Professional Documents
Culture Documents
5 Company Accounts
5 Company Accounts
Introduction
A company represents the third stage in business organizations Development. The first two
being Sole proprietorship and partnership firms.
A company is an association of persons formed for economic gains of its members who
contribute money’s worth to a common stock (ordinary shares). It has a right to act as a
natural being granted by law.
Advantages of companies
There is limited liability.
Large capital base because of big membership and their contributions.
Professional management- owners trust the running of the business to managers who
are professionals in different fields.
Higher chances of acquiring more funds from loans and debentures because companies
can afford collateral security.
They have a legal framework- operate in accordance with the law-Companies
Act.
There is continuity of business and perpetual succession of the business.
Shares are freely transferable, more especially in public limited
companies.
Disadvantages of Companies
Compliance with the companies Act.
Having to comply with all Accounting Standards during the preparation of Financial
Statement.
Formation and annual registration costs.
Types of Companies
1. Statutory companies- a company formed by the Act passed either by the central or state
legislature. Such companies are governed by their respective Acts and are not required
to have ant Articles of Association (AOA) and Memorandum of Association (MO A)
2. Government Companies- a company of which no less than 51% of the paid up capital
is held by the central government.
3. Foreign companies- a company which is incorporated outside the country but with a
place of business in the country.
6. Public company- a company which AOA does not contain a requisite restrictions to
make it a private company. A public company needs a minimum of seven (7) persons
for its registration.
Formation of a company
The idea of forming a company is first conceive then the company is actually formed and
commences business. The following stages are therefore identified;
- Promotion stage
- Incorporation stage
- Business Commencement stage
1. Promotion
This is the stage of conceiving the idea and it is write up. The person involved in this task
is termed a promoter.
2. Incorporation
This is the stage which brings the company into existence. It involves;
Ascertainment of the availability of the proposed name of the company.
Application for a license
Securities and exchange board / committee approval of draft prospectus (this applies
where the company proposes to raise capital by issue of shares or debentures to the
general public)
Preparation of the prospectus- a document inviting deposits from the public or offers
from the public to subscribe to the shares or debentures of the company. The
prospectus contains information about;
o The objectives of the company
o Past history and future prospects
o Managerial personnel
o Amount of minimum subscription
In addition to the above preliminary steps the promoters will have to take the following
steps to get the company incorporated
o Filling the necessary documents
o Payment of the necessary fees
o Obtaining of the certificate of incorporation
The promoters should file the following documents with the required fees to the registrar
of companies.
Memorandum of Association (MOA)
Articles of Association (AO A)
A list of persons who have consented to become directors of the company
A written consent by the directors to act as directors and written undertaking to take up
and pay for the shares.
Notice of address of the registered office.
A statutory declaration that all the requirement of the law for registration has been duly
complied with.
3. Commencement of business
A private company can commence business soon after its incorporation but a public
company has to obtain another certificate for this purpose which is known as a certificate
of commencement of business.
Ordinary shares are those that do not have preference treatment. Dividends on ordinary
shares are paid after the dividend on preference shares have been paid and the dividend rate
on ordinary shares depends upon the amount of profits and intentions of the directors.
Ordinary shares unlike preferences shares cannot be paid back until the liquidation of the
company and in case of liquidation, capital will be repaid after all the claims on the
company including preference shares have been paid.
Control of the company lies with the ordinary shareholders and when the company is
earning good profits they earn good dividends.
Preference shares on the other hand are shares that carry a preferential right regarding
both payment of dividends and return. Preference shares are paid a fixed rate of dividend
and is paid before any "dividend is paid to other shares. The rate is usually determined at
the time of issuing these shares.
Issue of shares
The company's capital is termed as share capital because its divided into number of units
called shares. For example a company may have share capital of Shs. 500,000 divided into
10,000 shares. Issue of share is done by inviting members of the public through a prospectus
to subscribe to the shares.
4. Called up capital
This is part of the issued share capital that the members have been required to pay. This
arises when only part of the share price has been requested for. For example if the
subscribers of the firm referred to above are requested to pay shs. 800 then the called up
capital will be Shs. 88,000,000 (Shs. 800 x 110,000 shares).
5. Un called up Capital
This is part of the issued share capital that shareholder have not been required to pay. The
un called capital for the above example would be Shs. 22,000,000 (Shs. 200 x 110,000).
6. Paid up Capital
This represents the actual amount received from issue of shares. From the above example,
if 100,000 subscribers actually pay, then paid up capital will be Shs. 80,000,000 (Shs. 800
x 100,000).
7. Un paid capital
This is the portion of called up capital not paid by the subscribers. The un paid capital from
the above example is Shs. 8,000,000 (Shs. 800 x 10,000).
