COMPANY

ACCOUNTING
MODULE CODE: AFU 07304
BACC, BTX, BAIT
Objectives:
At the end of this topic, you should be able to:
 Explain the Memorandum and Article of Association
 Distinguish between Public and Private Company
 Describe elements of company capitals
 Describe Capital and Revenue Reserves
 Explain Nominal and Market values of shares
 Create accounts for retaining earnings, share premium, revaluation reserve,
redemption reserves
 Show accounting treatment of a public issue, bonus issue, right issue, issue of
debenture and redemption of redeemable preference shares
Company Meaning
A company is an artificial person and a separate legal
entity registered under companies act, formed by
individuals for a common purpose.
In the formation of a company, individuals are required
to prepare the Memorandum of Association and Articles
of Association
Memorandum of Association
 Memorandum of Association is a legal document prepared during the
company formation process for the purpose of setting up the company
 The
Memorandum shows that the individuals identified wish to form a
company as per the Companies Act 2002
 Thememorandum should follow a prescribed form and must be signed
by each member
 Thememorandum is then signed and submitted to the registration board
together with other appropriate documents for company registration
The memorandum consists of five clauses for private companies, and six for
public companies containing the following details:

1. The name of the company.

2. The place where the registered office will be situated.
3. The objects of the company.
4. A statement (if a limited liability company) that the liability of its members is
limited.
5. Details of the share capital which the company is authorized to issue.
6. A public limited company will also have a clause stating that the company is a
public limited company.
Article of Association
 The Article of association specifies the purpose of the company and
sets out the constitution of the company including how the company is
owned, governed, run, role and powers of directors, shares, (issue and
rights attached) manner of holding the company meetings, etc.
 The article of association explains the internal affairs of the company
 Itis usually compulsory to have the article of association registered
along with the memorandum of association.
 See section 9 of Companies Act (2002)
The articles should cover the following:
 Liability of members;
 Directors’ powers and responsibilities;
 Directors’ meetings, voting, delegation to others and conflicts of interest;
 Retaining records of directors’ decisions;
 Appointment and removal of directors;
 Shares, unless a limited by guarantee company;
o issuing shares;
o different share classes;
o share certificates;
o share transfers;
 Dividends and other distributions to members;
 Members’ decision making and attendance at general meetings;
 Means of communication;
Public Vs. Private Companies
A company is considered public if it has public reporting
obligations for a reason that it trades company securities i.e.
shares and bonds on public markets.
 Public companies issue shares through IPO
A private company on the other hand, is held under private
ownership.
Private companies may issue securities as well, however their
securities are not issued through IPO and do not trade on public
securities market.
LIMITED LIABILITY
 Ifthe company failed to settle the debts owing to creditors, the
shareholders could not be forced to sell their private (personal) assets to
settle the company’s debts.
 The shareholders could only lose their original investment in the shares
i.e. their liability is limited to that original investment
 Unlike a sole trader or the partnership business, a limited company has
a separate identity from its owners (shareholders), so any legal actions
can be taken against the company rather than members (shareholders)
of the company.
Elements of company capitals

Equity

Authorized and Issued Share

Ordinary Share
Redeemable Preference Shares
Debentures/Bonds
EQUITY
-Equity refers to the company’s book value i.e. assets- liabilities
-It represents the amount that will be returned to shareholders if the company was
liquidated

AUTHORIZED SHARES
-Is the maximum number of shares a company is allowed to issue

ISSUED SHARES
-Is the number of shares the company has currently issued.
Issued shares can be less or equal to authorized shares.
ORDINARY SHARES
-Are shares traded publicly on securities exchange markets
-They give holders right of ownership, voting and right to receive part
of company’s profit in terms of dividends

PREFERENCE SHARES
-Are types of shares with debt and equity characteristics
-Holders of reference shares have priority regarding dividend
payments over common shareholders
-Holders of preference shares do not hove voting rights
DEBENTURES/BONDS
These are unsecure debt instruments issued by a company to obtain
funds from the public
Debenture holders are entitled to regular interest payments, and
principal plus interest on maturity

