Company accounts: share issues, debentures, reserves, dividends, and financial statement disclosure
Domain 6 examines company equity and debt finance. Ordinary shares carry voting rights and variable dividends; preference shares carry a fixed dividend and usually no vote. Issue at a premium: debit bank for proceeds, credit share capital with nominal value and credit share premium with the excess. Share premium is a capital reserve and is not available for dividends.
Debentures and reserves
Debentures are long-term borrowings. Interest is a finance cost in profit or loss, not an appropriation of profit. Reserves include share premium, revaluation surplus and retained earnings. Dividends are distributions of profit; interim dividends are paid during the year, while final dividends are declared after the year end.
Worked example
A company issues 100,000 ordinary shares of N$1 at N$1.50, raising N$150,000. Records: Dr Bank 150,000; Cr Ordinary share capital 100,000; Cr Share premium 50,000. It also has 10% debentures of N$200,000, so finance cost is N$20,000. After charging debenture interest, profit before tax is N$150,000, tax N$30,000, dividend paid N$25,000. Profit for the year = 120,000; retained earnings increase = 120,000 − 25,000 = N$95,000. Reasoning: debenture interest reduces profit before tax, while the dividend is a distribution from retained earnings.
Disclosure
Present share capital, reserves, borrowings, tax and dividends in the statement of changes in equity and notes. A final dividend proposed after the reporting date is not a liability; disclose it.
Traps
Treating debenture interest as a dividend; using share premium to pay dividends; charging dividends as an expense; omitting unpaid preference dividends from disclosure; recording the full issue proceeds as share capital.