Chapter 3: Accounting for Companies

==============================================
 A company is a business owned by a group people called
shareholders
 Shareholders earn a return called Dividends
 Share capital is thus the capital raised from shareholders

There are two types of shares:

 Preference shares and
 ordinary shares.

Structure of financial statement

The Statement of financial position of a company is unique only at the
equity section.. The Equity section of Statement of Financial Position
show the following;
 Preference share capital
 Ordinary share capital and
 Reserves

Reserves
 These are funds that the business sets aside for purposes of future
financial obligations.
There are two types of reserves;
 Revenue reserves:
 Capital reserves:

Revenue Reserves
These reserves can be distributed to the shareholders. They include
 Retained profits/loss (the balance after appropriation) and
 General reserves

Capital Reserves
These reserves are not distributable to the shareholders. They include :
 Share premium (representing the amount paid on the issued shares
above their par value);
 Revaluation reserve (representing the amounts by which assets
appreciate after valuation is done) and

1 | FA 2 notes
  Capital redemption reserve fund (representing the amount
transferred from the retained earnings to finance the redemption
of preference shares or debentures).
Income statement
The income statement for a company is unique in the following ways;
 It includes unique expenses director’s remuneration and audit fee.
 Companies are also required to pay tax on the profits.
 It includes an extra section which shows how the profits made by
the company are distributed or appropriated.
 Statement of financial position

The Statement of financial position of a company is unique only at the

equity section

Format Statement of income is as follows:

XYZ LTD
Statement of Income for the period ended 31 December 202X

Revenues:
Sales xx
Less: Return inwards (xx)
Net sales xx
Less: Cost of Sales
Opening inventory xx
Add: Carriage inwards xx
Less: Return outwards (xx)
Less: closing inventory (xx)
xx
Gross profit xx
Add :Other incomes xx
Discount received xx
Profit on disposal of assets xx
Income from investments xx
Interest received from bank xx
Less: Expenses
Administrative expenses xx
Operating expenses xx

2 | FA 2 notes
 Selling and distribution expenses xx
Debenture interest xx
Audit fees xx
Directors remuneration xx
Total expenses xx
Net profit for the period before tax
Less: Corporation tax (xx)
Net profit for the period after tax
Add :Retained profit b/d xx
Less: Transfers to General reserves
Less: Interim paid :
Preference dividend (xx)
Ordinary dividend (xx)
Less: Final proposed
Preference dividend (xx)
Ordinary dividend (xx)
Retained profit c/d xx
241
SStatement of Financial Position
The Statement of financial position of a company is unique only at the
equity section.

Format of the statement of financial position is as follows:

XYZ LTD
Statement of Financial Position as at 31 December 202X
Non-current assets COST ACC. DEP NBV
Land and buildings xx (xx) xx
Plant and equipment xx (xx) xx
Furniture and fittings xx (xx) xx
Motor vehicles xx (xx) xx
xx
Current Assets
Inventory xx
Accounts receivable xx
Less: Provision for doubtful debts (xx) xx
Prepayments xx
Short term investments xx
Cash at bank xx
Cash in hand xx

3 | FA 2 notes
 xx
Total Assets Y T E X T xx
Financed by:
Equity:
Authorized share capital
1,000,000 ordinary shares of Sh 1 each xx
1,000,000 preference shares of Sh 1 each xx
Issued and fully paid
800,000 ordinary shares of Sh 1 each xx
500,000 10% preference shares of Sh 1each xx
Capital reserves
Share premium xx
Revaluation reserve xx
Capital redemption reserve xx
xx
Revenue reserves
General reserve xx
Retained profit/loss xx
Total equity xx
Non-current liabilities:
10% debentures xx
Current Liabilities:
Bank overdraft xx
Creditors xx
Accruals xx
Tax payable xx
Dividends payable xx
xx
Total equity and current liabilities xx

4 | FA 2 notes
Example 1

Toshiba Enterprises Ltd is a medium sized company operating in

Industrial area, Nairobi. The company’s accountant has extracted the
following unadjusted trial balance for the period ended 31th December
2023.

Accounts Sh.‘000 Sh.‘000

Premises 34,000
Machinery (cost Sh. 78Million) 70,000
Furniture (cost Sh. 44 Million) 32,000
Ordinary share @ Sh. 10 50,000
10% Preference shares @ Sh. 100 10,000
9% Debenture 12,000
General Reserves 6,900
Retained profit 4,330
Inventory 11,530
Purchases/Sales 137,112 259,843
Account receivable/payable 54,680 42,530
Bank 299
Carriage in 106
Carriage out 168
Provision for doubtful debts 1,640
Administration cost 42820
Operating cost 1878
Bad debts expense 370
Returns 112 144
Debenture interest 810
interim dividends:ordinary (4%) 2,000
interim dividends:preference (5%) 500
Discounts 550 950
TOTALS 388,636 388,636

