company accounts lessons

7/29/2019 Company Accounts lessons

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Company Accounts

Final Accounts


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Introduction

Companies are formed and incorporatedunder the Companies Ordinance.

An incorporated company(also called

incorporation) is a legal entity using theterm company in its name


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Advantages of incorporation

An incorporated company is a separatelegal entity which enjoys similar legalauthority to a natural person

An incorporated company has an unlimitedlife

Ownership of a company can be easilytransferred to new owners

For a limited company, shareholders

liability is limited to the amount they haveinvested in shares


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Types of Corporation

Unlimited Company

Limited Liability Company


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Unlimited Company

The unlimited company does not have anylimits on the liability of its owners


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Limited liability company

Company limited by shares

Company limited by guarantee


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Company limited by shares

Private Company

Public company


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Private Company

According to the Companies Ordinance,the Articles of Association A privatecompany contains the following

restrictions: The maximum number of members is limited

to 50

Prohibited to subscribe for any shares or

debentures to the public Strict the right to transfer its shares


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Public company

Unlike the private company, there are nosuch restrictions on the public company


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Listed Company

Listed companies are companies whichhave their securities listed on the stockexchange of Hong Kong

Apart from the Companies Ordinance,listed companies are also under the strictcontrol of other regulations such asSecurities Ordinance etc.


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Means of funding

Share Capital

Debentures

Reserves


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Types of Share Capital

Preference Shares

Ordinary Shares


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Preference Shares

Preference shares are entitled to a fixedpercentage of dividends before anyordinary dividends are paid

They usually do not have voting rights The different types of preference shares

are:

Cumulative preference shares

Non-cumulative preference shares


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Cumulative preference shares

Any unpaid dividends on cumulativepreference shares can be carried forwardto a later year


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Non-cumulative preference shares

If the profits are insufficient to pay thedividends, the unpaid dividends cannot becarried forward to later years


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Ordinary Shares

The dividends of ordinary shares are notfixed. They depend on the return of thecompany

Ordinary shareholders are paid only afterall other claim (e.g. loan interest andpreference share dividends) have beenmet

Ordinary shareholders usually have votingrights


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Debentures

Debentures are long-term loans evidencedby deeds which set out the rate of interestpayable and the date of redemption


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Reserves

Reserves are profits or gains which accrueto ordinary shareholders

They are undistributed profits which have

been retained within the company There are two types of reserves:

Revenue reserves

Capital reserves


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Revenue reserves

They are undistributed trading profits

They can be used to pay dividends

E.g. the balance on the profit and loss

account and general reserve


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Capital reserves

They are gains or profits arising from non-trading or non-operating activities

They are not available for distribution as

dividends E.g. Share premium, revaluation reserve,

capital redemption reserve and debentureredemption reserve


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Share premium

When a company issues shares at a priceabove par, the excess amount is calledshare premium

The reserve is restricted to be used in thefollowing ways: To write off preliminary expenses

To write off expenses of issuing shares

To write off commission paid and discounts onshares

To pay up a bonus issue

To provide premium on redemption ofdebentures


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Revaluation reserve

This is the unrealized gain from anincrease in the value of an asset afterrevaluation


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Capital redemption reserve and

Debenture redemption reserve

This arises as a result of a companyredeeming its shares or debentures byusing its retained profits


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Final Accounts


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Final accounts

For internal reporting and managementpurposes, the final accounts of the limitedliability companies are similar as those of

the sole trader and partnership with theexception of certain types of expenses andthe appropriation of net profit


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XX Ltd. CompanyIncome Statement for the year ended 31 Dec XXXX

Sales XLess: Returns inwards X

(X)Less: Cost of Sales

Opening Inventory XAdd: Purchases XAdd: Carriage inwards XLess: Returns outwards (X)

Less: Closing Inventory (X) XGross profit XAdd: Other revenues X

XLess: Operating Expenses

Administrative Expenses

Selling and distribution expenses XFinance cost XOther operating expenses X X

Net profit XLess: Profit Tax (X)Profit after taxation (PAT) X


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Add: Retained profit b/f XX

Less: Appropriations:Transfer to general reserve XPreference dividend interim (paid) X

- proposed (final) XOrdinary dividend - interim (paid) X

- proposed (final) X XRetained profit c/f X


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Balance Sheet as at 31 Dec XXXXNon-currents Assets Cost Dep NetMachinery X X XFurniture X X X

