1 Company Accounts Final Accounts. 2 Introduction Companies are formed and incorporated under the...

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Company Accounts

Final Accounts

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Introduction Companies are formed and incorporated

under the Companies Ordinance. An incorporated company(also called

‘incorporation’) is a legal entity using the term ‘company’ in its name

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Advantages of incorporation An incorporated company is a separate

legal entity which enjoys similar legal authority to a natural person

An incorporated company has an unlimited life

Ownership of a company can be easily transferred to new owners

For a limited company, shareholders’ liability is limited to the amount they have invested 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 any

limits 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 private company 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 no

such restrictions on the public company

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Listed Company Listed companies are companies which

have their securities listed on the stock exchange of Hong Kong

Apart from the Companies Ordinance, listed companies are also under the strict control of other regulations such as Securities 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 fixed

percentage of dividends before any ordinary 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 cumulative

preference shares can be carried forward to a later year

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Non-cumulative preference shares If the profits are insufficient to pay the

dividends, the unpaid dividends cannot be carried forward to later years

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Ordinary Shares The dividends of ordinary shares are not

fixed. They depend on the return of the company

Ordinary shareholders are paid only after all other claim (e.g. loan interest and preference share dividends) have been met

Ordinary shareholders usually have voting rights

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Debentures Debentures are long-term loans evidenced

by deeds which set out the rate of interest payable and the date of redemption

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Reserves Reserves are profits or gains which accrue

to 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 debenture redemption reserve

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Share premium When a company issues shares at a price

above par, the excess amount is called share premium

The reserve is restricted to be used in the following ways: To write off preliminary expenses To write off expenses of issuing shares To write off commission paid and discounts on

shares To pay up a bonus issue To provide premium on redemption of

debentures

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Revaluation reserve This is the unrealized gain from an

increase in the value of an asset after revaluation

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Capital redemption reserve and Debenture redemption reserve This arises as a result of a company

redeeming its shares or debentures by using its retained profits

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Final Accounts

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Final accounts For internal reporting and management

purposes, the final accounts of the limited liability companies are similar as those of the sole trader and partnership with the exception of certain types of expenses and the 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 X Add: Purchases X Add: Carriage inwards X Less: Returns outwards (X) Less: Closing Inventory (X) XGross profit XAdd: Other revenues X XLess: Operating Expenses Administrative Expenses Selling and distribution expenses X Finance cost X Other operating expenses X XNet profit XLess: Profit Tax (X)Profit after taxation (PAT) X

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Add: Retained profit b/f X XLess: Appropriations: Transfer to general reserve X Preference dividend – interim (paid) X - proposed (final) X Ordinary 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

XCurrent AssetsStock XDebtors XBank X XLess: Current Liabilities Creditors X Proposed dividend X Debenture interest accrued X Provision for taxation XWorking Capital X XCapital and ReserveShare Capital Authorized IssuedXXXX Ordinary Shares of $1 each X X XXXX 8%Preference Shares of $1 each X X X X

No. 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 Director’s remunerations/fees/emolument Preliminary expenses/formation expenses Goodwill written off

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Debenture interest The amount of the debenture interest will

be calculated according to the pre-set percentage of debenture as the interest expenses of the company

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Trial Balance as at 31 Dec 20-1 Dr Cr 10% Debentures 10000 Debenture 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) 5000Debenture interest not yet paid

Example

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Director’s fee/emolument Directors fee and director’s emolument

are salaries and services charges of the directors of the limited company

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

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Preliminary expenses/Formation expenses They are incurred by an enterprise during the

period prior to the commencement of commercial operations

These include, for example, legal expenses and various government taxes

They should be written off when they are incurred Pre-operating expenses capitalized in prior years

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

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Amounts written off as goodwill According to SSAP(Statement of Standard

Accounting Practice), goodwill should be amortized over its useful economic life

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Appropriation of net profit Profit Tax Retained profit from last year/after next

year Dividends Transfer to/(from) reserve

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Profit tax It is shown as a deduction from profit for

the year before taxation (i.e. this is the net 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 10000Overprovision 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 10000Overprovision 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 during

a period This then will be balance on the

appropriation account as brought forward from the previous year or carried forward to next year

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Dividends Net profit from ordinary activities of the

business of a company will be distributed to its shareholders of preference shares and ordinary shares according to the level of net profit and the dividend policy of the company

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 to the

shareholders in the middle of the financial year

The amount of interim dividend will be subject to the performance of the business in the first half of the financial year

Descriptions Book-keeping entries

Interim dividend paid Dr Interim DividendCr Bank

Transfer interim dividend paid to appropriation account

Dr Profit & loss appropriationCr Interim Dividend

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Proposed/Final Dividend The amount of proposed dividend will be

subjected to the performance of the business in whole financial year and the shareholders’ approvals in the Annual General Meeting

