U3

ACCOUNTING FOR
COMPANIES

Unit 3: Accounting for Companies 3.1

Contents
Contents.............................................................................................................. 2 
Concept Map ...................................................................................................... 3 
Study organiser ................................................................................................... 4 
Introduction ........................................................................................................ 5 
3.1   Characteristics of Companies ....................................................................... 6 
Defining Companies .................................................................................... 6 
Nature of Companies ................................................................................... 6 
Advantages and Disadvantages .................................................................... 7 
Forming a Company .................................................................................... 9 
3.2   Accounting for the Issue of Shares ............................................................. 11 
Private vs. Public Company Share Issues ................................................... 11 
Shares Payable in Full on Application........................................................ 13 
Shares Payable in Part on Application and on Allotment ............................ 15 
Shares Payable in Part on Application, Allotment, and on Calls ................. 17 
Accounting for Under and Oversubscription for Shares ............................. 19 
3.3   Financial Statements .................................................................................. 29 
Income Statement/Statement of Financial Performance .............................. 29 
Balance Sheet /Statement of Financial Position .......................................... 30 
Statement of Shareholders’ Equity ............................................................. 30 
Statement of Cash Flows ........................................................................... 31 
3.4   Summary ................................................................................................... 37 
Minute Paper ............................................................................................. 37 
3.5   Glossary .................................................................................................... 39 
References ........................................................................................................ 43 
Index ................................................................................................................ 43 

Unit 3: Accounting for Companies 3.2

Concept Map
This is a diagrammatic representation of what you will be learning in this unit. It shows the links between the learning objectives and key concepts.

Defining Companies Nature Advantages and Disadvantages Forming Companies

Accounting for the Introduction to Accounting for Companies Financial Statements

Issue of Shares

Private and Public Company Issues of Shares Income Statement

Shares Payable in Full on Application Balance Sheet

Shares Payable in Part on Application and Allotment Partners’ Equity

Shares Payable in Part on Application, Allotment, and Calls Cash Flows

Unit 3: Accounting for Companies 3.3

Study organiser
Before you begin this unit, please check through your study organiser. It shows
the topics that we’ll be covering, the skills you need to acquire (the outcomes)
and the activities you’ll do to help you acquire these skills.

Topic Outcomes Activities

Unit 3: By the end of this unit, you
Accounting for should be able to:
Companies

3.1 Characteristics  Explain and describe the Activity 3.1

of Companies different types of companies Q1
and the formation process.

 Explain the major advantages

and disadvantages of
companies.

3.2 Accounting for  Explain and account for the Activity 3.1
issue of shares.
the issue of shares Q2, Q3, Q4
 Prepare a Statement for
Shareholders Equity

3.3 Financial  Differentiate the financial Moodle Quiz

Statements statements of Companies with
Partnerships and Sole
Proprietorship.

You should spend at least 2 weeks on this unit.

To help you, many of the sections indicate

approximately how many hours of work they

Unit 3: Accounting for Companies 3.4

Introduction
This is a short unit and it will introduce to Accounting for Companies. It contains
enough information for you to record the initial entries required when the
company is formed and shares are issued.

You will learn about:

 two different types of companies,

 the advantages and disadvantages of companies, and
 record the formation of companies through the issue of shares.

We will not discuss many of the complex issues that are beyond the scope of this
course. These can be studied when you do AF101 or AF210 and AF314.

As in previous units, there are activities for you to try out and the answers to
them have been provided. Please attempt to do the activities on your own first so
that you can determine if you have achieved the learning objectives. As you do
the activities, try to identify how what you are learning in this unit is being
portrayed in real life.

For example, the next

time you go through
town, try to identify
businesses that you
think are companies;
enquire with the
owners and employees
to verify your
impressions. What are
the characteristics that
indicate to you that a Suva City with different types of businesses
business is a company https://commons.wikimedia.org/wiki/File:Suva,_Fiji_56.jpg
(e.g. the name)?
Identify economic activities that you think will have better chances of succeeding
if they were owned and operated as companies. Talk to owners in an existing
company and determine how they account for issues like withdrawals of capital,
capital contributions, dividends, performance of management, financial reporting
requirements and so forth.

I strongly recommend that you spend at least two weeks on this unit

Unit 3: Accounting for Companies 3.5

3.1 Characteristics of Companies
Defining Companies
The definition of a company is stated in the Companies Act of
the laws of your country. Two definitions that may not differ
much from the one contained in the Companies Act of your
country are as follows:
Spend at least 1
hour on this
 A company is an artificial being, invisible, intangible,
section.
and existing only in contemplation of the law (Price J,
et.al., 2007, p. 712).
 A company is a type of business organisation registered under the
Companies Act which enjoys perpetual succession and whose capital is
contributed by more than one person (McNally Q, et.al., 2000, p.103).

A company is an accounting entity whose economic activities should be treated

as separate and distinct from those of its owners. It is also a legal entity and can
enter into contracts, own property, and has almost all the rights of a living
person.

Nature of Companies
Companies (corporations) are able to raise a lot of capital hence you will not
normally see them operating in the business activities that are common to sole
proprietorships and partnerships. If they do, then it will be on a very large scale.

While there may be many sole proprietorships and partnerships in your locality,
the resources controlled by them may not compare to the resources under the
control of the few companies that do exist in your area.

Companies can have few or many owners. A private company is one that is
owned by one or more persons and whose shares are not publicly traded on an
organised ‘stock exchange,’ thus they cannot raise funds from the public.

There are many private or ‘proprietary’ companies operating in the Pacific region
… the most common ones are family owned and operated businesses. All private
companies are required to use the word proprietary (PTY) and limited (LTD) in
their names to distinguish them from public companies which have many owners
and can sell shares on an organised ‘stock exchange.’

Unit 3: Accounting for Companies 3.6

A public company has no upper limits on the number of owners whereas a private
company usually has an upper limit imposed on it – usually 25 to 50 as stated in
the Companies Act of the country in which it operates.

The owners are now called shareholders – person(s) who own shares in a
corporation and enjoys the benefits of limited liability that sole proprietors and
partners do not enjoy. Limited liability simply means that the liability of the
shareholder is limited to the extent of the money he/she owes to the company for
his/her shares.

If the company has financial difficulty, the shareholder will only have to pay the
company the amount it owes the company for his/her shares. The Company
cannot ask the shareholders to use their personal assets to pay off the debts of the
company – it has no legal right to make any such claim.

