1. 1 Introduction to Company Accounts and Issue of Shares and Debentures

2. 2 Companies Limited Companies Unlimited Companies Authorized Capital Issued Capital Called up Capital Paid Up Capital Share Capital Other Funding Preference ShareOrdinary ShareDebentureReserves Issue of shares and debenture Revenue Reserve Capital Reserve Price: - at par - at premium - at discount Payment: - Payable in full - by instalments

3. 3 Introduction A limited liability company is a legal entity and the existence of the limited liability companies The owners of a limited liability company will be named as “members” or “shareholders” of the company Each company is governed by two documents, known as the Memorandum of Association and the Articles of Association

4. 4 A.Unlimited Company B. Limited Company -Companies do not have limited liability. - The liability of a company can be limited by shares. - A limited company has a separate legal personality. This means that it can sue or enter into contracts in its own name. Types of Limited liability companies

5. 5 Types of Limited Liability Companies There are two types of limited liability companies as follows: (I) Public Limited Company (II) Private Limited Company Descriptions Public Limited Company Private Limited Company Share Transfer No restrictionRestriction Number of Shareholders No restriction Restriction (2 to unlimited) (2 to 50) Raising fund from Public No restriction Restriction Shares can be traded on Yes No Stock Exchange or not

6. 6 Distinction between Partnerships and Limited Liability Companies DescriptionPartnerships Limited Companies Number of Members 2 to 20 (except in certain professional2 to Unlimited (except private limited business)companies up to 50) Liabilities of Members Unlimited liability of each partnerLimited liability of each shareholder (except Limited Partners)to their agreed amounts of contributions on their shares held Amount of Capital Stated in the Partnership AgreementRestricted to the amount of Authorized and subject to each partner’s Capital financial resources Management of the Partners are entitled to take part inDirectors are appointed on behalf of Business the operations of the businessshareholders to manage the business Distribution of Profits and losses are shared toBy way of dividend, profits are shared Profit each partner in their agreed profit to shareholders in respect of their and loss sharing ratioshares held Part of the profits may be unappropriated and retained by the company for future business purposes

7. 7 Classification of Capital Authorized Capital Authorized Capital is the total number of shares and the total amount of Share Capital which a limited liability company is allowed to issue and it is stated in the Memorandum of Association. Authorized Capital may be changed and increased to cope with the growth of the company by the approvals of the shareholder Issued Capital Issued Capital is the part of the Authorized Capital actually issued to the shareholders. Called-Up Capital Called-Up Capital is the amount of the Issued Capital that the limited liability companies request their shareholders to pay. Paid-up Capital Paid-up capital is the actual amount received from the Called-Up Capital. The amounts of the Called-Up Capital which has not yet been received will be named as “Calls in Arrears”. Calls in Advance”refers to the advance payment of the Un-called Capital from the shareholders.

8. 8 Types of Share Capital A. Preference Shares Preference shareholders are entitled to fixed % of dividends before any ordinary dividends are paid. No voting rights. I) Cumulative preference shares Any unpaid dividends on cumulative preference shares can be carried forward to a later year. II) Non-cumulative preference shares the unpaid dividends cannot be carried forward to later years. B. 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 claims have been met. - Ordinary shareholders usually have voting rights.

9. 9 Example: Cumulative preference shares Year 1 Year 2Year 3 $$ $ Net Profit / (Loss) for the year before appropriations(1,000) (2,000)50,000 5,000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 1,500

10. 10 Example: Non-cumulative preference shares Year 1 Year 2Year 3 $ $ $ Net Profit / (Loss) for the year before appropriations(1,000) (2,000)50,000 5,000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 500

11. 11 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 claims (e.g, loan interest and preference share dividends ) have been met. - Ordinary shareholders usually have voting rights

12. 12 Other Means of Funding A. Debentures Debentures are long-term loans evidenced by deeds which set out the rate of interest payable and the date of redemption. B. 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 and capital reserves. I) Revenue reserves - They are undistributed trading profits. - They can be used to pay dividends. - Examples are the balance on the profit and loss account and general reserve. II) Capital reserves - They are gains or profits arising from non-trading or non-operating activities. - They are not available for distribution as dividends.

13. 13 - e.g. 1. Share premium a) to write off preliminary expenses b) to write off expenses of issuing shares c) to write off commissions paid and discounts on shares d) to pay up a bonus issue e) to provide premium on redemption of debentures. 2. Revaluation reserve This is the unrealized gain from an increase in the value of an asset after revaluation. 3. 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.

