Recording financial information

As an accountant, it is important that the information

recorded in the financial statements are accurate. As a
result, it is pertinent to be able to identify the double
entry principle for assets, liabilities, capital (equity),
income (revenue) and expenditure (expenses).

Double entry table:

Item Increase Decrease
Assets Debit Credit
Liability Credit Debit
Owner's Equity Credit Debit
Income (Revenue) Credit Debit
Expenditure (Expenses) Debit Credit
 On May 20 Sarah J. Parker and her sister invested
$300,000 cash in exchange for shares in a business.
Debit cash (increases the companys asset of cash)
Credit share capital (increases the companys equity)

The Journal
Dr. Cash $300,000

Cr. Share capital $300,000

 On August 27, the owners wish to purchase some office
furniture for the managers office. They estimate that the
furniture will cost $450,000 and they obtain a loan from
VMBS.

The Journal
Dr. Office furniture $450,000
Cr. Bank loan $450,000
 On March 31, the Helsinki Bed & Breakfast declares and
pays dividends of $0.50 per share to the owners of its
3,000 shares totalling $1,500.

Journal entry
Dr. Dividends $1,500
Cr. Cash $1,500

** The declaration of dividends reduces share capital (Dr.) and

the pay out of cash reduces the asset of cash (Cr.)
Companies have shareholders who are issued shares in
exchange for money which will be invested into the
business. Being a shareholder has certain rights and
obligations as they are able to receive dividends and also
make votes on actions which will benefit the company.

Owners equity in a company is called shareholders

equity or share capital. On the balance sheet it consists
of:
Paid-up capital
Retained earnings
Reserves
 Paid up capital can either be common/ ordinary
shares or preference shares. A company is usually
assigned an authorised capital at its incorporation (the
number of shares it is legally authorised to issue).

Retained Earnings is the lifetime cumulative

earnings less lifetime cumulative loss or dividends.
 The term reserves is used to describe an
appropriation of retained earnings (sums set aside
that are not to be distributed).

Profits that are set aside out of the undistributed

profits from the retained profits account are called
revenue reserves. Money in this account is set aside
for a specific purpose. For. e.g. a foreign exchange
reserve account is created to meet any unexpected
situation when a company suffers loss because of
devaluation of foreign currency.
 Capital reserve reserve created by accumulated
surplus of an organisation and is reserved for long
term capital investments. They are not usually
available for distribution as cash dividend and can be
obtained by issuing shares at a premium or revaluing a
fixed asset (gain on the asset).
 When a company goes public and obtains listing on
the Jamaica Stock Exchange (JSE) it can seek to raise
capital by selling its shares to the public. Shares can
either be ordinary shares/ common stock and
preference shares.

Ordinary shareholders are usually aware of the risks of

their investments because if the company makes a
profit, he/she will receive dividends. However, if the
company makes, little or no profit, they may not
receive dividends.
 Ordinary shares typically have a face or par value
(nominal or dollar value written on the face of the
share).

A share with no-par value is determined by the price

an investor is willing to pay for them (market value),
this can be applied to ordinary shares traded on the
JSE (the share price)

Share premium is the amount by which the selling price

of a share exceeds its face value (par value).
 Preference shareholders have some priority over
ordinary shareholders regarding the receipt of
dividends or the distribution of assets upon
liquidation. Cash dividends should be paid to
preference shareholders before common stockholders
are paid and assets (in the case of liquidation) are
given over to them before the ordinary shareholder.
 Preference shares can be of various types. These
are:
Redeemable Preference Shares: A company may
issue this type of shares on the condition that the
company will repay the amount of share capital to the
holders of this category of shares after the fixed period or
even earlier at the discretion of the company.

Irredeemable Preference Shares: These preference

shares, which do not carry the agreement of redemption.
 Convertible Preference Shares: The holders of these
shares has the right to have them converted into equity shares
according to the terms and conditions of the issue.

