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7 - Intro To Company Accounting

This document provides an overview of key aspects of company accounting for limited liability companies. It discusses the statutory regulations governing companies, types of shares (ordinary, preference, redeemable, irredeemable), stated capital, reserves, appropriations of profit including dividends, and market valuation of shares listed on a stock exchange. The document is intended to outline some of the fundamental differences in accounting treatment between companies and other business organizations.

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25 views

7 - Intro To Company Accounting

This document provides an overview of key aspects of company accounting for limited liability companies. It discusses the statutory regulations governing companies, types of shares (ordinary, preference, redeemable, irredeemable), stated capital, reserves, appropriations of profit including dividends, and market valuation of shares listed on a stock exchange. The document is intended to outline some of the fundamental differences in accounting treatment between companies and other business organizations.

Uploaded by

surangauor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Company accounting

1
Fundamental difference from other
organizations
• National legislation- governing the limited liability
company is very extensive.
• Require minimum accounting records to be
maintained.
• Requires minimum information to be disclosed in
company accounts
• Owners of a company (members /shareholders) may
be very numerous.
• Businesses which are not limited liability companies
(non-incorporated businesses) often enjoy comparative
freedom from statutory regulation.
2
Limited and unlimited liability
• Unlimited: liable for the unpaid debts if the
business runs up debts that it is unable to pay.
Owners will become personally liable for the
unpaid debts.
• Limited: Limited liability to the owners. In the
event that the company becomes insolvent
and cannot pay off its debts, the maximum
amount that an owner stands to lose is
his/her share of capital in the business.
3
Stated capital
The capital of limited liability companies

• Shares are denominated in units of R. 1, Rs.2, Rs.


10 or whatever seems appropriate.
• New Companies Act:
– There is nothing called a authorised capital or par
value or nominal value.
– The issue prices of shares are determined by the
directors.
 Section 58: the stated capital of a company means
monies received on the share issued and monies
received , and receivable on calls.(defined as called up
capital).
4
Ordinary shares and preference shares
• Preference shares:
• Priority right over ordinary shareholders for
dividend
• Carry no right to vote
• If cumulative, unpaid dividends in previous years
should be paid before ordinary shareholders
• Classification of preference shares:
 redeemable
 irredeemable
5
Redeemable preference shares
• Treated like loans and included as non-current
liabilities (Long-term liabilities).
• Reclassify as current liabilities if the
dedemption is due within 12 months
• Dividends paid on these shares are treated
like interest paid on loans and are included in
financial costs.

6
Irredeemable preference shares
• Treated like other shares.
• Form part of equity
• Dividends are treated as appropriations of
profit.

7
Ordinary shares
• Most common type of share
• No right to a fixed dividend
• Entitled to all profits left after payment of any
preference dividend (though part of such remaining is
distributed)
• Rest is kept in reserve
• Voting right
• If the company is wound up, any surplus not
distributed is shared between the O/S
• Effective owners of the company
• Known as equity shareholders

8
Market value of shares

• Transfer of existing shares does not affect


company’s own financial position
• Only changing the register of members.
• No accounting is made for the sale of shares
• Companies listed on a stock exchange are quoted.
• It is the market value of the shares which is
quoted.

9
Reserves
• Shareholders’ equity:
– The value of stated capital (less arrears)
– Other equity
• Revaluation surplus
• General Reserves
• Retained earnings
• Revaluation surplus: unrealized profits on the revalued non-
current assets, non-distributable, kind of capital reserve
• Reserve: Statutory reserves & Non-statutory reserves

10
Reserves…… cont’d
• Statutory reserves:
Required to set up by law, not available for the distribution of
dividend (Capital reserves – revaluation surplus)
• Non-statutory reserves:
– Revenue reserves (profits that are distributable as dividends)
– Company directors may set up these reserve for a specific
purpose ( Plant & Machinery replacement reserve) or general
purpose (General reserve)
– This is usually set up with the intention not to distribute the
profits involved at any future date.
– However, it is legally available for the payment of dividend,

11
Appropriations of profit

12
Dividends
• Appropriations of profit after tax
• Interim dividend (mid year) & final dividend (year end)
• Only the sum of dividends actually paid for the year is included in the
financial statements. ( shown in the Statement of changes of equity,
not in the Profit or Loss, though they are deducted from the
RETAINED EARNINGS in the STATEMENT OF FINANCIAL POSITION)
• Final dividend:
– At the end of the year, directors of the company may propose a
final dividend payment.
– These dividends are not yet paid during the year.
– These proposed dividends do not appear in the accounts.
– This is disclosed in the NOTES as per LKAS 10: Events after the
reporting period)
– Proposed dividends are NOT adjusted for, but simply disclosed
by NOTES 13

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