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COMPANY
ACCOUNTS
Chapter 17.
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Company vs. Sole
trader
Sole trader
Company
Business: SAME
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Limited liability company
Sole trader
Separate legal
entity
A limited company is a separate legal A sole trader is legally not separate
entity, i.e. in the eyes of the law it is a from his business even though he is
person in its own right and is distinct treated as such for accounting
from its owners.
purpose
Liability
A company is fully liable for its own debts.
This means that if the company goes into
liquidation, the owners (shareholders) of the If a sole trader goes into liquidation
company are liable only for amounts that then he is personally liable for any
they have not yet paid for their shares. Thus outstanding debts of his business.
the shareholders are said to have limited
liability.
Ownership and
management
A company is owned by shareholders. The
managers of the company are called
directors and are appointed by the A sole trader is generally both the
shareholders. The directors may or may not owner and manager of his or her
be shareholders in the company. Thus most business.
shareholders do not play a part in the day-today running of the company.
Formalities
Formalities involved vary from country to
country, but frequently require public No such formalities exist for sole
availability of financial statements and an traders.
annual audit by qualified auditors.
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Regulation
• We already know: accounting is regulated
Sole trader
Companies
Sole trader: usually
the tax records are
regulated, the rest is
"common sense"
There are outsiders!
So we need a
regulator to set out
the rules!
IFRS
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Presentation
The game is the same (transactions happen the same)
The company has limited liability
EXTERNAL interest
The information "minimum" must be regulated
IAS 1: Presentation of
financial statement
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FINANCING
SHARE CAPITAL
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Share capital types
Types
Ordinary shares
‣ Carry voting rights
‣ Shareholders receive
Preference shares
a
dividend at the discretion of
the company directors.
‣ Dividend is paid out of
profits after the preference
shareholders
receive
dividends
‣ Do not generally carry
voting rights
‣ Shareholders receive a fixed
dividend (%*nominal)
‣ Dividend is paid out of
profits in priority
Cumulative
Non-cumulative
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Share capital
values
• Nominal (par) value
• Issue price: it may exceed the nominal value. The difference is
called the premium
• Market value: it may fluctuate. The market value will change
from time to times.
Share
premium
Issue price
Nominal
(par) value
Issued
capital
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Other
terminology
Authorized
share capital
Issued share
capital
Called-up
share capital
Paid-up
share capital
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Issues
• Right issues: when new shares are issued to the existing
shareholders, normally below market value (accounted like
normal issues)
• Bonus issues: a previous shareholder gets extra share for "free".
One of the reserve will be transferred to Share capital.
Share
premium
Issued
capital
Issued
capital
Dr. Share premium
Cr. Issued capital
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Bourbon issues 200,000 25c shares at a price of $1.75 each.
Show the relevant entries in the journal!
Upon incorporation in 20X4, The Jammy Dodger, a limited liability company,
issues 1,000 50c shares at nominal value. Needing further funds, in 20X5 it
makes a rights issue of 1 for 5 at $0.75. This offer is fully taken up.
What accounting entries are required in 20X4 and 20X5? Illustrate the relevant
section of the statement of financial position at year end 20X5!
Ginger Knut, a limited liability company, has 20,000 50c shares in issue (each
issued for $1.25) and makes a 1 for 4 bonus issue, capitalizing the share
premium account.
What are the balances on the share capital and share premium accounts after
this transaction?
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Dividends
• Dividends are the share of profit paid out to shareholders
• Dividends on preference shares are a fixed amounts
• Dividends expressed as an amount per share
Dr. Dividends
X
Cr. Bank/Payables
X
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Dividends
proposed vs.
Dividends
declared
Management
Proposed
ONLY
disclosed
Dividends
Owners
(AGM)
Declared
Recognized
(booked)
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