Non-convertible Preference Shares: The holders of

these shares do not enjoy the right to get the shares converted
into equity shares.

Participating Preference Shares: The holder of this type

of shares enjoy the right to participate in the surplus profits, if
any, after the equity shareholders have been paid dividend at
a rate fixed in the AGM. So the shareholders get additional
dividend with their normal dividend.
 Non-participating Preference Shares: These shares
carry only a fixed rate of dividend without any right to get
additional dividend.

Cumulative Preference Shares: These shares carry the

right to a fixed amount of dividend. The holders of these
shares are entitled to get dividend out of future profit if
current years profit is insufficient for the same.

Non-cumulative Preference Share: The dividend for

the shareholders do not accumulate. If there is no sufficient
profit, this type of preference shareholders will not get any
dividend. In this case, the dividend will be lapsed and there
will be no arrear dividend.
 Helsinki and his sisters decide to incorporate their
business. They sold shares to the public at $120 each.
The shares had a par value of $100. They are
authorised to issue 200,000 shares.

One person bought 1000 shares

Journal entry
Dr. Cash $120,000
Cr. Ordinary shares $100,000
Cr. Paid up capital in excess of par $20,000

** Recording the issue of 1000 shares in excess of par value

 If a share is issued at no-par value (the market
determines the value), the entire amount is assigned to
the capital stock account and there will be no
premium. E.g. Triangular Ltd. issues 1,000 shares of
no-par at $2 per share.

Prepare the Journal entry.

Date Details Debit Credit
Aug. Cash 2,000
27 Common Stock 2,000

Issued no-par common

stock
 If Triangular Ltd. Issues 1,000 shares of $1 common
stock. What is the journal entry?

Date Details Debit Credit

Aug. Cash 1,000
27 Common Stock 1,000

Issued common stock at

par.
 Companies are able to buy back their own
redeemable preference share which has benefits for
the company such as:
Helping shareholders who have difficulties in selling their
shares in the open market
Relieving shareholders with grievances against the company
through buying back shares
Retaining control especially for family owned companies.
6,000 preference shares are redeemed at par @ $1 per share
with no new issue of shares would be recorded as such.

Date Details Debit Credit

Aug. 27 Preference share 6,000
Preference share purchase 6,000
Shares to be redeemed

Preference share purchase 6,000

Bank 6,000
Cash paid as redemption

Profit and loss appropriation 6,000

Capital redemption reserve 6,000
Transfer of redemption amount
** Once no new issue has been made, the nominal value
of the shares redeemed MUST be transferred from the
Profit and Loss Appropriation Account to the credit of
the Capital redemption reserve account.

The P&L Appropriation is an account showing the

various ways that a company funds have been used
while the capital redemption reserve account is reserved
for long term capital investment projects.
 7,000 preference shares are redeemed at par @ $1 per
share with a new issue of 7,000 ordinary shares at par.
Date Details Dr. Cr.
31 Dec. Bank/ Cash 7,000
Ordinary share applicants 7,000
Cash received from applicants

31 Dec. Ordinary share applicants 7,000

Ordinary share capital 7,000
Ordinary shares allotted

31 Dec. Preference share capital 7,000

Preference share purchase 7,000
Shares to be redeemed

Preference share purchase

31 Dec. 7,000
Bank
Payment made to redeem shares
7,000
 Helsinki and his sisters decide to change the ordinary
share capital into 6 percent preference shares. Helsinki
had 1,000 shares, Sarah had 300 and Leah had 200
shares with each share valuing $100.
Prepare the Journal entry
Dr. Helsinki (ordinary share capital) $100,000
Dr. Sarah (ordinary share capital) $ 30,000
Dr. Leah (ordinary share capital) $ 20,000
Cr. 6% preference share capital $150,000
** The percentage attached to the preference shares is the dividend
that is paid to shareholders.
 Legally, dividends can be declared and paid from retained
earnings. Economically however, retained earnings are
relied on for the growth of the company.

