Accounting for Company

What is a Company?
The word 'Company', in everyday usage, implies an assemblage of persons for soci
al purpose. As a form of organization, the word 'company' implies a group of peo
ple who voluntarily agree to form a company. However, in law 'company' is defini
ng as “a Business Entity which is formed and registered under Company Act, No 07 o
f 2007. As per this definition of law, there must be group of persons who agree
to form a company under the law and once so formed, it becomes a separate legal
entity with a distinct name of its own. Its existence is not affected by the cha
nge of members. Generally, the capital of the company consists of transferable s
hares, and members have limited liability.
Characteristics of a Company
The followings are the characteristic of company
(i) Incorporated Association
A company comes into existence through the operation of law. Therefore, its inco
rporation under The Companies Act is must. Without such registration, no company
can come into existence. Being created by law, it is regarded as an artificial
legal person. Also, the registration provides the status of domicile to the comp
any.
(ii) Separate Legal Entity
A company has a separate legal entity, which is not affected by changes in its M
embership
(iii) Perpetual Existence
Since company has existence independent of its members, it continues to be in ex
istence despite the death, insolvency or change of members.
(iv) Limited Liability
The liability of every shareholder of a company is limited to the amount he has
agreed to pay to the company on the shares allotted to him. If such shares are f
ully paid-up, he is subject to no further liability.
(v) Divorce between Ownership and Management
Since the number of shareholders is very large and may be distributed at differe
nt geographical locations, it becomes difficult for them to carry on the operati
onal management of the company on a day-to-day basis. This gives rise to the nee
d of separation of the management and ownership. Therefore, the control and mana
gement of company's affairs is entrusted to the directors who are vested with th
e overall responsibility of management and operational control, though the share
holders contribute to the capital. Thus, the managers (directors) of the company
carry on the business of the company on the basis of fiduciary relationship wit
h the shareholders.
(vi) Transferability of Shares
The capital is contributed by the shareholders through the subscription of share
s. Such shares are transferable by its members except in case of a private limit
ed company, which may have certain restrictions on such transferability.
Types of Companies
Section 3(1) of Company Act recognized three types of company
(i) Limited Companies
It is company having the liability of its members limited by article of associat
ion to the amount that they contributed on the shares respectively held by them.
(ii) Companies Limited by guarantee
Non profit earning companies are mostly registered with guarantee capital. They
may or may not have share capital. A guarantee company is a company in which lia
bility if its members are limited by the article to such amounts as the members
may undertake be the article, to contribute to meet out the deficiency in the as
sets of the company, in the event of its being wound up.
(iii) Unlimited Companies
A Company not having any limit on the liability of its members is an unlimited c
ompany.
Shares
• Share is one of the unit into which the stated capital is divided.
• A share in a company shall be movable property, Section 49(1).
• A company may issue different class of shares, Section 49(3).
• A share in a company is transferable in the manner provided for by its articles
and such articles may limit or restrict the extent to which a share is transfera
ble, Section 49(5).
• A share in a company shall have no a nominal value or oar value, Section 49(4).
• The share issued to initial shareholders is termed as initial shares at time of
company incorporation.
Classes of Shares
According to the Section 49(3), companies may issue the following classes of sha
res.
a) Redeemable shares
b) Share which confer preferential rights to distribution; or
c) Share which confer special, limited, or conditional voting rights or con
fer no voting right.
Based on the classes of shares, a public company can issue the following type of
shares
• Ordinary shares/ Equity shares
• Preference shares
• Special shares
• Share with limited or conditional voting right
• Shares with no voting right
• Redeemable shares
Stated capital
• As per the Section 58, the stated capital is the total of all amounts(considerat
ion) received by the company or due and payable to the company in respect of iss
ued shares and called on shares
• The Stated capital should not include “non-called on shares” (the value of shares w
ich are not yet called)
• It is shown in liability side of the balance sheet of company.
Issue of Shares
A company offering shares to the public can state that the shares have to be pai
d either
