2. 2
Introduction
Companies are formed and incorporated
under the Companies Ordinance.
An incorporated company(also called
‘incorporation’) is a legal entity using the
term ‘company’ in its name
3. 3
Advantages of incorporation
An incorporated company is a separate
legal entity which enjoys similar legal
authority to a natural person
An incorporated company has an unlimited
life
Ownership of a company can be easily
transferred to new owners
For a limited company, shareholders’
liability is limited to the amount they have
invested in shares
8. 8
Private Company
According to the Companies Ordinance,
the Articles of Association A private
company contains the following
restrictions:
The maximum 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
10. 10
Listed Company
Listed companies are companies which
have their securities listed on the stock
exchange of Hong Kong
Apart from the Companies Ordinance,
listed companies are also under the strict
control of other regulations such as
Securities Ordinance etc.
13. 13
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
15. 15
Non-cumulative preference shares
If the profits are insufficient to pay the
dividends, the unpaid dividends cannot be
carried forward to later years
16. 16
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
17. 17
Debentures
Debentures are long-term loans evidenced
by deeds which set out the rate of interest
payable and the date of redemption
18. 18
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
19. 19
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
20. 20
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
21. 21
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
23. 23
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
25. 25
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
26. 26
XX Ltd. Company
Income Statement for the year ended 31 Dec XXXX
Sales X
Less: Returns inwards X
(X)
Less: Cost of Sales
Opening Inventory X
Add: Purchases X
Add: Carriage inwards X
Less: Returns outwards (X)
Less: Closing Inventory (X) X
Gross profit X
Add: Other revenues X
X
Less: Operating Expenses
Administrative Expenses
Selling and distribution expenses X
Finance cost X
Other operating expenses X X
Net profit X
Less: Profit Tax (X)
Profit after taxation (PAT) X
27. 27
Add: Retained profit b/f X
X
Less: Appropriations:
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
28. 28
Balance Sheet as at 31 Dec XXXX
Non-currents Assets Cost Dep Net
Machinery X X X
Furniture 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
Capital and Reserve
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
30. 30
Special types of expenses
Debenture interest
Director’s remunerations/fees/emolument
Preliminary expenses/formation expenses
Goodwill written off
31. 31
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
32. 32
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
33. 33
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
34. 34
Preliminary expenses/Formation
expenses
They are incurred by an enterprise during the
period prior to the commencement of commercial
operations
These include, for example, legal expenses and
various government taxes
They should be written off when they are
incurred
Pre-operating expenses capitalized in prior years
should be written off against the opening
retained profits as a prior year adjustments
35. 35
Amounts written off as goodwill
According to SSAP(Statement of Standard
Accounting Practice), goodwill should be
amortized over its useful economic life
36. 36
Appropriation of net profit
Profit Tax
Retained profit from last year/after next
year
Dividends
Transfer to/(from) reserve
37. 37
Profit tax
It is shown as a deduction from 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)
Accounting entries:
Dr. Profit and Loss
Cr. Provision for taxation
38. 38
Example
No under/overprovision of profit tax
Trial Balance as at 31 December 2003
Dr Cr.
Net Profit 10000
** The profit tax is estimated at $1500 for the year
Solution:
Provision for taxation
Bal c/f 1500 P/L 1500
39. 39
Profit and loss Account for the year ended 31 December 2003
$
Net Profit 10000
Less Profit tax 1500
Profit after tax 8500
Balance Sheet as at 31 December 2003
$
Current Liabilities
Provision for taxation 1500
40. 40
Example
Overprovision of profit tax
Trial Balance as at 31 December 2003
Dr Cr.
Net Profit 10000
Overprovision of profit tax 300
** The profit tax is estimated at $1500 for the year
Solution:
Provision for taxation
Bal c/f 1500 P/L 1200
Bal b/f 300
1500 1500
41. 41
Profit and loss Account for the year ended 31 December 2003
$
Net Profit 10000
Less Profit tax (1500-300) 1200
Profit after tax 8800
Balance Sheet as at 31 December 2003
$
Current Liabilities
Provision for taxation 1500
42. 42
Example
Underprovision of profit tax
Trial Balance as at 31 December 2003
Dr Cr.