Advantages and Disadvantages

A company form of ownership offers some important advantages:

 Limited Liability: shareholders’ personal assets cannot be used to pay for

the debts of the company except to the extent of the amount owed by the
shareholder to the company for shares he/she owns.
 Restricted Agency: shareholders have no right to act on behalf of the
business. This means that the company is not legally bound by the
personal actions of the shareholders. The board of directors and the
company’s elected officials control the operations of the company. A
shareholder of a public company has no greater power to act on behalf of
the company then someone who does not own shares. This ensures that
shareholders do not interfere with the operations of the business.
 Continuous Existence: the death, disability, or withdrawal of a shareholder
has no effect on the life of a public company.
 Transferability of Ownership Rights: shareholders of public companies
can sell their shares to anyone that they please without consulting or
obtaining permission from other owners. Shareholders of private
companies can also sell it to anyone they want provided that the existing
shareholders consent to the sale or have first rights of refusal.
 Ease of Raising Capital: a public company can have an unlimited number
of shareholders and can pool skills, abilities, and financial resources of
many individuals.

Unit 3: Accounting for Companies 3.7

Certain characteristics of companies are clearly disadvantageous.

 Company Taxes: companies are required to pay for income tax like other
legal entities. This means that shareholders actually get taxed twice, once
when the profits of the company is taxed and then again when the profits
are distributed to the shareholders in the form of dividends and included
in the personal income of the shareholders.
 Governmental Regulation: companies are subject to laws and regulations
imposed by the government that may prohibit companies from entering
into transactions of a particular type; or from owning specific types of
property; and that require them to prepare reports in excess of that
required by sole-proprietorships and partnerships (additional disclosure).
In addition to this, the costs associated with starting a company are very
high when compared to sole proprietorships and partnerships.
 Lack of Control: the fact that shareholders usually have no say in the
operations of the business is a major limitation because it requires them to
place their ‘trust’ in a management team that may and sometimes does
operate the company to their own benefit. This results in a conflict of
interest and can often cause a company many problems before the
shareholders can act on it and ‘fire’ management.

Unit 3: Accounting for Companies 3.8

Forming a Company
The laws in your country may differ from the procedures set out here so if in
doubt about something outlined below, contact a lawyer in your country who is
well versed with the Companies Act of your country.

Starting a company is a costly exercise that involves preliminary expenses, costs

of share issues and other ‘formation’ expenses. These are necessary and are
treated as revenue expenditure in the first accounting period. In general the
procedure to start a company is as shown below.

Formation of a Company If Issuing Shares to Public

Reserve Company Name Prepare and Issue

Prospectus

Prepare Application for

Registration including: Receive Share Applications
o Directors’ consents
o Shareholders’ consents
o Notice of name
reservation Issue Share Certificates
o Constitution
o Names and addresses of
all applicants,
shareholders and
directors Complete Register of
Members

Lodge with Registrar of Shares traded through

Companies (or similar Stock Exchange
government functionary)

Receive a Certificate of
Incorporation

Source: McNally, Q., et.al., 2000, p.107

When applying for registration, articles of association and memorandum of

association will also need to be prepared. These documents state amongst other
things, what the business will do, why it is being formed, how it will be managed,
what the relationships between directors and shareholders are, who the ‘promoters’
are, the face value / par value of shares (what each new share certificate is worth),
and if necessary, who the guarantors of external debt will be.

Unit 3: Accounting for Companies 3.9

There is a great variety of shares issued by companies. The two main types are
known as Ordinary Shares and Preference Shares.

are the most common shares and are frequently traded on

Ordinary shares the stock exchange. Their rights to dividends (share of
profits retained by the company) depend on the amount of profit made by the
company and its ability to pay the dividend. They have voting rights at
shareholder’s meetings but are the last to receive their original capital back if the
company is wound up.

are shares that give their holder certain privileges and

Preference shares rights with respect to the receipt of dividends and the
return of original capital if the company is liquidated. Preference shareholders
normally cannot vote in annual general meetings, and, receive a fixed rate of
return when the company declares dividends for payout to the shareholders.

Remember companies do not dissolve upon a shareholder’s death, incapacity, or

withdrawal from the ownership of the business.

Since the owners are ‘removed’ from the process of decision-making regarding
the operations of the business, it is necessary to determine the flow of authority,
responsibility and accountability in a company, especially if the company is
highly structured due to the nature and complexity of its operations.

Flow of Authority and Responsibility in a Company

Shareholders o Elect Directors

Directors o Make policies

o Appoint officers

Officers o Carry out policies

o Hire Managers

Managers o Oversee and Supervise

operations

Other Employees o Perform assigned tasks

Source: Price, J., et.al., 2007, p. 715

Unit 3: Accounting for Companies 3.10

We will now look at the accounting entries needed to account for the issue of
shares. Remember that this will only be a brief look at shareholder’s equity
because there are a number of complex issues that are best left to courses in
company accounting at the degree level.

3.2 Accounting for the Issue of

Shares
A company also uses the same types of journals and ledgers as
well as asset, liability, revenue, and expense accounts as
partnerships and sole proprietorships. The only difference is that
in a company, shareholders have a register of
Spend at least 6
membership/ownership that records the transfers and changes to hours on this
the value of shares owned by each shareholder. section.

The summary account Share Capital serves as the control account for the
subsidiary ledger for shares and is used to represent capital (shares issued.) There
is a Retained Profits account which is used to ‘accumulate’ profits from a
succession of accounting periods, and, a variety of reserve accounts that arise
from the application of GAAP, IAS and IFRS1.

Similar to a partnership, the company’s income summary (profit and loss

account) is closed off to the retained profits account at the end of the accounting
period.

There are many ways that a shareholder can acquire shares – cash is usually the
‘preferred’ choice but non – cash assets can also be transferred to a company at
their ‘fair market value’ on the transfer date in exchange for its equivalent value
of shares.

Private vs. Public Company Share Issues

Private
Upon formation and receipt of a certificate of registration, the company raises the
necessary capital by issuing shares to individuals interested in the company. The
private company offers its shares to selected individuals or other selected legal
entities on an invitation basis. There is no ‘application’ to own shares such as is
common for public companies.

1
Generally accepted accounting principles, international accounting standards,
international financial reporting standards

Unit 3: Accounting for Companies 3.11

This differs from the process by which a public company issues shares because a
public company will have to ‘publicly’ offer shares and anybody can apply to be
a member of the company. Normally, for the private company, an acceptance of
the invitation requires the payment of funds equivalent to the full value of the
shares offered and accepted by the individual investor.

Public
Acting directors (normally the promoters) of the company must decide how many
shares are to be issued and the terms of the issue. This is normally done at a
directors’ meeting and the secretary of the company records the decision in the
company’s Minute Book. The company then issues a prospectus (or little
brochure/booklet) inviting people to offer to take up shares.

