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Accounting, Finance, SPSS
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Topic:

Company Accounts

Instructions:
This was work we did in class and provides the necessary notes and practice questions for accounting class
Content:

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

£

x

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(x)

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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

£

x

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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

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