Company Accounts

Final Accounts

Introduction
Companies are formed and incorporated under the Companies Ordinance. An incorporated company(also called incorporation) is a legal entity using the term company in its name

Advantages of incorporation
An incorporated company is a separate legal entity which enjoys similar legal authority to a natural person An incorporated company has an unlimited life Ownership of a company can be easily transferred to new owners For a limited company, shareholders liability is limited to the amount they have invested in shares

Types of Corporation
Unlimited Company Limited Liability Company

Unlimited Company

The unlimited company does not have any limits on the liability of its owners

Limited liability company

Company limited by shares Company limited by guarantee

Company limited by shares

Private Company Public company

Private Company

According to the Companies Ordinance, the Articles of Association A private company contains the following restrictions:

The maximum number of members is limited to 50 Prohibited to subscribe for any shares or debentures to the public Strict the right to transfer its shares

Public company

Unlike the private company, there are no such restrictions on the public company

Listed Company
Listed companies are companies which have their securities listed on the stock exchange of Hong Kong Apart from the Companies Ordinance, listed companies are also under the strict control of other regulations such as Securities Ordinance etc.

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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 fixed percentage of dividends before any ordinary 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 cumulative preference shares can be carried forward to a later year

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Non-cumulative preference shares

If the profits are insufficient to pay the dividends, the unpaid dividends cannot be carried forward to later years

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Ordinary Shares
The dividends of ordinary shares are not fixed. They depend on the return of the company Ordinary shareholders are paid only after all other claim (e.g. loan interest and preference share dividends) have been met Ordinary shareholders usually have voting rights

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Debentures

Debentures are long-term loans evidenced by deeds which set out the rate of interest payable and the date of redemption

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Reserves
Reserves are profits or gains which accrue to 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 nontrading or non-operating activities They are not available for distribution as dividends E.g. Share premium, revaluation reserve, capital redemption reserve and debenture redemption reserve

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Share premium
When a company issues shares at a price above par, the excess amount is called share premium The reserve is restricted to be used in the following ways:

To write off preliminary expenses To write off expenses of issuing shares To write off commission paid and discounts on shares To pay up a bonus issue To provide premium on redemption of debentures

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Revaluation reserve

This is the unrealized gain from an increase in the value of an asset after revaluation

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Capital redemption reserve and Debenture redemption reserve

This arises as a result of a company redeeming its shares or debentures by using its retained profits

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Final Accounts

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Final accounts

For internal reporting and management purposes, the final accounts of the limited liability companies are similar as those of the sole trader and partnership with the exception of certain types of expenses and the appropriation of net profit

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Sales Less: Returns inwards

XX Ltd. Company Income Statement for the year ended 31 Dec XXXX

Less: Cost of Sales Opening Inventory Add: Purchases Add: Carriage inwards Less: Returns outwards Less: Closing Inventory Gross profit Add: Other revenues Less: Operating Expenses Administrative Expenses Selling and distribution expenses Finance cost Other operating expenses Net profit Less: Profit Tax Profit after taxation (PAT)

X X (X)

X X X (X) (X)

X X X X

X X X

X X (X) X
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Add: Retained profit b/f Less: Appropriations: Transfer to general reserve Preference dividend interim (paid) - proposed (final) Ordinary dividend - interim (paid) - proposed (final) Retained profit c/f

X X

X X X X X

X X

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Balance Sheet as at 31 Dec XXXX Non-currents Assets Cost Machinery X Furniture X Current Assets Stock Debtors Bank
Less: Current Liabilities Creditors Proposed dividend Debenture interest accrued Provision for taxation Working Capital Capital and Reserve Share Capital XXXX Ordinary Shares of $1 each XXXX 8%Preference Shares of $1 each No. of shares Par value

Dep X X X X X X X X X X

Net X X X

X X

Authorized Issued X X X X X X
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Reserves Share Premium General Reserve Profit and loss

Long-term Liabilities 10% Debentures

X X X X X X

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Special types of expenses

Debenture interest Directors remunerations/fees/emolument Preliminary expenses/formation expenses Goodwill written off

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Debenture interest

The amount of the debenture interest will be calculated according to the pre-set percentage of debenture as the interest expenses of the company