The prospectus identifies the type of shares offered, the par value of shares, an
application form, and other information that a potential investor would need to be
able to make an informed decision. As a sign of good faith, the applicants are
asked to pay for part or all of the shares when they apply to indicate their
commitment to the company. Note that no accounting entry is made when the
prospectus is issued.

Once the applications are received, the acting directors then meet and allot shares
to the applicants, who will then be required to pay the remainder or part of it on
allotment. After allotment, a meeting of shareholders is called and the Board of
Directors of the company is duly elected. The directors then make calls for any
amount that remains to be paid on each share as and when the business needs
cash.

Key terms
1. Application – the proportion of the issue price of the shares that
shareholders are requested to send with their applications to buy the
shares.
2. Allotment – the instalment required to be paid when the shareholder
receives notification of the allotment of the shares
3. Calls – all instalments of the issue price requested after the shares have
been allotted
4. Calls in arrears – calls that shareholders have failed to pay as requested
by the company.
Source: McNally, Q., et.al., 2000, p.112

We will discuss three scenarios related to the issue of shares.

Unit 3: Accounting for Companies 3.12

Shares Payable in Full on Application
a. Private Company
The entry to record the acceptance of shares in a proprietary company (in general
journal format) is as follows:

General Journal
Date Particulars Debit Credit
x/x/xx Cash at Bank xxxx
Share Capital xxxx
(to record cash contributed to the company by (name of
shareholder) for (number of shares) at (par value)

Example 1
Asheesh and Savin are two brothers who are going into business as
manufacturers of science lab equipment. On 1/1/18, they each buy
50 000 shares with a ‘par value’ of $1 per share in the proprietary
company AshVin Enterprises Pty Ltd.

The general journal entry to record this as follows:

General Journal
Date Particulars Debit Credit
1/1/18 Cash at Bank 100 000
Share Capital 100 000
(to record cash contributed to the company by Asheesh and
Savin for 50 000 shares each at $1 per share)

Remember that the actual number of shares held by each shareholder will be kept
in a separate share registry (this becomes the subsidiary ledger for the control
account represented by Share Capital.)

b. Public Company
Upon receipt of the application ‘fee’ from the subscribers (potential
shareholders), the cash received is put into a ‘cash trust’ account rather than the
cash at bank account because the money does not belong to the company yet.
This differs from the practice of private companies who do not need to place
monies in trust because membership/ownership is by invitation only.

General Journal
Date Particulars Debit Credit
x/x/xx Cash Trust xxxx
Application xxxx
(to record cash received by the company for (number of shares) at
(par value) per share, on application)

Unit 3: Accounting for Companies 3.13

The company may sometimes actually receive more applications then they need
thus they have to decide which of the applicants will become members. Once this
has been decided, the shares are allotted to successful applicants and the cash is
transferred from the cash trust to the cash at bank account.

If there were excess funds received on application, then it is either returned to

unsuccessful applicants, or, if there are no unsuccessful applicants, the excess
funds are kept by the company to satisfy future amounts payable on allotment and
calls. If cash is returned to unsuccessful applicants then the entry is as follows:

General Journal
Date Particulars Debit Credit
x/x/xx Application xxxx
Cash Trust xxxx
(to refund excess cash received on application to unsuccessful
subscribers)

Upon allotment of the shares, the application liability account is converted to

shareholders’ equity (share capital) because the funds are no longer held in trust
and once the shares have been allotted and excess cash refunded, the company
does not owe anything to the applicants.

The following entries are made to record the transfer of cash and the recognition
of share capital:

General Journal
Date Particulars Debit Credit
x/x/xx Cash at Bank xxxx
Cash Trust xxxx
(to record the transfer of application money received to the cash at
bank account)
x/x/xx Application xxxx
Share Capital xxxx
(to record cash received by the company for (number of shares) at
(par value) per share received in full)

Example 2
On 1/1/18, the directors of Peer Ltd. have decided to issue 100 000
shares at a par value of $1. A prospectus has been issued and states that
the full price of the share is to be included with the application form.

All the shares have been subscribed for and were allotted on 1/2/18. The general
journal entries to record these events are as follows:

Unit 3: Accounting for Companies 3.14

 General Journal
Date Particulars Debit Credit
1/1/18 Cash Trust 100 000
Application 100 000
(to record cash received by the company for 100 000 shares
at $1 per share, on application)
1/2/18 Cash at Bank 100 000
Cash Trust 100 000
(to record the transfer of application money received to the
cash at bank account)
Application 100 000
Share Capital 100 000
(to record funds contributed for 100 000 shares at $1 per
share received in full)

Notice how the cash trust account balance is transferred to the cash at bank
account to represent cash that now belongs to the entity and the application
account balance is transferred to the share capital account to represent the claims
by the shareholders against the assets of the entity.

Shares Payable in Part on Application and on

Allotment
In this scenario, the company may require that upon application, the subscribers
for the shares should pay a ‘deposit’ which is less than the full par value of the
share. When the shares are allotted to successful applicants, the remainder
becomes ‘due.’ At the date of allotment, a ‘receivable’ called ‘allotment’ is
created to reflect the fact that successful applicants now owe funds to the
company.

Shareholders’ equity is increased when the capital has been received or ‘paid up.’
On allotment of the shares the cash held in trust are transferred to the cash at
bank account.

Any money received after the shares have been allotted are recorded in the
normal manner by directly increasing the cash at bank account -the cash trust
account is no longer needed.

The entries to record these events are shown as follows.

General Journal
Date Particulars Debit Credit
Date Cash Trust xxxx
received Application xxxx
application (to record cash received by the company for (number of
fees shares) shares at (amount received per share) per share,
on application)
Date of Cash at Bank xxxx
allotment Cash Trust xxxx

Unit 3: Accounting for Companies 3.15

 (to record the transfer of application money received to
the cash at bank account)
Date of Application xxxx
allotment Share Capital xxxx
(to record application fee of (amount received per
share) per share on (number of shares allotted) shares)
Date of Allotment xxxx
allotment Share Capital xxxx
(to record allotment fee of (amount received per share)
per share on (number of shares allotted) shares allotted)
Date of Cash at Bank xxxx
allotment Allotment xxxx
(to record cash received by the company for (number of
shares) shares at (amount received per share) per share,
on allotment)

Example 3
On 1/1/18, the directors of Peer Ltd. have decided to issue 100 000
shares at a par value of $1. A prospectus has been issued and states
that $0.40 of the full price of each share is to be included with the
application form and the remainder to be received once shares have
been allotted.

