2. Financial Accounting
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Lecture – 01
What is Accounting?
• It is a way of recording, analysing and summarizing
transactions of a business.
What is Financial Accounting
• It is the maintenance of daily record of ALL financial
transactions in such manner that it would help in the
preparation of suitable information regarding the
financial affairs of a business or an individual.
Why is Financial Accounting Needed?
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Lecture – 01
Objectives of Accounting?
To keeping systematic record
To ascertain the results of the operation
To ascertain the financial position of the business
To portray the liquidity position
To protect business properties
To facilitate rational decision – making
To satisfy the requirements of law
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Lecture – 01
What is Financial Statement?
• The objective of financial statement is to provide
information about the financial positions, performance and
changes in financial positions of an enterprise that is useful
to a wide range of users in making economic decisions
(IAS-1)
Users of Financial Statements and Accounting
Information?
• Managers of the company
• Shareholders of the company
• Trade Contacts
• Taxation Authorities
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Lecture – 01
Users of Financial Statements and Accounting
Information?
• Government and their agencies
• Employees of the Company
• Financial Analyst and advisers
• Researchers
• The Public
Types of Financial Statements?
a)Income Statement
b)Balance Sheet
c)Owner’s Equity Statement
d)Cash Flow Statement
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Lecture – 01
Forms of Business Organizations
Proprietorship: An unincorporated business owned
by one person.
Characteristics:
•80% of the total number of business world
•easy to set up
•Single Taxation
•Legal Entity is the person who is the owner.
•Unlimited Liability/Limited Life
•Difficult to get financing
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Lecture – 01
Forms of Business Organizations
Partnership: “unincorporated business owned by
two or more persons”
•Similar to proprietorship but many owners
•It can be registered or not
•Limited life (upon the death of owner/partner)
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Lecture – 01
Forms of Business Organizations
Corporation
•80% of global sales of products or services
•A limited company registered by the state.
•Can be public Ltd. or private Ltd. company
•Unlimited life/limited liability
•Perpetual and going concern
•Separate Legal Entity
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Lecture – 01
Company Formation Procedure
Procedure of formation of a joint stock company may be
divided into four stages:
1. Promotion Stage
Idea of forming a company
Floatation work by promoters
Detail investigation whether the idea is really profitable?
Total amount of capital required to start/run?
Necessary documents required to gain incorporation
certificate.
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Lecture – 01
Company Formation Procedure
2. Incorporate Stage
• Firm is incorporated as it gets certificate of incorporation from
the registrar of the companies.
For this purpose following documents are to be filled by
promoters of the company
(i) Memorandum of Association (MOA)
(ii) Article of Association (AOA)
(iii) Notice and Address of head office
(iv) List of directors
(v) Consent of directors in written
(vi) Directors contract of qualification to purchase shares
(vii) Statutory declaration of fulfillment of legal conditions of incorporations.
• Documents (iv, v and vi) are not required for private companies.
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Lecture – 01
Company Formation Procedure
3. Raising of Share Capital
• After the Incorporation of the public company, the directors will
file a copy of the prospectus with the registrar.
• It is an invitation to the public for subscription.
• Investors can get the prospectus and application form free of
charge from the company’s bankers.
• Bankers will submit application along with the companies and
directors' will, and then precedes the allotment of the shares to
the applications.
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Lecture – 01
Company Formation Procedure
4. Trading or Business Commencement Certificate:
• Company through incorporation begins its business as it gets the
Trading certificate upon fulfillment of following:
a) Declaration by the company that the minimum subscription amounts as
per
prospectus is satisfied.
b) Declaration by the company that all the directors have taken up and paid for
their qualification shares.
c) Declaration by company those all legal requirements for commencement of
business has taken up.
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Lecture – 01
Memorandum of Association (MOA)
MOA
“Charter of the Company”
i. Name Clause
ii.Registered Office Clause
iii.Object Clause
iv.Liability Clause
v.Capital Clause
vi.Subscription Clause
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Lecture – 01
Article of Association (AOA)
AOA
• Second importance to memorandum of association is AOA.
• AOA is the regular rules & laws governs internal organization
and conduct of a company.
Content of Article:
Amount of share capital issue
Rights of shareholders regarding voting/ dividend /return of capital.
Rates regarding issuance of shares and debentures.
Rates regarding appointment of directors, managing directors, agents,
secretaries and treasures.
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Lecture – 01
Article of Association (AOA)
Qualification, remuneration, powers and liabilities of directors
Declaration of dividend
Matters relating to accountant audit.
Rates regarding the winding up the company.
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Lecture – 01
MOA and AOA
These are documents that are necessary at the time of formation of a
company and must be deposited with the registrar of companies who
approves the incorporation of the company.
MOA and AOA stand for memorandum of association and articles of
association respectively and are important source of information for
shareholders and other stakeholders in a company that has been duly
incorporated.
MOA AOA
It is the Charter of the company that
outlines the nature of the business,
aims and objectives.
AOA outlines the rules and
regulations for internal
management in doing the business.
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Lecture – 01
MOA and AOA
MOA AOA
It is must for all the companies It is not must for all the companies
MOA is supreme document of
the company
AOA cannot violate MOA.
Alteration of MOA is restricted. Can be altered through special
resolution.
Taken together MOA and AOA are referred to as Constitution of the
company.
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Lecture – 01
Public VS Private Sector
The differentiation between public and private sectors’ organizations is very
significant in order to know their different features, aims and objectives, and
scope of work.
Public Sector organizations are budgeted and run by state. They are often called
as state organizations.
Private Sector encompasses organizations with primary objective of profit
earning and further divided in to two kinds:
• Public Limited Company
• Private Limited Company
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Lecture – 01
Private Limited Company Public Limited Company
Cannot offer its share to general
public.
Can offer its shares to general public.
Members (2 to 50) Members (atleast 7 members)
Any 2 members can subscribe
their names in MOA and AOA
along with other requirements of
the companies’ ordinance 1984.
They can also apply to SEC for
company’s registration.
Any 7 members can subscribe their
names MOA and AOA along with other
requirements of the companies’
ordinance 1984.
They can also apply to SEC for
company’s registration.
Each subscriber of the MOA shall write
opposite to his name, the number of
shares held by him/her.
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Lecture – 01
The shareholders elect 2
members of the company as
Directors.
These directors form a board of
directors to run the affairs of the
company.
The shareholders elect 7 members of
the company as Directors.
These directors form a board of directors
to run the affairs of the company.
Word “(Private) Limited” is
added at the end of the name of
a private limited company.
Word “Limited” is added at the end of the
name of a public limited company.
Financial statements are private Financial statements are public
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Lecture – 01
Company Registration in Pakistan
Which law is applicable for incorporation of companies?
• Companies Ordinance, 1984
• Companies (General Provisions and Forms) Rules, 1985
• Single Member Companies Rules, 2003
• Code of Corporate Governance for limited companies.
How many types of Companies are there?
1. Company limited by shares
2. Company limited by guarantee (e.g. Charities)
3. Unlimited company
