1

Company Accounts

Final Accounts

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

Types of Companies Unlimited Company Limited Company

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

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

Types of Limited Company Private Company Public company

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

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

Means of funding Share Capital Debentures Reserves

10

Types of Share Capital Preference Shares Ordinary Shares

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

Cumulative preference shares Any unpaid dividends on cumulative

preference shares can be carried forward to a later year

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

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

Debentures Debentures are long-term loans evidenced

by deeds which set out the rate of interest payable and the date of redemption

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

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

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

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

Revaluation reserve This is the unrealized gain from an

increase in the value of an asset after revaluation

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

Capital StructureAuthorized 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

Final Accounts

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

XX Ltd. Company Trading and Profit and Loss Account for the year ended 31 Dec XXXXSales XLess: 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) XGross profit XAdd: Gains on disposal X XLess: Expenses Rent X Directors’ remuneration X Debenture interest (% * Debenture) X XProfit for the year before taxation (PBIT) XLess: Taxation (X)Profit for the year after taxation (PAT) X

26

Add: Retained profit b/f X XLess: 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 XRetained profit c/f X

27

Balance Sheet as at 31 Dec XXXXFixed Assets Cost Dep NetMachinery X X XFurniture X X X X X XCurrent AssetsStock XDebtors XBank X XLess: Current Liabilities Creditors X Proposed dividend X Debenture interest accrued X Provision for taxation XWorking Capital X XFinanced by:Share Capital Authorized IssuedXXXX Ordinary Shares of $1 each X X XXXX 8%Preference Shares of $1 each X X X X

No. of shares Par value

28

ReservesShare Premium XGeneral Reserve XProfit and loss X XLong-term Liabilities10% Debentures X X

29

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

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

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 XLess: 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) 5000Debenture interest not yet paid

Example

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

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

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

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

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

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

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

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 DividendCr Bank

Transfer interim dividend paid to appropriation account

Dr Profit & loss appropriationCr Interim Dividend

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

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 appropriationCr Proposed dividend

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

Descriptions Book-keeping entries

Transfer part of net profit from appropriation account to specific reserves

Dr Profit & loss appropriation accountCr Reserves

Transfer specific reserves back to appropriation account

Dr ReservesCr Profit & loss appropriation

44

Example Trial Balance as at 31 Dec 2000(extract) Dr Cr400000 ordinary shares of $0.5 each, fully paid 200000250000 10% preference shares of $1 each, fully paid 250000General reserves 15000Interim ordinary dividend 5000Interim 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

Ans.:Trading and profit and loss a/c for the year ended 31 Dec 20-2 $ $Net profit XAdd: Retained profit from last year X XLess: 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) 20000Transfer to general reserve 5000

46

Bonus Shares/Script Issue Bonus shares are ‘free’ shares issued to sha

reholders 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

Example $20000 Ordinary Share Capital of $1 each 20000Reserves 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