• In full on application, or
• By instalments.
Paid in full on application
When applying for shares which have to be paid in full, the applicant will send
the full value of the shares with the application form.
The Journal Entries for issue of shares
1) Full value received on application
Bank a/c Dr
To shares application & allotment a/c
2) Transfer to share capital account
Share application & allotment a/c Dr
To share capital a/c
By installments
when applying for shares which are to be paid in instalments a prospective share
holder only sends a proportion of the value of the shares he is applying for wit
h his application form and if successful he will send another part when the shar
es are allotted; the rest of the money will be sent in instalments, when asked f
or by the company. The instalments are named ‘First Call’, ‘Second Call’ etc. A compan
y may ask for the shares to be paid by instalments if the full amount of the mon
ey to be raised is not required immediately.
The Journal Entries for issue of shares
1) Cash receipt on application
Bank a/c Dr
To share application & allotment a/c
2) Rejection of incomplete or excess application
Share application & allotment a/c Dr.
To bank a/c
3) Amount received on application and amount due on allotment are transferr
ed to the share capital a/c on allotment of share
Share application & allotment a/c Dr.
To share capital a/c
4) Cash received on allotment
Bank a/c Dr.
To Share application & allotment a/c
5) On making of 1st cal
Shares 1st call a/c Dr.
To share capital a/c
6) Cash received on 1st call
Bank a/c Dr.
To Share 1st call a/c
7) On making 2nd or final call
Share 2nd or final call a/c Dr.
To share capital a/c
8) Cash received on 2nd or final call
Bank a/c Dr.
To share 2nd or final call a/c
Question no 01
On January 1, 2010, It offered to the public for subscription 3,000 shares payab
le as thus:
On Application Rs. 30 per share
On Allotment Rs. 20 per share
On First Call (One month after allotment) Rs. 25 per share
On Second Call (Three months after allotment) Rs. 25 per share
The shares were fully subscribed by the public and application money duly receiv
ed on January 15, 2010. The directors made the allotment on February 1, 2010.
Record journal entries in the books of the Company to record these share capital
transactions, assuming that amount due have been received within 15 days of mak
ing the allotment and calls.
Calls-in-Arrears
Sometimes shareholders fail to pay the amount due on allotment or calls. The tot
al unpaid amount on one or more installments is known as Calls-in-Arrears or Unp
aid Calls. Such amount represents the uncollected amount of capital from the sha
reholders; hence, it is shown by way of deduction from called-up capital to ar
rive at paid-up value of the share capital to be shown in the balance sheet.
For recording Calls-in-Arrears , the following journal entry is recorded:
Calls-in-Arrears a/c Dr. [Amount of Unpaid Calls]
Allotment-in-Arrears a/c Dr
To Application & Allotment a/c
To Share Call a/c
Question no 02
Universal Limited issued at par 10,000 Equity shares of Rs. 10 each payable Rs.
2.50 on application; Rs. 3 on allotment; Rs. 2 on first call and balance on the
final call. All the shares were fully subscribed and paid except a shareholder h
aving 100 shares could not pay the final call.
(a) Give journal entries to record these transactions.
(b) Show necessary ledger accounts
Forfeiture of Shares
It may happen that certain shareholders fail to pay one or more installments, vi
z., allotment money and/or call money. In such circumstances, the company can fo
rfeit their shares by giving due notice and following the procedure specified in
the Articles of Association in this behalf.
The journal entries required to record the forfeiture are as follows
1) Amount called-up
Share capital a/c Dr.
To Share Forfeited a/c
2) Call in-arrears
Share forfeited a/c Dr
To Call-in-arrears
To Allotment-in-arrears
Question no 03
X Ltd. issued for public subscription 40,000 Equity Shares of Rs.12 each payable
as under:
On application Rs. 4 per share
On Allotment Rs. 5 per share
On Call Rs. 3 per share
Applications were received for 60,000 shares. Allotment was made to the applican
ts for 40,000 shares, the excess applications being rejected. Mr. X, to whom 1,6
00 shares were allotted, failed to pay the allotment money and Mr. Nimal, to who
m 2,000 shares were allotted, failed to pay the call money. These shares were su
bsequently forfeited.
Record journal entries in the books of the company to record the above transacti
ons
Company Final Accounts
A company may prepare two set o final accounts
1. Preparation of Final Accounts for Director Board
2. Preparation of Final Accounts for Share Holders
As prescribed by SLAS 03 (Presentation of Financial Statement), the following st
atements should be included in a set of financial statement.
1. A Balance Sheet
2. An Income Statement
3. A statement of Changes in Equity
4. A Cash Flow Statement
5. Notes to the Financial Statement and Summary of significant Accounting P
olicies