All the shares have been subscribed for and were allotted on 1/2/18. The general
journal entries to record these events are as follows:
General Journal
Date Particulars Debit Credit
1/1/18 Cash Trust 40 000
Application 40 000
(to record cash received by the company for 100 000
shares at $0.40 per share, on application)
1/2/18 Cash at Bank 40 000
Cash Trust 40 000
(to record the transfer of application money received to
the cash at bank account)
1/2/18 Application 40 000
Share Capital 40 000
(to record application fee of $0.40 per share on 100 000
shares allotted)
1/2/18 Allotment 60 000
Share Capital 60 000
(to record allotment fee of $0.60 per share on 100 000
shares allotted)
1/2/18 Cash at Bank 60 000
Allotment 60 000
(to record cash received by the company for 100 000
shares at $0.60 per share, on allotment)

Note: the amount receivable on application was $0.40 / share × 100 000 shares =
$40 000 and the amount receivable on allotment was $0.60 / share × 100 000
shares = $60 000. This brings the cash receivable to $100 000 and the share
capital to $100 000, the desired capitalisation.

Unit 3: Accounting for Companies 3.16

Shares Payable in Part on Application,
Allotment, and on Calls
In this scenario, the company may require that upon application, the subscribers
for the shares should pay a ‘deposit’ which is less than the full par value of the
share. When the shares are allotted to successful applicants, a further ‘deposit’ is
to be paid. At the date of allotment, a ‘receivable’ called ‘allotment’ is created to
reflect the fact that successful applicants now owe funds to the company.

Shareholders’ equity is increased when allotments are received or ‘paid up.’ On

allotment of the shares the cash held in trust are transferred to the cash at bank
account. Any money received after the shares have been allotted are recorded in
the normal manner by directly increasing the cash at bank account – the cash trust
account is no longer needed.

Any amounts not yet received per share are requested by the board of directors as
and when needed and become ‘due’ when ‘called.’ At the date of the call, a
‘receivable’ called ‘Call (number of call)’ is created to reflect the fact that
shareholders now owe funds that they have been ‘called’ to provide to the
company. Shareholders’ equity is increased when the call monies due is received
or ‘paid up.’ The entries to record these events are as follows:

General Journal
Date Particulars Debit Credit
Date Cash Trust xxxx
received Application xxxx
application (to record cash received by the company for (number of
fees shares) shares at (amount received per share) per share,
on application)
Date of Cash at Bank xxxx
allotment Cash Trust xxxx
(to record the transfer of application money received to
the cash at bank account)
Date of Application xxxx
allotment Share Capital xxxx
(to record application fee of (amount received per
share) per share on (number of shares allotted) shares)
Date of Allotment xxxx
allotment Share Capital xxxx
(to record allotment fee of (amount received per share)
per share on (number of shares allotted) shares allotted)
Date of Cash at Bank xxxx
allotment Allotment xxxx
(to record cash received by the company for (number of
shares) shares at (amount received per share) per share,
on allotment)
Date of Call (number of call) xxxx
call Share Capital xxxx
(to record call of (amount received per share) per share
on (number of shares allotted) shares)

Unit 3: Accounting for Companies 3.17

Date of Cash at Bank xxxx
call Call (number of call) xxxx
(to record cash received by the company for (number of
shares) shares at (amount received per share) per share
for call (number of call))

Example 4
On 1/1/18, the directors of Peer Ltd. have decided to issue 100 000
shares at a par value of $1. The prospectus states that:

 $0.40 of the full price of each share is to be included with

the application form;
 $0.20 of the full price of each share is to be paid upon allotment; and
 the remainder to be paid when called by the company.

All the shares have been subscribed for and were allotted on 1/2/18. The first call
of $0.20 of the full price of each share was made on 1/7/18. All call money was
received by 31/07/18 except for the amount due on 2 000 shares.

Note:
 the amount receivable on application is
$0.40 / share × 100 000 shares = $40 000,
 the amount receivable on allotment is
$0.20 / share × 100 000 shares = $20 000, and
 the amount receivable on call 1 is
$0.20 / share × 100 000 shares = $20 000.

This results in cash receivable of $80 000 and a share capital of $80 000. The
general journal entries to record these events are as follows:

General Journal
Date Particulars Debit Credit
1/1/18 Cash Trust 40 000
Application 40 000
(to record cash received by the company for 100 000
shares at $0.40 per share, on application)
1/2/18 Cash at Bank 40 000
Cash Trust 40 000
(to record the transfer of application money received to
the cash at bank account)
1/2/18 Application 40 000
Share Capital 40 000
(to record application fee of $0.40 per share on 100 000
shares allotted)
1/2/18 Allotment 20 000
Share Capital 20 000
(to record allotment fee of $0.20 per share on 100 000
shares allotted)

Unit 3: Accounting for Companies 3.18

1/2/18 Cash at Bank 20 000
Allotment 20 000
(to record cash received by the company for 100 000
shares at $0.20 per share on allotment)
1/7/18 Call 1 20 000
Share Capital 20 000
(to record call of $0.20 per share on 100 000 shares)
31/7/18 Cash at Bank 19 600
Call 1 19 600
(to record cash received by the company for 98 000
shares at $0.20 per share for Call 1)

As you may have noticed, the company did not receive all the cash needed from
shareholders. This means that the Call 1 account will have a ‘balance’ in it. This
represents the amounts that are ‘overdue’ and are often transferred to a Calls in
Arrears account and shown as a debit in trial balance.

It is similar to an accounts receivable account, except that this receivable is from the
owners instead of some external party. It represents called up capital that is unpaid.
No account is opened to record this amount. Failure to pay a call within a set period
may lead to shares being forfeited (taken back by the company).

So what is the value of shareholders equity? To determine the value of shareholders

equity we need to subtract any calls in arrears from the share capital account. This
difference gives the actual value of ‘paid up capital’ and is normally regarded as a
residual value hence no account is created to record this amount.

This paid up capital represents the claims by shareholders against the assets of the
business and is shown as follows in the balance sheet:

Peer Ltd; (extract of) Statement of Financial Position as at 31/7/18

Shareholders’ Equity

Share Capital (100 000 shares called to $0.80) $80 000

Less Calls in Arrears (2 000 shares at $0.20 / share) $400
Paid up Capital $79 600

Do you remember?
Journal entries are completed in the following order:

1. Receipt of Application money due as per prospectus;

2. Allotting of shares to applicants, application of excess funds as per the terms of the
prospectus or directors prerogative, and transfer of application monies held in trust to
the cash at bank account;
3. Receipt of allotment monies;
4. Call made on the shares; and
5. Receipt of call monies

Unit 3: Accounting for Companies 3.19

Accounting for Under and Oversubscription for
Shares
It is very rare that the number of shares issued to the public and the number of
applications received from the pubic will be same, so the issue may be either
under or over subscribed.

Accounting for undersubscription

An under subscription happens when less applications are received than the
directors desired.

