1. Chapter 8 The Principles Applied: Owner’s Equity
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

2. Chapter 8 Overview 8.1 Partnerships 8.2 Companies 8.3 Trusts
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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3. Chapter 8 Objectives Explain reasons for forming partnerships
Examine reasons for forming trusts
Describe the appropriation of profits
Explain differences in reports between partnerships and sole ownerships
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

4. Chapter 8 Objectives Describe key company characteristics
Explain advantages/disadvantages of the company structure
Explain how companies are incorporated
Account for the takeover of a business
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

5. Chapter 8 Objectives Account for the issue of shares
Report on the shareholders’ equity section of the balance sheet
Account for income tax expense, dividends and transfers to reserves
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

6. Introduction This chapter introduces:
The variations in accounting for equity between sole ownership, partnerships and companies
The differences that arise because of the different number of owners and the rules regarding how capital and profits are accounted for
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

7. 8.1 Partnerships Defined by the Partnership Act as:
the relationship that subsists between persons carrying on a business in common with a view to profit
Advantages of forming partnerships include
Pooling of capital
Pooling of skills
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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8. 8.1 Partnerships Forming a partnership is easy
May be formed with a verbal agreement
May be inferred from the actions of partners
May be formed with a written agreement
Partnerships are regulated by the Partnership Act, and if there is no formal written agreement then this Act provides guidelines on what is acceptable
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

9. 8.1 Partnerships
A partnership is not a separate legal entity, but for accounting purposes it is regarded as a separate accounting entity
The first journal entries made are those that form the partnership
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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10. 8.1 Partnerships
EXAMPLE 8.1
Partner 1 (Crunch) contributes $ cash
Partner 2 (Slamm) contributes the following:
$ Cash
$ Accounts Receivable
$ Equipment
$ Accounts Payable
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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11. 8.1 Partnerships EXAMPLE 8.1 Date Accounts Debit Credit
1/1/X4 Cash
Accounts Receivable
Equipment
Accounts Payable
Capital (Crunch)
Capital (Slamm)
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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12. 8.1 Partnerships Appropriation (distribution) of profits
Partners may agree to distribute profit among themselves in any way
Partners may award themselves salaries and interest on capital
If there is no formal agreement, the applicable Partnership Act requires equal sharing of profits and no salaries or interest on capital
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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13. Appropriation (distribution) of profits
8.1 Partnerships
Appropriation (distribution) of profits
EXAMPLE 8.2
Slamm Crunch
Salaries $ $20 000
Interest on capital 6% p.a. 6% p.a.
Share of profits 50% 50%
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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14. Appropriation (distribution) of profits
8.1 Partnerships
Appropriation (distribution) of profits
EXAMPLE 8.2
Total profit to be appropriated = $
Appropriate salaries = ($ $20 000)
Appropriate interest = ($ $1200)
Residual profit share = $ each
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

15. 8.2 Companies Key characteristics of companies include:
Limited liability
Shareholders are only liable for the unpaid portion of the issue price of shares they hold
This is different to sole ownerships and partnerships, where owners have unlimited liability
Separate legal entity
A company is an ‘artificial person in the eyes of the law’ which is why limited liability is possible
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

16. 8.2 Companies Key characteristics of companies include:
Perpetual succession
A company lives on indefinitely and is not affected by the death of individual owners (like partnerships and sole ownerships are)
Transferability of shares
As a company is a separate legal entity to the owners, the ownership shares in a company may be sold or transferred
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

