Every company entry uses the same debit and credit rules as any other business. What changes is which equity or liability account takes the other side of the entry.
This lesson is part of the limited companies chapter. It follows reading company financial statements, where you saw these figures in a statement.
Which transactions does this lesson cover?
This lesson covers four transactions: an issue of shares for cash, a bank loan, a dividend and a transfer to a reserve. The journals below credit the whole issue price to ordinary share capital.
Worked example: four entries for Mawar Berhad
1. Issue of 50 000 ordinary shares at RM1 each for cash.
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Bank | 50 000 | |
| Ordinary share capital | 50 000 |
2. A bank loan of RM30 000 received.
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Bank | 30 000 | |
| Bank loan | 30 000 |
3. A dividend of RM12 000 declared, then paid.
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Retained profits | 12 000 | |
| Dividends payable | 12 000 | |
| Dividends payable | 12 000 | |
| Bank | 12 000 |
4. A transfer of RM8 000 to general reserve.
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Retained profits | 8 000 | |
| General reserve | 8 000 |
What does each entry do to the statement?
The share issue raises assets and equity by RM50 000. The loan raises assets and liabilities by RM30 000.
The dividend lowers equity by RM12 000 and, after payment, lowers assets by the same amount. The reserve transfer moves RM8 000 inside equity, so the total is unchanged.
The mistake that costs marks
One slip is to record a loan received as share capital, because both bring cash into the business. The lender is an outsider, so the credit belongs to a liability.
| Step | Wrong | Right |
|---|---|---|
| Who provided the cash | “Money came in, so capital” | The bank lent it |
| Credit side | Ordinary share capital | Bank loan |
| Effect | Equity overstated by RM30 000 | Liabilities increase by RM30 000 |
Another slip is to debit a dividend to an expense account. A dividend reduces retained profits directly.
Check yourself
A company issues 20 000 ordinary shares at RM2 each for cash. It then transfers RM5 000 from retained profits to general reserve. Write both journal entries.
Answer
Cash received = 20 000 × RM2 = RM40 000.
Entry 1: Debit Bank RM40 000, credit Ordinary share capital RM40 000.
Entry 2: Debit Retained profits RM5 000, credit General reserve RM5 000.
Total equity rises by RM40 000 only, because the reserve transfer moves money within equity.
What to study next
The next lesson, explaining ownership and reporting differences, helps you write short answers about why these entries differ from a sole trader’s. Use the debit-credit transaction trainer to rehearse new entries.
If you want a teacher to check your journals as you write them, see online one-to-one Accounting tuition.