Topic 5 - Completing The Balance Sheet

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This article is a topic within the subject Accounting 1B.


Required Reading

Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 495-511.

Breaking Down Equity


  • Share Capital – What we put in
  • Reserves – Direct adjustments to equity
  • Retained Profits – What the firm has made (Opening + Revenue – Expenses – Dividends)

Equity funding is 1 of 3 main ways of raising funds (debt & profit making activities). The issuance of shares can also enhance the firm’s profile (via SX listing), provide takeover defence & for employee benefits.

Share Capital

[2] [3] Share Capital or ‘contributed equity’ can be raised via ordinary, preferred, founder or deferred shares. First, the firm makes an offer; the public make an application & provided there is enough funds to go ahead with the raising shares are allotted.

Share Issues – Institutional Investors

There is no need for a costly prospectus or investment banking team & the firm may be unable to access public markets. Issue 200,000 shares @ $2.20 each.

  • DR Cash 440,000 (A)
    • CR Share Capital, 440,000 (OE)

Share Issues – Public IPO

A firm may go public to gain the desired capital structure & access large amounts of equity funding.

Gordon Ltd. Issues 200,000 shares @ $2.20 each, application money received on the 10th April, allotted on the 28th.

  • 10th April – NB - Application is an Equity Account
    • DR Cash Trust 440,000,
      • CR Application 440,000 (Cash held in trust by solicitor until allotment of shares as it’s not the firms)
  • 18th April
    • DR Cash 440,000,
      • CR Cash Trust 440,000 (Company legally owns the cash once the allotment has been made)
    • DR Application 440,000
      • CR Share Capital 440,000, (discharge obligation to create shares)

If there are excess application funds the firm can send cheques back, Taylor Ltd refunded 20,000 shares x 20c payable on application. This obligation is discharged by:

  • DR Application 4000
    • CR Cash Trust 4000

Share Issues – Public Instalments

Issue shares to the general public by way of a prospectus, payable in instalments. Instalment payments make it more attractive to investors particularly in recessions or project based companies.

Glebe Ltd issues 200,000 shares for $2.20 each, $1.60 per share down payment with the application. On allotment, another $0.40 is due & a further $0.20 is due when determined by the directors. Application money received 10th April, shares allotted on the 28th, allotment money received on the 10th of may, directors call for the remaining amount owing on the 12th of July – received on the 28th of July

  • 10th April
    • DR Cash Trust 320,000,
      • CR Application 320,000
  • 28th April (Shares Allotted + $0.40 due)  Allotment is an Equity Account
    • DR Cash 320,000
      • CR Cash Trust 320,000
    • DR Application 320,000
      • CR Share Capital 320,000
    • DR Allotment 80,000
      • CR Share Capital 80,000
  • 10th May (Allotment Money ($0.40) Received)
    • DR Cash 80,000
    • CR Allotment 80,000
  • 12th July(Call ‘Called’ by Directors)
    • DR Call 40,000
      • CR Share Capital 40,000
  • 28th July (Called Cash Received)
    • DR Cash 40,000
      • CR Call 40,000

Under Subscriptions & Oversubscriptions

[4] An under subscription occurs when too few applicants apply. Shares can still be allotted if the minimum subscription condition is met. Abandonment occurs 4 months after issuing the disclosure document (offer). Oversubscription occurs when too many applicants apply i.e. more applications are received for shares than the amount of shares offered. Directors must decide who & how much applicants are to receive (possibly 1st come 1st serve). When the applicant is allotted fewer shares than he/she applied for the firm may:

