Company Accounts

Company Accounts Final Accounts

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

Types of Companies • Unlimited Company • Limited Company

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

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

Types of Limited Company • Private Company • Public company

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

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. quotedshares) on the Hong Kong Stock Exchange • They have to comply with Hong Kong Stock Exchange requirement

Means of funding • Share Capital • Debentures • Reserves

Types of Share Capital • Preference Shares • Ordinary Shares

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

Cumulative preference shares • Any unpaid dividends on cumulative preference shares can be carried forward to a later year

Non-cumulative preference shares • If the profits are insufficient to pay the dividends, the unpaid dividends cannot be carried forward to later years

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

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

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

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

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

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

Revaluation reserve • This is the unrealized gain from an increase in the value of an asset after revaluation

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

Capital Structure

Final Accounts

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

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

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

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

Reserves Share Premium X General Reserve X Profit and loss X X Long-term Liabilities 10% Debentures X X

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

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

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

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

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

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)

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

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

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

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

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

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

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

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

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 Balance Sheet as at 31 Dec 21-1 $ $ Less: Current Liabilities Dividend owning(17000+20000) 37000 Dividend not yet paid to shareholders

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

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

Company Accounts