Some special provision in SLAS 03

Purpose of Financial Statements
The objective of general purpose financial statements is to provide information
about the financial position, financial performance and cash flows of an entity
that is useful to a wide range of users in making economic decisions. Financial
statements also show the results of management’s stewardship of the resources entr
usted to it. To meet this objective, financial statements provide information ab
out an entity’s
(a) Assets;
(b) Liabilities;
(c) Equity;
(d) Income and expenses, including gains and losses;
(e) Other changes in equity; and
(f) Cash flows
Going Concern
When preparing financial statements, management shall make an assessment of an
entity’s ability to continue as a going concern. Financial statements shall be pre
pared on a going concern basis unless management either intends to liquidate the
entity or to cease trading, or has no realistic alternative but to do so.
Accrual Basis of Accounting
An entity shall prepare its financial statements, except for cash flow informati
on, using the accrual basis of accounting.
Consistency of Presentation
The presentation and classification of items in the financial statements shall b
e retained from one period to the next unless:
(a) it is apparent, following a significant change in the nature of the enti
ty’s operations or a review of its financial statements, that another presentation
or classification would be more appropriate having regard to the criteria for t
he selection and application of accounting policies in SLAS 10 (Revised 2005); o
r
(b) a Standard requires a change in presentation.
Materiality and Aggregation
Each material class of similar items shall be presented separately in the financ
ial statements. Items of a dissimilar nature or function shall be presented sepa
rately unless they are immaterial.

Offsetting
Assets and liabilities, and income and expenses, shall not be offset unless req
uired or permitted by a Sri Lanka Accounting Standard.
Structure and Content
Balance Sheet
• Current/Non-current Distinction
• Current Assets
• Current Liabilities
Information to be presented on the Face of the Balance Sheet
• property, plant and equipment;
• investment property;
• intangible assets;
• financial assets
• investments accounted for using the equity method;
• biological assets;
• inventories;
• trade and other receivables;
• cash and cash equivalents;
• trade and other payables;
• provisions;
• financial liabilities
• liabilities and assets for current tax, as defined in
SLAS 14 Income Taxes (Revised 2005)
• deferred tax liabilities and deferred tax assets, as
defined in SLAS 14 (Revised 2005);
• minority interest, presented within equity; and
issued capital and reserves attributable to equity
holders of the parent.
Income Statement
Information to be presented on the Face of the Income Statement
• finance costs;
• share of the profit or loss of associates and joint ventures accounted for using
the equity method;
• tax expense;
• a single amount comprising the total of (i) the post-tax profit or loss of disco
ntinued operations and (ii) the post-tax gain or loss recognized on the measurem
ent to fair value less costs to sell or on the disposal of the assets or disposa
l group(s) constituting the discontinued operations; and
• Profit or loss.
Some specific adjustment
1. Company Tax
Income tax expenses Dr.
To provision for Income Tax
2. Provision for reserves
Profit & Loss Appropriation A/C Dr
To relevant Reserve A/C
3. Dividend
Interim Dividend
Interim Dividend A/C Dr
To Cash Book
Proposed Dividend (Preference Shares)
Profit & Loss Appropriation A/C Dr
To Dividend Payable A/C
Proposed Dividend (Ordinary Shares)
Proposed Dividend for Ordinary Shares should not be recognized in a Financial St
atement according o SLAS 12 (Event after Balance Sheet date). Proposed dividend
for ordinary shares should be disclosed under Notes.

Preparation of Financial Statement for Director Board (for internal use/ for man
agement purpose/ detailed Final Accounts)
Example no 04
The following balances are extracted from the books of Olu Ltd for the year ende
d 31st March 2009.
Profit before Tax 895,000
Profit & Loss b/f (01.04.2008) 630,000
Tax paid 250,000
Interim dividend-
Ordinary Shares 100,000
Preference Shares 40,000
Stated Capital
Ordinary Shares 500,000
Preference Shares 300,000
General Reserve 70,000
Additional Information
1. Tax paid consists of Rs. 50,000 paid for 2007/2008 and remainder for 200
8/2009. The Estimated Tax liability for 2008/2009 is Rs.268,500
2. No. of Ordinary Shares and Preference Shares issued by the company are 5
0,000 and 30,000 respectively.
3. Following decision ware taken at the Board of Director Meeting held on 0
2nd May 2009.
• To transfer Rs. 30,000 into General Reserve
• To pay due dividend for Preference Shares
• Proposed Rs. 1 as final dividend for Ordinary Shares
You are required to prepare;
Income Statement for the year ended 2008/09
Question no 05
Following is the Trail Balance of Sriyani Ltd as on 31st December 2009

