STATE the contents of the Constitution, so memorise three or four of these items.
Private Company (Sdn. Bhd.) vs Public Company (Bhd.)
- A Private Company (Sendirian Berhad / Sdn. Bhd.) has a maximum of 50 shareholders, may NOT invite the public to buy shares, and the transfer of shares is restricted. Typical example: a family business or small firm. Hook: 'Sdn.' = 'Sendirian' (private) = closed, insiders only.
- A Public Company (Berhad / Bhd.) MAY invite the public to subscribe for shares, has no limit on the number of shareholders, and if listed may be traded on Bursa Malaysia. Distinguish: 'Bhd.' alone = public; 'Sdn. Bhd.' = private. Give an example of a listed public company you know as your answer.
- How it is tested: a comparison table by criteria (number of members, inviting the public, transfer of shares, listing). The marks depend on giving the correct feature for BOTH columns, not describing only one type.
Types of Share Capital & 'No Authorised Capital'
- Subscribed capital is the value of shares applied for by subscribers; Issued capital is the value of shares issued; Fully paid-up capital is the value of shares that has been paid in full. Issued and fully paid capital = number of shares × issue price. Hook: 'applied → issued → paid'.
- Under the Companies Act 2016, there is NO longer any concept of Authorised (Registered) Capital. This is often tested as a true/false or fill-in item; the answer: a company no longer needs to state an authorised capital. Do not write 'Authorised Capital' in the Owner's Equity.
- Oversubscribed = applications EXCEED the shares offered; undersubscribed = applications are FEWER. Suggested action: if oversubscribed, refund the excess money or allot pro-rata; if undersubscribed, extend the period or cancel the issue. Questions ask you to PROPOSE the appropriate action.
Ordinary Shares vs Cumulative Preference Shares
- Ordinary Shares: the dividend rate is NOT fixed (it depends on profit), holders have voting rights, and they receive the residual after preference shareholders are paid. Hook: 'Ordinary = riskier but powerful (votes)'.
- Cumulative Preference Shares: the dividend rate is FIXED (e.g. 6%), paid with PRIORITY before ordinary shares, and if a dividend is not declared in a year it ACCUMULATES as arrears. Hook: 'Cumulative = it accumulates', so unpaid dividends do not disappear.
- How it is tested: compute the preference dividend (share value × rate %) across several years, including a year with no dividend, then pay it out together. Many candidates forget to add the prior years' arrears; this is the main trap that loses marks.
Owner's Equity of a Company
- A company's Owner's Equity consists of Share Capital (Ordinary + Preference Shares) and Reserves, chiefly Retained Profits. It is shown in the Statement of Financial Position. Hook: 'Share Capital + Reserves = Owner's Equity'.
- Difference from other forms: a Sole Proprietorship uses a single Capital account plus Drawings; a Partnership uses each partner's Capital and Current accounts; a Company uses Share Capital plus Retained Profits (no personal drawings account, as owners are paid through dividends).
- How it is tested: correctly present the Owner's Equity section or contrast the components across the three business forms. Remember: do NOT include Authorised Capital, and Retained Profits must be shown as a reserve, not merged into Share Capital.
Cash Dividends: Interim, Final & Arrears
- A cash dividend is a distribution of profit in CASH to shareholders. An interim dividend is declared and paid DURING the financial year (by directors), while a final dividend is proposed at the YEAR-END and approved at the general meeting. Hook: 'interim = mid-way, final = at the end'.
- Dividend arrears occur when the company does NOT declare the cumulative preference dividend in a given year because profit is insufficient or there is no profit. Common reasons: losses, weak cash flow, or profit retained for expansion. Questions ask you to DISCUSS the reasons.
- Rights of cumulative preference shareholders: the arrears must be paid FIRST and IN FULL before ordinary shareholders receive any dividend in the year payment resumes. This is a key concluding point; be sure to state the priority right over the accumulated arrears.
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Bank | 100,000 | |
| Ordinary Share Capital | 100,000 | |
| Total | 100,000 | 100,000 |
This General Journal entry must balance; issued capital = 100,000 × RM1.
| Year | Due (RM) | Paid (RM) | Accumulated Arrears (RM) |
|---|---|---|---|
| 2022 | 3,000 | 0 | 3,000 |
| 2023 | 3,000 | 0 | 6,000 |
| 2024 | 3,000 | 9,000 | 0 |
Annual dividend due = 50,000 × RM1 × 6% = RM3,000. Arrears for 2022 & 2023 are paid together in 2024.
See the full glossary for this chapter →
Does a company still need to state an Authorised Capital in its accounts?
No. Under the Companies Act 2016, the concept of Authorised Capital has been abolished, so it is no longer shown in Owner's Equity.
What is the main difference between an interim and a final dividend?
An interim dividend is declared and paid mid-year by the directors, while a final dividend is proposed at year-end and approved by shareholders at the general meeting.
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