Journal Entries for Equity Accounts (Cambridge International A-Level Accounting)

Journal entries & equity accounts

Spec point — the features and accounting treatment of ordinary shares, bonus issues, rights issues, debentures, dividends and reserves

Journal entries for equity accounts

What is the layout of an equity account?

• Equity accounts include:

  • Ordinary share capital account
  • Share premium account
  • Revaluation account
  • General reserve account
  • Retained earnings account

• Each equity account has a credit balance

  • They never have a debit balance

• Credit entries increase the capital or reserve

• Debit entries decrease the capital or reserve

How do I make journal entries for a revaluation?

Increase

• STEP 1 Find the difference between the old value and the new value

  • For example, a property previously valued at $800 000 has been revalued at $900 000
  • Difference is $900 000 - $800 000 = $100 000

• STEP 2 Debit the non-current asset account

• STEP 3 Credit the revaluation reserve account

Decrease

• STEP 1 Find the difference between the old value and the new value

  • For example, a property previously valued at $800 000 has been revalued at $600 000
  • Difference is $800 000 - $600 000 = $200 000

• STEP 2 Credit the non-current asset account

• STEP 3 Debit the revaluation reserve account and the retained earnings account if needed

  • If the difference is less than the current balance of the revaluation reserve, then you only need to debit this account

  • If the difference is more than the current balance of the revaluation reserve, then:

    • debit the revaluation reserve account with amount of the current balance
    • debit the retained earnings account with the excess

How do I make journal entries for common transactions?

Worked Example The following balances had been extracted from the books of D Limited on 1 January 2025.

	$
Share capital (ordinary shares of $0.75 each)	600 000
Share premium	130 000
Retained earnings	162 000
Revaluation reserve	70 000

During the year ended 31 December 2025, the following occurred:

• 30 June: An interim dividend of $0.04 per share was paid.
• 1 August: A rights issue of one share for every four ordinary shares held at this date was made. The shares were issued at $1 per share. The rights issue was fully subscribed.
• 1 November: Property was revalued at $350 000. Before this date, the property was valued at $450 000.
• 1 December: A bonus issue of three shares for every ten ordinary shares held at this date was made. The reserves were maintained in their most flexible form. The bonus issue was fully subscribed.
• 31 December: The profit for the year was $152 000.

Prepare the following ledger accounts for the year ended 31 December 2025.

Ordinary share capital account

		$			$

Share premium account

		$			$

Retained earnings account

		$			$

Revaluation reserve account

		$			$

Answer:

30 June

Calculate the number of shares held at the start of the year

$600 000 ÷ $0.75 = 800 000 shares

Calculate the total dividends paid

800 000 × $0.04 = $32 000

1 August

Calculate the number of new shares issued in the rights issue

800 000 ÷ 4 = 200 000 shares

Calculate the total received from the rights issue

200 000 × $1 = $200 000

Calculate the increase in the ordinary share capital

200 000 × $0.75 = $150 000

Calculate the increase in the share premium

$200 000 - $150 000 = $50 000

1 November

Calculate the decrease in value of the property

$450 000 - $350 000 = $100 000

Calculate the excess needed from the retained earnings

$100 000 - $70 000 = $30 000

1 December

Calculate the total number of shares before the bonus issue

800 000 + 200 000 = 1 000 000 shares

Calculate the number of new shares issued in the bonus issue

1 000 000 ÷ 10 × 3 = 300 000 shares

Calculate the increase in the ordinary share capital

300 000 × $0.75 = $225 000

Calculate the balance of the share premium account

$130 000 + $50 000 = $180 000

Calculate the additional amount needed from the retained earnings

• The share premium account should be used up before moving to the retained earnings account

$225 000 - $180 000 = $45 000

Enter the transactions into the accounts and bring down the balances

• The share premium account and revaluation account won't have a balance to bring down

31 December

Ordinary share capital account

		$			$
2025			2025
Dec 31	Balance c/d	975 000	Jan 1	Balance b/d	600 000
			Aug 1	Bank	150 000
			Dec 1	Share premium	180 000
				Retained earnings	45 000
		975 000			975 000
			2026
			Jan 1	Balance b/d	975 000

Share premium account

		$			$
			2025
Dec 1	Ordinary share capital	180 000	Jan 1	Balance b/d	130 000
			Aug 1	Bank	50 000
		180 000			180 000

Retained earnings account

		$			$
2025			2025
Jun 30	Bank	32 000	Jan 1	Balance b/d	162 000
Nov 1	Property	30 000	Dec 31	Statement of profit or loss	152 000
Dec 1	Ordinary share capital	45 000
Dec 31	Balance c/d	207 000
		314 000			314 000
			2026
			Jan 1	Balance b/d	207 000

Revaluation reserve account

		$			$
2025			2025
Nov 1	Property	70 000	Jan 1	Balance b/d	70 000
		70 000			70 000