Topic ten

Company Accounts

Topic 9 we learnt how to account for partnerships

In this topic we shall learn;

Accounting for a company’s share capital,DebenturesDrawing a profit and loss appropriation accountPresentation of a company’s balance sheet

Introduction

This topic is intended to help you to;

Differentiate between private and public limited liability companies

Account for share capital in limited liability companies

Describe debentures as a source of capital

Learning outcomes

Account for debenturesDraw a profit and loss appropriation account Draw a balance sheet for a limited liability

company

Learning outcomes

Private and public limited liability companies

No Item Private company Public company

1 Minimum subscribers 2 7

2 Maximum subscribers 50 Infinity

3 Annual general meeting Optional Mandatory

4 Audited financial accounts Optional Mandatory

5 Articles of association Mandatory Mandatory

6 Memorandum of association Optional Mandatory

7 Trading of shares Restricted Trade in the market

The following is a summary of differences between private and public limited liability companies

Is the shareholders stake in the company Represents their claim on assets Since companies are limited, is the maximum

amount shareholders would lose if the company becomes insolvent.

Share capital could be fully or partially paid Amount per share disclosed in the balance

sheet is the par value of the share If shares are issued at a price above par, the

difference is regarded as paid-in capital in excess of par.

Accounting for share capital

IllustrationBeverages Services Limited sold 10,000,000 shares to the public on 1 January 2011 at $5 per share. The Par value of each share was $3. Determine the increase in share capital and show how this will be reported in the company’s balance sheet.

Accounting for share capital

Accounting for share capital

Beverages Services LimitedBalance sheet (Extract)As at 31 January 2011

Amount ($)

Share capital (10,000,000 *$3) 30,000,000Capital contribution in excess of par

20,000,000Total capital 50,000,000

In some legislation, a company can repurchase its shares.

Repurchased shares are referred to as treasury stocks

Treasury stocks are reported as a reduction in equity

Capital could also be raised from preference stocks.

Preference stocks attract a fixed rate of dividend

Preference stocks are long term liabilitiys

Accounting for share capital

Long term borrowing instrument Could be issued at a discount or premium Is issued at a discount, discount is a long

term liability If issued at a premium, premium is a long

term assets Discount is amortized over the period of the

debt

See next slide for an illustration

Debentures

If the redemption value equals the amount received for the debenture, the following entries are passed.

On issue:-Dr Bank XXX

Cr Debenture XXX Being issuance of debenture

On redemption:-Dr Bank XX

Cr Debenture XXBeing redemption of debentures

Issue of a debenture and redemption at par

On issue:-

Dr Bank XXDr Discount on debenture issue XX

Cr Debenture XX

Amortization of discount on issue:-Dr P&L A/C XX

Cr Discount on debenture issue XX

Discount amortization is done over the debenture period

On redemption:-

Dr Debenture XXCr Bank XX

Issue of a debenture at discount and redemption at par

On issue:-

Dr Bank XXCr Debenture XXCr Premium on debenture issue XX

 To amortize the premium on issue

Dr Premium on debenture issue XXCr P&L XX

Premium should also be amortized over the period of the debenture.

Issue at premium and redemption at par

The account summarizes changes in shareholders’ funds

Its different from the partners’ account Profits from the business are credited to this

account Dividends are debits to the account Transfers to other reserves such as general

reserve are debited to the account Transfer from other reserves are credit to this

account See next slide for an illustration

Profit and appropriation account

Profit and loss appropriation account

Halima Superior Stores Company LimitedProfit and Loss appropriation AccountFor the period ended 31 December 2010

Debit CreditAmount ($) Amount ($)

Balance brought forward XXAdd:Net profit for the year XXTransfer from general reserve XX

XXLess:Transfer to general reserve XXDividends proposed XX (XX)Balance carried down XX

Credit balance carried down is the retained profit figure in the balance sheet

Retained profits are part of equity capital Represents amounts kept aside to finance

future growth Debit balance in the account indicate that

the company is in historical losses Companies with negative balances in

retained earnings indicate poor financial position

Profit and loss appropriation account

Is similar to balance sheet of other organisations

Separation made between current and long term assets and liabilities

Revisit what we learnt in topic 3 on preparation of financial statements

Balance sheet

Useful tips;Preference share capital is not part of

shareholders funds, but a long term liability

Proposed dividends are part of shareholders funds and not current liabilities

Debentures should be classified according to their maturity profiles, with short term and long term portion separate

Balance sheet

Discount/premium on issue of debentures should be amortized over the period of the debenture.

The amortization relating to the next 12 months should be disclosed either as a current liability in case of a discount, or a current asset in case of a premium

Balance sheet

What have we learnt in this topicThere are a number of differences between

private and public limited liability companiesThere are two types of share capital, ordinary

share capital and contribution in excess of par (share premium)

Treasury stocks are shares repurchased by a company from the market

Capital could be sourced from preference share capital, a long term liability

Conclusion / summary

Debentures are sources of long term finance Have both a short term and long term

portion Debenture issue at a discount yields a

liability Debenture issue at a premium yield an

asset Classification of items into either current or

long term is the subject of International Accounting Standards (IAS’s)

In our final topic, we shall learn more about IAS’s.

Conclusion/summary

Questions