1. Company Accounts
Final Accounts

2. Introduction
Limited companies are so popular compared with partnership business.
Limited companies enable larger businesses to be formed, and help an owner safeguard his private assets
The owners’ (shareholders’) loss is only limited to the amount of shares they bought
The law governing the preparation and publication of final accounts of limited companies in Hong Kong is the Companies Ordinance of Hong Kong

3. Types of Companies
Unlimited Company
Limited Company

4. Unlimited Company
Some businesses which are small in size or provide highly specialized professional services
E.g. firms of solicitors or accountants are not limited liability companies

5. Limited 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
Their liabilities of a company can be limited by shares.
This means that shareholders are not obliged to introduce funds to pay off the debts of the company beyond the amount of share capital they have purchased

6. Types of Limited Company
Private Company
Public company

7. Private Company The 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

8. Public Company
All public companies’ shares are traded on the Stock Exchange
The ones that are traded in are known as ‘listed companies’ meaning that their shares have prices quoted (i.e. quoted shares) on the Hong Kong Stock Exchange
They have to comply with Hong Kong Stock Exchange requirement

9. Means of funding
Share Capital
Debentures
Reserves

10. Types of Share Capital
Preference Shares
Ordinary Shares

11. 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

12. Cumulative preference shares
Any unpaid dividends on cumulative preference shares can be carried forward to a later year

13. Non-cumulative preference shares
If the profits are insufficient to pay the dividends, the unpaid dividends cannot be carried forward to later years

14. 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

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

16. 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

17. 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

18. Capital reserves
They are gains or profits arising from non-trading 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

19. 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

20. Revaluation reserve
This is the unrealized gain from an increase in the value of an asset after revaluation

21. 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

22. Capital Structure Authorized Capital
It is the maximum amount of share capital which the company is allowed to issue
Issued Capital
It is the nominal value of a portion of the authorized capital which has been taken up (purchased) by shareholders
Called Up Capital
It is the amount of issued capital which the company has called to be paid
Paid Up Capital
It the amount of issued capital which has actually been received
Calls in Arrears
It the amount of called up capital which has not been received

23. Final Accounts

24. 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

25. XX Ltd. Company
Trading and Profit and Loss Account for the year ended 31 Dec XXXX
Sales X
Less: Returns inwards X
(X)
Less: Cost of Goods Sold
Opening Stock X
Add: Purchases X
Add: Carriage inwards X
Less: Returns outwards (X)
Less: Closing Stock (X) X
Gross profit X
Add: Gains on disposal X X
Less: Expenses
Rent X
Directors’ remuneration X
Debenture interest (% * Debenture) X X
Profit for the year before taxation (PBIT) X
Less: Taxation (X)
Profit for the year after taxation (PAT) X

26. Add: Retained profit b/f X
Less: Appropriations:
Goodwill written off X
Preliminary expenses X
Transfer to general reserve X
Preference dividend – interim (paid) X
- proposed (final) X
Ordinary dividend - interim (paid) X
- proposed (final) X X
Retained profit c/f X

27. Balance Sheet as at 31 Dec XXXX
Fixed Assets Cost Dep Net
Machinery X X X
Furniture X X X
X X X
Current Assets
Stock X
Debtors X
Bank X X
Less: Current Liabilities
Creditors X
Proposed dividend X
Debenture interest accrued X
Provision for taxation X
Working Capital X
Financed by:
Share Capital Authorized Issued
XXXX Ordinary Shares of $1 each X X
XXXX 8%Preference Shares of $1 each X X
X X
No. of shares
Par value

28. Reserves
Share Premium X
General Reserve X
Profit and loss X X
Long-term Liabilities
10% Debentures X

29. Special types of expenses
Debenture interest
Director’s remunerations/fees/emolument

30. 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

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

32. Director’s fee/emolument
Directors fee and director’s 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

33. Appropriation of net profit
Taxation payable on profit
Amounts written off as goodwill
Preliminary expenses
Retained profit from last year/after next year
Dividends
Transfer to/(from) reserve

34. Taxation payable on profits
Profit tax is not an expenses, it is an appropriation of profits
However, for the purpose of presentation and to make the accounts more understandable, it is not shown with the other appropriation
It is shown as a deduction form 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)

35. Amounts written off as goodwill
Goodwill, in a company, may have been written off it from time to time.
When this is done, the amount written off should be shown in the appropriation account

36. Preliminary expenses
When a company is formed, there are many kinds of expenses concerned with its formation
These include, for example, legal expenses and various government taxes
These cannot be shown as an asset in the balance sheet, and can be charged to the appropriation account

37. 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

38. 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

39. 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
Dr Interim Dividend
Cr Bank
Transfer interim dividend paid to appropriation account
Dr Profit & loss appropriation
Cr Interim Dividend

40. 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 as ‘current liabilities’ in the balance sheet

41. Descriptions
Book-keeping entries
Transfer proposed dividend to appropriation account
* Proposed dividend will be shown in balance sheet under the heading of current liabilities
Dr Profit & loss appropriation
Cr Proposed dividend

42. 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

43. Descriptions
Book-keeping entries
Transfer part of net profit from appropriation account to specific reserves
Dr Profit & loss appropriation account
Cr Reserves
Transfer specific reserves back to appropriation account
Dr Reserves
Cr Profit & loss appropriation

44. Example Dr Cr Trial Balance as at 31 Dec 2000(extract)
ordinary shares of $0.5 each, fully paid
% preference shares of $1 each, fully paid
General reserves
Interim ordinary dividend
Interim preference dividend
Additional information:
The director proposed a final dividend of $0.05 per ordinary share
The director resolved to transfer $5000 to the general reserve

45. 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
- final (250000* ) 17000
Ordinary dividend - interim
- final (400000*0.05)
Transfer to general reserve
Balance Sheet as at 31 Dec 21-1
$ $
Less: Current Liabilities
Dividend owning( )
Dividend not yet paid to shareholders

46. 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

47. Example Ans: $ 20000 Ordinary Share Capital of $1 each 20000
Reserves
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) $5000
Cr Ordinary share capital $5000
Ordinary share capital ( )
Reserve ( )