Company Accounts
Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business and the need to have many investors in the business.
Partnerships were not suitable for such businesses because the membership is limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot invite the members of the public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words public limited company at the end of their name.
They can invite the members of the public to invest in their ownership and the companies may be quoted on the stock exchange.
Share capital of a company.
The owner’s interest in a limited company consists of share capital. The share capital is divided into shares. The investor will then pay for and be issued with the shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. (e.g.) If a company decides to set up a share capital of Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.
There are 2 main types of share capital
Preference share capital
This is made up of preference shares and a preference share carries the right to a final dividend, which is expressed as a percentage of their par value. E.g. 10% preference shares.
Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital
These are the most common shares. They carry no right to a fixed dividend but are entitled to residual value of the business during winding up, and all profits after the claim on all of the preference dividend have been paid. The more the no. of ordinary share held, the higher the control.
Share capital may also have the following meaning:
Authorized share capital
Also called, registered or nominal capital. Is the total of the share capital which the company is allowed to issue to shareholders. A company cannot issue more shares than the amount that is authorized.
Issued share capital
This is the total of the share capital actually issued to the shareholders.
Called up share capital
This is the amount the shareholders have been asked to pay where the amount of capital required is less than the issued share capital.
(e.g.) If a firm issues ordinary shares of £1 each and request the shareholders to pay 60p. Assuming that the issued 100,000 shares, then the called up share capital will be:
60p 100,000 = £60,000
Uncalled share capital
This is part of the issued share capital for which the company has not requested for payment and therefore these amounts will be received in the future.
In the above (e.g.) because the firm had not requested for 40p, therefore the uncalled capital is 40p 100,000 = £40,000.
Paid-up share capital
This is the total of the share capital, which has been paid for by the shareholders.
Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which only 150,000 share have been issued, Although the firm requested the shareholders to pay 80p per share, the shareholders were able to pay 50p per share.
Required:
Determine the:
Authorized share capital
Issued share capital
Called up share capital
Uncalled up share capital
Paid up share capital
Authorized share capital
200,000 £ = £200,000
Issued share capital
150,000 £1 = £150,000
Called up share capital
150,000 80p = 120,000
Uncalled up share capital
150,000 20 p = £30,000
Paid up share capital
150,000 50p = £75,000
The principal distinctions between unlimited partnerships and limited companies are:
Unlimited Partnerships
Limited Companies
No separate Legal Entity apart from its members
Separate legal entity, which is not affect by changes in its membership. A company may contract, sue or be sued in it’s own name.
Liability of each member for debts of the firm is unlimited.
If the company is limited by share, each shareholder is limited to the amount he has agreed to pay the company for share allotted.
Number of partners limited to 20 except for professional firms.
A limited company must have at least 2 members. The maximum number of shares is restricted to the company’s authorized share capital.
Every partner can normally take part in the management of the business. He can legally bind the firm by his action.
Rights to management are delegated to directors who alone can act on behalf of and bind the company.
Copy of accounts need not be filed with the Registrar of Companies
Copies of accounts must be registered with the Registrar of Companies
Although a written Partnership deed is desirable it is not mandatory.
A company is required to have a memorandum and articles of association which defines powers and duties of directors.
A partnership is subject to the partnership Act which can be varied by mutual agreement.
A company is subject to the Companies Act the provisions of which cannot be varied.
The partners contribute the capital by agreement. The amount need not be fixed.
The authorized share capital is fixed by the memorandum of association. It can be altered by passing ordinary resolution or by the court.
A share in a partnership cannot be transferable except by the consent of all partners.
In public companies shares are freely transferable. In private companies share transfer are subject to any restrictions imposed by the articles of association.
A partnership is not obliged to keep statutory books of account and an audit is not compulsory.
A company is required to keep specialized accounting records and is subject to compulsory audit.
Format Of Final Account
The P & L of a company, is the same as that of a sole trader, but there are additional expenses that are unique to the company and therefore, they should be included in the P & L A/C.
(e.g.)