Net Profit 10000
Overprovision of profit tax 300
** The profit tax is estimated at $1500 for the year
Solution:
Provision for taxation
Bal c/f 1500 P/L 1800
Bal b/f 300
1800 1800
43. 43
Profit and loss Account for the year ended 31 December 2003
$
Net Profit 10000
Less Profit tax (1500+300) 1800
Profit after tax 8200
Balance Sheet as at 31 December 2003
$
Current Liabilities
Provision for taxation 1500
44. 44
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
45. 45
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
Dividend = Nominal value * % of dividend paid
OR
= no. of shares * Amount of dividend per share
46. 46
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
47. 47
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 should
be disclosed on the face of the balance sheet as a
separate component of equity(I.e. part of the
shareholders’ fund)
48. 48
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
49. 49
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
50. 50
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
51. 51
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
52. 52
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 8000
- final (250000*0.1-8000) 17000
Ordinary dividend - interim 5000
- final (400000*0.05) 20000
Transfer to general reserve 5000
53. 53
Balance Sheet as at 31 Dec 21-1
$ $
Dividend owning(17000+20000) 37000
Dividend not yet paid to shareholders
Capital and Reserve
Reserves
General reserves (1500+5000) 20000
54. 54
Limited Liability 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
55. 55
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
57. 57
Issue Price
Issue at Par
-The issue price is same as the “PAR”, “NOMINAL” or “FACE” value of the shares
and debentures.
Issue at a Premium
-The issue price may be HIGHER than the par value of the shares and debentures.
The difference between the issue price and the par value of the shares or debentures
is named as “SHARE PREMIUM”
Issue at a Discount
-The issue price may be LOWER than the par value of the shares and debentures.
The difference between the issue price and the part value of the shares or debentures
is named as “SHARE DISCOUNT’
Raising of Capital-Issue of shares and
debentures
59. 59
Descriptions Accounting entries
Application Monies Received Dr. Bank
Cr. Ordinary Share Applicants
*”No. of Application” * “Issue Price”
Issue of Ordinary Shares Capital (a) Issue at Par
Dr. Ordinary Share Applicants
Cr. Ordinary Share Capital
•“No of Shares Actually Issued” X “Par Value of
Each Share”
(b) Issue at a Premium
Dr. Ordinary Share Applicants
Cr. Ordinary Share Capital
Cr. Share Premium
* “No. of Share Actually Issued” X “Par Value of
Each Share” will be recorded in Ordinary Share
Capital
* “No. of Shares Actually Issued” X “The Value
of Share Premium per
Each Share” will be recorded in Share Premium
60. 60
Descriptions Accounting entries
( c) Issue at a Discount
Dr. Ordinary Share Applicants
Share Discount
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” X “Par Value of
Each Share” will be recorded in Ordinary Share
Capital
* “No. of Shares Actually Issued” X “The Value of
Share Discount per Each Share” will be recorded in
Share Discount
Refund of Oversubscribed Dr. Ordinary Share Applicants
Cr. Bank
* “No. of Application Oversubscribed” X “Issue
Price”
61. 61
Note:
The issue is oversubscribed when the number of
applications is greater than the number of shares
available for issue. Excess application money will
be refunded to the unsuccessful applicants
The issue is undersubscribed when the number of
applications is smaller than the number of shares
available for issue. Hence, no refund will be
required
If the number of applications is below the
predetermined minimum amount, no shares will
be issued and all the application money will be
refunded
62. 62
Example – Issue at par
Tai Fat Ltd made a public offering of its
1000 ordinary shares of $1 each
The shares were issued at par
63. 63
The Journal
Dr. Cr.