REDEEMABLE PREFERENCE SHARES

Are type of preference shares issued to shareholders with an option
that allows the company to buy back it’s shares by issuing a
repayment to the shareholders
Capital and Revenue Reserves
CAPITAL RESERVES
- Capital reserve is created from profit generated by non-operating
activities of the company such as non-current assets revaluation reserve,
share premium and capital redemption reserve.
- It is prohibited to use capital reserves for payment of cash dividends.
- These reserves are shown separately in the shareholders' equity section
of the Statement of Financial Position.
REVENUE RESERVES
-Are reserves created by retaining part of company profit
generated from its operating activities in a specific period i.e.
retained earnings

Companies create reserves to be able to handle future needs of

the business such as business expansion, undertaking urgent
projects, handling unforeseen events.
Types of revenue reserves
Specific reserve
Is a revenue reserve which is created out of profit for
identified/specific purposes (example replacement of non-current
assets, or planned expansion of the business)

General reserve
Is a revenue reserve which is created out of profit for unidentified
purpose. This kind of reserve can be used for any task.
Nominal and Market Value of Shares
NOMINAL SHARE VALUE
-This refers to the price assigned to shares when they are issued
-This is the value recorded in books of accounts
-Also called face or par value

MARKET SHARE VALUE

-This refers to the price at which shares are traded in the market
-The market value fluctuates frequently in response to various factors that influence
shares demand and supply
 SELF STUDY:
What are the factors that influence the demand and
supply of shares in the market?
Shareholders’ Equity
Share capital and reserves are 'owned' by the shareholders. They are known
collectively as 'shareholders' equity'.
Shareholders' equity consists of the following.
The par value of issued capital (minus any amounts not yet called up on
issued shares)
Other equity
The share capital itself might consist of both ordinary shares and preference
shares. All reserves, however, are owned by the ordinary shareholders, who
own the 'equity' in the company.
'Other equity' consists of four elements.

 Capital paid-up in excess of par value (share premium)

 Revaluation surplus
 Reserves
 Retained earnings
Creating Accounts
Retained Earnings
This is the most significant reserve and is variously described as:
 Revenue reserve
 Retained earnings
 Accumulated profits
 Undistributed profits
 Unappropriated profits
These are profits earned by the company and not appropriated by
dividends, taxation or transfer to another reserve account.
Revenue Reserves Accounts
Accounting treatment for creation of revenue reserve
Dr. Profit and loss account
Cr. Reserve Account
New shares issue
New Issue of shares is a process through which the company allocates new shares to
the new or existing shareholders
Company’s prospectus is a disclosure document that describes a financial security
(shares or debentures) for potential buyers
Is an offer document that invites the public to subscribe and purchase shares of a
company.
 The steps followed when a company issues shares are:
 Invitation.
 Application.
 Allotment.
 Calls.
Payment Terms
Fully payment on application
The whole price of share is payable on application
Example if price is Tshs 100/=, the shareholder is required to pay all Tshs 100/= for each share he or
she bought.
Instalment Payments.
The price of share is payable on installment basis i.e. a certain part of price received on application,
the other part received on allotment, and the remaining balance received on calls.
Example if price is TZS100/=, the shareholder is required to pay may be TZS30/= on application,
TZS40/= on allotment, TZS20/= on the first call, and TZS10/= on the final call for each share he or
she bought
Share Issue at Par
A share is issued at par when sold at a price equal to the nominal value
of a share.
Upon each event on which an allotment of shares is made, an entry
must be made in the journal, debiting an account called Application
and Allotment with the amount payable on application and allotment
in respect of the shares so allotted, and in case the shares have been
issued at par crediting share capital Account.
Entries: DR Bank a/c
CR Share Capital a/c (Lump sum payment)
Share Issue at Premium
A company is said to have issued shares at a premium, when the issue
price is above the nominal value of share.
That means, the buyer pays higher than the share certificate value (face
value).
When shares are issued at a premium, whether for cash or otherwise, the
premium must be credited to an account called the share premium
Account.
Entries: DR Cash/ Bank a/c
CR Share Capital a/c
CR Share Premium a/c (Lump sum payment)
Share Issue at Discount
The shares are said to have been issued at discount when sold at a price
lower than the nominal value.
Technically such an issue amounts to issue of shares at a loss
The issue of shares at a discount is illegal, the Companies Ordinance is
not willing therefore to permit a company to issue shares at a discount
except under strict conditions stipulated by section 40,
Entries: DR Bank a/c
DR Discount on share issue a/c
CR Share Capita a/c (Lump sum payment)
Calls in arrears and Advance
 At the balance sheet date some shareholders will not have paid all the
calls made.
 These are all together known as calls in arrears which can be shares
in arrear for allotment and calls.
 Some shareholders may have paid money in respect of calls not yet
requested at the balance sheet date. These are called calls in advance
 Calls in advance can be advance payment made by shareholders for
any call not yet requested for payment. Calls in arrear are shown in
the balance sheet as share capital whereas call in advance is shown as
a liability.
Payment in Installments
1. On receipt of applications money:
Dr. Bank a/c
Cr. share application a/c
2. On allotment of shares:
 Dr Share Application a/c
Cr Share Capital a/c (Being Appropriation of application money to
share capital)