Additional Information
1. The stock as at 31st December 2009, was Rs. 708,000
2. Outstanding liabilities for wages Rs. 25,000 and Business Expenses Rs. 25,000
3. Depreciation should be made on following rates
 Plant & Machinery 5%
Tool & Equipment 20%
Furniture & Fixture 10%
4. Provide 2% on debtors as doubtful debtors after written of Rs.21, 500 as bad
debts. Do Written off preliminary expenses Rs. 5000 to
the P&L.
5. Provide Rs. 240,000 for Income Tax
You are required to prepare; (for internal use)
(c) Profit & Loss account for the year ended 31st December 2009; and
(d) Balance Sheet as at 31st December 2009.
Question no 06
The following balances have been taken from the ledger of Philips plc at 30 June
2010
Rs.000
Sales 7,170
Purchases 3,300
Returns In 250
Returns Out 410
Stock at 1.7.2009 620
Carriage In 65
Warehouse Costs 40
Wages and Salaries 1,599
Selling Expenses 58
Audit Fees 10
Directors’ Emoluments 12
Rent Received 6
Equipment at cost 1,400
Vehicles at cost 700
Provision for Doubtful Debts 1.7.2009 8
Provision for Depreciation 1.7.2009
Equipment 560
Vehicles 250
Loss on sale of equipment 2
Dividends Received 20
Ordinary dividend paid 300
Profit and loss Balance brought forward 205
Notes
1. Stock at end of year is valued at Rs. 470,000.
2. Depreciation for the year is to be charged as follows:
Equipment – 15% of cost
Vehicles – 20% on diminishing balance.
Depreciation of Equipment is to be charged to Cost of Sales, Distributio
n and Administration in the ratio of 2:1:2 respectively.
Vehicles are used solely for the delivery of goods to customers.
3. Wages and Salaries owing Rs.25, 000.
Wages and Salaries are to be split between Cost of Sales, Distribution a
nd Administration in the ratio of 3:2:2.
4. Selling Expenses paid in advance – Rs.7, 000.
5. Provision for Doubtful Debts is to be increased by Rs.3, 000.
6. Corporation Tax for year is estimated at Rs.448, 000.
7. The Directors propose to:
• pay a final dividend of Rs.450, 000
• transfer Rs.200, 000 to Reserves.

You are required to prepare the Profit and Loss Account for year ended 30 June 2
010 for
a) For directors
b) For publication

Question no 07
The financial year of Nippon plc ends on 30 June and the following balances were
taken from the accounts on 30 June 2010
Trial Balance as at 30 June 2010
Rs.000 Rs.000
Issued Share Capital (fully paid):
1,000,000 6% Rs.1 Preference Shares 1,000
10,000,000 Rs.1 Ordinary Shares 10,000
Share Premium 360
8% Debentures (2008–2016) 100
Profit and Loss Account Balance at 1 July 2009 156
Sales 28,000
Stocks at 1 July 2009 2,300
Advertising 120
Bank Charges 12
Purchases 10,000
Carriage on Purchases 82
Trade Marks 245
Directors’ Fees 1,650
Auditors’ Fees 89
Insurance 310
Carriage on Sales 150
Wages and Salaries 14,400
Land and Buildings – cost 7,000
Equipment – cost 800
Fixtures and Fittings – cost 450
Provision for Depreciation at 1 July 2009
Equipment 30
Fixtures and Fittings 25
Trade Debtors 4,180
Trade Creditors 2,100
Provision for Doubtful Debts at 1 July 2009 120
Sundry Warehouse Expenses 4
Goodwill 38
Sundry Office Expenses 17
Bank 13
Sundry Selling Expenses 31
41,891 41,891
Notes
1. Stock at 30 June 2010 at cost – Rs.3, 200,000.
2. Depreciation is charged as follows –
Equipment – 15% per annum on cost
Fixtures and Fittings – 20% per annum on diminishing balance basis.
3. Depreciation is to be charged to Cost of Sales, Distribution and Adminis
tration respectively as follows:
Equipment – 1:1:2
Fixtures and Fittings – 2:1:2.
4. Provision for Doubtful Debts is to be decreased to Rs.105,000.
5. Land and Buildings is to be revalued at Rs.7, 200,000.
6. An equipment replacement reserve is to be created with an initial transf
er from profits of Rs.50,000.
7. Provide for the following:
Insurance prepaid – Rs.10,000
Carriage on sales due – Rs.20,000
Debenture Interest for year due
Corporation tax at 25%
8. Wages and Salaries and Insurance are to be split equally between Cost of
Sales, Distribution and Administration. .
10. The Directors propose to:
(i) Pay the preference share dividend for the year
(ii) Pay a final dividend of 8% on ordinary shares
(iv) Write down goodwill to zero.
From the Trial Balance and Notes, you are required to:
(a) Prepare the Profit and Loss Account for the year ended 30 June 2010
(b) Balance Sheet at that date
(i) for external use
(ii) for Directors