Bank (1000*$1) 1000
Ordinary Share Applicants 1000
Being money received on application
Ordinary Share Applicants 1000
Ordinary Share Capital 1000
Being allotment of 1000 ordinary shares
64. 64
Shares issued at par
Bank
Ordinary Share Applicants
Ordinary Share Capital
Ordinary share applicants 1000
Bank 1000
Ordinary share capital 1000
Ordinary share applicants 1000
65. 65
Example – Issue at premium
Tai Fat Ltd made a public offering of its
1000 ordinary shares of $1 each
The shares were issued at premium of
20%
66. 66
The Journal
Dr. Cr.
Bank (1000*$1.2) 1200
Ordinary Share Applicants 1200
Being money received on application
Ordinary Share Applicants 1200
Ordinary Share Capital (1000*$1) 1000
Share premium (1000*$0.2) 200
Being allotment of 1000 ordinary shares
67. 67
Shares issued at premium
Bank
Ordinary Share Applicants
Ordinary Share Capital
Ordinary share applicants 1200
Bank 1200
Ordinary share capital 1000
Ordinary share applicants 1200
Share premium 200
Share premium
Ordinary share applicants 200
68. 68
Example – Issue at discount
Tai Fat Ltd made a public offering of its
1000 ordinary shares of $1 each
The shares were issued at a discount of
10%
69. 69
The Journal
Dr. Cr.
Bank (1000*$0.9) 900
Ordinary Share Applicants 900
Being money received on application
Ordinary Share Applicants 900
Discounts on shares (1000*$0.1) 100
Ordinary Share Capital (1000*$1) 1000
Being allotment of 1000 ordinary shares
70. 70
Shares issued at discount
Bank
Ordinary Share Applicants
Ordinary Share Capital
Ordinary share applicants 900
Bank 900
Ordinary share capital 1000
Ordinary share applicants 1000
Discount on shares 100
Discount on shares
Ordinary share applicants 100
71. 71
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
72. 72
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
73. 73
A debenture is a written acknowledgement
of debt.
Debenture are long-term loans which
attract a large number of investors.
The terms of debentures such as the rate
of interest payable, the date of
redemption (if applicable) and security
given by the borrowing company are
governed by a trust deed
Debentures
74. 74
Types of debentures
Redeemable and irredeemable debentures
Debentures with fixed charge
Debentures with floating charge
Unsecured/naked/simple debentures
75. 75
Redeemable and irredeemable
debentures
Redeemable debentures are repayable at
or by a specified date
Irredeemable debenture are nor repayable
However, the borrowing company can
purchase its own debentures on the open
market when the price of debentures is
very low
76. 76
Debentures with fixed charge
Debentures are secured by means of
mortgaging specific assets, e.g. premises.
The borrowing company cannot sell these
assets without the prior consent of the
debenture holders
77. 77
Debentures with floating charge
Debentures are secured by means of
mortgaging a group of assets, e.g.
premises
The borrowing can trade in the assets
which are subject to a floating charge
If the company defaults on its interest or
capital repayment, the floating charge will
crystallize on the group of assets
The debenture holders can sell the assets
to recover the amount due to them
80. 80
The accounting treatment of debenture is
the same as that of shares, except for the
change in the name of the accounts
Debenture can be issued at par, at
premium or at a discount
Issue of Debentures
81. 81
Descriptions Accounting entries
Issue of Debentures (a) Issue at Par
Dr. Bank
Cr. Debentures
(b) Issue at a Premium
Dr. Bank
Cr. Debentures
Cr. Debentures Premium
( c) Issue at a Discount
Dr. Bank
Debenture Discount (note)
Cr. Debentures
82. 82
Note:
The debenture discount account can be
written off using either method:
It can be written off immediately against the
share premium on profit and loss appropriation
account. The debentures should be disclosed in
the balance sheet at a nominal value
It can also be written off over the life of
debentures to the profit or loss account. The
debentures should then be disclosed in the
balance sheet at a nominal value less
unamortized discount