X

Current AssetsStock XDebtors XBank X

XLess: Current Liabilities

Creditors XProposed dividend XDebenture interest accrued XProvision for taxation X

Working Capital XX

Capital and ReserveShare Capital Authorized IssuedXXXX Ordinary Shares of $1 each X XXXXX 8%Preference Shares of $1 each X X

X XNo. of shares

Par value


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ReservesShare Premium XGeneral Reserve XProfit and loss X

XLong-term Liabilities10% Debentures X

X


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Special types of expenses

Debenture interest

Directors remunerations/fees/emolument

Preliminary expenses/formation expenses

Goodwill written off


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Debenture interest

The amount of the debenture interest willbe calculated according to the pre-setpercentage of debenture as the interest

expenses of the company


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Trial Balance as at 31 Dec 20-1Dr Cr

10% Debentures 10000Debenture interest 5000

Ans.:Trading and profit and loss a/c for the year ended 31 Dec 20-2

$ $Gross profit XLess: Expenses

Debenture interest (10000*10%) 10000

Balance Sheet as at 31 Dec 21-1$ $

Less: Current Liabilities

Paid debenture interest

Actual debenture interest

Accrued expenses(1000-5000) 5000

Debenture interest not yet paid

Example


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Directors fee/emolument

Directors fee and directors emolument are

salaries and services charges of thedirectors of the limited company

It will be treated as one of expenses in theprofit and loss account

P li i /F i


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Preliminary expenses/Formation

expenses

They are incurred by an enterprise during theperiod prior to the commencement of commercialoperations

These include, for example, legal expenses and

various government taxes

They should be written off when they areincurred

Pre-operating expenses capitalized in prior years

should be written off against the openingretained profits as a prior year adjustments


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Amounts written off as goodwill

According to SSAP(Statement of StandardAccounting Practice), goodwill should beamortized over its useful economic life


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Appropriation of net profit

Profit Tax

Retained profit from last year/after nextyear

Dividends Transfer to/(from) reserve


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Profit tax

It is shown as a deduction from profit forthe year before taxation (i.e. this is thenet profit figure) to show the net result

(i.e. profit for the year after taxation) Accounting entries:

Dr. Profit and Loss

Cr. Provision for taxation


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Example

No under/overprovision of profit tax

Trial Balance as at 31 December 2003Dr Cr.

Net Profit 10000

** The profit tax is estimated at $1500 for the year

Solution:Provision for taxation

Bal c/f 1500 P/L 1500


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Profit and loss Account for the year ended 31 December 2003$

Net Profit 10000Less Profit tax 1500Profit after tax 8500

Balance Sheet as at 31 December 2003$

Current LiabilitiesProvision for taxation 1500


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Example

Overprovision of profit tax


Net Profit 10000

Overprovision of profit tax 300



Bal c/f 1500 P/L 1200

Bal b/f 300

1500 1500


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Net Profit 10000Less Profit tax (1500-300) 1200Profit after tax 8800




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Example

Underprovision of profit tax


Net Profit 10000

Overprovision of profit tax 300



Bal c/f 1500 P/L 1800

Bal b/f 300

1800 1800


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Net Profit 10000Less Profit tax (1500+300) 1800Profit after tax 8200




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Retained profit to next year/ from last

year

All profits may not be appropriated duringa period

This then will be balance on the

appropriation account as brought forwardfrom the previous year or carried forwardto next year


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Dividends

Net profit from ordinary activities of thebusiness of a company will be distributedto its shareholders of preference sharesand ordinary shares according to the level

of net profit and the dividend policy of thecompany

Dividend can be divided into: Interim/paid dividend

Final/proposed dividend

Dividend = Nominal value * % of dividend paidOR

= no. of shares * Amount of dividend per share


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Interim/Paid Dividend

Interim dividend is the paid dividend tothe shareholders in the middle of thefinancial year

The amount of interim dividend will besubject to the performance of the businessin the first half of the financial year

