Company accounting and equity in QCE Accounting Unit 4
“Apply double-entry principles to record the issue of shares and the appropriation of company profit, and prepare the equity section of a company balance sheet”
A company is a separate legal entity owned by shareholders whose liability is limited to the amount unpaid on their shares. It raises equity by issuing shares: cash received is debited to Cash at Bank and credited to Share Capital. Company profit is not simply added to one owner's capital; it flows into Retained Earnings, from which directors appropriate dividends to shareholders. The equity section of a company balance sheet shows Share Capital plus Retained Earnings (and any reserves), rather than the single capital-plus-profit-less-drawings figure of a sole trader. Dividends, not drawings, distribute profit to owners, and they reduce retained earnings.
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Check against your course. The 2025 QCAA Accounting syllabus describes Unit 4 as the complete accounting processes for a trading GST business and the performance analysis of a public company, with ratios that include EBITDA, earnings per share, price earnings, dividend yield and cash flow ratios. This page covers part of that ground, so check your school's materials for the full list of what is assessed.
Recording share issues and dividends in the ledger is background that supports reading a company's reports, so confirm with your teacher how much of it is expected.
What this dot point is asking
QCAA wants you to understand how a company, unlike a sole trader, raises and reports equity. You must record the issue of shares for cash, account for the appropriation of company profit through dividends and retained earnings, explain the separate legal entity and limited liability that distinguish a company, and prepare the equity section of a company balance sheet.
Company versus sole trader
A company differs from a sole trader in ways that change how equity is recorded:
- Separate legal entity: the company exists independently of its owners and can own assets, owe debts and sue in its own name.
- Limited liability: shareholders can lose only what they paid (or agreed to pay) for their shares; their personal assets are protected.
- Ownership by shares: ownership is divided into shares, which can be transferred without ending the business.
- Perpetual succession: the company continues regardless of changes in ownership.
Because of these features, company equity has two main parts (share capital and retained earnings) rather than a single owner's capital account.
Issuing shares
When a company issues shares for cash, it raises share capital. Issuing 100,000 ordinary shares at $2.00 each, fully paid:
- Debit Cash at Bank $200,000
- Credit Share Capital $200,000
Share Capital is an equity account. There is no GST on a share issue, because raising capital is not a taxable supply. Once issued, the shares belong to the shareholders, and the company has the cash to fund its operations.
Company profit and its appropriation
A company calculates net profit the same way as a sole trader, but the profit is not added to one owner's capital. Instead:
Net profit (after company income tax) is transferred to Retained Earnings, the accumulated undistributed profit of the company.
Directors may declare a dividend, a distribution of profit to shareholders. Declaring a dividend of $30,000 reduces retained earnings:
- Debit Dividends (or Retained Earnings) $30,000
- Credit Dividend Payable $30,000 (a current liability until paid)
When the dividend is paid: debit Dividend Payable $30,000, credit Cash at Bank $30,000.
Dividends are the company equivalent of drawings, but they are distributions of profit declared by directors, not informal withdrawals by an owner. Retained earnings carries forward the profit the company chooses to reinvest.
The equity section of a company balance sheet
A company balance sheet reports equity as:
- Share capital: the amount raised by issuing shares.
- Retained earnings: opening retained earnings + net profit - dividends.
- Reserves (where present): amounts set aside, such as a general reserve.
Total equity = Share capital + Retained earnings + Reserves
This contrasts with a sole trader, whose equity is a single figure: opening capital + net profit - drawings. The company structure separates the capital contributed by shareholders from the profit retained by the business, which gives analysts clearer information for the ratio analysis covered elsewhere in Unit 4.
Why the distinction matters
Separating share capital from retained earnings shows how the company is financed: how much came from shareholders contributing capital versus how much the business generated and kept. This split feeds directly into stability and return ratios (return on equity, gearing) and helps investors judge whether a company funds growth from profit or from raising new capital and debt.
The data
On 1 July, Coastline Ltd issues 150,000 ordinary shares at $2.50 each, fully paid. During the year it earns net profit after tax of $90,000. Opening retained earnings were $40,000. Directors declare a dividend of $35,000, unpaid at year end.
Step 1: Record the share issue
Cash raised = 150,000 x $2.50 = $375,000.
- Debit Cash at Bank $375,000
- Credit Share Capital $375,000
Step 2: Appropriate profit
- Net profit $90,000 transferred to retained earnings.
- Dividend declared $35,000: debit Retained Earnings $35,000, credit Dividend Payable $35,000.
Closing retained earnings = 40,000 + 90,000 - 35,000 = $95,000.
Step 3: Equity section of the balance sheet
| Equity | $ |
|---|---|
| Share capital (150,000 shares fully paid) | 375,000 |
| Retained earnings | 95,000 |
| Total equity | 470,000 |
The unpaid dividend of $35,000 appears separately as a current liability (Dividend Payable), not within equity.
- Adding GST to a share issue
- Raising capital is not a taxable supply; there is no GST on issuing shares.
- Treating dividends as an expense
- Dividends are an appropriation of profit that reduces retained earnings, not an expense in the income statement.
- Adding profit straight to share capital
- Company profit flows to retained earnings; share capital changes only when shares are issued.
- Using one capital account like a sole trader
- Company equity separates share capital from retained earnings.
Exam-style questions
Questions in the style of QCAA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice1 markInformation on a company's shareholdings is provided: Shareholder's equity (10 365 shares @ $2.40 per share) $24 876.00; Reserves $12 160.00; Retained earnings $16 873.00; Market value per share $3.12; Dividends paid $20 146.00. What is the dividend yield ratio? (A) 0.51 (B) 0.62 (C) 0.77 (D) 0.81Show worked answer →
The correct answer is (B) 0.62.
The dividend yield ratio compares the dividend paid to the market price of the shares. Calculate the dividend per share first: dividends paid / number of shares = 20 146.00 / 10 365 = $1.9437 per share.
Dividend yield = dividend per share / market value per share = 1.9437 / 3.12 = 0.62 (or 62%). The same result comes from dividing total dividends by total market value: 20 146 / (10 365 x 3.12) = 0.62.
Note that the share capital ($24 876, being 10 365 shares at their $2.40 issue price), reserves and retained earnings make up the equity section but are not used in the yield ratio - the distractors arise from mistakenly bringing those figures into the calculation. Dividends are the appropriation of company profit distributed to shareholders, which is why this draws on the company's equity information.