14. 14 Distinction between Shares and Debentures DescriptionOrdinary Shares Preference Shares Debentures Relationship between the Members/ShareholdersMember/Shareholders Creditors of the holders and the company of the companyof the company company Dividends/Interest No fixed percentageA fixed rate of dividends A fixed rate of or amounts of dividends interest will paid The dividends will be whether or not the subjected to the company makes a profitability and profit dividends policy of the company Priority of Distribution After the distributionBefore to Ordinary Before any dividend of the dividends toShareholders distributable to Preference Shareholders Ordinary and Preference Shareholders Treatment in Balance Ordinary Share CapitalPreference Share Treated as a long term SheetCapital liability if the period of repayment is longer than one year Treated as a current liab. If repayment < 1 yr.

15. 15 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’ Raising of Capital-Issue of shares and debentures

16. 16 Methods of Payment Payment in Full Payable by instalments

17. 17 The full amount of the issue price of the shares and debentures should be paid to the company on application whether or not the applicants will allot the shares and debentures. Payment in full

18. 18 DescriptionsAccounting entries Application Monies ReceivedDr. Bank Cr. Ordinary Share Applicants *”No. of Application” X “Issue Price” Issue of Ordinary Shares Capital(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

19. 19 DescriptionsAccounting 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 OversubscribedDr. Ordinary Share Applicants Cr. Bank * “No. of Application Oversubscribed” X “Issue Price”

20. 20 The full amount of the issue price of the shares and debentures will be paid to the company by instalments in following steps: Step 1Receipt of application money Step 2Return of application money to unsuccessful applicants Step 3Allotment of shares Step 4Receipt of allotment money Step 5Call on shares Step 6Receipt of call money These steps are demonstrated in the following example: Payable by instalments

21. 21 DescriptionsAccounting entries Application Monies Received Dr. Bank Cr. Ordinary Share Applicants * “No. of Application” X “Issue Price” Issue of Ordinary Shares Capital (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

22. 22 DescriptionsAccounting 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 or Rejected Application Monies Dr. Application and Allotment Cr. Bank * “No. of Application Oversubscribed or Rejected” x “Issue Value of Application”

23. 23 DescriptionsAccounting entries Allotment Monies Received Dr. Bank Cr. Application and Allotment * “No. of Share Actually Issued” X “Issue Value at Allotment”* Sometimes, oversubscribed application monies may be carried forward and offset against the allotment monies due. The difference between original allotment monies received and oversubscribed application monies will be recorded in these entries Issue of Ordinary Shares at Call Dr. Call Cr. Ordinary Share Capital * “No. of Shares Actually Issued” x “Par Value of Each Share at Call” will be recorded in Ordinary Share Capital

24. 24 DescriptionsAccounting entries Call Monies ReceivedDr. Call Cr. Ordinary Share Capital * “No. of Shares Actually Issued” x “Par Value of Each Share at Call” will be recorded in Ordinary Share Capital

25. 25 Example 1

26. Example 1 Tai Fat Limited made a public offering of its 1,700,000 ordinary shares of $1 each at $1.4 per share. The shares were issued on the following terms: Per share $ Application 0.3 Allotment 0.6 First and final call 0.5 On 1 February 1997, applications for 3,000,000 shares were received. Applications for 300,000 shares were unsuccessful and the money involved was returned on 3 February 1997. Applications for 700,000 shares were given full allotment. The remainder of the available shares were allotted among the other applicants on a pro-rata basis. The balance of the sums received on application was applied to the amounts due on allotment. The balances due on allotment were received on 1 March 1997. On 1 April 1997, the first and final call was made and paid in full. $1.4

27. Application and Allotment 900,000 First and Final Call 850,000 Application and Allotment 90,000 Application and Allotment Bank 90,000 (300,000*$0.3) Ordinary Shares 850,000 (1,700,000*$0.5) Share Premium 680,000 (1,700,000*$0.4 ) Bank 900,000 (3,000,000*$0.3) Bank 720,000 (1,700,000*$0.6-1,000,000*$0.3) 1,620,000 Application and Allotment 720,000 Bank Ordinary Shares Balance c/f 1,700,000Application and Allotment 850,000 First and Final Call 850,000 1,700,000 First and Final Call Ordinary Shares 850,000Bank 850,000 Share Premium Balance c/f 680,000 Application and Allotment 680,000

28. 28 1. Bank (3,000,000 X $0.30) 900,000 Application and Allotment 900,000 Being money received for 3,000,000 shares on application Journal Dr Cr $ $ 2. Application and Allotment 90,000 Bank (300,000 X $0.3) 90,000 Being return of application money to unsuccessful applicants for 300,000 shares 3. Application and Allotment ($0.9 X 1,700,000) 1,530,000 Ordinary Shares ($0.5 X 1,700,000) 850,000 Share Premium ($0.4 X 1,700,000) 680,000 Being allotment of 1,700,000 ordinary shares 4. Bank (1,700,000 X $0.60 - 1,000,000 X $0.30) 720,000 Application and Allotment 720,000 Being receipt of the amount due on allotment