Cash dividends are distributions of cash to shareholders

(owners) that reduce the retained earnings of the company.
When paid out, they provide a return on shareholders
investment but is constrained by the amount of cash on
hand or available.

** Many companies do not pay cash dividends since

these funds are retained for financing future growth.
 The Board of Directors (BOD) will decide if and when
cash dividends are paid to shareholders. When
accounting for this, there are three important dividend
dates:
Declaration date the BOD announces its intention to pay a
dividend
Record date the date when ownership of shares is
determined i.e. the date when a shareholder must be on the
company's books to receive the dividend
Payment date the actual payment of the dividend to the
stockholders on the record date.
 Declared dividends entail two accounting transactions,
upon declaration shareholders become creditors as the
dividend becomes a legal liability of the company. The
liability is reduced only when payment is made.

If the fiscal year ends between the declaration date

and payment date, the amount is shown as a current
liability (dividends payable) on the companys balance
sheet.
 Companies can issue two types of shares. Common
shares (the most basic types of shares) and preference
shares which are shares which have some priority over
the common shares.

When dividend is declared, preference shareholders

are paid first. If preference shares are cumulative, they
should receive payments before any allocation is given
to ordinary shareholders.

If preference shares are non-cumulative, only the

current years dividends must be paid to the
preference shareholder.
Example
Mingtao Ltd. had the following shares outstanding when the
company BOD declared a $112,000 cash dividend during the
current year.

Preference shares $50 par 10%, 5,000 shares issued

$250,000.

Common shares $10 par, 50,000 shares issued $500,000.

Allocate the dividend between the preference and common

shareholders, assuming that the preference share is non-
cumulative.
 Preference dividend Common dividend

5,000 * $50 * 0.10 25,000

112,000 25,000 87,000

** The preference shareholders dividends are first

secured before any issuance to the common
shareholders.
Example
Grayson Company has 10,000 shares of $4 cumulative
preference shares outstanding. The company BOD
declared and paid the following amounts of dividends.

Year 1 $0 Year 2 $25,000 Year 3 $125,000

Determine how the dividends should be distributed to

the preference and common shareholders.
 Year Total Preferred Common
dividends dividends dividends
1 $0 $0 $0
2 $25,000 $25,000 $0
3 $125,000 $95,000** $30,000

** Arrears for years 1 ($40,000), 2 (15,000) and 3

(40,000) = $95,000
 This refers to financial obligations that are not payable
within a year. E.gs. include, debentures, loan stocks,
bonds payable, long-term investments etc.

Debentures are loans with a written agreement that are

usually secured and either have a floating or fixed charge.

It outlines the interest rate, date of repayment, securities

on loan, rights of debenture holders etc.
 Fixed charge may be presented as 5% debenture
2005/2007.
For example: $200,000 which means that the debenture is
redeemable between 2005 and 2007 and the interest rate is
fixed at 5%.

Debentures issued at a floating charge means that

interest rate is not fixed.
 The directors of Amdahl Inc. decide to issue 10,000 $100,
10%, 5 year debentures payable in full on application.
Date Details Dr. Cr.
Bank 1,000,000
10% Debenture application 1,000,000

10% Debenture application 1,000,000

10% Debentures 1,000,000
Issue of 10,000 $100 5-year
debentures as per directors
resolution
** Debentures are amounts owing by the company and is therefore
credited as they are considered liabilities.
 The 10% debenture account is a deferred liability and remains
unchanged until the debentures are due for repayment in the
following accounting period. It then becomes a current
liability and interest must be paid regardless of if profits were
made. When paid, the interest is recorded in the cash paid
journals.

Date Details Dr. Cr.

Interest on debentures 100,000
Cash 100,000

** The interest would then be transferred to the P&L account at the

end of the financial period and is treated as a finance expense to
the company.
 Loan stocks are common or preferred stock shares that
are used as collateral to secure a loan from another
party. They carry a fixed rate of interest and are issued
in multiples of $100 nominal value and interest rate is
expressed as a percentage of the nominal value.

