share capital

Kelly7

Hi guys
I've only had 2 lessons of my level 4 and already feeling like I'm not capable & will not pass .
I know I have to try & just get on but I've spent about an hour googling share capital & still none the wiser.

My pack says money invested by shareholders but for me, surely if a few people started the company and all invested for eg £10,000, the money then gets divided into shares which I would assume is 3 shares, how do other shareholders come in because I would imagine they're not all going to join with the 10k the original shareholders put in? I was so told most shares are £1.

If anyone can give me any info on this at all it would really helpp as I feel I can't really get any further without knowing this.

Also (sorry), is a share a liability as in it is owed to the shareholder like capital would be to a sole trader?


Did anyone else feel like it was all a bit much at first?

Sorry for my negativity.

Xxxx

Steve Collings

Hi Kelly,

First, please don't feel overwhelmed by Level 4. Many students have battled their way through it and have passed and I'm sure you will be one of those sucess stories. Once you get more into Level 4 you will soon find your feet, but if you're seriously struggling with it, then take it all bit by bit as you'll find that by doing this everything will slot into place.

Re share capital. Shares can be worth anything from 1p to £10,000. Questions will usually give you the nominal value of the shares, so dont' worry too much about that. In real life a company can have 1 ordinary £1 share issued, whereas some companies have millions of shares in issue.

A company may start its life with 100 £1 shares in issue, so the entries will be debit cash at bank and credit share capital, so you will have a £100 asset and £100 equity. As the company grows and becomes more profitable, it may issue additional shares to shareholders which is where these new shareholders come in. Think of a company like Virgin who offer shares to the general public - shareholders will come on board all the time. However, in contrast, an owner-managed business (husband and wife, say) will probably only ever have 2 shareholders during the entire lifetime of the company.

Usually more shareholders will come on board during the life of a company when the company is trying to raise finance. It can do this by way of issuing more shares so you will see more money coming into the company (debit bank) and share capital being increased (credit shares).

Shares are not liabilities because it is money that the shareholders have invested into the company, so they are equity and the shareholders can receive dividends (a return on that investment) on their shares. A liability is money owed to a third party and whilst I can see why you interpret shares as being a liability because it is essentially money owed to the shareholders, it isn't the same as the shareholders have invested in the company rather than lent the business money.

I hope that helps you. Again, please don't feel despondent about Level 4 - you'll will get through it

All the best
Steve

Kelly7

Thank you for your reply Steve. I think its all a bit overwhelming because on Thu we had our first fin statements lesson & I hadn't hears of any of the terms before & I need to know where to put them in the income statement or statement of fin pos.

Can I ask, if shares are bought we debit the bank with money coming in so obviously the other entry has to be a credit but thinking of it in my level 2 teaching of PEARLS, does share capital come under revenue, liability or a sale? I see you mentioned equity but doesn't this word just mean a value of the business?

Thanks again.

Kelly x

coojee

Kelly7 wrote: »

Thank you for your reply Steve. I think its all a bit overwhelming because on Thu we had our first fin statements lesson & I hadn't hears of any of the terms before & I need to know where to put them in the income statement or statement of fin pos.

Can I ask, if shares are bought we debit the bank with money coming in so obviously the other entry has to be a credit but thinking of it in my level 2 teaching of PEARLS, does share capital come under revenue, liability or a sale? I see you mentioned equity but doesn't this word just mean a value of the business?

Thanks again.

Kelly x

Think about the accounting equation:

Assets - Liabilities = Equity

When a share is sold the money comes in so assets go up, to make the equation balance either liabilities need to go down by the same amount or equity needs to go up. In this case it's equity going up. I don't think PEARLS covers it but DEADCLIC does as the second C stands for Capital (which can be substituted for equity).

Kelly7

Hi Coojee

Thanks for the reply. I have seen in my book the accounting equation as assets - liabilties = equity but I've always learnt up to now that assets - liabilities = capital. Unless equity is just another word for capital?

What does DEADCLIC stand for?

I have heard that this unit is one of the hardest so hoping if I can get through this at least i've got one of the hardest out of the way. IF I do pass that is.

x

coojee

Kelly7 wrote: »

Hi Coojee

Thanks for the reply. I have seen in my book the accounting equation as assets - liabilties = equity but I've always learnt up to now that assets - liabilities = capital. Unless equity is just another word for capital?

What does DEADCLIC stand for?

I have heard that this unit is one of the hardest so hoping if I can get through this at least i've got one of the hardest out of the way. IF I do pass that is.

x

Yes, equity and capital are pretty much the same thing. Capital is usually associated with sole traders and partnerships and equity with limited companies.

DEADCLIC:

Debit
Expense
Asset
Drawings
Credit
Liability
Income
Capital

topcat

coojee wrote: »

Yes, equity and capital are pretty much the same thing. Capital is usually associated with sole traders and partnerships and equity with limited companies.

DEADCLIC:

Debit
Expense
Asset
Drawings
Credit
Liability
Income
Capital

Thanks coojee was also struggling with this but now understand what equity means at least