To overcome this problem, many companies have their share issues underwritten.
This means that the stockbroker or underwriter agrees to take up any shares not
applied for by the public.

Accounting for oversubscriptions

An oversubscription does not have an effect on the entries to be made in the
General Journal for the issues of the number of shares and terms of issue
contained in the prospectus.

Nevertheless, the amount of application money received is in excess of the

amount dues on application. The directors will only be allowed to allot the
number of shares as per prospectus so the decision has to be made on how the
shares will be allotted and what to do with the extra application money received.

As McNally et al. (2000) explains the directors have a number of choices open to
them:

 allot all of the shares applied for to certain applicants;

 refuse to allot any to certain applicants;
 allot only a portion of the shares applied for to certain applicants;
 allot shares according to some combination of the above

In this situation the directors are required to:

 refund excess application, or

 apply excess application money received to allotment and calls in
advance, or
 a combination of these two.

(p. 124)

Unit 3: Accounting for Companies 3.20

Example – Refund of Excess Application
Cool Breeze Co. Ltd was registered on 01/01/2018. On 1st January
the directors decided to issue 40 000 to the public at $1 each.

Terms of issue:
 $0.50 on application;
 $0.30 on allotment;
 $0.20 on call.

On 10th January applications have been received for 50 000 shares. On 15th
January the directors decided to allot the 40 000 shares and refund the excess
application. All cash on allotment was received by 20th January and on this date
the call was made and all money was received on 31st January.

Required:
Show the General journal entries to record these transactions.

Solution
General Journal
Date Particulars Debit Credit
10/01/18 Cash Trust 25 000
Application 25 000
(to record cash received by the company for
50 000 shares at $0.50 per share, on application)
15/01/18 Application(refund) 5 000
Cash Trust 5 000
(to record the refund of excess application on
10 000 shares at $0.50 per share on application)
15/01/18 Cash at Bank 20 000
Cash Trust 20 000
(to record the transfer of application money
received to the cash at bank account)
15/01/18 Application 20 000
Share Capital 20 000
(to record application fee of $0.50 per share on
40 000 shares allotted)
15/01/18 Allotment 12 000
Share Capital 12 000
(to record allotment fee of $0.30 per share on
40 000 shares allotted)
20/01/18 Cash at Bank 12 000
Allotment 12 000
(to record cash received by the company for
40 000 shares at $0.30 per share on allotment)
31/1/18 Call 1 8 000
Share Capital 8 000
(to record call of $0.20 per share on 40 000
shares)
31/01/18 Cash at Bank 8 000
Call 1 8 000
(to record cash received by the company for
40 000 shares at $0.20 per share for call)

Unit 3: Accounting for Companies 3.21

Cool Breeze Co Ltd; (extract of) Statement of Financial Position
as at 31/01/2018
Shareholders’ Equity
Share Capital (40 000 shares called to $1) $40 000
Paid up Capital $40 000

Example: Transfer of excess application to allotment

Sun Silk Co. Ltd was registered on 01/06/2018. On 9th June the
directors decided to issue 80 000 shares to the public for $1 each.

Terms of issue:
 $0.50 on application;
 $0.40 on allotment;
 $0.10 on call.

On 10th June applications have been received for 120 000 shares. On 15th June the
directors decided to allot the 80 000 shares and transfer excess application to
allotment. All cash on allotment was received by 20th June and on this date the
call was made and all money was received on 30th June except for 4 000 shares.

Required:
a. Show the General journal entries to record these transactions.
b. Calculate the paid up capital.

Solution: Transfer of excess application to allotment

General Journal
Date Particulars Debit Credit
10/06/18 Cash Trust 60 000
Application 60 000
(to record cash received by the company for 120 000
shares at $0.50 per share, on application)
15/06/18 Application 20 000
Allotment 20 000
(to record the transfer of excess application received on
40 000 shares at $0.50 per share to allotment)
15/06/18 Cash at Bank 40 000
Cash Trust 40 000
(to record the transfer of application money received to
the cash at bank account)
15/06/18 Application 40 000
Share Capital 40 000
(to record application fee of $0.50 per share on 40 000
shares allotted)
15/06/18 Allotment 32 000
Share Capital 32 000
(to record allotment fee of $0.40 per share on 80 000
shares allotted)

Unit 3: Accounting for Companies 3.22

20/06/18 Cash at Bank 12 000
Allotment 12 000
(to record the balance of cash received by the company
for 80 000 shares at $0.40 per share on allotment)
20/06/18 Call 8 000
Share Capital 8 000
(to record call of $0.10 per share on 80 000 shares)
30/06/18 Cash at Bank 7 600
Call 7 600
To record cash received by the company for 76 000
shares at $0.10 per share)

Sun Silk Co Ltd; (extract of) Statement of Financial Position as at 30/06/18

Shareholders’ Equity
Share Capital (80 000 shares called to $1.00) $80 000
Less Calls in Arrears (4 000 shares at $0.10 / share) $400
Paid up Capital $79 600

Example: Refund of excess application to allotment and calls in

advance
South Pacific Co Ltd was registered on 01/07/2018. On 5th July the
directors decided to issue 200 000 shares to the public at $1 each.

Terms of issue:
 $0.50 on application;
 $0.25 on allotment;
 $0.25 on call.

On 15th July applications have been received for 280 000 shares of which 20 000
shares were paid in full. On 16th July the directors allotted the shares in the
following manner:

 Allotted the 200 000 shares including 20 000 fully paid shares;
 20 000 applications were refunded;
 The remaining shares were allotted in the ratio of three for every four
applied for, with excess application being applied to allotment.

Allotment money due was received by 31st July. The call of $0.25 was made on
1st August. All call money was received on 15th August except for 800 shares.

Required:
a. Show the General journal entries to record these transactions.
b. Calculate the paid up capital.

(Use the next blank page for your answer.)

Unit 3: Accounting for Companies 3.23

Unit 3: Accounting for Companies 3.24
Solution: Refund of excess applications, transfer of excess application to
allotment and calls in advance.