E.g. if a quotation is listed as 6% loan stock at $60, it means

that $60 will be paid to acquire stock with a nominal value of
$100 and buyers will stand to receive an interest payment of
6% (6% x $100).
 Assume that Jevan Holdings Ltd. redeems the 10%
debentures 2008/2010 1,000,000 issued at $1 by
purchase in the open market at $1.10 (ignoring interest
payments).
Date Details Dr. Cr.
10% debentures 1,000,000
Loss on redemption of (share discount) 100,000
Bank 1,100,000
Redemption of debentures at
premium of 100,000.
 Companies also have the option to issue bonds (groups
of notes issued to multiple lenders) since it is
impossible to borrow from only one lender.

Bondholders lend their money to the company to earn

interest. If a bond is issued at a value above its
maturity value, it is similar to a share being issued
above their par value (premium) and if it is issued
below its maturity value (discount).
 Jevan Holdings Ltd. has $50,000 of 5% bonds payable
that mature in 3 years and the bonds are issued at a
maturity value on Jan. 1, 2006. What is the journal
entry?

Date Details Dr. Cr.

Jan. 1, 2006 Cash 50,000
Bond payable 50,000
Issued bonds payable
 The entry to record annual interest payment of $2,500
($50,000 x 5%) on December 31, 2006 would be as
follows:

Date Details Dr. Cr.

Dec. 31, 2006 Bond interest expense 2,500
Cash 2,500
Paid off annual interest

Why is the bond interest account being debited?

in expenses debit
 At maturity date, Jevan Holdings Ltd. will record
payment of bonds as follows:

Date Details Dr. Cr.

Jan. 1, 2006 Bonds payable 50,000
Cash 50,000
Paid off principal

in liabilities debit
in assets credit
 Assume Jevan Holdings Ltd. issues $50,000 of bonds
on January 1, 2006 at 95 (meaning 95% of par), the
issuance would be recorded as follows:
Date Details Dr. Cr.
Jan. 1, Cash (50,000 x 0.95) 47,500
2009 Discount on bonds payable (50,000 x 0.05) 2,500
Bonds payable 50,000
Bonds issued at discount
 A sinking fund is an account that is established to
set aside cash for the companys debt repayments
(redeeming shares, bonds etc.)

For example Laded Ltd. issues $5million bonds that will

mature in 10 years. If the bonds have a sinking fund, the company
be required to retire, say, 500,000 of the bonds each year for 10
years. In doing so, management is required to deposit $500,000
each year into a sinking fund separate and apart from its
operating funds and is used exclusively to retire this debt.

Using this strategy, it is assured that Laded Ltd. will pay off the $5
million in 10 years
 Assume Jevan Holdings Ltd. issues 1,000,000 par
value 5% 3 year bonds on 1 January 2006. The bond
contract calls for a sinking fund to be maintained
throughout the life of the bonds issued. In addition,
the company has to make three annual payments of
$200,000 to the fund beginning January 1, 2007 and
the fund will earn a net return of 10%.
Date Details Dr. Cr.
Bond sinking fund 200,000
Cash 200,000
Initial payment to the bond sinking fund

Bond sinking fund 20,000

Sinking fund earnings 20,000
Sinking fund earnings for the second year

Bond 1,000,000
Bond sinking fund 1,000,000
Payment of the bond at maturity
 An investment is the purchase of a product that is not
consumed today but will be used in the future to increase
wealth. Investments are considered assets to the investors
and can be short-term or long-term investment.

Short-term investment indicates that the asset is readily

convertible to cash within a year or is used to pay a current
liability. E.g. trading investment.

