Shareholders' Equity Overview

Overview

This lecture introduces the basic concepts of shareholders' equity, its components, and the methods of accounting for share capital.

Shareholders' equity is the residual interest of owners in the net assets of a corporation.
It is calculated as total assets minus total liabilities.
The basic accounting equation: Assets = Liabilities + Equity.
Rearranged, shareholders' equity = Assets − Liabilities.

There are four main components: contributed (paid-in) capital, retained earnings, other comprehensive income (OCI), and treasury shares.
This course covers all except OCI, which is discussed in the statement of comprehensive income topic.

Contributed capital has three parts: share capital, subscribed share capital, and share premium.
Share capital is the total par or stated value of issued shares.
Share certificate represents ownership and is only given when shares are fully paid and issued.
Classes of share capital: ordinary share capital and preference share capital.

Subscribed share capital refers to authorized shares that are subscribed but not yet fully paid.
Shares are only issued (and share certificates given) when they are fully paid.

Share premium is the excess paid over the par or stated value of shares.
Common sources: excess over par value, issuance of treasury shares, donated capital, warrants, stock dividends, and quasi-reorganization.

Two methods: memorandum method and journal entry method.
Authorization of share capital is recorded as a memorandum entry or as a debit/credit under journal entry method.
Issuance of shares: debit asset (cash/non-cash), credit share capital at par/stated value, and credit share premium for excess.
Under journal entry method, use "issued share capital" and "share premium."
Subscription of shares: debit asset/down payment, debit subscription receivable, credit subscribed share capital.
Share premium is not recognized until shares are actually issued.
Upon full payment, share certificates are issued and entries update to reflect full ownership.

Shareholders' Equity — Owners' residual claim on assets after liabilities.
Share Capital — Par or stated value of shares issued.
Subscribed Share Capital — Value of shares subscribed but not yet fully paid.
Share Premium — Amount received over par or stated value of shares.
Ordinary Share Capital — Basic class of share capital, often with voting rights.
Preference Share Capital — Shares with preferential rights, e.g., dividends.

Review the next video lecture on accounting for the original issuance of shares.