Descriptions Book-keeping entries

Interim dividend paid Dr Interim DividendCr Bank

Transfer interim dividendpaid to appropriationaccount

Dr Profit & loss appropriation

Cr Interim Dividend


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Proposed/Final Dividend

The amount of proposed dividend will besubjected to the performance of the business inwhole financial year and the shareholders

approvals in the Annual General Meeting

Proposed dividend will be paid in the early of nextfinancial year, it will be treated as one ofappropriations to the shareholders in the profit &loss account of current financial year and should

be disclosed on the face of the balance sheet as aseparate component of equity(I.e. part of theshareholders fund)


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Transfer proposeddividend to appropriation

account* Proposed dividend willbe shown in balancesheet under the heading

of current liabilities

Dr Profit & lossappropriation

Cr Proposed dividend


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Transfer to /(from) Reserve

Part of the net profit for the financial yearmay be transferred from the appropriationaccount to the reserves to meet the future

requirements or specific reason Revenue reserve can be transferred back

to appropriation account for dividendspurposes in the future financial period


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Transfer part of net profitfrom appropriation

account to specificreserves

Dr Profit & lossappropriation account

Cr Reserves

Transfer specific reservesback to appropriation

account

Dr Reserves

Cr Profit & lossappropriation


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ExampleTrial Balance as at 31 Dec 2000(extract)

Dr Cr400000 ordinary shares of $0.5 each, fully paid 200000250000 10% preference shares of $1 each, fully paid 250000General reserves 15000Interim ordinary dividend 5000

Interim preference dividend 8000

Additional information: The director proposed a final dividend of $0.05 per ordinary share The director resolved to transfer $5000 to the general reserve


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Ans.:

Trading and profit and loss a/c for the year ended 31 Dec 20-2$ $Net profit XAdd: Retained profit from last year X

XLess: Appropriation

Preference dividend

interim 8000- final (250000*0.1-8000) 17000

Ordinary dividend - interim 5000- final (400000*0.05) 20000

Transfer to general reserve 5000


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Balance Sheet as at 31 Dec 21-1$ $

Dividend owning(17000+20000) 37000

Dividend not yet paid to shareholders

Capital and Reserve

ReservesGeneral reserves (1500+5000) 20000


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Limited Liability Company

The capital of a limited company is dividedinto shares

The par value of each share can be $1,$5or other

A person who buy the shares, become themember of company called shareholder


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Capital Structure

Authorized

Capital

It is the maximum amount of share

capital which the company isallowed to issue

Issued Capital It is the nominal value of a portionof the authorized capital which has

been taken up (purchased) byshareholders

Called Up Capital It is the amount of issued capitalwhich the company has called to

be paidPaid Up Capital It the amount of issued capital

which has actually been received

Calls in Arrears It the amount of called up capital

which has not been received


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Issue ofShares/Debentures


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Issue Price

Issue at Par

-The issue price is same as the PAR, NOMINAL or FACE value of the shares

and debentures.

Issue at a Premium

-The issue price may be HIGHER than the par value of the shares and debentures.

The difference between the issue price and the par value of the shares or debentures

is named as SHARE PREMIUM

Issue at a Discount

-The issue price may be LOWER than the par value of the shares and debentures.

The difference between the issue price and the part value of the shares or debentures

is named as SHARE DISCOUNT

Raising of Capital-Issue of shares and

debentures


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Issue of shares


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Descriptions Accounting entries

Application Monies Received Dr. Bank

Cr. Ordinary Share Applicants

*No. of Application * Issue Price

Issue of Ordinary Shares Capital (a) Issue at Par

Dr. Ordinary Share Applicants

Cr. Ordinary Share Capital

No of Shares Actually Issued X Par Value of

Each Share(b) Issue at a Premium


Cr. Ordinary Share Capital

Cr. Share Premium

* No. of Share Actually Issued X Par Value of

Each Share will be recorded in Ordinary ShareCapital

* No. of Shares Actually Issued X The Value

of Share Premium per

Each Share will be recorded in Share Premium


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( c) Issue at a Discount


Share DiscountCr. Ordinary Share Capital

* No. of Shares Actually Issued X Par Value of

Each Share will be recorded in Ordinary Share

Capital

* No. of Shares Actually Issued X The Value of

Share Discount per Each Share will be recorded inShare Discount

Refund of Oversubscribed Dr. Ordinary Share Applicants

Cr. Bank

* No. of Application Oversubscribed X IssuePrice


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Note:

The issue is oversubscribed when the number ofapplications is greater than the number of sharesavailable for issue. Excess application money willbe refunded to the unsuccessful applicants

The issue is undersubscribed when the number ofapplications is smaller than the number of sharesavailable for issue. Hence, no refund will berequired

If the number of applications is below the

predetermined minimum amount, no shares willbe issued and all the application money will berefunded


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Example Issue at par

Tai Fat Ltd made a public offering of its1000 ordinary shares of $1 each

The shares were issued at par


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The JournalDr. Cr.

