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WAAccountingSyllabus dot point

How does a company record the issue of shares, the payment of dividends, and the appropriation of profit?

Record the issue of shares for cash, the declaration and payment of interim and final dividends, transfers to reserves, and prepare the equity section showing share capital and retained earnings

WACE Year 12 Accounting and Finance Unit 3 on company accounting: recording share issues for cash, interim and final dividends, transfers to reserves, and presenting share capital and retained earnings in the equity section of a company Balance Sheet.

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  1. What this dot point is asking
  2. Recording a share issue for cash
  3. Dividends: interim and final
  4. Transfers to reserves
  5. Presenting the equity section

What this dot point is asking

SCSA wants you to journalise share issues and dividends, distinguish interim from final dividends, account for transfers to reserves, and present the equity section of a company Balance Sheet correctly.

Recording a share issue for cash

When investors subscribe and pay in full for shares, the company receives cash and increases its contributed equity.

The entry to issue 100 000 ordinary shares at $2.00 each, fully paid on application:

  • Debit Bank $200 000
  • Credit Share Capital $200 000

This raises both an asset (Bank) and equity (Share Capital) by $200 000, keeping the accounting equation in balance.

Dividends: interim and final

A dividend is a distribution of profit to shareholders. There are two timing types.

  • Interim dividend: declared and paid by the directors during the financial year. Because it is paid immediately, no payable is needed at year-end.
  • Final dividend: recommended by directors after the year-end profit is known. When the company has a present obligation to pay, it is recognised as a liability (Dividend Payable) and reduces Retained Earnings.

Transfers to reserves

Directors may set aside profit into a reserve, such as a General Reserve, to signal funds retained for future needs. The transfer debits Retained Earnings and credits General Reserve. It moves an amount within equity and does not change total equity or cash.

Presenting the equity section

The equity section of a company Balance Sheet lists:

  • Share Capital (issued and paid-up ordinary shares)
  • Reserves (for example General Reserve)
  • Retained Earnings (accumulated undistributed profit)