Date Particulars Debit Credit

15/07/18 Cash Trust 150 000
Application 150 000
(to record cash received by the company for 260 000
shares at $0.50 per share on application and 20 000
shares fully paid)
16/07/18 Application(refund) 10 000
Cash trust 10 000
(to record the refund on 20 000 excess application
received at $0.50 per share to allotment)
16/07/18 Application 40 000
Allotment 35 000
Calls in advance 5 000
(to record transfer of excess application to allotment
and calls in advance)
16/07/18 Cash at Bank 140 000
Cash Trust 140 000
(to record the transfer of application money received
to the cash at bank account)
16/07/18 Application 100 000
Share Capital 100 000
(to record application fee of $0.50 per share on 200
000 shares allotted)
16/06/18 Allotment 50 000
Share Capital 50 000
(to record allotment fee of $0.25 per share on
200 000 shares allotted)
31/07/18 Cash at Bank 15 000
Allotment 15 000
(to record the balance of cash received by the
company for 200 000 shares at $0.25 per share on
allotment)
01/08/18 Call 50 000
Share Capital 50 000
(to record call of $0.25 per share on 200 000 shares)
01/08/18 Calls in advance 5 000
Calls 5 000
(Transfer of calls in advance $0.25 per share on
20 000 shares)
15/08/18 Cash at Bank 44 800
Call 44 800
To record cash received by the company for 179 200
shares at $0.25 per share)

Unit 3: Accounting for Companies 3.25

 South Pacific Co. Ltd; (extract of) Statement of Financial Position as at 15/08/2018
Shareholders’ Equity
Share Capital
200 000 $1 shares called to $1.00 $200 000
Less calls in arrears (800 shares @ $0.25) 200
Paid up Capital $199 800

Working
Worksheet to deal with oversubscriptions

Shares Group of Application Application Allot in Calls in Refund

Shares received due advance advance
$ $ $ $ $ $ $
Application 280 000
received
Applications 20 0000 20 000 @ $0.50 10 000 10 000
refunded
Remaining 260 000
applications
20 000 @ $1 20 000 10 000 5 000 5 000
Shares 200 0000
allotted
180 000@ 50C 90 000 90 000
Excess 60 000 60 000 @ 50C 30 000 30 000
applications
150 000 100 000 35 000 5 000 10 000
a b c d e

Note:
The most affected account is the application account when there is
oversubscription. So the total of columns b, c, d and e should equal to a.

Calls in advance
McNally et al (2000) points out that:
If there is a balance in the Calls in Advance account, it appears
separately in the statement of financial position in the Shareholder’s
Equity section. It does not form part of the paid-up capital to give the
total shareholders funds.
If the terms of issue has set two calls, the calls in advance received
relates to both calls. As each call is made the amount appropriate to
that call must be transferred from the Calls in advance account to the
call account. The balance in the calls in the advance account relates to
the calls, which have not yet been made.

(p. 124)

Unit 3: Accounting for Companies 3.26

Example
On 1st January, 2018 the Directors of Cool Breeze Ltd decided to
issue 800 000 shares at $1 on the following terms.

Terms of issue:
 $0.30 on application;
 $0.20 on allotment;
 $0.50 0n call.

On 31st January the applications were received for 920 000 shares, of which
40 000 shares were paid in full.

On 1st February, the Directors allotted as follows:

 Allotted 800 000 shares including 40 000 fully paid shares.
 Refunded 40 000 unsuccessful applications;
 Excess applications were transferred to allotment.

All allotment money due was received 20th February. On 1st March the Directors
made a call of $0.25 per share. All call money was received by 31st March except
for 3 600 shares.

Using this information:

a) Journalise these transactions; and
b) Prepare the shareholder’s equity section in the statement of financial position
as at 31st March 2018.

Solution:
General Journal
Date Particulars Debit Credit
31/01/18 Cash Trust 304 000
Application 304 000
(to record cash received by the company for 880 000
shares at $0.30 per share, and 40 000 shares paid full on
application)
01/02/18 Application(refund) 12 000
Cash trust 12 000
(to record the refund on 40 000 excess application
received at $0.30 per share to allotment)
01/02/18 Application 52 000
Allotment 32 000
Calls in advance 20 000
(to record transfer of excess application to allotment and
calls in advance)
01/02/18 Cash at Bank 292 000
Cash Trust 292 000
(to record the transfer of application money received to
the cash at bank account)
01/02/18 Application 240 000
Share Capital 240 000
(to record application fee of $0.30 per share on 800 000
shares allotted)

Unit 3: Accounting for Companies 3.27

01/02/18 Allotment 160 000
Share Capital 160 000
(to record allotment fee of $0.20 per share on 800 000
shares allotted)
20/02/18 Cash at Bank 128 000
Allotment 128 000
(to record the balance of cash received by the company
for 640 000 shares at $0.20 per share on allotment)
01/03/18 Call 1 200 000
Share Capital 200 000
(to record call of $0.25 per share on 800 000 shares)
01/03/18 Calls in advance 10 000
Calls 10 000
(Transfer of calls in advance $0.25 per share on 40 000
shares)
31/03/18 Cash at Bank 189 100
Call 189 100
To record cash received by the company for 756 400
shares at $0.25 per share)

Cool Breeze Ltd; (extract of) Statement of Financial Position as at 31/03/18

Shareholders’ Equity
Share Capital (800 000 shares called to $0.75) $600 000
Less Calls in Arrears (3 600 shares at $0.25 / share) $ 900
Paid up Capital $599 100
Add calls in advance $10 000
Total shareholders’ equity $609 100

Unit 3: Accounting for Companies 3.28

3.3 Financial Statements
The financial statements of companies are not that different
from that of a sole proprietorship and partnership. The
statements included are a statement of:

 Financial Performance for the period, Spend at least 1

hour on this
 Financial Position at the end of the period, section.
 Shareholders’ Equity for the period, and
 Cash Flows.

Income Statement/Statement of Financial

Performance
The statement of financial performance for a company is similar to that of a
partnership and a sole proprietorship except that the net income is calculated both
before and after any income tax expense as shown below:

Peer Ltd. Statement of Financial Performance

For the year ending 31/12/18
Particulars ($)
Net Sales 19 000
Less Cost of Sales 4 200
Gross Profit 14 800
Add Other Income 1 360
16 160
Less Expenses 9 700
Net Profit before income tax 6 460
Less Income Tax 1 938
Net Profit after income tax $4 522

Unit 3: Accounting for Companies 3.29

Balance Sheet /Statement of Financial
Position
The statement of financial position of a company is identical to that of a
partnership and sole proprietorship, except that the company’s balance sheet
shows the share capital paid up, retained profits account and any reserves that
may have been created. The format is shown in the extract below.

Peer Ltd
(extract of) Statement of Financial Position as at 31/12/18
Shareholders’ Equity
Share Capital Paid up 79 600
Retained Profits 3 200
Reserves 1 000
83 800

As you can see, only the ‘summary’ of the values are provided. The details of the
value are provided in a separate statement of Shareholders’ Equity.

