Introduction to Company

Accounts

Lecture 1
 What is a Company?

• A legal entity, separate and

distinct from its owners;
• Conducting business with same
legal rights, duties and
responsibilities as a person;
• Shareholders’ liability can be
limited, by choice, to the amount
invested in the Company.
 Formation of a Company

• Companies Act;
• Registrar of Companies issues a
Certificate of Incorporation;
• Memorandum of Association
– Name, Objects, Liability, Capital
• Articles of Association
– Internal working arrangements of the
Company, voting, powers and duties
of Directors, etc.
 Public and Private Companies

• Public - =>7 members, with its

shares available to the public with
no restriction;
– Public listed company [plc] - Public
company listed on a Stock Market;
• Private - 2>=50 members, share
ownership and transfer restricted.
Limited and Unlimited Companies

• Limited by shares - liability limited

to the amount outstanding on
shares owned or allotted;
• Limited by Guarantee - liability
limited to amounts committed by
members in the event of winding
up;
• Unlimited company - members
have unlimited liability.
 Share Capital of a Company

• Capital divided into shares of

small denominations of value;
• Authorised Share Capital -
100,000 shares of T.Shs 100
each;
• Types of Shares
– Preference Shares
– Ordinary Shares
 Steps in the issuing of Shares

• Invitation - Prospectus;
• Application - application money
received;
• Allotment - dealing with over-
application;
– Refuse allotment and refund
application moneys
– Prorate allotment
• Calls - instalment payments.
 Matters worth noting

• Application money must be at least

5 percent of Par value;
• Allotment cannot be made unless
minimum share capital stated to be
raised in the Prospectus has been
subscribed, OR postpone issue and
re-advertise;
• Investment Companies -
Underwriting of Share Issues.
 Share issue Prices

• At Par - Nominal value;

• At a Premium - more than Par
value;
• Theoretically At a Discount - less
than Par value; Subject to many
regulations and restrictions.
Therefore, rarely happens in
practice.
Other terminology in Share Issues

• Authorised Share Capital;

• Called up Capital;
• Calls in arrear;
• Calls in advance;
• Paid up Capital.
 Accounting requirements

• Issue of shares;
• Forfeiture of shares;
• Reserves and Appropriation of
Reserves; and
• Formats of, and Disclosure
requirements in, Financial
Statements of Companies.
 Example on Issue of Shares:
Entries [page 374-7]
Details Debit Credit

Cash 2,000,000
[a]
Ordinary Share Capital 2,000,000

Details Debit Credit

Cash 3,600,000
[b]
Ordinary Share Capital 3,000,000

Share Premium 600,000

 Example on Issue of Shares:
Entries [page 374-7]
Details Debit Credit

Cash 1,200,000
[c]
Applications and allotment 1,200,000

Applications and allotment 4,000,000

Ordinary Share Capital 2,500,000

Share Premium 1,500,000

 Example continues
Details Debit Credit
Cash 2,800,000

Applications and allotment 2,800,000

First Call 1,250,000

Ordinary Share Capital 1,250,000

Cash 1,250,000

First Call 1,250,000

 Example continues
Details Debit Credit

Final Call 1,250,000

Ordinary Share Capital 1,250,000

Cash 1,125,000

Final Call 1,125,000

 Ledger entries [page 376]
Application and Allotment Account
Ord. Shares 2,500,000 Cash 1,200,000
Share Prem. 1,500,000 Cash 2,800,000

Ordinary Share Capital

Cash 2,000,000
Cash 3,000,000
Appl. and allot. 2,500,000
First call 1,250,000
Balance c/f 10,000,000 Final call 1,250,000

10,000,000 10,000,000
 Ledger entries [page 376]
Share Premium Account
Cash 600,000
Balance c/f 2,100,000 Appl. and allot. 1,500,000

2,100,000 2,100,000

Final Call Account

Ord. Shares 1,250,000 Cash 1,125,000

Balance c/f 125,000
1,250,000 1,250,000
 Balance Sheet [extracts only]

T.Shs
Authorised Share Capital:
200,000 shares @ T.Shs 100/= 20,000,000

Issued and Paid-up Share Capital:

100,000 shares @ T.Shs 100/= 10,000,000
Less: Calls in arrears, 5,000 shares 125,000
9,875,000
Share Premium 2,100,000
 Accounting requirements

• Issue of shares;
• Forfeiture of shares;
• Reserves and Appropriation of
Reserves; and
• Formats of, and Disclosure
requirements in, Financial
Statements of Companies.
 Forfeiture of Shares [page 377]
Ordinary Share Capital
Forfeit. shares 500,000 Cash 2,000,000
Cash 3,000,000
Appl. and allot. 2,500,000
First call 1,250,000
Balance c/f 9,500,000 Final call 1,250,000

10,000,000 10,000,000

Final Call Account

Ord. Shares 1,250,000 Cash 1,125,000

Forfeited Shares 125,000
1,250,000 1,250,000
 Forfeiture of Shares [page 377]

Forfeited Shares Account

Final call 125,000 Ord. Shares 500,000

Balance c/f 375,000

500,000 500,000
 Balance Sheet [extracts only]

T.Shs
Authorised Share Capital:
200,000 shares @ T.Shs 100/= 20,000,000

Issued Share Capital:

95,000 shares @ T.Shs 100/= 9,500,000

Share Premium 2,100,000

Forfeited Shares 375,000

 Accounting requirements

• Issue of shares;
• Forfeiture of shares;
• Reserves and Appropriation of
Reserves; and
• Formats of, and Disclosure
requirements in, Financial
Statements of Companies.
 Reserves and Appropriation of
Profits
• Revenue versus Capital Reserves;
• Capital Reserves;
– Share Premium
– Fixed Assets Revaluation Reserve
• Profits are transferred to Retained
Earnings - Revenue Reserves;
• Dividend pay-out is an
appropriation of Reserves.
 Dividend Pay-outs

• Interim dividends - BOD may

decide;
• Final dividends - approval of AGM;
– Board makes a recommendation
– AGM approves
– Dividends are paid out.
 Dividends pay-outs: Journal
entries
Details Debit Credit
P&L Account 2,000,000

Retained Earnings 2,000,000

Retained Earnings 1,000,000

Dividends Payable 1,000,000

Dividends Payable 1,000,000

Cash 1,000,000
 Accounting requirements

• Issue of shares;
• Forfeiture of shares;
• Reserves and Appropriation of
Reserves; and
• Formats of, and Disclosure
requirements in, Financial
Statements of Companies.
Format of Financial Statements and
Disclosure Requirements
• Income Statement;
– Turnover;
– Directors’ remuneration;
– Interest expenses;
– Audit fees;
– Profits before taxation;
– Taxation.
Format of Financial Statements and
Disclosure Requirements
• Balance Sheet;
– Authorised Share Capital
– Issued and Paid up Share Capital
• Cash Flow Statement;
• Statement of Changes in Equity;
• Notes to Financial Statements,
etc..