Topic: Company Accounts

Limited liability companies more commonly referred to as limited companies came into
existence because of the need to have people invest in them in order to raise more capital.

Types of Companies
1. Public Companies
2. Private Companies

Differences between these two types of companies:

1. Public companies are allowed to sell shares to the general public, while private
companies are only allowed to sell shares to friends and family members.

N.B A share is a unit of ownership within a company, it is intangible (cannot feel, touch or
see). Individuals who purchase shares are called shareholders. Shareholders earn a part of
the company’s profit for their investment. This is called Dividend.

2. Public companies may have a minimum membership of two (2), while there is no limit to
the maximum membership. However, in a private company, minimum membership is
two (2) and maximum is fifty (50).

3. Public companies must make their final accounts public by law while private companies
are not required to do so.

4. Public companies are allowed to borrow money from the general public (debentures,
loan capital/equity, loan stock) while private companies are not allowed to do so.

NB
 Debenture is treated as a long-term liability in the Balance Sheet.
 Debenture holders earn interest on the money they lend. This is paid at a specific
period.
 Debenture holders must receive their interest even if the company is not profitable.

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Formation
When a company is formed, it must be registered with the Companies Office of Jamaica. This
registration is carried out with the presentation of these two main documents:
1. The Memorandum of Association
2. The Articles of Association

 Memorandum of Association – This document deals with the external relationships of the
company:
(a) The name of the business
(b) Location of the head office
(c) Objectives of the company

 Articles of Association – This document deals with the internal relationships of the
company:
(a) The rights of the shareholders
(b) Protocols for election of the company’s directors
(c) How profit is to be allocated

Types of Shares Issued:

1. Preference Shares – These shares are sold to selected individuals and businesses. The
dividend rate for this type of share is fixed. In addition, dividends for preference
shareholders are accounted for first.

2. Ordinary Shares – Ordinary shares are sold to the general public. These shareholders are
instrumental in the decision-making process of the company as they have the voting
rights. The dividends rate for ordinary shareholders are not fixed and their dividend is
accounted for after the preference shareholders.

NB. It does not necessarily mean that ordinary shareholders will always receive less
dividends. It can be an advantage that their rate is not fixed as in some instances the rate
may be larger than that of preference shareholders. In addition, depending on the profit
that is earned for that accounting period, the ordinary shareholders may also earn more
dividends.

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 Types of Share Capital

1. Authorized Share Capital – This is also known as registered or nominal share capital.
This is the amount of capital the company can raise from the shares they are allowed
to issue as stipulated by law.

2. Issued Share Capital – This is the actual amount of share capital raised from shares
issued.

NB. Companies will issue shares base on the share capital they want to raise. Therefore, the
company may not issue all shares they are allowed to.

Other types of Share Capital:

Read text – Principles of Accounts for the Caribbean, fifth edition, by Frank Wood, page
426.

Final Accounts prepared by Limited Liability Companies.

A. Trading, Profit and Loss Account
B. Appropriation Account
C. Balance Sheet

A. Trading, Profit and Loss Account – These accounts are similar to those prepared by
a sole trading and partnership businesses. However, there are two expenses are
specifically related to this type of business.

 Director’s remuneration - Directors are legal employees of the company appointed by

the shareholders. Their remuneration/income is charged to the profit and loss account.

 Debenture Interest

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 B. Appropriation Account – When the topic Partnership was taught, an Appropriation
Account was prepared because profit was shared. In a company, profit will be shared,
hence the need for an Appropriation Account.
NB. The information Partnership Appropriation Account differs from the Company
Account.
Information recorded in a company’s Appropriation Account:
1. Net Profit
2. Profit brought forward from the previous period (profit that was not apportioned in the
previous period).
3. Reserves – Money the company sets aside for:
(i) General purposes
(ii) Specific purposes
NB. The reserves for the current period are placed in the Appropriation Account, while
the accumulated reserves are placed in the Balance Sheet.
4. Goodwill written off
5. Preliminary Expenses – Expenses related to legal fees or government taxes.
6. Tax – Companies pay corporation tax based on the profit they have earned.
7. Dividends – The part of the company’s profit proposed by the directors to be paid to
shareholders.
Types of Dividends:
(i) Proposed Dividend – Dividend that the company intends or plans to pay for the
current accounting period.
(ii) Interim Dividend – Dividend that was paid during the current accounting period.

NB. Both types of dividend are treated in the Appropriation Account, however, only the
proposed dividend (part still not yet paid) will be treated in the Balance Sheet as a current
liability.
8. The remanding profit which will be carried forward to the next accounting period

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 C. Balance Sheet – Additional Information:

(i) Proposed Dividends - Current liability

(ii) Authorized and Issued share capital

(iii)Accumulated /Total reserves Financed by section
(iv) Unappropriated profit for the current period
(v) Debenture
(vi) Share Premium

Share Premium – When shares are sold above par, (more than what is asked for), the
difference or extra money received is called share premium. This difference is treated as a
reserve in the Balance Sheet.
Shares may be sold above par because of the demand for those shares

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Example:
Question 2 (Worksheet)

Halliday Company
Trading, Profit and Loss Appropriation Account for the year ending December 31, 2001
$ $ $
Sales 185 000
Less Cost of Goods Sold:
Opening Stock 17 500
Add Purchases 94 000
Cost of Goods Available 111 500
Less Closing Stock 15 400
Cost of Goods Sold 96 100
Gross Profit 88 900
Less Expenses
Salaries 19 600
Insurance 8 400
Electricity 3 500
Telephone 4 200
Auditor’s Fee 900
Director’s Remuneration 3 100
Debenture Interest 1 600
Overdraft Interest 700
Miscellaneous Expenses 1 100 2 400
Depreciation: Building 1 600
Machinery
2 700 47 100
41 800
Net Profit 73 000
Add Unappropriated/ Retained Profit b/d 114 800

Less Appropriations: 3 000

Dividends: Interim 5 000
Proposed 8 000
106 800
Unappropriated Profits for the Current Year

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Halliday Company
Balance Sheet as at December 31, 2001
$ $ $
Fixed Assets Cost Acc. Dep. NBV
Building 109 400 5 200 104 200
Machinery 19 300 3 900 15 400
128 700 9 100 119 600

Current Assets
Stock 15 400
Debtors 27 300
Cash 1 800
44 500
Less Current Liabilities
Creditors 13 700
Bank Overdraft 8 600
Proposed Ordinary Dividend 5 000
27 300
17 200
Working Capital
136 800
Financed by
Ordinary Share Capital 10 000
Add Unappropriated Profit 106 800
116 800
Add Long Term Liability
Debentures 20 000 136 800

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