Business Accounting 2

Temasek Polytechnic
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Lecture 4

Accounting for Companies I

(Lecturers copy)
(For week beginning 09 Nov 2015)

Learning Objectives
At the end of the lecture you should be able to:
describe the nature and features of companies;
describe the various types of companies;
state the procedures relating to company formation;
describe advantages and disadvantages of companies.
describe components of shareholders equity;
account for issues of shares and debentures;
differences between share financing and debt financing.
References

1.

i) Kirkwood, Accounting: An Introductory Framework

ii) R.C. Clift, V. Navaratnam - Company Accounting
iii) Singapore Companies Act, Cap 50.

Sole Traders and Partnerships

Sole Trader or Proprietor (single owner)
Partnerships (two or more owners)
Problems of Sole Proprietors and Partnerships
Inability to raise large amounts of capital
Unlimited liability of owners
Dissolution of the business (in many cases) on the death or disability of the owners
To overcome these problems, a new type of business organisation called the company is
formed.

2.

Definition of Company
A form of business organisation, registered under the Companies Act, which represents a
group of people who have come together for a common legal objective.
An entity created by law with many of the same privileges and responsibilities enjoyed by
individuals. Companies incorporated in Singapore have to comply with the Singapore
Companies Act, Cap 50.
Examples of Singapore Companies:
Singapore Airlines, SingTel, Creative Technology, Fraser & Neave, Robinsons, etc.

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Temasek Polytechnic
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3.

Features of a Company
A separate accounting entity
A separate legal entity
Can raise capital by equity financing (issue of shares) and debt financing (issue of
bonds).
A company can issue shares at any price and at different prices over a period of time.
When a company first issues shares to the public, an invitation is made for shares to be
purchased from the company. Details are set out in the prospectus.
An applicant applies for shares in a company and the buyer becomes a shareholder of the
company when his application is successful.
Initial Public Offering (IPO)
Where a listing on the stock exchange involves raising of funds by way of public offer of
shares.
Refer to attached Business Times articles dated 26 July and 13 April 2013
- MoneyMax launches IPO for Catalist listing
- GDS Global launches Catalist IPO
MoneyMax launches IPO for Catalist listing
o Pawnbroking chain, MoneyMax Financial Services, offers 53.8 million new shares
for a Catalist listing comprising of
2 million shares for public subscription
51.3 million shares for placement and
500,000 reserved shares
o IPO price of 30 cents per new share
o Seeks to raise net proceeds of $14.4 million (after deducting expenses)
o Funds raised intended to be used as follows:
$4 million on expansion of its network of outlets
$10.4 million on general working capital and corporate purposes
At IPO price of 30 cents per share and assuming all 53.8 million new shares were issued,
what were the gross proceeds from the IPO of MoneyMax?
$16,140,000
GDS Global launches Catalist IPO
o
The provider of commercial and industrial door and shutter solutions, offers 12
million new shares and 5.5 million vendor shares (total 17.5 million shares) for a
Catalist listing
o IPO price of 25 cents per new share
o Expects to raise net proceeds of $1.43 million (after deducting expenses)
o Plans to use funds to expand operations in Middle East and Taiwan
Placement shares are shares set aside for specific groups of people like institutional
investors or high net worth investors.
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Temasek Polytechnic
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Reserved shares are shares set aside for employees or management staff of the company.
Company will only get proceeds from issuance of new shares. Proceeds from issuance of
vendor shares go to the vendors, who are the initial shareholders of the shares. Vendor
shares are shares already issued by the company to somebodies (the vendors) and these
vendors are reselling their shares to the public now. Therefore the proceeds from vendor
shares go to the vendors.
Limited liability of shareholders. If a shareholder is allotted 50 shares of $2 each, the liability is
limited to the face value of the shares held. If he/she pays $100 there is no liability for further
payments from private funds if the company is unable to pay its debts in the future.
A person may also become a shareholder of a company by buying shares through a
stockbroker. The shares have been previously issued by the company and are owned by
an individual, a partnership or another company.
The stockbroker is registered with the stock exchange centralised place of business
where shares of listed public companies are bought and sold.
In this instance, the cash will flow from the purchaser to the seller. The stockbroker will
earn a commission for handling the transaction but no cash will flow to the company.
Implications:
No accounting entries are made by the company.
Share ownership change will be recorded in Registry of Members.
Subject to corporate income tax
Business income is subject to corporate income tax. Corporate tax rate is 17% for
income earned in the year 2013 and assessed in Year of Assessment 2014.

4.

Rights of Shareholders
Attend the annual general meeting (AGM)
Vote on matters requiring decisions in the AGM
Receive dividends on shares held when dividend is available for distribution.
Receive repayment of capital only after all other liabilities have been settled in the case
of the winding up of the company.

5.

Annual General Meeting (AGM)

Held after the end of the financial year after the final reports are ready for distribution.
Directors of company

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Temasek Polytechnic
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o Present final reports and report on companys progress and future
o Propose final dividends for the past year.
o Propose re-appointment of existing auditors or appointment of new
auditors.
Shareholders vote on whether to accept proposed dividends, vote to elect directors if
vacancies have occurred, re-appoint auditors and any other matters arising.
Proxy votes are allowed.
6.

