F. 5 BAFS Limited companies accounts wch3.

2/2pp

Company Accounts

Limited Liability: the liability of a member (i.e. shareholder) is limited to the amount (if any) unpaid on his shares, or
to the amount for which he originally agrees to be liable (i.e. the liability of a member does not extend to his private
possessions.) (N.B. ≠ not liable for the debts of the company)

Shareholders vs. Directors

 shareholders are owners or members of a company
 directors are elected by shareholders to manage the company

Ordinary Shares (Equity capital) Preference shares Debentures

 holders have voting right
 holders are entitled to the profits
remaining after interest/preference
dividends and dividend rate is not fixed
 dividend is an appropriation of profit
 holders rank the last to the surplus
assets in case of liquidation
 no stipulated date for repayment of
capital
 may not have voting right  have no voting right
 are entitled to a fixed rate of  are entitled to a fixed rate of
dividend before ordinary dividend interest at regular intervals
at specified date(s)
 dividend is an appropriation of profit  interest is an expense
 holders have prior right over  holders rank before
ordinary shareholders in case of shareholders in case of
liquidation liquidation
 may be redeemable at a stipulated  a fixed stipulated date for
date redemption
 either cumulative or non-cumulative,  may be secured over the
participating and/or convertible assets of the company

Dividends
 a company's profit may be distributed to its members by way of dividends (i.e. an appropriation of profit)
 dividends are paid at the rate of so many cents or dollars per share (e.g. $0.20 per share),i.e.
total dividend = dividend per share x number of shares issued
 interim dividend may be declared before the financial year ends (e.g. after half-year profit is known) and is
usually paid in the financial year
 final dividend may be declared after profit for the year is known and is usually unpaid in the financial year
 Accounting entries:
When dividend is declared: When dividend is paid:
Dr Ordinary dividend Dr Dividend payable
Cr Dividend payable Cr Cash/Bank
 Dividend declared should be transferred to profit and loss appropriation account at the end of the financial year

Debenture interest
 payable whether profits are made or not
 calculated at a fixed annual rate (coupon rate) (e.g. 5% per annum) of the nominal value of the issued debentures
 usually paid semi-annually (half-yearly) or annually
 Accounting entries:
When interest is paid or accrued:
Dr Debenture interest
Cr Cash/Bank/Accrued debenture interest(Debenture interest payable)

Share Capital
 Issued Capital: the share capital actually issued to shareholders.
 Paid-up capital: the total amount of shareholder capital that has been paid in full by shareholders.

N.B. Issued capital is usually the same as paid-up capital as subscribers of shares have to pay in full on application.

Raising of Capital: the issue of ordinary shares and debentures:

1. Receipt of application monies
(issue of ordinary shares) (issue of debentures)
Dr Bank Dr Bank
Cr Ordinary Shares Applicants Cr Debentures Applicants

2. Allotment
(issue of ordinary shares) (issue of debentures)
Dr Ordinary Shares Applicants Dr Debentures Applicants
Cr Ordinary Share Capital Cr 5% Debentures

N.B. Ordinary Share/Debentures Applicants is a temporary personal a/c, which will be closed after allotment.
(Cr bal. = amount owed to ordinary share/debenture applicants)

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Treatment of oversubscription on issue

 rationing e.g. scaling down pro rata (i.e. in proportion)
 excess application monies should be refunded to unsuccessful applicants
(issue of ordinary shares) (issue of debentures)
Dr Ordinary Shares Applicants Dr Debentures Applicants
Cr Bank Cr Bank
N.B. In the case of undersubscription, only the number of shares/debentures applied will be issued.

Reserves
 are amounts set aside out of profits and other surpluses which are not designed to meet any liability or contingency
 are a part of the equity attributable to the owners of the company (shareholders’ fund) set aside for different
purposes (e.g. expansion)
 are in effect part of the undistributed profits of the business and are not future economic obligations (i.e. not liabilities)
 two kinds of reserves:
1. capital reserves (profits not associated with normal course of trading): not normally regarded as available for
distribution as dividend (non-distributable) e.g. revaluation reserve, capital redemption reserve
2. revenue reserves (undistributed trading profits): normally regarded as available for distribution (distributable)
e.g. retained profits (retained earnings), general reserve

Provision
 is a liability of uncertain timing or amount (HKAS 37)
 sums set aside to meet known liabilities of which the amount can be determined with substantial accuracy do not
fall within the definition of a provision and should therefore be described as accruals.
Provisions are recognised as liabilities (assuming that a reliable estimate can be made) because they are present
obligations as a result of a past event and it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligations. (e.g. provision for product warranty, provision for long-service payments,
provision for compensation in lawsuit)
Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty
about the timing or amount of the future expenditure required in settlement. By contrast:
(a) trade payables are liabilities to pay for goods or services that have been received and have been invoiced or agreed;
and
(b) accruals are liabilities to pay for goods or services that have been received but have not been paid, invoiced or
agreed with the supplier, including amounts due to employees (e.g. accrued vacation pay).
Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally
much less than for provisions.
Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.