  1. Keep the excess application funds & apply them to allotment or future calls
  2. Return funds to the applicant

Subsequent Share Issues, Takeovers & Complications


  • Rights Issue - issue ordinary shares to existing holders on a pro rata basis. Renounceable rights can be sold
  • Bonus Issues - Also known as stock dividends given to shareholders on a pro rata basis
    • A company who has accumulated reserves may distribute it to existing shareholders by making a bonus issue of additional shares ‘capitalising reserves into equity’ otherwise it is done via retained earnings
    • Reasons – good profitability & cash dividends in the future (if DPS maintained), fake a ‘dividend’
    • No change in assets or earnings - value remains the same  shares outstanding increase = share price falls
    • DR Revaluation Reserve, CR Share Capital
    • DR Bonus Issue Declared CR BI Payable, DR Revaluation Res., CR BI Declared, DR BI Payable, CR Share Cap.
      • More accessible (appeal) to smaller investors may help with take over defence
  • Share Splits - Involves dividing the number of shares on issue, no effect on the company (no entries required)
  • Share Buy Backs - A ‘type’ of dividend, the firm repurchases shares (& cancels them) at fixed tender or at market
    • Reduces issued share capital
    • Must Not – affect liquidity or be unfair to different classes of shareholders
    • Reasons – company is undervalued (efficiently manage surplus funds), reducing equity–capital structure mgmt
    • Buyback @ Issue Price - $300,000 for 30,000 shares issued @ $10, DR Share Capital 300,000, CR Cash 300,000
    • Buyback NOT at Issued Price - $400,000 for 30,000 shares issued @ $10,
      • DR Share Capital 300,000, DR Retained Profits 100,000, CR Cash 400,000
  • Share Options - Right to buy/sell an agreed number of shares at a later date at a predetermined price.

Takeover Defence


  • Issue Bonus Shares & Share Splits – Acquirer needs to withdraw & resubmit an offer for the news shares
  • Buy Backs – use up company assets - Cash (may be less attractive)
  • Private Placement – change the balance of voting rights with a friendly institution.

Forfeiture of Shares

[7] It is the cancellation of a shareholder’s rights as a member with respect of particular shares. Under common law, this only occurs if the investor fails to meet a call payment. The holders ownership is nullified (can be reversed if paid or transferred to another person) but the share per se are not cancelled.

Carter Ltd share capital was 100,000 shares @ $1, with 50c having been paid. A Call was made on the 1st of July; the money was received except 1 shareholder who held 10,000 shares on August 1st. Directors decided to forfeit the shares on Sept. 1st.

  • 1st July (20c Call Made)
    • DR Call 20,000
      • CR Share Capital 20,000
  • 1st August (Most Money Received Except 1 Shareholder)
    • DR Cash 18,000
      • CR Call 18,000
  • 1st September (Forfeiture of Shares with Call Outstanding = 70c)
    • DR Share Capital 7,000
      • CR Call 2,000
      • CR Forfeiture of Shares 5,000 - Reserve or Liability Account
  • Re – Issue of Forfeited Shares (10,000 Shares @ Discounted Price of $0.55c)
    • DR Cash 5,500
    • DR Forfeiture of Shares 1,500
      • CR Share Capital 7,000
  • Return of Surplus to Original Shareholder
    • DR Forfeiture of Shares 3,500
      • CR Cash 3,500

Retained Earnings, Dividends & Reserves

[8] Closing Retained Earnings = Opening +- (Changes in acct policy) + Current Profit + Transfers to & from Reserves – Dividends


Dividends represent the distribution of profits to shareholders. It reduces equity & generally is paid out of retained profits.

  • Dividends Declared
    • DR Retained Earnings
      • CR Dividends Payable
  • Dividends Paid
    • DR Dividends Payable
      • CR Cash


[9] Reserves are not defined in the accounting standards. They simply reflect where certain gains or losses have originated. Hence they are direct adjustments to equity. E.g. revaluation reserves from week 3. DR Acc. Depreciation, CR Asset, DR Asset, CR Revaluation Reserve. Or Foreign Currency Translation Reserve, or Capital Redemption for redeeming pref. Shares.

  • General Reserve – reduces available profit for distribution - possibly reinvesting for growth or rainy day contingencies
    • DR Retained Earnings
      • CR General Reserve
  • Reversal
    • DR General Reserve
      • CR Retained Earnings

Other Considerations

Preference shares are equity unless if it is redeemable by the issuer whereby a fixed amount is due at a fixed date –liability. Converting notes are typically liabilities unless the holder is exposed to changes in the market price of the ordinary shares. E.g. $100 worth of shares at conversion (Liability) OR 100 shares at conversions (Equity)


This is the end of this topic. Click Accounting 1B to go back to the main subject page for Accounting 1B


Textbook refers to Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning

  1. ASB, UNSW
  2. Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 503-506
  3. ASB, UNSW
  4. ASB, UNSW
  5. Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 507-510
  6. ASB, UNSW
  7. ASB, UNSW
  8. Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 507-508
  9. Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 506-507
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