company accounts

1. 1
Company Accounts
Final Accounts

2. 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. 3
Types of Companies
 Unlimited Company
 Limited Company

4. 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. 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. 6
Types of Limited Company
 Private Company
 Public company

7. 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. 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. 9
Means of funding
 Share Capital
 Debentures
 Reserves

10. 10
Types of Share Capital
 Preference Shares
 Ordinary Shares

11. 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. 12
Cumulative preference shares
 Any unpaid dividends on cumulative
preference shares can be carried forward
to a later year

13. 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. 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. 15
Debentures
 Debentures are long-term loans evidenced
by deeds which set out the rate of interest
payable and the date of redemption

16. 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. 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. 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. 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. 20
Revaluation reserve
 This is the unrealized gain from an
increase in the value of an asset after
revaluation

21. 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. 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. 23
Final Accounts

24. 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. 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. 26
Add: Retained profit b/f X
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. 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
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. 28
Reserves
Share Premium X
General Reserve X
Profit and loss X
X
Long-term Liabilities
10% Debentures X
X

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

30. 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. 31
Trial Balance as at 31 Dec 20-1
Dr Cr
10% Debentures 10000
Debenture interest 5000
Ans.:
Trading and profit and loss a/c for the year ended 31 Dec 20-2
$ $
Gross profit X
Less: Expenses
Debenture interest (10000*10%) 10000
Balance Sheet as at 31 Dec 21-1
$ $
Less: Current Liabilities
Paid debenture interest
Actual debenture interest
Accrued expenses
(1000-5000) 5000
Debenture interest not yet paid
Example

32. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 44
Example
Trial Balance as at 31 Dec 2000(extract)
Dr Cr
400000 ordinary shares of $0.5 each, fully paid 200000
250000 10% preference shares of $1 each, fully paid 250000
General reserves 15000
Interim ordinary dividend 5000
Interim preference dividend 8000
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. 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
Balance Sheet as at 31 Dec 21-1
$ $
Less: Current Liabilities
Dividend owning(17000+20000) 37000
Dividend not yet paid to shareholders
Preference dividend – interim 8000
- final (250000*0.1-8000) 17000
Ordinary dividend - interim 5000
- final (400000*0.05) 20000
Transfer to general reserve 5000

46. 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. 47
Example
$
20000 Ordinary Share Capital of $1 each 20000
Reserves 12000
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 (20000+5000) 25000
Reserve (12000-5000) 7000