Types of Companies

a) Private company
This form is usually suitable for smaller businesses than the typical public company.
Not more than 50 shareholders
Right to transfer shares is restricted.
Not able to advertise to the public to buy its shares but able to do a private placement where
selected people are invited to subscribe for its shares.
Able to borrow money from public by issuing debentures so long as they fulfil disclosure
requirements under the Securities and Futures Act.
Shall have the word Private in the name of the company e.g. Wong Private Limited.
b) Exempt private company
This form is usually found among family-type businesses. It is subject to certain restrictions but
enjoys some benefits.
Less than 20 shareholders none of whom are corporate entities; or wholly owned by the
government for national interest and is gazetted as such.
Exempted from filing accounts with ACRA
Financial statements exempted from audit if annual turnover is less than $5 million.
c) Public company
This form is designed for large businesses that need a large amount of capital.
Called a public company as it can advertise to the public to buy its shares or lend money.
May be listed on the Singapore Exchange.
7.

Does not have the word Private in the name of the company e.g. Wong Limited.
Formation / Registration of a Company
i)

Reserve a name with the new statutory body, Accounting and Corporate Regulatory
Authority (ACRA).

ii)

More complex than formation of sole trader and partnerships.

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Temasek Polytechnic
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iii)

May be advisable to have a solicitor to draw up the documentation necessary to set

up a company. Statutory documents that need to be submitted include:

Memorandum of Association
Basic constitutional document. Sets out the company's name and objects; full names,
addresses and occupations of subscribers, etc.
Articles of Association
A set of rules for internal management. Sets out the procedures for appointment of directors,
auditors, the method of keeping accounts, paying dividends, the calling of meetings, etc.
iv)
8.

Certificate of Incorporation issued by ACRA.

Advantages and Disadvantages of Public Companies

Advantages

Disadvantages

Ability to raise large amounts of capital for Regulations placed on companies

large-scale businesses
adversely affect their efficiency

may

Ability to gain limited liability for members

through the separate legal entity concept
Easy marketability of shares (for public Separation of shareholders from running of the
companies)
company is a disadvantage in cases where
management abuses their trust and uses the
company to benefit its own ends and not the
Larger resources at their disposal which enable shareholders interests, and where shareholders
companies to hire best qualified staff
find it difficult to remedy the situation.
Shareholders (owners) need not take an active
part in management of company
Perpetual succession unaffected by changes
in shareholders (separate legal entity).
Tax saving advantages in a company structure
where company tax rate is below relevant
individual tax rates. (depends on tax rates in the
country).

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Temasek Polytechnic
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9.

Types of Shares
a)

Ordinary Shares
o Ordinary shareholders carry the full rights and responsibilities of ownership.
o They have full voting rights
o Are entitled to all profits after dividends have been paid to preference
shareholders, and must bear all losses.

b)

Preference Shares
o Always given preference over ordinary shares for payment of dividends.
o Preference shareholders do not normally have voting rights at AGMs.

10.

Shareholders Equity for Companies

Accounting principles applied to sole proprietor same for companies (Review BA1
Financial Statements)
Main difference - Capital section of the Balance Sheet
Sole trader has one Capital account which includes all increases and decreases (profits
and drawings).
Differences between Shareholders Equity of Companies and Owners Equity of SoleProprietorships
Sole Proprietor
Owners Equity

Companies
Shareholders Equity

Capital (owners investment)

Share Capital

Add: Net Profit

Reserves
Retained profits
General reserves
Other reserves

Less: Drawings

Dividends

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Temasek Polytechnic
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2 major categories
i)

Share Capital
o amount shareholders have paid to the company for the purchase of shares.
o contains only amounts given to the company issue of shares for the first time.
Subsequent sales of shares occur between individuals usually on the stock
exchange.

ii)

Reserves
o Funds retained in the organisation, which can be in the form of
Retained Profits or Revenue Reserves
o Amounts of after-tax profits earned by the company and retained in the
business (after payment of dividends)
o Can be carried over at the end of the year
o Accumulated losses if the company is making losses
e.g. China Aviation Oil (CAO) has accumulated losses in its
balance sheet.
General reserves
o Amounts transferred to this fund for a specified purpose or to comply with
statutory requirements
Other reserves
o Arise from capital transactions such as revaluation of assets, translation
reserves etc which are non-distributable in the form of dividends.

11.

COMPONENTS OF SHARE CAPITAL

Issue Price
o Value of a share set by a company (based on value of its net tangible assets and other
factors) at the time of issue of shares to the public. It could be issued at any price such
as 10c, 50c or $1 per share.
Issued and Paid-Up Capital
o Represents capital which has been issued and paid up by shareholders.
o

Calculated by multiplying issue price by number of shares issued and paid-up.

Market Value
o Value of share as reflected by its price as traded in the stock market.
o Is constantly changing and is influenced by various market forces such as supply and
demand for shares and other factors.
o Note that balance sheet will only reflect the issue price and not market price of the
shares.

