Introduction to Company
Accounts and Issue of Shares and
Debentures
1
Companies
Unlimited Companies
Limited Companies
Authorized Capital
Issued Capital
Called up Capital
Share Capital
Preference Share
Other Funding
Ordinary Share
Debenture
Reserves
Issue of shares and debenture
Revenue Reserve
Capital Reserve
Paid Up Capital
Price:
- at par
- at premium
- at discount
Payment:
- Payable in full
- by instalments
2
Introduction
A limited liability company is a legal entity
and the existence of the limited liability
companies
The owners of a limited liability company will
be named as “members” or “shareholders” of
the company
Each company is governed by two
documents, known as the Memorandum of
Association and the Articles of Association
3
Types of Limited liability companies
A. Unlimited Company
- Companies do not have limited liability.
B. Limited Company
-
The liability of a company can be limited by shares.
-
A limited company has a separate legal personality.
This means that it can sue or enter into contracts in its
own name.
4
Types of Limited Liability Companies
There are two types of limited liability companies as follows:
(I) Public Limited Company
(II) Private Limited Company
Descriptions
Public Limited Company
Share Transfer
Private Limited Company
No restriction
Restriction
Number of Shareholders
No restriction
(2 to unlimited)
Restriction
(2 to 50)
Raising fund from Public
No restriction
Shares can be traded on
Stock Exchange or not
Yes
Restriction
No
5
Distinction between Partnerships and Limited Liability Companies
Description
Partnerships
Limited Companies
Number of Members
2 to 20 (except in certain professional
business)
2 to Unlimited (except private limited
companies up to 50)
Liabilities of Members
Unlimited liability of each partner
(except Limited Partners)
Limited liability of each shareholder
to their agreed amounts of contributions
on their shares held
Amount of Capital
Stated in the Partnership Agreement
and subject to each partner’s
financial resources
Restricted to the amount of Authorized
Capital
Management of the
Business
Partners are entitled to take part in
the operations of the business
Directors are appointed on behalf of
shareholders to manage the business
Distribution of
Profit
Profits and losses are shared to
each partner in their agreed profit
and loss sharing ratio
By way of dividend, profits are shared
to shareholders in respect of their
shares held
Part of the profits may be
unappropriated and retained by the
company for future business purposes
6
Classification of Capital
Authorized Capital
Authorized Capital is the total number of shares and the total amount of Share
Capital which a limited liability company is allowed to issue and it is stated in the
Memorandum of Association. Authorized Capital may be changed and increased
to cope with the growth of the company by the approvals of the shareholder
Issued Capital
Issued Capital is the part of the Authorized Capital actually issued to the shareholders.
Called-Up Capital
Called-Up Capital is the amount of the Issued Capital that the limited liability
companies request their shareholders to pay.
Paid-up Capital
Paid-up capital is the actual amount received from the Called-Up Capital.
The amounts of the Called-Up Capital which has not yet been received will be named
as “Calls in Arrears”. Calls in Advance”refers to the advance payment of the
Un-called Capital from the shareholders.
7
Types of Share Capital
A. Preference Shares
Preference shareholders are entitled to fixed % of dividends before any ordinary
dividends are paid.
No voting rights.
I) Cumulative preference shares
Any unpaid dividends on cumulative preference shares can be carried forward
to a later year.
II) Non-cumulative preference shares
the unpaid dividends cannot be carried forward to later years.
B. 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 claims have been met.
- Ordinary shareholders usually have voting rights.
8
Example: Cumulative preference shares
Net Profit / (Loss) for the year before
appropriations
Year 1
$
Year 2
$
Year 3
$
(1,000)
(2,000)
50,000
Nil
1,500
5,000 10% Cumulative Preference
Shares of $1 each
Dividend
Nil
9
Example: Non-cumulative preference shares
Net Profit / (Loss) for the year before
appropriations
Year 1
$
Year 2
$
Year 3
$
(1,000)
(2,000)
50,000
Nil
Nil
5,000 10% Cumulative Preference
Shares of $1 each
Dividend
500
10
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 claims (e.g,
loan interest and preference share dividends ) have been met.
- Ordinary shareholders usually have voting rights
11
Other Means of Funding
A. Debentures
Debentures are long-term loans evidenced by deeds which set out the rate of
interest payable and the date of redemption.
B. 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 and capital reserves.
I) Revenue reserves
- They are undistributed trading profits.
- They can be used to pay dividends.
- Examples are the balance on the profit and loss account and general reserve.
II) Capital reserves
- They are gains or profits arising from non-trading or non-operating activities.
- They are not available for distribution as dividends.
12
- e.g.
1. Share premium
a) to write off preliminary expenses
b) to write off expenses of issuing shares
c) to write off commissions paid and discounts on shares
d) to pay up a bonus issue
e) to provide premium on redemption of debentures.
2. Revaluation reserve
This is the unrealized gain from an increase in the value of an asset after
revaluation.
3. 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.
13
Distinction between Shares and Debentures
Description
Ordinary Shares
Preference Shares
Debentures
Relationship between the
holders and the company
Members/Shareholders
of the company
Member/Shareholders
of the company
Creditors of the
company
Dividends/Interest
No fixed percentage
or amounts of dividends
The dividends will be
subjected to the
profitability and
dividends policy of the
company
A fixed rate of dividends A fixed rate of
interest will paid
whether or not the
company makes a
profit
Priority of Distribution
After the distribution
of the dividends to
Preference Shareholders
Before to Ordinary
Shareholders
Before any dividend
distributable to
Ordinary and Preference
Shareholders
Treatment in Balance
Sheet
Ordinary Share Capital
Preference Share
Capital
Treated as a long term
liability if the period of
repayment is longer than
one year
Treated as a current liab.