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Example
Trial Balance as at 31 Dec 20-1 Dr Cr 10% Debentures 10000 Debenture interest 5000

Ans.:

Paid debenture interest

Trading and profit and loss a/c for the year ended 31 Dec 20-2 $ $ Gross profit Actual debenture interest X Less: Expenses Debenture interest (10000*10%) 10000 Balance Sheet as at 31 Dec 21-1 $ Less: Current Liabilities Accrued expenses (1000-5000) 5000 Debenture interest not yet paid $

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Directors fee/emolument
Directors fee and directors emolument are salaries and services charges of the directors of the limited company It will be treated as one of expenses in the profit and loss account

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Preliminary expenses/Formation expenses

They are incurred by an enterprise during the period prior to the commencement of commercial operations These include, for example, legal expenses and various government taxes They should be written off when they are incurred Pre-operating expenses capitalized in prior years should be written off against the opening retained profits as a prior year adjustments

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Amounts written off as goodwill

According to SSAP(Statement of Standard Accounting Practice), goodwill should be amortized over its useful economic life

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Appropriation of net profit

Profit Tax Retained profit from last year/after next year Dividends Transfer to/(from) reserve

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Profit tax
It is shown as a deduction from profit for the year before taxation (i.e. this is the net profit figure) to show the net result (i.e. profit for the year after taxation) Accounting entries:

Dr. Profit and Loss Cr. Provision for taxation

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Example

No under/overprovision of profit tax

Net Profit Trial Balance as at 31 December 2003 Dr Cr. 10000

** The profit tax is estimated at $1500 for the year Solution: Bal c/f Provision for taxation 1500 P/L 1500

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Profit and loss Account for the year ended 31 December 2003 $ Net Profit 10000 Less Profit tax 1500 Profit after tax 8500

Balance Sheet as at 31 December 2003 Current Liabilities Provision for taxation

$ 1500

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Example

Overprovision of profit tax

Trial Balance as at 31 December 2003 Dr Cr. Net Profit 10000 Overprovision of profit tax 300 ** The profit tax is estimated at $1500 for the year Solution: Provision for taxation Bal b/f Bal c/f 1500 1500 P/L 300 1200 1500
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Profit and loss Account for the year ended 31 December 2003 $ Net Profit 10000 Less Profit tax (1500-300) 1200 Profit after tax 8800

Balance Sheet as at 31 December 2003 Current Liabilities Provision for taxation

$ 1500

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Example

Underprovision of profit tax

Trial Balance as at 31 December 2003 Dr Cr. Net Profit 10000 Overprovision of profit tax 300 ** The profit tax is estimated at $1500 for the year Solution: Bal b/f Bal c/f Provision for taxation 300 1500 1800 P/L 1800 1800
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Profit and loss Account for the year ended 31 December 2003 $ Net Profit 10000 Less Profit tax (1500+300) 1800 Profit after tax 8200

Balance Sheet as at 31 December 2003 Current Liabilities Provision for taxation

$ 1500

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Retained profit to next year/ from last year

All profits may not be appropriated during a period This then will be balance on the appropriation account as brought forward from the previous year or carried forward to next year

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Dividends
Net profit from ordinary activities of the business of a company will be distributed to its shareholders of preference shares and ordinary shares according to the level of net profit and the dividend policy of the company Dividend can be divided into:

Interim/paid dividend Final/proposed dividend

Dividend = Nominal value * % of dividend paid OR = no. of shares * Amount of dividend per share

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Interim/Paid Dividend
Interim dividend is the paid dividend to the shareholders in the middle of the financial year The amount of interim dividend will be subject to the performance of the business in the first half of the financial year

Descriptions Book-keeping entries

Interim dividend paid

Transfer interim dividend paid to appropriation account

Dr Interim Dividend Cr Bank

Dr Profit & loss appropriation Cr Interim Dividend
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Proposed/Final Dividend

The amount of proposed dividend will be subjected to the performance of the business in whole financial year and the shareholders approvals in the Annual General Meeting Proposed dividend will be paid in the early of next financial year, it will be treated as one of appropriations to the shareholders in the profit & loss account of current financial year and should be disclosed on the face of the balance sheet as a separate component of equity(I.e. part of the shareholders fund)
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Descriptions

