Company Accounts Final Accounts 1 Introduction p p

Company Accounts Final Accounts 1

Introduction p p 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 2

Types of Companies Unlimited Company p Limited Company p 3

Unlimited Company Some businesses which are small in size or provide highly specialized professional services p E. g. firms of solicitors or accountants are not limited liability companies p 4

Limited Company p p p 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 5

Types of Limited Company Private Company p Public company p 6

Private Company The number of members is limited to 50 p Prohibited to subscribe for any shares or debentures to the public p Strict the right to transfer its shares p 7

Public Company All public companies’ shares are traded on the Stock Exchange p 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 p They have to comply with Hong Kong Stock Exchange requirement p 8

Means of funding Share Capital p Debentures p Reserves p 9

Types of Share Capital Preference Shares p Ordinary Shares p 10

Preference Shares Preference shares are entitled to a fixed percentage of dividends before any ordinary dividends are paid p They usually do not have voting rights p The different types of preference shares are: p n n Cumulative preference shares Non-cumulative preference shares 11

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

Non-cumulative preference shares p If the profits are insufficient to pay the dividends, the unpaid dividends cannot be carried forward to later years 13

Ordinary Shares The dividends of ordinary shares are not fixed. They depend on the return of the company p Ordinary shareholders are paid only after all other claim (e. g. loan interest and preference share dividends) have been met p Ordinary shareholders usually have voting rights p 14

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

Reserves are profits or gains which accrue to ordinary shareholders p They are undistributed profits which have been retained within the company p There are two types of reserves: p n n Revenue reserves Capital reserves 16

Revenue reserves They are undistributed trading profits p They can be used to pay dividends p E. g. the balance on the profit and loss account and general reserve p 17

Capital reserves They are gains or profits arising from nontrading or non-operating activities p They are not available for distribution as dividends p E. g. Share premium, revaluation reserve, capital redemption reserve and debenture redemption reserve p 18

Share premium When a company issues shares at a price above par, the excess amount is called share premium p The reserve is restricted to be used in the following ways: p n n n 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 19

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

Capital redemption reserve and Debenture redemption reserve p This arises as a result of a company redeeming its shares or debentures by using its retained profits 21

Capital Structure Authorized Capital Issued Capital Called Up Capital Paid Up Capital Calls in Arrears It is the maximum amount of share capital which the company is allowed to issue It is the nominal value of a portion of the authorized capital which has been taken up (purchased) by shareholders It is the amount of issued capital which the company has called to be paid It the amount of issued capital which has actually been received It the amount of called up capital 22 which has not been received

Final Accounts 23

Final accounts p 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 24

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 25

Add: Retained profit b/f Less: Appropriations: Goodwill written off Preliminary expenses Transfer to general reserve Preference dividend – interim (paid) - proposed (final) Ordinary dividend - interim (paid) - proposed (final) Retained profit c/f X X X 26

Fixed Assets Machinery Furniture Current Assets Stock Debtors Bank Balance Sheet as at 31 Dec XXXX Cost X X X Less: Current Liabilities Creditors Proposed dividend Debenture interest accrued Provision for taxation Working Capital Financed by: Share Capital XXXX Ordinary Shares of $1 each XXXX 8%Preference Shares of $1 each No. of shares Par value Dep X X X Net X X X X Authorized Issued X X X 27

Reserves Share Premium General Reserve Profit and loss Long-term Liabilities 10% Debentures X X X 28

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

Debenture interest p The amount of the debenture interest will be calculated according to the pre-set percentage of debenture as the interest expenses of the company 30

Example Trial Balance as at 31 Dec 20 -1 Dr Cr 10% Debentures 10000 Debenture interest 5000 Ans. : Paid debenture interest Trading and profit and loss a/c for the year ended 31 Dec 20 -2 $ $ Actual debenture interest Gross profit X Less: Expenses 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 $ 31

Director’s fee/emolument Directors fee and director’s emolument are salaries and services charges of the directors of the limited company p It will be treated as one of expenses in the profit and loss account p 32

Appropriation of net profit Taxation payable on profit p Amounts written off as goodwill p Preliminary expenses p Retained profit from last year/after next year p Dividends p Transfer to/(from) reserve p 33

Taxation payable on profits Profit tax is not an expenses, it is an appropriation of profits p However, for the purpose of presentation and to make the accounts more understandable, it is not shown with the other appropriation p 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) p 34

Amounts written off as goodwill Goodwill, in a company, may have been written off it from time to time. p When this is done, the amount written off should be shown in the appropriation account p 35

Preliminary expenses When a company is formed, there are many kinds of expenses concerned with its formation p These include, for example, legal expenses and various government taxes p These cannot be shown as an asset in the balance sheet, and can be charged to the appropriation account p 36

Retained profit to next year/ from last year All profits may not be appropriated during a period p This then will be balance on the appropriation account as brought forward from the previous year or carried forward to next year p 37

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 p Dividend can be divided into: p n n Interim/paid dividend Final/proposed dividend 38

Interim/Paid Dividend Interim dividend is the paid dividend to the shareholders in the middle of the financial year p The amount of interim dividend will be subject to the performance of the business in the first half of the financial year p 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 39

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 p 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 p 40

Descriptions Book-keeping entries Transfer proposed Dr Profit & loss dividend to appropriation account Cr Proposed dividend * Proposed dividend will be shown in balance sheet under the heading of current liabilities 41

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 p Revenue reserve can be transferred back to appropriation account for dividends purposes in the future financial period p 42

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 43

Example Trial Balance as at 31 Dec 2000(extract) Dr 400000 ordinary shares of $0. 5 each, fully paid 250000 10% preference shares of $1 each, fully paid General reserves Interim ordinary dividend 5000 Interim preference dividend 8000 Cr 200000 250000 15000 Additional information: • The director proposed a final dividend of $0. 05 per ordinary share • The director resolved to transfer $5000 to the general reserve 44

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 - final (400000*0. 05) Transfer to general reserve Balance Sheet as at 31 Dec 21 -1 Less: Current Liabilities Dividend owning(17000+20000) Dividend not yet paid to shareholders 5000 20000 5000 $ $ 37000 45

Bonus Shares/Script Issue Bonus shares are ‘free’ shares issued to shareholders without any cash being paid for them p The reserves are utilised for the purpose p The accounting entry is: p n n Dr Reserve/Share premium/Retained earnings Cr Ordinary share capital 46

Example $ 20000 120000 Ordinary Share Capital of $1 each Reserves 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) Cr Ordinary share capital ÞOrdinary share capital (20000+5000) Reserve (12000 -5000) $5000 25000 7000 47