17. 8.2 Companies Key characteristics of companies include:
Raising additional finance
Publicly listed companies may obtain additional finance by issuing further shares or debt
Separation of ownership and management
Even though ultimate control of the company rests with shareholders, the Board of Directors acts as the management of the company
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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18. 8.2 Companies
Because companies have numerous owners who are able to transfer their shares, the structure of the equity section is more complex than with sole ownerships and partnerships
A companies equity may include
Share capital—ordinary and preference shares
Retained profits
Reserves
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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19. 8.2 Companies EXAMPLE 8.3 1/7/X4 Company is formed
2/7/X shares issued at $1
2/7/X4 $2500 paid for formation costs
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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20. 8.2 Companies EXAMPLE 8.3 Date Accounts Debit Credit
2/7/X4 Cash
Paid-up Capital
2/7/X4 Formation expenses
Cash
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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21. 8.2 Companies
EXAMPLE 8.4
3/7/X4—Company purchases a business for $ ($ cash, $ in $1 shares)
The business had the following assets and liabilities
Cash $
Inventory $27 000
Equipment $
Accounts Payable $21 000
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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22. 8.2 Companies EXAMPLE 8.4 Date Accounts Debit Credit 3/7/X4 Cash 2 000
Inventory
Equipment
Accounts Payable
Cash
Paid-up Capital ( shares)
NOTE: This does not balance: So the balancing entry is:
Debit GOODWILL
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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23. 8.2 Companies Appropriation (distribution) of profits
A sole trader may withdraw profit at will
Partners may withdraw profits with ease
Company shareholders, however, do not have specific entitlement to a distribution of profits until directors recommend a dividend
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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24. 8.2 Companies Appropriation (distribution) of profits
Shareholders are only entitled to receive distributions of profits and retained profits, not capital
This leads to the separation of accounts in the equity section of the balance sheet
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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25. Appropriation (distribution) of profits
8.2 Companies
Appropriation (distribution) of profits
EXAMPLE 8.5
Profit (before tax) =
Tax payable =
Profit for appropriation =
Dividend declared =
Transfer to general reserve =
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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26. 8.2 Companies EXAMPLE 8.5 Date Accounts Debit Credit
30/6/X4 Income Tax Expense
Taxation Payable
Profit & Loss Summary
Retained Profits
Retained Profits
Dividend Payable
General Reserve
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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27. 8.2 Companies Shareholder equity has 2 main parts
Contributed capital (or issued capital)
Retained profits
This separation makes capital maintenance possible, as dividends are only paid out of profits, not capital
Contributed capital may not be returned to shareholders without a formal resolution
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

28. 8.2 Companies Shareholder equity represents a residual claim on assets
This means that it does not represent cash, but rather the claims on all assets after all liabilities have been met
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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29. 8.2 Companies Accounting for share issues Prospectus is usually issued
Applications from investors are received
Applications are held in trust until allotment
Shares are allotted to applicants
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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30. 8.2 Companies Accounting for share issues EXAMPLE 8.6
1/1/X4—A prospectus is issued asking for applications for
shares at $1 each
By 31/1/X4 all applications are received
15/2/X4—Directors allot the shares
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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31. 8.2 Companies EXAMPLE 8.6 Date Accounts Debit Credit
1/1/X4 No journal entries
1–31/1/X4 Cash trust
Application
15/2/X4 Application
Paid-up Capital
Cash at Bank
Cash Trust
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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32. 8.3 Trusts A common form of business ownership
In a trust, the entity’s assets are owned by the trustee on behalf of beneficiaries
The trustee is often a company
Governed by a trust deed
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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33. 8.3 Trusts Types of trust include
Discretionary trust: where the trustee has discretion to distribute the income in any way to the beneficiaries
Unit trust: where the beneficiaries hold units representing a proportionate interest in the property and income of the trust
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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34. Summary
Partnerships are very easy to form and exist when two or more people combine together in a business
Accounting for partnerships requires recording a separate capital component for each partner and appropriating profits according to predetermined percentages
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

35. Summary Companies are separate legal entities which allows for
Limited liability
Perpetual succession
Transferability of shares
Raising of additional finance
Separation of ownership and control
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

36. Summary
Companies have a complex shareholder equity section which splits equity into:
Contributed capital (issued capital)
Retained profits
Reserves
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes