Content Standard 14.3

Owners' Equity of a Company Limited by Shares

Ekuiti Pemilik Syarikat Berhad Menurut Syer

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Explanation

Owners' equity of a company limited by shares refers to the interest or claim of the owners (the shareholders) over the net assets of the company. Unlike a sole proprietorship and a partnership, which use a personal Capital Account, the owners' equity of a limited company is reported in several distinct components in the Owners' Equity section of the Statement of Financial Position. The two broad groups of these components are Share Capital and Reserves. This standard requires students to identify each component, arrange them correctly in the Statement of Financial Position, and distinguish them from the equity structure of a partnership and a sole proprietorship.

Share Capital is the capital raised through the issue of shares to the public or to investors. Several capital terms must be clearly distinguished. Authorised Capital (also called registered capital) is the maximum amount of share capital a company is permitted to issue under its incorporation documents; it is shown only as information and is not included in the totals of the Statement of Financial Position. Issued Capital is the portion of authorised capital that has been offered and issued to shareholders, while Paid-up Capital is the amount that shareholders have paid. Share capital may consist of Ordinary Shares (holders bear the highest risk but have voting rights and receive variable dividends) and Preference Shares (holders receive a fixed rate of dividend and rank ahead of ordinary shares when dividends are distributed).

Reserves are profits or surpluses retained within the company and not yet distributed as dividends. Reserves are divided into two types. Capital Reserves arise from capital transactions and cannot be distributed as cash dividends; the main example is Share Premium, the excess of the issue price of shares above their nominal (par) value. Revenue Reserves arise from ordinary operating activities and are distributable; examples include Retained Earnings (the accumulated undistributed profit balance) and General Reserve (profit set aside for general purposes such as strengthening the financial position). Retained Earnings increases with the current year's profit and decreases when dividends are declared or when amounts are transferred to other reserves.

In the Statement of Financial Position, the Owners' Equity section begins with Share Capital (Issued and Paid-up), separating Ordinary Shares and Preference Shares, followed by a list of Reserves such as Share Premium, General Reserve and Retained Earnings. The total of all these components gives Total Owners' Equity, which must equal the Net Assets of the company (Total Assets minus Total Liabilities) in line with the accounting equation. Authorised Capital may be shown as a note only, because it does not contribute to the actual equity total.

Students also need to understand how this differs from other types of business. In a sole proprietorship, owners' equity is a single Capital Account adjusted by net profit and the owner's drawings. In a partnership, each partner has a separate Capital Account (and usually a Current Account), and profit is shared according to the partnership ratio. By contrast, the equity of a limited company consists of share capital raised from many shareholders, returns are given as dividends (not drawings), and undistributed profit is retained as reserves. These differences reflect the separate entity concept and limited liability that are the main features of a limited company.

Worked examples

Example 1: Issue of shares at a premium and Share Premium

Maju Bestari Berhad issues 100,000 ordinary shares with a par value of RM1 each at an issue price of RM1.20 per share. All money is received in cash.

Cash received = 100,000 x RM1.20 = RM120,000. Par value = 100,000 x RM1 = RM100,000. Share Premium = RM120,000 - RM100,000 = RM20,000.

Double entry: Debit Bank RM120,000; Credit Ordinary Share Capital RM100,000; Credit Share Premium RM20,000.

In the Statement of Financial Position, Ordinary Share Capital RM100,000 is reported under Share Capital, while Share Premium RM20,000 is reported under Reserves (Capital Reserve).

Example 2: Owners' Equity section in the Statement of Financial Position

Indah Permata Berhad has the following information at 31 December 2024: Authorised Capital 500,000 ordinary shares of RM1 and 100,000 preference shares of RM1. Issued and Paid-up Capital: 300,000 ordinary shares of RM1 and 50,000 6% preference shares of RM1. Share Premium RM15,000, General Reserve RM25,000, Retained Earnings RM40,000.

The Owners' Equity section starts with Share Capital (Issued and Paid-up): Ordinary Shares RM300,000; 6% Preference Shares RM50,000; total Share Capital RM350,000.

Reserves: Share Premium RM15,000; General Reserve RM25,000; Retained Earnings RM40,000; total Reserves RM80,000.

Total Owners' Equity = RM350,000 + RM80,000 = RM430,000. Authorised Capital (600,000 shares worth RM600,000) is shown only as a note and is not included in the total.

Example 3: Effect of dividends on Retained Earnings

Sinar Gemilang Berhad has an opening Retained Earnings balance of RM30,000. Net profit after tax for the current year is RM50,000. The company declares an ordinary dividend of RM12,000 and transfers RM8,000 to General Reserve.

Closing Retained Earnings = RM30,000 + RM50,000 - RM12,000 - RM8,000 = RM60,000.

Entry for transfer to reserve: Debit Retained Earnings RM8,000; Credit General Reserve RM8,000. The closing Retained Earnings balance of RM60,000 is reported under Reserves in the Statement of Financial Position.

Practice

State two main components of the owners' equity of a company limited by shares and give one example of each.

Answer: The two main components are Share Capital and Reserves. An example of Share Capital is Ordinary Shares or Preference Shares (Issued and Paid-up Capital). An example of Reserves is Share Premium (capital reserve) or Retained Earnings and General Reserve (revenue reserves). Share Capital represents capital raised from shareholders, while Reserves represent profits or surpluses retained and not yet distributed.

Distinguish between Authorised Capital, Issued Capital and Paid-up Capital. Which is included in the total in the Statement of Financial Position?

Answer: Authorised Capital is the maximum amount of share capital the company is permitted to issue under its incorporation documents. Issued Capital is the portion of authorised capital that has been offered and issued to shareholders. Paid-up Capital is the amount paid by shareholders. Only the Issued and Paid-up Capital is included in the Owners' Equity total; Authorised Capital is shown only as a note and is not included in the total.

Cahaya Murni Berhad issues 200,000 ordinary shares with a par value of RM1 at RM1.15 per share for cash. Show the double entry and state how the related amounts are reported in the Statement of Financial Position.

Answer: Cash received = 200,000 x RM1.15 = RM230,000. Par value = 200,000 x RM1 = RM200,000. Share Premium = RM30,000. Double entry: Debit Bank RM230,000; Credit Ordinary Share Capital RM200,000; Credit Share Premium RM30,000. In the Statement of Financial Position, Ordinary Share Capital RM200,000 is reported under Share Capital, and Share Premium RM30,000 is reported under Reserves (capital reserve).

Explain three differences between the owners' equity of a limited company and that of a sole proprietorship and a partnership.

Answer: First, a sole proprietorship has one Capital Account and a partnership has a Capital Account and a Current Account for each partner, while a limited company has Share Capital raised from many shareholders plus Reserves. Second, the return to owners in a sole proprietorship and partnership is drawings, but in a limited company it is dividends. Third, undistributed profit in a sole proprietorship or partnership is added directly to the Capital Account or Current Account, while in a limited company it is retained as reserves such as Retained Earnings and General Reserve. These differences reflect the separate entity concept and limited liability of a limited company.

Exam tips

Key terms

Authorised Capital: The maximum amount of share capital a company is permitted to issue under its incorporation documents; shown only as a note.
Issued and Paid-up Capital: The portion of share capital issued to shareholders and paid; included in the total of Owners' Equity.
Share Premium: A capital reserve arising when shares are issued above par value; cannot be distributed as a cash dividend.
Retained Earnings: The accumulated undistributed profit balance; a revenue reserve within owners' equity.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

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