Bank (1000*$1) 1000Ordinary Share Applicants 1000

Being money received on application

Ordinary Share Applicants 1000Ordinary Share Capital 1000Being allotment of 1000 ordinary shares


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Shares issued at par

Bank

Ordinary Share Applicants

Ordinary Share Capital

Ordinary share applicants 1000

Bank 1000Ordinary share capital 1000



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Example Issue at premium


The shares were issued at premium of

20%


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The JournalDr. Cr.

Bank (1000*$1.2) 1200Ordinary Share Applicants 1200


Ordinary Share Applicants 1200Ordinary Share Capital (1000*$1) 1000Share premium (1000*$0.2) 200Being allotment of 1000 ordinary shares


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Shares issued at premiumBank






Share premium 200

Share premium



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Example Issue at discount


The shares were issued at a discount of

10%


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The JournalDr. Cr.

Bank (1000*$0.9) 900Ordinary Share Applicants 900


Ordinary Share Applicants 900Discounts on shares (1000*$0.1) 100Ordinary Share Capital (1000*$1) 1000Being allotment of 1000 ordinary shares


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Shares issued at discountBank






Discount on shares 100

Discount on shares



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Bonus Shares/Script Issue

Bonus shares are free shares issued toshareholders without any cash being paidfor them

The reserves are utilised for the purpose The accounting entry is:

Dr Reserve/Share premium/Retained earnings

Cr Ordinary share capital


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Example

$20000 Ordinary Share Capital of $1 each 20000Reserves 12000

A bonus issue of 1 for 4 were made. (i.e. 1 bonus share for every 4

shares already held)

Ans:Bonus issue (20000/4)=5000 shares

The entry: Dr Reverse (5000*$1) $5000Cr Ordinary share capital $5000

Ordinary share capital (20000+5000) 25000Reserve (12000-5000) 7000


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A debenture is a written acknowledgementof debt.

Debenture are long-term loans which

attract a large number of investors. The terms of debentures such as the rate

of interest payable, the date ofredemption (if applicable) and security

given by the borrowing company aregoverned by a trust deed

Debentures


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Types of debentures

Redeemable and irredeemable debentures

Debentures with fixed charge

Debentures with floating charge

Unsecured/naked/simple debentures

Redeemable and irredeemable


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debentures

Redeemable debentures are repayable ator by a specified date

Irredeemable debenture are nor repayable

However, the borrowing company canpurchase its own debentures on the openmarket when the price of debentures isvery low


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Debentures with fixed charge

Debentures are secured by means ofmortgaging specific assets, e.g. premises.

The borrowing company cannot sell these

assets without the prior consent of thedebenture holders


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Debentures with floating charge

Debentures are secured by means ofmortgaging a group of assets, e.g.premises

The borrowing can trade in the assets

which are subject to a floating charge If the company defaults on its interest or

capital repayment, the floating charge willcrystallize on the group of assets

The debenture holders can sell the assetsto recover the amount due to them

Unsecured/naked/simple


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p

debentures

They are not secured by any of thecompanys assets


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Issue of debentures


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The accounting treatment of debenture isthe same as that of shares, except for thechange in the name of the accounts

Debenture can be issued at par, atpremium or at a discount

Issue of Debentures


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Issue of Debentures (a) Issue at Par

Dr. Bank

Cr. Debentures

(b) Issue at a Premium

Dr. BankCr. Debentures

Cr. Debentures Premium

( c) Issue at a Discount

Dr. Bank

Debenture Discount (note)

Cr. Debentures


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Note:

The debenture discount account can bewritten off using either method:

It can be written off immediately against theshare premium on profit and loss appropriationaccount. The debentures should be disclosed inthe balance sheet at a nominal value

It can also be written off over the life ofdebentures to the profit or loss account. The

debentures should then be disclosed in thebalance sheet at a nominal value lessunamortized discount

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