This document is a continuation of Owner's equity, non-current liabilities, and companies. Owner's equity is explained in more detail as dividends and retained profits are discussed. The Statement of changes in equity is shown. Taxation is also explained along with its calculations and examples to ...
• Retained profits = profits accumulated over a no. of years = used for
expansion/growth.
• Share capital is primary source of financing.
• As a separate legal entity,
o Company pays tax on its profits.
o Directors decide how much of after tax profit to declare as a dividend to
shareholders.
• Profits retained are referred to as reserves:
o Distributable
o Non-distributable
Distributable reserves:
• Are retained profits which:
o At the discretion of the directors.
o May be declared as a dividend to shareholders.
• The distributable reserves = known as retained earnings.
• The dividend is initiated by the company and a dividends payable/shareholders for
dividends account records the liability (current liability).
• Dividends declared:
o Before SOFP date and not paid at end of financial year = recognised as a
liability.
o After SOFP date = not recognised as a liability on the SOFP.
DR Dividend declare/ retained earnings
CR Dividends payable/ shareholders for dividends (SOFP)
Once a dividend is declared:
• Company has an obligation to transfer money to its S/H.
Non-distributable reserves:
• Not available to be declared as a dividend to shareholders.
• Unrealised surplus (revaluation surplus) of a non-current asset is a non-
distributable reserve.
• Realised surplus on disposal of a non-current asset:
• Income item (P&L)
• Included in retained earnings as a distributable reserve.
• Gains are not yet realised
• Cannot distribute from Unrealised amounts.
, • Can only distribute when asset is disposed (derecognised).
A company has a profit for the period of R1 200 000 and has revalued land by R100 000.
• R1 200 000 = distributable reserve
• R100 000 = non-distributable
A company has a profit for the period of R1 300 000, including a profit on sale of land of
R100 000.
• R1 300 00 = distributable
Composition of owner's equity:
Company:
Company
Share capital
Preference share capital
Retained earnings
Reserves (incl Revaluation
surplus)
Statement of changes in equity:
Ordinary Non- Retained Reserves (e.g. Total
share capital redeemable earnings revaluation
Preference surplus)
share capital
Balance as at … (OB) CCC PPP XX Y
Share issue C P
Share issue costs [C] (P)
Capitalization issue 100 (100)
Treasury shares (30)
Total comprehensive XXX YYY ZZZ
income (Profit for the
period after tax)
Dividends (gross amt.) (X)
• Interim
• Final
Balance as at … CCC PPP XXXX YYYY
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