Answers
Question no 06
Philips plc
Profit and Loss Account
for year ended 30 June 2010
Rs.000 Rs.000
Turnover 6,920
Cost of Sales 3,925
Gross Profit 2,995
Other Income 24
3,019
Distribution Costs 647
Administration Costs 573 1,220
1,799
Profit on Ordinary activities 1,799
Finance Cost -
Profit before Tax 1,799
Tax on ordinary activities 448
Profit after taxation 1,351
Transfer to Reserves 200
Dividends paid and proposed 750 950
Retained profit for year 401

Working Notes
Cost of Sales:
Opening Stock 620
Net Purchases (3,300 – 410) 2890
3510
Closing Stock 470
3040
Carriage In 65
Warehouse costs 40
Depreciation – Equipment 84
Wages and Salaries (3/7 x 1624) 696 885
Cost of sales 3925
Distribution Costs:
Selling Expenses (58 – 7) 51
Wages and Salaries (2/7 x 1624) 464
Depreciation – Equipment ((1400 x 15%) x 1/5) 42
Depreciation – Vehicles (700 – 250) x 20% 90
647
Administration Costs:
Wages and Salaries (2/7 x 1624) 464
Depreciation – Equipment ((1400 x 15%) x 2/5) 84
Provision for Doubtful Debts 3
Directors’ Emoluments 12
Audit Fees 10
573
Other Operating Income:
Rent Received ¬ 6
Loss on Sale of Equipment ¬ (2)
4
Question no 07
Nippon Plc
Profit and Loss Account
For year ended 30 June 2010
Rs.000s Rs.000s
Turnover 28,000
Cost of Sales 14,150
Gross Profit 13,850
Distribution Costs 5,268
Administration Costs 6,747 12,015
1,835
Other Operating Income 0
1,835
Income from Interest/Dividends 0
1,835
Interest payable 8
Profit on ordinary activities 1,827
Tax on ordinary activities 457
Profit on ordinary activities after taxation 1,370
Extra-ordinary Income 0
1,370
Transfer to Reserves 50
Goodwill 38
Dividends paid and proposed (60 + 800) 860 948
Retained profit for year 422

Nippon Plc
Balance Sheet as at 30 June 2010
Rs.000s Rs.000s
Fixed Assets
Intangible Assets 245
Tangible Assets* 8,190
Investments 0
8,435
Current Assets
Stocks 3,200
Debtors 4,075
Investments 0
Cash/Bank 13
Prepayments and accrued Income 10
7,298
Creditors: amounts falling due within one year
Trade Creditors 2,100
Accruals 20
Debenture Interest 8
Tax 457
Dividends due 860
3,445
Net Current Assets 3,853
Total Assets less Current Liabilities 12,288
Creditors: amounts falling due after one year 100
Provisions for liabilities and charges 0 100
Net Assets 12,188
Capital and Reserves
Called-up Share Capital 11,000
Share Premium 360
Reserves 828
Equity Shareholders’ Funds 12,188
Nippon plc
Cost of Sales Rs.000s Rs.000s
Opening Stock 2,300
Purchases 10,000
Carriage 82
12,382
Closing Stock 3,200
9,182
Depreciation:
Equipment 30
Fixtures and Fittings 34
Warehouse Expenses 4
Wages and Salaries 4,800
Insurance 100 4,968
14,150
Distribution Costs Rs.000s
Advertising 120
Insurance 100
Carriage on Sales 170
Wages and Salaries 4,800
Depreciation:
Equipment 30
Fixtures and Fittings 17
Selling Expenses 31
5,268
Administration Costs Rs.000s
Bank Charges 12
Directors’ Emoluments 1,650
Auditors’ Fees 89
Insurance 100
Wages and Salaries 4,800
Depreciation:
Equipment 60
Fixtures and Fittings 34
Office Expenses 17
Decrease in Provision for Doubtful Debts (15)
6,747
Land and Buildings Equipment Fixtures and
Fittings Total
Cost 7,000 800 450 8,250
Revaluation 200 – –
Depreciation1.7.–0 – 30 25 55
Depreciation for year – 120 85 205
Depreciation 30.6.–1 – 150 110 260
NBV at 30.6.–0 7,200 650 340 8,190