Business Accounting 2
Temasek Polytechnic
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Illustration 1
(refer to attached Business Times article Marble producer launches IPO dated 22
July 2014)
Terratech Group Limited, a Singapore business, launched its IPO of 108.7 million shares,
comprising 43.5 million new shares and 65.2 million vendor shares, at S$0.23 per share on
21 July 2014. If the current market price is $0.15, what are the gross proceeds raised?
Answer: $10,005,000
If you obtained 2,000 shares from the initial public offering and are planning to sell your
shares now, you would be making
a)
b)
c)
d)
e)
12.

$160 loss.
$300 gain.
$300 loss.
$460 gain.
$460 loss.

ACCOUNTING FOR THE ISSUE OF SHARES

A share capital account is used to record the amount that is issued and paid-up by the
shareholders.
Illustration 2
On 1 January 2014, Wong Ltd was incorporated in Singapore as a limited liability company.
The directors issued a prospectus which invited the public to subscribe for 2,000,000
ordinary shares at an issue price of 10c each. The shares were to be payable in full on
application.
Applications for the 2,000,000 shares and the appropriate amount of cash were subsequently
received on 31 January 2014.
Simplified journal entries:
Date
2014
31 Jan

Particulars

Dr ($)

Cash at Bank
Ordinary Share Capital

Cr ($)

200,000
200,000

Issue of 2 million ordinary shares at issue

price of 10c. (2,000,000 x $0.10 = $200,000)
Recall the double entry concept in BA1?
in cash (asset - DR nature)
DR Cash at Bank
in capital (OE CR nature)
CR Share Capital

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Temasek Polytechnic
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Balance sheets in published reports should show
- for each class of share, the number of issued shares and the extent to which they have been
paid up.

Wong Ltd
Balance Sheet as at 31 January 2014
(immediately after allotment of shares)
Shareholders' Equity
Issued and paid-up capital:
2,000,000 ordinary shares fully paid

$200,000

Represented by:
Current Asset
Cash at bank

$200,000

Note for your information:

With effect from January 2006, Companies (Amendment) Act 2005 states that the concepts of
par value of shares and authorised capital have been abolished.
13. Debt Financing (financial resources borrowed on a long-term basis)
A company can raise capital through equity financing or debt financing.
Different forms of borrowings from creditors on long-term contracts:
a)

Mortgage
Loan from financial institutions (e.g. banks) with property (i.e. land and building) as
security/collateral. If the company is not able to repay the loan, the lender has the
right to sell the property to repay the loan.

b)

Bonds/Debentures
A document issued by a public company evidencing the fact that money has been
borrowed at a fixed rate of interest for a fixed period and that some form of security
exists over the company's assets.

c)

Unsecured Note
Borrowed from any institution or the public. A document issued by a public company
evidencing the fact that money has been borrowed at a fixed rate of interest for a
fixed period but without security in the form of a charge over the assets.

Business Accounting 2
Temasek Polytechnic
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Illustration 3
On 23 June 2013, the directors of ABC Company issued a prospectus which invited the public to
subscribe for 7,500 debentures of $200 each for a period of 4 years at a rate of 5% per annum
(interest payable semi-annually). The debentures were to be issued at par and payable in full on
application on 1 July 2013. A trust deed creating 7,500 debentures of $200 each (par value) was
created.
Simplified journal entries:
Date
2013
1 July

Particulars

Dr ($)

Cash at Bank
5% Debentures

Cr ($)

1,500,000
1,500,000

Issue of debentures for a period of 4 years at

5% interest rate. (7,500 x $200)
31 Dec Interest expense or Debenture interest
Interest payable or accrued expenses

37,500
37,500

Interest expense for 6 months payable on 1

Jan 2014.
(5% x $1,500,000 x 6 / 12)
(for ease of computation, calculate interest
based on the number of months instead of
number of days)
Applying the double entry concept in BA1:
in cash (asset - DR nature)
in debentures (liability CR nature)

DR Cash at Bank
CR 5% Debentures

in interest expense (expense - DR nature)

in accrued expense (liability CR nature)

DR Interest Expense
CR Interest Payable/ Accrued Expense

Classification in Balance Sheet

5% Debentures Non-current liability
Interest payable -

Current liability

Classification in Profit & Loss Statement

Interest expense Financial expense

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Temasek Polytechnic
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Some major differences between ordinary shares and debentures
Ordinary Shares

Bonds/Debentures

Shareholders are owners with voting

rights.

Bond-holders / Debenture-holders
creditors with no voting rights.

Dividends are paid at the discretion of

the directors.

Interest at a fixed rate must be paid.

However, the interest expense is allowed as a
deduction in the computation of tax. Thus it
can be cheaper for company to raise money
through loans than share capital.

The issue of shares results in an increase in

shareholders' equity, i.e. equity financing.

The issue of debentures results in an increase

in liabilities owing by the company, i.e. debt
financing.

~ End of lecture 4 ~

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