 Dr Share Allotment a/c

Cr Share Capital a/c (Being allotment money due on shares
3. When allotment money is received
Dr Bank a/c
Cr Share allotment a/c(Being allotment money received)
4.When call is made
Dr Share call a/c
Cr Share Capital a/c
-when money is received
Dr Bank a/c
Cr Share call a/c ( Being call money received)
Allotment of Shares under Pro rata
Where the number of applications exceeds the number of shares offered for
issue, the directors of the company may decide to allot the shares
proportionately.
For instance, in case 30,000 shares are applied for when the offer is only for
20,000 shares the directors may decide to allot 2 shares for every 3 applied
for.
The excess of application money received by the company during
application is usually not immediately refunded but retained with the
company and adjusted against what becomes due at the point of allotment.
Forfeiture and Reissue of Shares
Sometimes, although it is probably fairly rare, in certain times, a
shareholder fails to pay the calls requested from him. Therefore, the
directors of a company are usually empowered by the Articles of
associations to FORFEIT shares.
Reissue of forfeited shares as are very often at a price below the par
value
Although this virtually amounts to issue of shares at discount, it does
not need the formalities of court sanction.
 Share Forfeiture entries
Forfeiture of shares issued at par
DR Share Capital a/c
CR Share Allotment a/c or Share Call a/c
CR Forfeited Share a/c
Date Particular Amount (DR) Amount (CR)
Share Cap a/c Dr xxx
Forfeited shares a/c Cr xxx
Shares Allotment a/c Cr Xxx
Shares Call Cr xxx

If, we maintain Calls-in-Arrears Account we will credit Calls-in-Arrears Account instead of

“Shares Allotment Account” and “Shares Call Account”.
Forfeiture of shares issued at Premium

Date Particulars Amount (Dr) Amount (Cr)

Share Capital a/c Dr Xxxx
Share Premium a/c Dr Xxx
ShareAllotment a/c Cr Xxx
Forfeited shares a/c Cr Xxx
First Call cr Xxx
Forfeiture of shares issued at a discount
The discount applicable
on the shares forfeited is written back by crediting the Discount on Issue A/c

Date Particulars DR Amount CR Amount

Share capital acc XXXX

Share Discount a/c Xxxx

Share Forfeiture a/c XXX

Share Allotment a/c XXX

Generally, the shares will be reissued at a discount. This discount given will be
written off from the Share Forfeiture A/c

Date Particulars DR CR

Bank a/c Xxxx

Share Forfeiture a/c Xxxxx

Share Capital a/c Xxxxxx

 Bonus (capitalization) issues
 A company may wish to increase its share capital without wishing to
raise additional finance by issuing new shares.
 A company can re-classify some of its reserves as share capital
 This is purely a paper exercise which raises no funds.
 Any reserve may be re-classified in this way, including a share
premium account or other reserve.
 Such a re-classification increases the capital base of the company and
gives creditors greater protection.
Bonus Issues

Debit: Undistributed Profit Reserves / Share Premium Reserve / or

Other reserves

Credit: Share Capital Account

Right Issue of shares
A rights issue (unlike a bonus issue) is an issue of shares for cash
The 'rights' are offered to existing shareholders, who can sell them if they
wish.
This is beneficial for existing shareholders in that the shares are usually
issued at a discount to the current market price.
Right issue entry

The accounting entry for right share issue is same as the

accounting entry for normal share issues but with a lower
price.
Dr Bank XXXX
Cr Share Capital XXXXX
Account emtries on redemption of
preference shares
Task
 In a group of five people discuss
1. How right issue is beneficial to existing shareholders

2. Miss Amina is a shareholder of NICOL PLC. Upon a call

for right issue, she refuses to exercise her right, what is the
impact of her decision?