Note:
The difference between paid up capital, called up capital, issued capital and authorized
capital are temporal, once all the called up capital has been paid for then paid up capital
will equal to called up capital and when all the installments are requested for then the called
up capital will equal to issued capital. Similarly, when all shares are issued the issued share
capital will equal to authorized capital.
ADD
Other operating incomes XX XX
Distribution costs (XX) (XX)
Administration costs (XX) (XX)
Other expenses (XX) (XX)
Profit from operations XX XX
Income Statement
(Illustrating the classification of expenses by nature)
20-3 20-2
Revenue XX XX
Other operating incomes XX XX
Changes in inventory of finished goods (XX) (XX)
and work in progress
Work performed by the enterprise and XX XX
capitalized
Raw materials and consumables used (XX) (XX)
Staff costs (XX) (XX)
Depreciation and amortisation expense (XX) (XX)
Other operating expenses (XX) (XX)
Profits from operations XX XX
Finance costs (XX) (XX)
Incomes from associates XX XX
Profit before tax XX XX
Income tax expense (XX) (XX)
Profit after tax XX
Minority interest (XX) (XX)
Net profit for the period XX XX
2. STATEMENT OF FINANCIAL POSITION
A statement of financial position is another name for the balance sheet. It displays the assets of
a company and their sources of financing, debt and equity.
Investors and creditors will use the statement of financial position to determine how efficiently
a company is using its resources and how efficiently is it being financed.
Statement of Financial Position Template
Format
The statement of financial position can be reported in either of the following formats:
Account Format
This format divides the statement into two columns. The left side would include the assets of
a company consisting of both current assets and fixed assets. The right side of the statement of
financial position displays the liabilities and equity of a company. Think of this as a debit and
a credit type format as the debit accounts come on the left side and the credit accounts come
on the right-hand side.
Report Format
This will have only one column and it is the more traditional way of presenting the statement
of financial position. In this format, the assets appear first, followed by liabilities and equity of
a company.
In both formats, the assets and liabilities are subdivided into current and non-current/long term.
They will also be listed generally by how liquid they are.
Components of a Statement of Financial Position
There are primarily 3 main components as listed below:
Assets
Liabilities
Equity
The difference with other previous statements of financial position in a company is the Equity
Equity
Equity is directly calculated as the combination of contributed capital (commons stock +
preferred stock – treasury stock) and retained earnings (net income + other comprehensive
income – dividends paid).
Analysis of the Statement of Financial Position
The balance sheet can be used by the investor, creditors or any other stakeholders in any of the
following ways:
It reveals the financial position of a business at a specific point in time. When previous
periods are grouped and compared together, various trends and insights can be generated
that could be used for forecasting purposes.
A balance sheet can reveal how leveraged a company really is. If the total amount of debt
exceeds the equity, we can say that the company is now operating at dangerously high
levels of borrowing. Financial leverage can exponentially amplify the losses for a company
in hard and difficult economic times.
Investors might want to know how much cash the company has and whether it is sufficient
for the company to pay them dividends.
Various financial ratio analysis can be undertaken to identify problems a company might
be facing. For example, an investor might calculate the inventory turnover, which might
indicate that there is a lot of excess inventory. Another useful ratio is the fixed asset
turnover, which determines how efficiently is a company utilizing its fixed assets.
STATEMENT FORMAT
Non-Current Assets
Property Plant and Equipment XX
Less Acc Depreciation XXX
NET Non-Current Asset XXX
Current Asset
Cash XX
Acct Receivable XX
Prepayments XX
Inventories XX
Total Current Asset XXX
Current Liabilities
Account Payable XX
Accrued Expense XX
Unearned Income XX
Total Current Liab XXX
Net Capital Employed XXX
Non-Current Liabilities
Long term Loans XX
Equity
Preferred Stock (x%) XX
Common Stock XX
Net Income XX
Less Dividends (xx)
Total Shareholders’ Equity XXX
COMPANY NAME
Statement of Financial Position at 31/12/xxx
Non-Current Assets Cost Accumulated Net Book Value
Depreciation
Buildings X
Plant X
Equipment X
NET NON-CURRENT ASSET XXX
CRURRENT ASSET
Cash X
Receivables X
Prepayments X
Inventories X
TOTAL CURRENT ASSETS XXX
FINANCED BY:
XXXX
EQUITY
Preference Stock (X5%)
Ordinary/Common Stock(2,000 Ord @1,000/=) XXXX
Net Income XXXX
Less Dividends (xxxx)
Total Shareholders’ Equity XXXX
NET CAPITAL XXXX