Additional information
1) The authorized share capital is 10,000,000 ordinary shares of Sh 10
each and 1,000,000 preference shares of Sh 100 each. The issued and
5 | FA 2 notes
 fully paid 5,000,000 ordinary shares of Sh 1 each and 100,000 10%
preference shares of Sh 100 each.
2) The operating cost include an amount of Sh. 56,000 for insurance
which relates to the four months ending March 2024
while December 2023 salaries were paid on 5th January 2024 for
Sh. 387,000
3) Inventory on 31.12.2023 were valued at Sh. 11,890, 000
4) Depreciation is to be provided on the furniture and fitting at 15%
using the normal reducing method and to Machinery at 10% using the
straight line method.
5) The directors have decided to provide a final dividend of 6% on the
ordinary shares and the balance due to the preference shares. They
have also decided to transfer profits of Sh. 1 million to General
reserves.
6) The provision for doubtful debts is to be provided at 5% of accounts
receivables.
7) The company usually makes annual provisions of Sh. 450,000 and
Sh. 3 million for audit and directors fees respectively.
8) Debenture interest for the last quarter had not been paid
9) A sales and purchase invoice of Sh. 180,000 and Sh. 95,000
respectively had been recorded twice
10) Corporation tax rate is 30%
Required:
a) Statement of income
b) Statement of financial position
c) Statement of changes in equity

6 | FA 2 notes
Example 2
Mwembe Enterprises Ltd is a medium sized company operating in
Industrial area, Mombasa. The company’s accountant has provided you
with the following account balances as at 31 December 2024
Sh. ‘000 Sh. ‘000
Land 160,000
Building 88,500
Machinery (Cost) 34,000
Furniture (Cost) 38,000
Ordinary share each sh.10 65,000
10% Preference shares each 100 15,000
Provision for depreciation: Machinery 12,000
Provision for depreciation: Furniture 15,000
10% Debenture 18,000
Retained profit 4,269
General reserves 5,400
Capital Reserves 9,800
Revaluation Reserves 164,800
Inventory 11,520
Purchases 140,200
Sales 238,120
Accounts receivable 55,790
Accounts payable 38,740
Bank 4,693
Provision for doubtful debts 2,100
Administration expenses 29,128
Operating expenses 22,714
Bad debts expense 760
Debenture interest 1,350
Discounts received 876
Dividends- interim Ordinary 2,000
Dividends- interim Preference 450
TOTALS 589,105 589,105

7 | FA 2 notes
Additional information:
a) The authorized share capital is 10,000,000 ordinary shares of Sh
10 each and 500,000 preference shares of Sh 100 each. The issued
and fully paid 6,500,000 ordinary shares of Sh 1 each and
150,000 10% preference shares of Sh 100 each.
b) The general expense include an amount of Sh. 240,000 for
insurance which relates to the six months ending April 2025
while December 2024 wages unpaid by 31 December 2025 were
Sh. 675,000
c) Inventories on 31.12.2024 were valued at Sh. 10,970, 000
d) Depreciation is to be provided on the Furnitute and fitting at 15%
using the normal reducing method while depreciation is to be
provided on the Machinery at 12% using the straight line method
e) The provision for doubtful debts is to be provided at 10% of
accounts receivables, audit fees at shs. 500,000 and directors
remuneration at shs.1,000,000.
f) Debenture interest for the last quarter year had not been paid
g) A final ordinary dividend of shs.0.50 per share is declared and
was an obligation before the year-end, together with the balance
of preference dividend. Neither dividend was paid at the year-end.
h) Buildings were revalued on December 31, 2022 to shs.95 million.
i) Corporation tax is 30%
Required
i. Prepare the Statement of income
ii. Prepare the Statement of shareholders equity
iii. Prepare the Statement of financial position

8 | FA 2 notes
Exercise
Alpha Enterprises Ltd is a medium sized company operating in Industrial
area, Mombasa. The company’s accountant has extracted the following
unadjusted trial balance for the period ended 31 December 2023
Shs. ‘000’ Shs.‘000’
Issued 100,000 8% Preference shares @shs.100 10,000
Issued 5,000,000 ordinary share @shs 10 50,000
9% Debenture loan 12,000
Accounts receivable/accounts payable 34,500 22,626
Bad debts expense 280
Bank 532
Buildings (cost) 34,000
Carriage in 256
Carriage out 60
Debenture interest expenses 810
Directors fees 356
Discounts 450 760
General expenses 450
Interim dividends: Ordinary (4%) 2000
Interim dividends: preference (5%) 500
Inventory –January1, 2023 970
Freehold Land (cost) 35,000
Plant and equipment(cost) 78,000
Provision for depreciation: Buildings 4,000
Provision for depreciation: plant & equipment 7,200
Provision for doubtful debts 450
Purchases/Sales 38,634 78,200
Retained profit 40,700
Returns 28 106
Salaries expenses 150
Water expenses 130
TOTALS 226,574 226,574

9 | FA 2 notes
Additional information
1) The general expense include an amount of shs. 60,000 for insurance
which relates to the six months ending April 2024
2) December 2023 water bills shs. 80,000 were unpaid by 31st
December 2023
3) Buildings are depreciated using the straight line method. It has a
useful life of a further 40 years.
4) Inventory on 31.12.2023 were valued at shs. 898,000
5) Depreciation is to be provided on the plant and equipment at 10%
using the normal reducing balance method
6) The directors have decided to provide a final dividend of 6% on the
ordinary shares and the balance due to the preference shares.
7) A sales invoice of shs.200,000 issued on December 31, 2023 was
unrecorded
8) The provision for doubtful debts is to be provided at 1% of sales.
9) Debenture interest for the last quarter had not been paid
10) Provide corporation tax rate is 30%, audit fees at shs. 400,000 and
directors fees at shs. 440,000
11) Buildings were revalued on December 31, 2023 to shs.40 million.
12) The authorized share capital is 10,000,000 ordinary shares of Sh 10
each and 1,000,000 preference shares of Sh 100 each.
REQUIRED
(a) Prepare the statement of income
(b) Prepare the statement of shareholders equity
(c) Prepare the statement of financial position

10 | FA 2 notes