29. 29 Journal Dr Cr $ $ 5. First and Final Call 850,000 Ordinary Shares (1,700,000 X $0.5) 850,000 Being call on shares 6. Bank 850,000 First and Final Call 850,000

30. 30 Forfeiture and Reissue of Shares If a member fails to pay the calls requested from him, the directors may declare the shares as the ‘ Forfeited Shares’ and reissue the shares to another shareholder

31. 31 DescriptionsAccounting entries Declaration of Forfeited Shares (a) Forfeited Shares were Declared when they were not paid Dr. Bank Forfeited Shares Cr. Application and Allotment, OR Call * “No. of Shares Declared as Forfeited” x “Issue Value at that Stage” will be recorded in Forfeited Shares. (b) Forfeited Shares were NOT Declared when they were not paid Dr. Bank Allotment / Call in Arrears Cr. Application and Allotment, OR Call * “No. of Shares Unpaid” x “Issue Value at that Stage” will be recorded in Allotment / Call in Arrears Unpaid Value Declared as Forfeited Shares Dr. Forfeited Shares Cr. Allotment / Call in Arrears Transfer the Value of Allotment / Call in Arrears to Forfeited Shares

32. 32 DescriptionsAccounting entries Transfer the call-up value of Forfeited share from issued share capital to Forfeited shares Dr. Ordinary Share Capital Cr. Forfeited Shares *”No. of shares Declared as Forfeited” x “Call-up value of Shares Forfeited” will be transferred to Forfeited Shares Transfer the called-up value of Forfeited share from issued share capital to Forfeited shares Dr. Ordinary Share Capital Cr. Forfeited Shares *”No. of shares Declared as Forfeited” x “Call-up value of Shares Forfeited” will be transferred to Forfeited Shares Reissue of Forfeited Shares or not Forfeited Shares are “NOT Reissued” Dr. Forfeited Shares Cr. Share Premium Any paid amount of the Forfeited Shares will be transferred to the Share Premium Forfeited Shares Account is closed

33. 33 DescriptionsAccounting entries Reissue of Ordinary SharesDr. Forfeited Shares Cr. Ordinary Share Capital * “No. of Shares Reissued” x “Called-up value of shares forfeited” will be recorded in Ordinary Share Capital Receipts from the reissue of shares Dr. Bank Cr. Forfeited Shares *”No. of shares Reissued” x “Issue Value of Each Reissued Share” Transfer of the excess amount over the called-up nominal value of the shares reissued Dr. Forfeited Shares Cr. Share Premium Any balance of the Reissue of Forfeited Shares will be transferred to the Share Premium

34. 34 Example 2

35. Tai Cheong Limited made a public offering of its 1,000,000 ordinary shares of $1 each at $1.5 per shares The shares were issued on the following terms: Per share $ Application 0.6 Allotment on 1 April 1997 0.2 First call on 1 June 1997 0.5 Final call on 1 September 1997 0.2 On 1 March 1997, applications for 1,000,000 shares were received. They were given full allotment. All sums due on received on 10 April 1997. All money for the first call was received on 10 June, except for one shareholder who had been allotted 1,000 shares. $1.5

36. 36 Case 1 All money for the final call was received on 15 September 1997, except for the shareholder who failed to pay the first call. The directors had not declared the shares forfeit by 31 December 1997. Case 2 All money for the final call was received on 15 September 1997. Except for the shareholder who failed to pay the first call. The directors declared the shares forfeit on 1 October 1997. Case 3 The directors declared the shares forfeit on 1 July 1997. On 1 August 1997, 600 shares were reissued for $0.9 each, subject to a final call. On 1 September 1997, the directors made the final call and all sums due were received.

37. 37 Case 1

38. 38 Application and Allotment Apr 1 Ordinary Shares 300,000 (1,000,000*$0.3) Apr 1 Shares Premium 500,000 (1,000,000*$0.5) Mar 1 Bank (1,000,000 X $0.60) 600,000 Apr 10 Bank (1,000,000 X $0.20) 200,000 800,000 Case 1 Ordinary Shares Apr 1 Application and Allotment 300,000 Share Premium Dec 31 Balance c/f 500,000 Apr 1 Application and Allotment 500,000 Bank Mar 1 Application 600000 Apr 15 Allotment 200000