Statement of Shareholders’ Equity

This statement shows all changes in the shareholders equity over the period and
includes the following:

Share Capital Paid-Up

 Share capital allotted
 Calls in Arrears
 Calls in Advance

Retained Profits
 Balances from prior periods
 Increases in retained profits
 Transfers from reserves
 Net income after tax
 Decreases in retained profits
 Transfers to reserves
 Net loss after tax
 Dividends payable
 Ending balance for current period

Unit 3: Accounting for Companies 3.30

Reserves
A typical detailed format is given below. Please note that the numbers are
fictitious and have been included to demonstrate how the format is used. If an
entry does not exist then do not include it. For example, if there are no calls in
arrears, calls in advance, or reserves, then do not include those lines in the
statement.

Statement of Shareholders’ Equity

For the year ended 31st December 2018
Share Capital
100 000 shares at $0.80 per share 80 000
add Calls in Advance -
80 000
less Calls in Arrears (2 000 @ $0.20) 4 00
Paid up Share Capital 79 600

Retained Profits
Balance (1/1/18) -
add Increases to Retained profits
Transfers from General Reserves 2 000
Net Income After Income Tax 4 522
6 522
less Decreases to Retained profits
Transfers to General Reserves 3 000
Net Loss After Income Tax -
Ordinary Dividends provided for 322
3 322
Balance (31/12/18) 3 200

Reserves
Transfers from Retained Profits 3 000
Transfers to Retained Profits 2 000
1 000

Total Shareholders’ Equity 83 800

You should notice that the statement of shareholders’ equity is the detailed
information for the shareholders’ equity section of the statement of financial
position. If you compare the values in the statement above with the summarised
values in the shareholders’ equity section of the statement of financial position
you will notice that they are equal ... they should always be equal. There are some
items that have been left out but you will encounter them when you do degree
accounting so you will be able to adapt this format to incorporate those changes.

Statement of Cash Flows

The statement of cash flows merely lists all the receipts and payments of the
partnership into cash flows from operating activities, investing activities and
financing activities.

Unit 3: Accounting for Companies 3.31

This concludes our discussion on Companies and I encourage you to review the
journal entries again so that you know them and also understand why the entries
are made on the date that they are made.

Activity 3.1

You will find a brief discussion of these questions in the section Feedback on Activities.

The questions will help you to review and consolidate your understanding of
accounting for companies at a fundamental level.

Question 1 Concepts
1. What is the role of shareholders in running the business of a company?

2. Janice and her husband are the only shareholders in a company they formed
to operate their chain of retail outlets throughout Tonga. Their company
earned net income of approximately $200 000 in their first year of
operations. One of Janice’s friends suggested to her that she had made a
mistake in incorporating and should operate as a sole proprietorship or
partnership. What reasons may Janice use to support their decision to
incorporate?

3. Explain the characteristics of a corporation.

Unit 3: Accounting for Companies 3.32

Question 2 Paid on application, allotment, and calls
On 1/1/18, the directors of Puji Ltd. have decided to issue 1 000 000 shares at a
par value of $2. The prospectus states that:
 $0.80 of the full price of each share is to be included with the application
form;
 $0.50 of the full price of each share is to be paid upon allotment; and
 the remainder to be paid when called by the company.

Applications closed on 15/1/18 and all the shares have been subscribed for and
were allotted on 1/2/18. The first call of $0.40 of the full price of each share was
made on 1/7/18. All call money was received by 31/07/18 except for the amount
due on 20 000 shares.

Journalise the transactions and calculate paid up capital.

Unit 3: Accounting for Companies 3.33

Question 3 Complicated application/allotment/calls
On 1/1/18, the directors of Fire Ltd. have decided to issue 1 000 000 shares at a
par value of $2. The prospectus states that:
 $1.00 of the full price of each share is to be included with the application
form;
 $0.50 of the full price of each share is to be paid upon allotment; and
 the remainder to be paid when called by the company.

 Applications closed on 15/1/18 and all the shares have been subscribed for
and were allotted on 1/2/18.
 All allotment money was received by received by 15/2/18 except for the
amount due on 20 000 shares. This was received on 31/3/18 when the
shareholder was informed that his shares would be forfeited.
 The first call of $0.40 of the full price of each share was made on 1/7/18. All
call money was received by 31/07/18 except for the amount due on 10000
shares. One shareholder who owned 10 000 shares actually paid up the $0.50
outstanding instead of the $0.40 called.

Journalise the transactions and calculate paid up capital.

Unit 3: Accounting for Companies 3.34

Question 4 Refund of excess applications, transfer of excess application to
allotment and calls in advance
st
On 1 June, 2018 the Directors of Pacific Dealers Ltd decided to issue 200 000
shares at $1 on the following terms.
Terms of issue:
 $0.30 on application;
 $0.20 on allotment;
 $0.50 on call.

On 31st July the applications were received for 230 000 shares, of which 10 000
shares were paid in full.
On 1st August , the Directors allotted as follows:
 Allotted 200 000 shares including 10 000 fully paid shares.
 Refunded 10 000 unsuccessful applications;
 Excess applications were transferred to allotment.

All allotment money due was received 20th August. On 1st September the
Directors made a call of $0.25 per share. All call money was received by 30th
September except for 900 shares.

Using this information:

a. Journalise these transactions;
b. Prepare the shareholder’s equity section in the statement of financial
position as at 30th September 2018.

(Use the next blank page for your answer.)

Unit 3: Accounting for Companies 3.35

Unit 3: Accounting for Companies 3.36
3.4 Summary
We are now at the end of this unit. After doing your readings and all the activities,
you should be able to account for the formation of companies that have a simple
capital structure. You should also be able to determine the key characteristics of
companies and discuss the relative merits and demerits. Finally, you should also
be able to understand the differences between the financial statements of a Sole
trader, Partnership and Company.

In the next unit you will be learning about Cash Flow Statements.

Good Job and well done for finishing this unit!

If you are on schedule with your readings then it should now
be the end of week 9 of the semester.

Take a short break and then spend about 15 to 20 minutes

to summarise what you have learnt in this unit and
identify the queries that you still have. Ask your tutor or
your coordinator to clarify the issues for you.

Minute Paper
In concise, well-planned sentences, please answer the two questions below:

1. What are the two [three, four, five] most significant [central, useful,
meaningful, surprising, disturbing] things you have learned during this
unit?

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Unit 3: Accounting for Companies 3.37

_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________

2. What key question(s) about this unit still remain in your mind?

_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
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Unit 3: Accounting for Companies 3.38

3.5 Glossary
The following are some accounting terms / jargon that you need to master. Please
try to define and explain them in your own words. Discuss your definitions with
your tutor or email the coordinator if you need to verify your definitions.

