1. Company Accounts

2.  Topic 9 we learnt how to account for partnerships  In this topic we shall learn;  Accounting for a company’s share capital,  Debentures  Drawing a profit and loss appropriation account  Presentation of a company’s balance sheet

3. 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

4.  Account for debentures  Draw a profit and loss appropriation account  Draw a balance sheet for a limited liability company

5. NoItemPrivate companyPublic company 1Minimum subscribers27 2Maximum subscribers50Infinity 3Annual general meetingOptionalMandatory 4Audited financial accountsOptionalMandatory 5Articles of associationMandatory 6Memorandum of associationOptionalMandatory 7Trading of sharesRestrictedTrade in the market The following is a summary of differences between private and public limited liability companies

6.  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.

7.  Illustration Beverages 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.

8. Beverages Services Limited Balance sheet (Extract) As at 31 January 2011 Amount ($) Share capital (10,000,000 *$3)30,000,000 Capital contribution in excess of par20,000,000 Total capital50,000,000

9.  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

10.  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

11.  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 BankXX Cr DebentureXX Being redemption of debentures

12. On issue:- Dr BankXX Dr Discount on debenture issueXX Cr DebentureXX Amortization of discount on issue:- Dr P&L A/CXX Cr Discount on debenture issueXX Discount amortization is done over the debenture period On redemption:- Dr DebentureXX Cr BankXX

13. On issue:- Dr BankXX Cr Debenture XX Cr Premium on debenture issueXX To amortize the premium on issue Dr Premium on debenture issueXX Cr P&LXX Premium should also be amortized over the period of the debenture.

14.  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

15. Halima Superior Stores Company Limited Profit and Loss appropriation Account For the period ended 31 December 2010 DebitCreditAmount ($) Balance brought forward XX Add: Net profit for the yearXX Transfer from general reserveXX XX Less: Transfer to general reserveXX Dividends proposedXX(XX) Balance carried downXX

16.  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

17.  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

18.  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

19.  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

20.  What have we learnt in this topic  There are a number of differences between private and public limited liability companies  There 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

21.  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.