39. 39 Final Call Sep 1 Ordinary Shares 200,000Sep 15 Bank (1,000,000 - 1,000) X $0.2 199,800 Sep 15 Calls in Arrears 200 200,000 Calls in Arrears June 10 First Call 500 Dec 31 700 700 First Call June 1 Ordinary Shares 500,000June 10 Bank (1,000,000 - 1,000) x $0.5 499,500 June 10 Calls in Arrears 500 500,000 Bank Mar 1 Application 600000 Apr 15 Allotment 200000 June 1 First call 499500 Final call 199800 Sep 15 Final Call 200

40. 40 Balance Sheet as at 31 December 1997 (Extract) $ Current Assets Called-up Capital not yet paid Share Capital Issued and Fully Paid 1,000,000 Ordinary Shares of $1 each Reserves Share Premium Ordinary Shares Apr 1 Application and Allotment 300,000 June First call 500000 Sept 1 Final call 200000 700 1000000 500000

41. 41 Case 2

42. 42 Ordinary Shares Apr 1 Application and Allotment 300,000 June First call 500000 Sept 1 Final call 200000 Oct 1 Forfeited shares (1000*$1) 1000 Dec 31 Bal c/d 999000 1000000 Calls in Arrears June 10 First Call 500 700 Sep 15 Final Call 200 Oct 1 Forfeited shares 700 Forfeited shares Oct 1 Call in Arrears 700 Dec 31 Bal c/f 300 Case 2 Oct 1 Ordinary shares (1000*$1) 1000 1000

43. 43 Balance Sheet as at 31 December 1997 (Extract) Share Capital Issued and Fully Paid 999,000 Ordinary Shares of $1 each Reserves Share Premium Forfeited Shares 300 500000 999000

44. 44 Case 3

45. 45 Ordinary Shares Dec 31 Balance c/f 999,600 Apr 1 Application and Allotment 300,000 June 1 First Call 500,000 1,000,400 Share Premium July 1 Forfeited Shares (1000*$0.5) 500 Sept 1 Final Call (999,600 X $0.2) 199,920 June 10 First Call 500 Calls in Arrears Aug 1 Forfeited Shares 240 500,240 Apr 1 Application and Allotment 500,000 Dec 31 Balance c/f 500,240 500,240 Case 3 Aug 1 Forfeited Shares (600 x $0.80) 480 July 1 Forfeited Shares 800 (1,000 x $0.80) Forfeited shares July 1 Calls in arrears 500 Aug 1 Ordinary shares (600*$0.8) 480 Aug 1 Share premium 240240 Dec 31 Bal c/d 120 July 1 Ordinary shares (1000*$0.8) 800 Aug 1 Bank (600*$0.9) 540 1340 Reissue

46. 46 *Amount transferred to share premium: Receipt from original holder (600*$0.8)480 Less: Share premium (600*$0.5) 300 180 Add: Receipt from second holder (600*$0.9)540 720 Less: Called-up nominal value (600*$0.9)480 240 Final call Bank Sept 1 Ordinary shares 199920 (999600*$0.2) Sept 15 Bank 199920 Mar 1 Application 600000 Apr 10 Allotment 200000 June 10First call 499500 Aug 1 Forfeited shares 540 Sept 15 Final call 199920

47. 47 Balance Sheet as at 31 December 1997 (Extract) Share Capital Issued and Fully Paid 999,000 Ordinary Shares of $1 each Reserves Share Premium Forfeited Shares 999600 500240 120

48. 48 Right issue Right issue is an offer to the existing shareholders to subscribe for more shares, in proportion to their existing shareholding, usually at a relatively cheap price.

49. 49 Bonus issue Bonus shares are issued when there is a build-up of reserves (e.g. undistributed profits) in the company. Those profit will often not be represented by cash, since the profits have been invested in other assets to expand the business. It is done by changing the company’s reserves into share capital and allotting shares to existing shareholders por rata, e.g. one share for every two shares held This decrease the amount of retained earnings and increases the share capital. There is no entry on cash or bank account because mp cash changes hands, the bonus shares are issued free. Dr. Profit and Loss (retained earnings) account Cr. Share Capital account (with the nominal value of shares allotted as fully paid bonus shares)

50. 50 Debenture 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

51. 51 Issue of debenture The accounting treatment of debenture is the same as that of shares, except for the change in the name of the accounts Debenture may be issued payable in full or payable by instalments Debenture can be issued at par, at premium or at a discount

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56. Better Enterprises Ltd was formed with the legal right to be able to issue 100,000 shares of $1 each. The company has actually issued 75,000 shares. None of the shares has yet been fully paid up. So far the company has made calls of $0.80 per share. All the calls have been paid by shareholders except for $200 owing from one shareholder. Authorised share capital = Issued share capital = Called-up capital = Calls in arrear = Paid-up capital =

57. 57 $1,000,000 $75,000 $60,000 $200 59,800