Revision Notes
Revision Notes: Accounting for a Company Limited by Shares
Condensed revision notes for Form 5 Chapter 5 covering the formation of a company limited by shares under the Companies Act 2016, types of capital and share issue, owners' equity and cash dividends.
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Formation of a Company Limited by Shares
- A company limited by shares is a separate entity incorporated and registered under the Companies Act 2016; it has a legal identity separate from its owners and members' liability is limited to the amount unpaid on their shares.
- Formation steps: submit an application for registration to the Registrar of Companies, prepare the company Constitution (if any), appoint directors and a secretary, and receive the Certificate of Incorporation confirming the company legally exists.
- The company Constitution contains the company name, objectives and business activities, share capital and rights attached to shares, the rights and duties of directors and members, and rules for meetings.
- Refer to the Companies Act 2016: the concept of authorised (registered) capital has been abolished, so a company is no longer bound by a registered capital ceiling when issuing shares.
Private Company versus Public Company
- A private company (Sdn. Bhd.) is limited to 50 members, cannot invite the public to subscribe for shares, and the transfer of shares is restricted by the Constitution.
- A public company (Berhad / Bhd.) has no limit on the number of members, may invite the public to subscribe for shares through a prospectus, and its shares are freely transferable.
- Example of a private company: a family business or small firm using the Sdn. Bhd. suffix and not listed on the stock market.
- Example of a public company: a large company listed on Bursa Malaysia whose shares can be traded by the public.
Types of Share Capital and Share Issue
- Issued capital is the value of shares issued to investors, while fully paid-up capital is the amount that has been fully received from shareholders.
- Issued and fully paid-up capital = number of shares issued x issue price per share.
- If the issue is under-subscribed: the amount applied for is less than offered; the company may accept the subscriptions received or cancel the issue if the minimum subscription is not met.
- If over-subscribed: applications exceed the shares offered; the company may allot shares on a pro-rata basis and refund excess money to unsuccessful applicants.
Ordinary Shares versus Cumulative Preference Shares
- Ordinary shares: holders have voting rights, receive a variable dividend depending on profit, and bear the highest risk as they are paid after preference shares.
- Cumulative preference shares: the dividend is paid at a fixed rate (a percentage of share value), takes priority over ordinary shares, but usually carries no voting rights.
- The cumulative feature means a dividend not declared in a given year (arrears of dividend) is carried forward and must be settled in full before any dividend is paid to ordinary shareholders.
- Preference dividend = number of preference shares x value per share x preference rate; this amount is fixed each year.
Owners' Equity of a Company Limited by Shares
- The owners' equity components in the Statement of Financial Position include Ordinary Share Capital, Preference Share Capital, reserves and Retained Profit.
- For a sole proprietorship, owners' equity is shown as a single Capital account adjusted by drawings and net profit.
- For a partnership, equity is shown for each partner through separate Capital Accounts and Current Accounts.
- For a company, equity consists of share capital from many shareholders plus reserves and retained profit; there is no drawings account because owners receive returns through dividends.
Cash Dividends
- A cash dividend is the distribution of part of a company's profit in cash to shareholders as a return on their investment.
- Types of cash dividend: interim dividend declared by the directors during the financial year, and final dividend proposed at year-end and approved by shareholders at the general meeting.
- Total ordinary dividend = number of ordinary shares x value per share x dividend rate; total dividend for the year = interim dividend + final dividend.
- Arrears of dividend arise when a company does not declare the cumulative preference dividend because profit is insufficient or there is no profit; it accumulates for subsequent years.
- Right of cumulative preference shareholders: all arrears of dividend must first be paid in full when profit is sufficient, before ordinary shareholders receive any dividend.
| Particulars | Debit | Credit |
|---|---|---|
| Bank | 100,000 | |
| Ordinary Share Capital | 100,000 | |
| (Issue of 100,000 ordinary shares at RM1 each, fully paid) | ||
| Total | 100,000 | 100,000 |
Example: the company issues 100,000 ordinary shares at RM1 each, fully subscribed and received in cash.
| Particulars | RM |
|---|---|
| Owners' Equity | |
| Ordinary Share Capital (200,000 shares) | 200,000 |
| 6% Preference Share Capital (100,000 shares) | 100,000 |
| Retained Profit | 50,000 |
| Total Owners' Equity | 350,000 |
How does the Companies Act 2016 affect share capital?
The Companies Act 2016 abolished the concept of authorised (registered) capital, so a company no longer has a ceiling on the shares it may issue and records only issued and fully paid-up capital.
How are arrears of dividend on cumulative preference shares calculated?
Compute the fixed preference dividend for each year (shares x value per share x rate), then add up the amounts for the undeclared years; that accumulated total must be paid first when profit is sufficient, before ordinary shares are paid.
What action does a company take if a share issue is over-subscribed?
The company allots shares on a pro-rata basis according to applications and refunds excess money to unsuccessful applicants or applies it to reduce the balance due.
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