Book-keeping entries

Transfer proposed Dr Profit & loss dividend to appropriation appropriation account Cr Proposed dividend * Proposed dividend will be shown in balance sheet under the heading of current liabilities

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Transfer to /(from) Reserve

Part of the net profit for the financial year may be transferred from the appropriation account to the reserves to meet the future requirements or specific reason Revenue reserve can be transferred back to appropriation account for dividends purposes in the future financial period

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Descriptions Transfer part of net profit from appropriation account to specific reserves Transfer specific reserves back to appropriation account

Book-keeping entries Dr Profit & loss appropriation account Cr Reserves Dr Reserves Cr Profit & loss appropriation

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Example
400000 ordinary shares of $0.5 each, fully paid 250000 10% preference shares of $1 each, fully paid General reserves Interim ordinary dividend 5000 Interim preference dividend 8000

Trial Balance as at 31 Dec 2000(extract) Dr

200000 250000 15000

Cr

Additional information: The director proposed a final dividend of $0.05 per ordinary share The 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 X Add: Retained profit from last year X X Less: Appropriation Preference dividend interim 8000 - final (250000*0.1-8000) 17000

Ordinary dividend

- interim - final (400000*0.05) Transfer to general reserve

5000 20000 5000

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Balance Sheet as at 31 Dec 21-1 Capital and Reserve Reserves General reserves (1500+5000) Dividend owning(17000+20000) Dividend not yet paid to shareholders 20000 37000

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Limited Liability Company

The capital of a limited company is divided into shares The par value of each share can be $1,$5 or other A person who buy the shares, become the member of company called shareholder

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Capital Structure
Authorized Capital It is the maximum amount of share capital which the company is allowed to issue

Issued Capital

Called Up Capital

Paid Up Capital Calls in Arrears

It is the nominal value of a portion of the authorized capital which has been taken up (purchased) by shareholders It is the amount of issued capital which the company has called to be paid It the amount of issued capital which has actually been received It the amount of called up capital 55 which has not been received

Issue of Shares/Debentures

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Raising of Capital-Issue of shares and debentures

Issue Price Issue at Par -The issue price is same as the PAR, NOMINAL or FACE value of the shares and debentures.

Issue at a Premium -The issue price may be HIGHER than the par value of the shares and debentures. The difference between the issue price and the par value of the shares or debentures is named as SHARE PREMIUM
Issue at a Discount -The issue price may be LOWER than the par value of the shares and debentures. The difference between the issue price and the part value of the shares or debentures is named as SHARE DISCOUNT
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Issue of shares

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Descriptions
Application Monies Received

Accounting entries
Dr. Bank Cr. Ordinary Share Applicants *No. of Application * Issue Price (a) Issue at Par Dr. Ordinary Share Applicants Cr. Ordinary Share Capital No of Shares Actually Issued X Par Value of Each Share (b) Issue at a Premium Dr. Ordinary Share Applicants Cr. Ordinary Share Capital Cr. Share Premium * No. of Share Actually Issued X Par Value of Each Share will be recorded in Ordinary Share Capital * No. of Shares Actually Issued X The Value of Share Premium per Each Share will be recorded in Share Premium
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Issue of Ordinary Shares Capital

Descriptions

Accounting entries
( c) Issue at a Discount Dr. Ordinary Share Applicants Share Discount Cr. Ordinary Share Capital * No. of Shares Actually Issued X Par Value of Each Share will be recorded in Ordinary Share Capital * No. of Shares Actually Issued X The Value of Share Discount per Each Share will be recorded in Share Discount

Refund of Oversubscribed

Dr. Ordinary Share Applicants Cr. Bank * No. of Application Oversubscribed X Issue Price

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Note:

The issue is oversubscribed when the number of applications is greater than the number of shares available for issue. Excess application money will be refunded to the unsuccessful applicants The issue is undersubscribed when the number of applications is smaller than the number of shares available for issue. Hence, no refund will be required If the number of applications is below the predetermined minimum amount, no shares will be issued and all the application money will be refunded
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Example Issue at par

Tai Fat Ltd made a public offering of its 1000 ordinary shares of $1 each The shares were issued at par

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The Journal

Dr.
1000

Cr.

