FINANCIAL ACCOUNTING Unit 3 – COMPANIES II: Taxation, Provisions, Reserves and Liabilities Unit 31Copyright © 2010 MDIS. All rights reserved.

Taxation in Company Financial Statements Unit 3Copyright © 2010 MDIS. All rights reserved.2 The principal tax paid by limited companies is corporation tax. Legally, it is an appropriation of profits, not an expense. Taxation is the last deduction shown in the income statement and appears after the line showing profits for the year before taxation. But, corporation tax is assessable on the profit calculated after certain adjustments.

Taxation in Company Financial Statements (Cont’d) Unit 3Copyright © 2010 MDIS. All rights reserved.3 A company’s profits are assessable to corporation tax. But, corporation tax is assessable on the profit calculated after certain adjustments have been made to the net profits. These adjustments are not made in financial statements. They are done quite separately from the drafting of financial statements and are not entered in the accounting book of the company.

Provision and Liabilities Unit 3Copyright © 2010 MDIS. All rights reserved.4 A provision is an amount written off or retained in order to provide for renewals of, or diminution in value of assets, or retained to provide for any known liability of which the amount cannot be determined with ‘substantial’ accuracy. A liability is an amount owing which can be determined with substantial accuracy.

Two Main Categories of Reserves There are two main categories of reserves: Revenue reserves Can be freely distributed. Capital reserves Subject to restrictions. on their distribution Unit 6Copyright © 2010 MDIS. All rights reserved.5

Revenue Reserves A revenue reserve is an account to which an amount has been voluntarily transferred from retained profits to an appropriate reserve account. The reserve may be for some particular purposes, such as a foreign exchange reserve account created just in case the business should ever meet a situation where it would suffer loss because of foreign currency exchange rate movements, or it could be a general reserve account that could be for any purpose. Unit 3Copyright © 2010 MDIS. All rights reserved.6

Capital Reserves A capital reserve is a reserve which is not available for cash dividends. Most capital reserves can never be utilised for cash dividend purposes. There are a number of ways in which capital reserves are created. Unit 3Copyright © 2010 MDIS. All rights reserved.7

Using Capital Reserves These reserves can only be used in accordance with the Companies Act. For instance, To be applied in paying up unissued shares of the company as fully paid shares. Providing any premium payable on redemption or purchase of shares or loan notes. Writing off expenses and commission paid on the issue of shares that gave rise to the share premium used for this purpose. These can be used in the issue of bonus shares or in the paying up of partly paid shares. Unit 3Copyright © 2010 MDIS. All rights reserved.8

Questions? Unit 49Copyright © 2010 MDIS. All rights reserved.