Director’s fees salaries and other expenses
Audit fees
Amortization e.g. goodwill
Debenture interest
In addition to the P & L A/C, just like a partnership has an appropriation A/C which shows the allocation of the net profit for the period. Therefore, the format will be as shown:
Format for Company Accounts
B Limited
Trading, profit and loss and Appropriation Account for the year ended 31.12
Sales
Less Returns inwards
Less Cost of Sales
Opening Stock
Purchases
Add Carriage in
Less purchase returns
Less Closing stock
Gross Profit
Add incomes
Discount received
Profit on disposal (sale of Assets)
Income from investment (can also be shown below)
Other incomes e.g. interest received from bank
Less Expenses
Other expenses
Directors salaries/fees/----
Audit fees
Debenture Interest
Amortization of good will
Operating profit for the period
Add investment income
Profit before tax
Taxation: Corporation tax
Transfer to deferred tax
Under or over provision
Profit after tax
Less: transfer to the general reserve
Less: Dividends
Preference dividend: Interim paid
Final proposed
Ordinary dividend: Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d
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B Limited
Balance sheet as at 31.12………
Non current Assets
Land & Building
Plant and Machinery
Fixtures, Furniture & Fittings
Motor vehicle
Intangible Assets
Goodwill
Copyrights, patents
(Longterm) Investments (mkt value sh x)
Current Assets
Stock
Debtors
Less provision for bad debts
Prepayments
(Short term) Investments
Cash at bank
Cash in hand
Current liabilities
Bank overdraft
Creditors
Accruals
Interest payable(debenture interest)
Tax payable
Dividends payable
Financed by
Authorized share capital
100,000 ordinary shares of £1 each
100,000 preference shares of £1 each
Issued and Fully paid
80,000 ordinary shares of £1 each
50,000 10% preference shares of £1 each
Capital Reserves
Share premium
Revaluation Reserve
Capital Redemption Reserve
Revenue Reserves
General Reserve
Profit and loss A/C
Deffered tax A/C
Non Current Liabilities
10% debenture
Other Long term Loans
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Director’s salaries:
Salaries, fees and other expenses in relation to the directors are expenses as far as company accounts are concerned.
This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees paid in relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as an expenses and unpaid amount are shown as current liabilities in the business.
The debenture is classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profirs they earn. This is shown in the accounts because a company is a separate legal entity unlike for sole traders and partnerships whose tax is shown as drawings.
The tax is listed under those 3 items as shown in the appropriation (under/over provision for previous period, transfer to deferred tax corporation tax for the year).
The under provision and corporation tax relate to direct liability to the government and therefore is a deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.
Assume that a firm had estimated that the corporation tax for the year ended 31.12.99 is £150,000. In 2000, the liability is now agreed at £160,000, which the company pays and at the end of the year 2000, the company estimates that the tax liability is £140,000.
Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore deferred tax).
25146001428750022860018542000(e.g.)Taxation Account
Cashbook160,000 Bal b/d 150,000
178117514287500Bal c/d140,000 Appropriation150,000
3657600000300,000300,000
Under provision 10,000 (160 -150)
Corporation tax 140,000
DIVIDENDS
Shareholders are also entitled to a share of profits made by the company and this is because the shareholders do not make drawings from the company.
A company may pay dividends in 2 stages during the cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 -----
Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose interim paid and final proposed.
CAPITAL RESERVES
Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three types of capital reserves are:
Share Premium: A share premium arises when accompany issues shares at a price that is more than the par value. The share Premium may be applied in:
Paying un issued shares.
Writing off preliminary expenses.
Write off discounts on shares.
Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at £1 each (per value) and the issue price (selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook (100,000 £1.5)150,000
Cr Ordinary shares capital (100,000 £1)100,000
Cr Sahre Premium A/C (100,000 £0.5) 50,000
Issue of shares at a premium of £0.5
Revaluation Reserve: Any gain made on revaluation of non current Assets especially for Land and buildings. When company sills it’s property to realize the gain, the amount is transferred to the Profit and Loss Account.
Capital Redemption Reserve: A reserve created after redemption or purchase of Preference shares without issuing new shares. The transfer is made from either the share premium or the profit and loss account.
REVENUE RESERVES
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves. Transfers are made from the Profits to the General reserves to provide for expansion or purchase of non current assets. The General Reserves can also be used to issue bonus Shares.
DEBENTURE LOANS
The term debenture is used when a limited company receives money on loan, and certificates called debenture certificates are issued to the lender.
They are also called loan stock or loan capital. Debenture interest has to be paid whether profits are made or not. A debenture may either be redeemable of irredeemable. Redeemable is repayable at or by a particular date and irredeemable is payable when the company is officially terminated.
BONUS SHARES
Shares issued to existing shareholders free of charge. They are paid out from either the share premium, balance of retained profits of the General Reserves.
A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000 and a balance on the share premium A/C of £50,000. It issues some bonus shares to existing shareholders at a rate of 1 share for every 5shares hel
