company accounts. topic 9 we learnt how to account for partnerships in this topic we shall learn; ...
TRANSCRIPT
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