Bank (1000*$1) Ordinary Share Applicants Being money received on application Ordinary Share Applicants Ordinary Share Capital Being allotment of 1000 ordinary shares

1000

1000

1000

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Shares issued at par

Bank Ordinary share applicants 1000

Ordinary Share Applicants Ordinary share capital 1000 Bank 1000

Ordinary Share Capital Ordinary share applicants 1000

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Example Issue at premium

Tai Fat Ltd made a public offering of its 1000 ordinary shares of $1 each The shares were issued at premium of 20%

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The Journal

Dr.
1200

Cr.

Bank (1000*$1.2) Ordinary Share Applicants Being money received on application Ordinary Share Applicants Ordinary Share Capital (1000*$1) Share premium (1000*$0.2) Being allotment of 1000 ordinary shares

1200

1200

1000 200

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Shares issued at premium

Bank Ordinary share applicants 1200

Ordinary Share Applicants Ordinary share capital Share premium 1000 200 Bank 1200

Ordinary Share Capital Ordinary share applicants 1200 Share premium Ordinary share applicants 200
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Example Issue at discount

Tai Fat Ltd made a public offering of its 1000 ordinary shares of $1 each The shares were issued at a discount of 10%

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The Journal

Dr.
900

Cr.

Bank (1000*$0.9) Ordinary Share Applicants Being money received on application Ordinary Share Applicants Discounts on shares (1000*$0.1) Ordinary Share Capital (1000*$1) Being allotment of 1000 ordinary shares

900

900

100 1000

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Shares issued at discount

Bank Ordinary share applicants 900

Ordinary Share Applicants Ordinary share capital 1000 Bank Discount on shares 900 100

Ordinary Share Capital Ordinary share applicants 1000 Discount on shares Ordinary share applicants 100
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Bonus Shares/Script Issue

Bonus shares are free shares issued to shareholders without any cash being paid for 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 Reserves $ 20000 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) Cr Ordinary share capital Ordinary share capital (20000+5000) Reserve (12000-5000) $5000 $5000 25000 7000
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Debentures
A debenture is a written acknowledgement of debt. Debenture are long-term loans which attract a large number of investors. The terms of debentures such as the rate of interest payable, the date of redemption (if applicable) and security given by the borrowing company are governed by a trust deed

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Types of debentures
Redeemable and irredeemable debentures Debentures with fixed charge Debentures with floating charge Unsecured/naked/simple debentures

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Redeemable and irredeemable debentures

Redeemable debentures are repayable at or by a specified date Irredeemable debenture are nor repayable However, the borrowing company can purchase its own debentures on the open market when the price of debentures is very low

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Debentures with fixed charge

Debentures are secured by means of mortgaging specific assets, e.g. premises. The borrowing company cannot sell these assets without the prior consent of the debenture holders

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Debentures with floating charge

Debentures are secured by means of mortgaging a group of assets, e.g. premises The borrowing can trade in the assets which are subject to a floating charge If the company defaults on its interest or capital repayment, the floating charge will crystallize on the group of assets The debenture holders can sell the assets to recover the amount due to them

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Unsecured/naked/simple debentures

They are not secured by any of the companys assets

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Issue of debentures

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Issue of Debentures
The accounting treatment of debenture is the same as that of shares, except for the change in the name of the accounts Debenture can be issued at par, at premium or at a discount

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Descriptions
Issue of Debentures

Accounting entries
(a) Issue at Par Dr. Bank Cr. Debentures (b) Issue at a Premium Dr. Bank Cr. Debentures Cr. Debentures Premium ( c) Issue at a Discount Dr. Bank Debenture Discount (note) Cr. Debentures

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Note:

The debenture discount account can be written off using either method:

It can be written off immediately against the share premium on profit and loss appropriation account. The debentures should be disclosed in the balance sheet at a nominal value It can also be written off over the life of debentures to the profit or loss account. The debentures should then be disclosed in the balance sheet at a nominal value less unamortized discount
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