company account

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Company Accounts

Final Accounts


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Introduction

Limited companies are so popular compared withpartnership business.

Limited companies enable larger businesses to beformed, and help an owner safeguard his privateassets

The owners(shareholders) loss is only limited tothe amount of shares they bought

The law governing the preparation andpublication of final accounts of limited companiesin Hong Kong is the Companies Ordinance ofHong Kong


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Types of Companies

Unlimited Company

Limited Company


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Unlimited Company

Some businesses which are small in sizeor provide highly specialized professionalservices

E.g. firms of solicitors or accountants arenot limited liability companies


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Limited Company

The capital of a limited company is divided intoshares

The par valueof each share can be $1,$5 orother

A person who buy the shares, become themember of company called shareholder

Their liabilities of a company can be limited byshares.

This means that shareholders are not obliged tointroduce funds to pay off the debts of thecompany beyond the amount of share capitalthey have purchased


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Types of Limited Company

Private Company

Public company


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Private Company

The number of members is limited to 50

Prohibited to subscribe for any shares ordebentures to the public

Strict the right to transfer its shares


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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 fixedpercentage of dividends before anyordinary 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 cumulativepreference shares can be carried forwardto a later year


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Non-cumulative preference shares

If the profits are insufficient to pay thedividends, the unpaid dividends cannot becarried forward to later years


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Ordinary Shares

The dividends of ordinary shares are notfixed. They depend on the return of thecompany

Ordinary shareholders are paid only afterall other claim (e.g. loan interest andpreference share dividends) have beenmet

Ordinary shareholders usually have votingrights


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Debentures

Debentures are long-term loans evidencedby deeds which set out the rate of interestpayable and the date of redemption


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Reserves

Reserves are profits or gains which accrueto 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 debentureredemption reserve


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Share premium

When a company issues shares at a priceabove par, the excess amount is calledshare premium

The reserve is restricted to be used in thefollowing ways: To write off preliminary expenses

To write off expenses of issuing shares

To write off commission paid and discounts onshares

To pay up a bonus issue

To provide premium on redemption ofdebentures


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Revaluation reserve

This is the unrealized gain from anincrease in the value of an asset afterrevaluation


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Capital redemption reserve and

Debenture redemption reserve

This arises as a result of a companyredeeming its shares or debentures byusing its retained profits


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Capital Structure

Authorized

Capital

It is the maximum amount of share

capital which the company isallowed to issue

Issued Capital It is the nominal value of a portionof the authorized capital which has

been taken up (purchased) byshareholders

Called Up Capital It is the amount of issued capitalwhich the company has called to

be paidPaid 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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Final Accounts


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Final accounts

For internal reporting and managementpurposes, the final accounts of the limitedliability companies are similar as those of

the sole trader and partnership with theexception of certain types of expenses andthe appropriation of net profit


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XX Ltd. CompanyTrading and Profit and Loss Account for the year ended 31 Dec XXXX

Sales XLess: Returns inwards X

(X)Less: Cost of Goods Sold

Opening Stock XAdd: Purchases XAdd: Carriage inwards XLess: Returns outwards (X)

Less: Closing Stock (X) XGross profit XAdd: Gains on disposal X

XLess: Expenses

Rent X

Directorsremuneration XDebenture interest (% * Debenture) X X

Profit for the year before taxation (PBIT) XLess: Taxation (X)Profit for the year after taxation (PAT) X


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Add: Retained profit b/f XX

Less: Appropriations:Goodwill written off XPreliminary expenses XTransfer to general reserve XPreference dividend interim (paid) X

- proposed (final) XOrdinary dividend - interim (paid) X

- proposed (final) X X

Retained profit c/f X


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Balance Sheet as at 31 Dec XXXXFixed Assets Cost Dep NetMachinery X X XFurniture X X X

X X X

Current AssetsStock XDebtors XBank X

XLess: Current Liabilities

Creditors XProposed dividend XDebenture interest accrued XProvision for taxation X