Jargon / Term Definition

1 Company

2 Private Company

3 Public Company

4 Limited Liability

5 Ordinary Shares

6 Preference Shares

7 Application

8 Cash Trust

9 Allotment

10 Call

11 Share Capital

12 Calls in Arrears

13 Calls in Advance

14 Paid Up Capital

15 Issued Capital

16 Prospectus

Unit 3: Accounting for Companies 3.39

17 Statement of
Shareholders’ Equity

Feedback on Activities

Activity 3.1
Question 1
1. What is the role of shareholders in running the business of a company? The
major role of the shareholders is to choose the directors of the company.
Shareholders have no inherent right to represent the corporation or to take
part in its management.
2. What reasons may Janice use to support their decision to incorporate?
They have escaped the legal liability associated with a sole proprietorship
or partnership. They can sell the corporation or part of it without any legal
problems of continuity of the business. It is much easier to find people to
purchase an ownership interest in a corporation than undivided interests in a
partnership.
3. Explain the characteristics of a Company! A company is organised to carry
on activities permitted by its charter (and the Companies Act.)
a. Ownership is indicated by shares
b. Shareholders owning voting shares elect a board of directors
c. The board selects officers to run the business
d. The constitution of the company guides its general operations as long as
they are consistent with the company’s act
e. The company is subject to income tax and a lot of other regulations.

Question 2
General Journal
Date Particulars Debit Credit
15/1/18 Cash Trust 800 000
Application 800 000
(to record cash received by the company for 1000 000
shares at $0.80 per share, on application)
1/2/18 Cash at Bank 800 000
Cash Trust 800 000
(to record the transfer of application money received to
the cash at bank account)
1/2/18 Application 800 000
Share Capital 800 000
(to record application fee of $0.80 per share on 1 000
000 shares allotted)
1/2/18 Allotment 500 000
Share Capital 500 000
(to record allotment fee of $0.50 per share on 1 000 000
shares allotted)

Unit 3: Accounting for Companies 3.40

1/2/18 Cash at Bank 500 000
Allotment 500 000
(to record cash received by the company for 1 000 000
shares at $0.50 per share on allotment)
1/7/18 Call 1 200 000
Share Capital 200 000
(to record call of $0.40 per share on 1 000 000 shares)
31/7/18 Cash at Bank 392 000
Call 1 392 000
(to record cash received by the company for 980 000
shares at $0.40 per share for Call 1)

Puji Ltd; (extract of) Statement of Financial Position as at 31/7/18

Shareholders’ Equity
Share Capital (1 000 000 shares called to $1.70) $1 700 000
Less Calls in Arrears (20 000 shares at $0.40 / share) $8 000
Paid up Capital $1 692 000

Question 3
General Journal
Date Particulars Debit Credit
15/1/18 Cash Trust 1 000 000
Application 1 000 000
(to record cash received by the company for 1000 000
shares at $1 per share, on application)
1/2/18 Cash at Bank 1 000 000
Cash Trust 1 000 000
(to record the transfer of application money received to
the cash at bank account)
1/2/18 Application 1 000 000
Share Capital 1 000 000
(to record application fee of $1 per share on 1 000 000
shares allotted)
1/2/18 Allotment 500 000
Share Capital 500 000
(to record allotment fee of $0.50 per share on 1 000 000
shares allotted)
1/2/18 Cash at Bank 490 000
Allotment 490 000
(to record cash received by the company for 980 000
shares at $0.50 per share on allotment)
31/3/18 Cash at Bank 10 000
Allotment 10 000
(to record cash received by the company for 20 000
shares at $0.50 per share on allotment)
1/7/18 Call 1 400 000
Share Capital 400 000
(to record call of $0.40 per share on 1 000 000 shares)
31/7/18 Cash at Bank 397 000
Call 1 397 000
(to record cash received by the company for 980 000
shares at $0.40 per share; and 10 000 shares at $0.50 per
share for Call 1)

Unit 3: Accounting for Companies 3.41

Fire Ltd; (extract of) Statement of Financial Position as at 31/7/18
Shareholders’ Equity
Share Capital (1 000 000 shares called to $1.90) $1 900 000
Less Calls in Arrears (10 000 shares at $0.40 / share) $4 000
Plus Calls in Advance (10 000 shares at $0.10 / share) $1 000
Paid up Capital $1 897 000

Question 4
General Journal
Date Particulars Debit Credit
31/07/18 Cash Trust 76 000
Application 76 000
(to record cash received by the company for 220 000
shares at $0.30 per share, and 10 000 shares paid full on
application)
01/08/18 Application(refund) 3 000
Cash trust 3 000
(to record the refund on 10 000 excess application
received at $0.30 per share to allotment)
01/08/18 Application 13 000
Allotment 8 000
Calls in advance 5 000
(to record transfer of excess application to allotment and
calls in advance)
01/08/18 Cash at Bank 73 000
Cash Trust 73 000
(to record the transfer of application money received to the
cash at bank account)
01/08/18 Application 60 000
Share Capital 60 000
(to record application fee of $0.30 per share on 200 000
shares allotted)
01/08/18 Allotment 40 000
Share Capital 40 000
(to record allotment fee of $0.20 per share on 200 000
shares allotted)
20/08/18 Cash at Bank 32 000
Allotment 32 000
(to record the balance of cash received by the company for
160 000 shares at $0.20 per share on allotment)
01/09/18 Call 1 50 000
Share Capital 50 000
(to record call of $0.25 per share on 200 000 shares)
01/09/18 Calls in advance 2 500
Calls 2 500
(Transfer of calls in advance $0.25 per share on 10 000
shares)
30/09/18 Cash at Bank 47 275
Call 47 275
To record cash received by the company for 189 100
shares at $0.25 per share)

Unit 3: Accounting for Companies 3.42

Pacific Dealers Ltd; (extract of) Statement of Financial Position as at 30/09/18

Shareholders’ Equity
Share Capital (200 000 shares called to $0.75) $150 000
Less Calls in Arrears (900 shares at $0.25 / share) 225
Paid up Capital $149 775
Add calls in advance 2 500
Total shareholders’ equity $152 275

References
Chasteen L., Flaherty R., O’Conner M., 1998, Intermediate Accounting:
International Edition, McGraw Hill Companies Inc., USA. 6th Ed.
Hogget J., Edwards L., Medlin J., 2003, Accounting in Australia, John Wiley &
Sons, Australia. 5th Ed.

McNally Q., L Kirkwood L., Ryan C., Falt J., Stanley T., 2000, Accounting:
Concepts and Applications, Pearson Education New Zealand Ltd.

Price J., Haddock M., Brock H., 2007, College Accounting: Chapters 1-32,
McGraw-Hill/Irwin, NY, USA.
Yates L., et.al. , 2003, TAFE Accounting to Trial Balance, Thomson, Australia.
8th Edition.

Index
There is no index for this unit.

Unit 3: Accounting for Companies 3.43