Long-term investment indicates that the investor can hold the

asset for more than a year. It is not readily marketable and e.gs
include: bonds and stocks, tangible and intangible fixed assets
like premises, land, machinery, equipment and intangible assets
like copyright , trademarks, franchise, goodwill and patents.
 Augustine Ltd. purchased 900 shares of FLOWs stock
for $100 per share on 31 August 2009. What is the
journal entry?
Date Details Dr. Cr.
31 August Short-term investment 90,000
Cash 90,000

in assets - debit
in assets - credit
 If FLOW paid a cash dividend of $8 per share,
Augustine would receive $8,000 dividend on its
investment. Enter the transaction in the journal.

Date Details Dr. Cr.

31 Dec Cash $8,000
Dividend revenue $8,000

Received cash dividend for

short term investment
 If Augustine sells all the shares at $70,000 on January
2, 2010, the journal entry should be as follows:
Date Details Dr. Cr.
January 2 Cash $70,000
Loss on sale of investment $20,000
Short term investment $90,000

Sale of short-term
investment

in assets and expenses debit

in assets - credit
The Charter of Bogot Corporation authorizes the issuance of
10,000 shares of Class A preferred stock, 2,000 shares of Class B
preferred stock and 20 000 shares of common stock. During a two-
month period, the following stock issuance occurred.

Nov 17 Issued 4 000 shares of $2 per common stock at $12.50.

Dec 4 Sold 600 no par Class A preferred stock at $5.00, for $3
000 cash.
Dec 15 Received inventory valued at $15 000 and equipment with
market value of $25 000 for 6500 shares of $1 par
common stock.
Dec 29 Issued 2 000 shares of 5% no par preferred
stock with stated value of $50 per share. The issue price
was cash of $60 per share.

Prepare the journal entries for the transactions above. [10 marks]
Nov 17 Issued 5 000 shares of $3 per common
stock at $15.50.
Dec 4 Sold 800 no par Class A preferred stock
at $5.00, for $4 000 cash.
Dec 15 Received inventory valued at $25 000
and equipment with market value of
$25000 for 10,000 shares of $1 par
common stock.
Dec 29 Issued 2 000 shares of 6% no par
preferred stock with stated value of $65
per share. The issue price was cash of $73
per share.
Date Details Dr. Cr.
Nov. 17 Cash 77,500
Common stock 15,000
Share premium 62,500
Dec. 4 Cash 4,000
Preference stock 4,000
Dec. 15 Inventory 25,000
Equipment 25,000
Common stock 10,000
Share premium 40,000
Dec. 29 Cash 146,000
Preference stock 130,000
Paid in excess of state value 16,000
Date Details Dr. Cr.
(i) Cash xxxxx
No par shares (equity) xxxxx
(ii) Cash xxxxx
Bank (liability) xxxxx
(iii) Motor Van xxxxx
Cash xxxxx
Liability (monies owing) xxxxx
(iv) Cash xxxxx
Revenue xxxxx
(v) Expenses xxxxx
Cash xxxxx
(vi) Debtor xxxxx
Revenue xxxxx
Date Details Dr. Cr.
Expenses xxxxx
Liability xxxxx
(viii) Liability xxxxx
Expenses xxxxx
(ix) Retained earnings xxxxx
Dividend payable xxxxx

Dividend Payable xxxxx

Cash xxxxx
(x) Expense xxxxx
Cash xxxxx
(xi) Tyre (expense) xxxxx
Tyre (asset) xxxxx
Date Details Dr. Cr.

Jun. 15 Land 60,000

Building 180,000
Common stock 150,000
Share premium 90,000
Oct. 15 Ordinary share capital 700,000
Bank 700,000
Nov. 13 Dividend payable 120,000
Cash 120,000
Dec. 13 Interest payable 8,000
Bank 8,000

Dec. 13 Retained Earnings 90,000

Common stock 90,000
Date Details Dr. Cr.
Mar. 15 Welding plant 150,000
Welders International 50,000
Cash/ Bank 100,000
Welding plant purchased using cash
and a loan.

Apr. 20 Welders International 50,000

Cash/ Bank 50,000
Cash payment completed for Welding
plant.

Aug. 27 Office supplies expense 22,500

Office supplies
Adjustments to office supplies used. 22,500