Working Capital XX

Financed by:Share Capital Authorized IssuedXXXX Ordinary Shares of $1 each X XXXXX 8%Preference Shares of $1 each X X

X XNo. of shares

Par value


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ReservesShare Premium XGeneral Reserve XProfit and loss X

X

Long-term Liabilities10% Debentures XX


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Debenture interest

The amount of the debenture interest willbe calculated according to the pre-setpercentage of debenture as the interest

expenses of the company


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Trial Balance as at 31 Dec 20-1Dr Cr

10% Debentures 10000Debenture 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) 5000

Debenture interest not yet paid

Example


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Directors fee/emolument

Directors fee and directors emolument are

salaries and services charges of thedirectors of the limited company

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


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Appropriation of net profit

Taxation payable on profit

Amounts written off as goodwill

Preliminary expenses

Retained profit from last year/after nextyear

Dividends

Transfer to/(from) reserve


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Taxation payable on profits

Profit tax is not an expenses, it is anappropriation of profits

However, for the purpose of presentationand to make the accounts moreunderstandable, it is not shown with theother appropriation

It is shown as a deduction form profit for

the year before taxation (i.e. this is thenet profit figure) to show the net result(i.e. profit for the year after taxation)


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Amounts written off as goodwill

Goodwill, in a company, may have beenwritten off it from time to time.

When this is done, the amount written off

should be shown in the appropriationaccount


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Preliminary expenses

When a company is formed, there aremany kinds of expenses concerned withits formation

These include, for example, legalexpenses and various government taxes

These cannot be shown as an asset in thebalance sheet, and can be charged to theappropriation account


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Retained profit to next year/ from last

year

All profits may not be appropriated duringa period

This then will be balance on the

appropriation account as brought forwardfrom the previous year or carried forwardto next year


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Dividends

Net profit from ordinary activities of thebusiness of a company will be distributedto its shareholders of preference shares

and ordinary shares according to the levelof net profit and the dividend policy of thecompany

Dividend can be divided into:

Interim/paid dividend

Final/proposed dividend


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Interim/Paid Dividend

Interim dividend is the paid dividend tothe shareholders in the middle of thefinancial year

The amount of interim dividend will besubject to the performance of the businessin the first half of the financial year

Descriptions Book-keeping entries

Interim dividend paid Dr Interim DividendCr Bank

Transfer interim dividendpaid to appropriationaccount

Dr Profit & loss appropriation

Cr Interim Dividend


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Proposed/Final Dividend

The amount of proposed dividend will besubjected to the performance of thebusiness in whole financial year and theshareholdersapprovals in the Annual

General Meeting Proposed dividend will be paid in the early

of next financial year, it will be treated asone of appropriations to the shareholders

in the profit & loss account of currentfinancial year and as current liabilitiesinthe balance sheet


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Transfer to /(from) Reserve

Part of the net profit for the financial yearmay be transferred from the appropriationaccount to the reserves to meet the future

requirements or specific reason Revenue reserve can be transferred back

to appropriation account for dividendspurposes in the future financial period


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Descriptions Book-keeping entries

Transfer part of net profitfrom appropriationaccount to specificreserves

Dr Profit & lossappropriation account

Cr Reserves

Transfer specific reservesback to appropriation

account

Dr Reserves

Cr Profit & lossappropriation


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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 5000

Interim preference dividend 8000

Additional information:The director proposed a final dividend of $0.05 per ordinary shareThe 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

Balance Sheet as at 31 Dec 21-1$ $

Less: Current LiabilitiesDividend owning(17000+20000) 37000

Dividend not yet paid to shareholders

Preference dividend interim 8000- final (250000*0.1-8000) 17000

Ordinary dividend - interim 5000- final (400000*0.05) 20000

Transfer to general reserve 5000


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Bonus Shares/Script Issue

Bonus shares are freeshares issued to

shareholders without any cash being paidfor 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) $5000Cr Ordinary share capital $5000

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

company account

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