Proposed dividend will be paid in the early of next financial year, it will be treated as one of appropriations to the shareholders in the profit & loss account of current financial year and should be disclosed on the face of the balance sheet as a separate component of equity(I.e. part of the shareholders’ fund)

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Transfer proposed dividend to appropriation account* Proposed dividend will be shown in balance sheet under the heading of current liabilities

Dr Profit & loss appropriationCr Proposed dividend

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Transfer to /(from) Reserve Part of the net profit for the financial year

may be transferred from the appropriation account to the reserves to meet the future requirements or specific reason

Revenue reserve can be transferred back to appropriation account for dividends purposes in the future financial period

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Transfer part of net profit from appropriation account to specific reserves

Dr Profit & loss appropriation accountCr Reserves

Transfer specific reserves back to appropriation account

Dr ReservesCr Profit & loss appropriation

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Example Trial 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 5000Interim 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) 20000Transfer 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

Reserves

General reserves (1500+5000) 20000

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Limited Liability Company The capital of a limited company is divided

into shares The par value of each share can be $1,$5

or other A person who buy the shares, become the

member of company called shareholder

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Capital StructureAuthorized Capital

It is the maximum amount of share capital which the company is allowed to issue

Issued Capital It is the nominal value of a portion of the authorized capital which has been taken up (purchased) by shareholders

Called Up Capital It is the amount of issued capital which the company has called to be paid

Paid 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 of Shares/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. BankCr. 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 Dr. Ordinary Share Applicants Cr. Ordinary Share Capital Cr. Share Premium* “No. of Share 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 Premium perEach Share” will be recorded in Share Premium

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Descriptions Accounting entries

( c) Issue at a Discount Dr. Ordinary Share Applicants Share Discount Cr. 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 in Share Discount

Refund of Oversubscribed Dr. Ordinary Share ApplicantsCr. Bank* “No. of Application Oversubscribed” X “Issue Price”

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Note: The issue is oversubscribed when the number of

applications is greater than the number of shares available for issue. Excess application money will be refunded to the unsuccessful applicants

The issue is undersubscribed when the number of applications is smaller than the number of shares available for issue. Hence, no refund will be required

If the number of applications is below the predetermined minimum amount, no shares will be issued and all the application money will be refunded

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Example – Issue at par Tai Fat Ltd made a public offering of its

1000 ordinary shares of $1 each The shares were issued at par

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The JournalDr. Cr.

Bank (1000*$1) 1000Ordinary Share Applicants 1000Being money received on application

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

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Shares issued at parBank

Ordinary Share Applicants

Ordinary Share Capital

Ordinary share applicants 1000

Bank 1000Ordinary share capital 1000


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Example – Issue at premium Tai Fat Ltd made a public offering of its

1000 ordinary shares of $1 each The shares were issued at premium of

20%

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The JournalDr. Cr.

Bank (1000*$1.2) 1200Ordinary Share Applicants 1200Being money received on application

Ordinary Share Applicants 1200 Ordinary 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 Tai Fat Ltd made a public offering of its

1000 ordinary shares of $1 each The shares were issued at a discount of

10%

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The JournalDr. Cr.

Bank (1000*$0.9) 900Ordinary Share Applicants 900Being money received on application

Ordinary Share Applicants 900Discounts on shares (1000*$0.1) 100 Ordinary 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 to sha

reholders without any cash being paid for 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) $5000 Cr Ordinary share capital $5000

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

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A debenture is a written acknowledgement of 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 of redemption (if applicable) and security given by the borrowing company are governed 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

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Redeemable and irredeemable debentures Redeemable debentures are repayable at

or by a specified date Irredeemable debenture are nor repayable However, the borrowing company can

purchase its own debentures on the open market when the price of debentures is very low

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Debentures with fixed charge Debentures are secured by means of

mortgaging specific assets, e.g. premises. The borrowing company cannot sell these

assets without the prior consent of the debenture holders

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Debentures with floating charge Debentures are secured by means of

mortgaging 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 will crystallize on the group of assets

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

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Unsecured/naked/simple debentures They are not secured by any of the

company’s assets

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Issue of debentures

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

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

Issue of Debentures

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Descriptions Accounting entriesIssue of Debentures (a) Issue at Par

Dr. Bank Cr. Debentures(b) Issue at a Premium Dr. Bank Cr. 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 be

written off using either method: It can be written off immediately against the

share premium on profit and loss appropriation account. The debentures should be disclosed in the balance sheet at a nominal value

It can also be written off over the life of debentures to the profit or loss account. The debentures should then be disclosed in the balance sheet at a nominal value less unamortized discount

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