If repayment < 1 yr.
14
Raising of Capital-Issue of shares and
debentures
Issue Price
Issue at Par
-The issue price is same as the “PAR”, “NOMINAL” or “FACE” value of the shares
and debentures.
Issue at a Premium
-The issue price may be HIGHER than the par value of the shares and debentures.
The difference between the issue price and the par value of the shares or debentures
is named as “SHARE PREMIUM”
Issue at a Discount
-The issue price may be LOWER than the par value of the shares and debentures.
The difference between the issue price and the part value of the shares or debentures
is named as “SHARE DISCOUNT’
15
Methods of Payment
Payment in Full
Payable by instalments
16
Payment in full
The full amount of the issue price of the shares and debentures should be
paid to the company on application whether or not the applicants will allot the
shares and debentures.
17
Descriptions
Accounting entries
Application Monies Received
Dr. Bank
Cr. Ordinary Share Applicants
*”No. of Application” X “Issue Price”
Issue of Ordinary Shares Capital
(a) Issue at Par
Dr. Ordinary Share Applicants
Cr. Ordinary Share Capital
•“No of Shares Actually Issued” X “Par
Value of Each Share”
(b) Issue at a Premium
Dr. Ordinary Share Applicants
Cr. Ordinary Share Capital
Cr. Share Premium
* “No. of Share Actually Issued” X “Par
Value of Each Share” will be recorded in
Ordinary Share Capital
* “No. of Shares Actually Issued” X “The
Value of Share Premium per
Each Share” will be recorded in Share
Premium
18
Descriptions
Accounting entries
( c)
Issue at a Discount
Dr. Ordinary Share Applicants
Share Discount
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” X “Par Value
of Each Share” will be recorded in Ordinary
Share Capital
* “No. of Shares Actually Issued” X “The Value
of Share Discount per Each Share” will be
recorded in Share Discount
Refund of Oversubscribed
Dr. Ordinary Share Applicants
Cr. Bank
* “No. of Application Oversubscribed” X “Issue
Price”
19
Payable by instalments
The full amount of the issue price of the shares and debentures will be paid to the
company by instalments
in following steps:
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Receipt of application money
Return of application money to unsuccessful applicants
Allotment of shares
Receipt of allotment money
Call on shares
Receipt of call money
These steps are demonstrated in the following example:
20
Descriptions
Accounting entries
Application Monies
Received
Dr. Bank
Cr. Ordinary Share Applicants
* “No. of Application” X “Issue Price”
Issue of Ordinary Shares (a) Issue at Par
Dr. Ordinary Share Applicants
Capital
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” X “Par Value of
Each Share”
(b) Issue at a Premium
Dr. Ordinary Share Applicants
Cr. Ordinary Share Capital
Cr. Share Premium
* “No. of Share Actually Issued” X “Par Value of
Each Share” will be recorded in Ordinary Share
Capital
* “No. of Shares Actually Issued” X “The Value of
Share Premium per Each Share” will be recorded in
21
Share Premium
Descriptions
Accounting entries
( c ) Issue at a Discount
Dr. Ordinary Share Applicants
Share Discount
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” x “Par Value of
Each share” will be recorded in Ordinary Share
Capital
* “No. of Shares Actually Issued” x “The Value of
Share Discount per Each Share” will be recorded in
Share Discount
Refund of Oversubscribed Dr. Application and Allotment
or Rejected Application
Cr. Bank
Monies
* “No. of Application Oversubscribed or Rejected” x
“Issue Value of Application”
22
Descriptions
Accounting entries
Allotment Monies
Received
Dr. Bank
Cr. Application and Allotment
* “No. of Share Actually Issued” X “Issue Value at
Allotment”* Sometimes, oversubscribed application
monies may be carried forward and offset against the
allotment monies due.
The difference between original allotment monies
received and oversubscribed application monies will be
recorded in these entries
Issue of Ordinary
Shares at Call
Dr. Call
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” x “Par Value of Each
Share at Call” will be recorded in Ordinary Share
Capital
23
Descriptions
Accounting entries
Call Monies Received
Dr. Call
Cr. Ordinary Share Capital
* “No. of Shares Actually Issued” x “Par Value of Each
Share at Call” will be recorded in Ordinary Share
Capital
24
Example 1
25
Example 1
Tai Fat Limited made a public offering of its 1,700,000 ordinary shares of $1
each at $1.4 per share. The shares were issued on the following terms:
Application
Allotment
First and final call
Per share
$
0.3
0.6
$1.4
0.5
•On 1 February 1997, applications for 3,000,000 shares were received.
•Applications for 300,000 shares were unsuccessful and the money involved was
returned on 3 February 1997.
•Applications for 700,000 shares were given full allotment.
•The remainder of the available shares were allotted among the other applicants on
a pro-rata basis.
•The balance of the sums received on application was applied to the amounts due
on allotment.
•The balances due on allotment were received on 1 March 1997.
•On 1 April 1997, the first and final call was made and paid in full.
Bank
Application and Allotment
900,000 Application and Allotment
Application and Allotment
720,000
First and Final Call
850,000
Application and Allotment
Bank
(300,000*$0.3)
Ordinary Shares
(1,700,000*$0.5)
Share Premium
(1,700,000*$0.4
)
Balance c/f
Balance c/f
Ordinary Shares
90,000
850,000
90,000
Bank
900,000
(3,000,000*$0.3)
Bank
720,000
(1,700,000*$0.6-1,000,000*$0.3)
680,000
1,620,000
Ordinary Shares
1,700,000
Application and Allotment
First and Final Call
1,700,000
Share Premium
680,000 Application and Allotment
First and Final Call
850,000 Bank
1,620,000
850,000
850,000
1,700,000
680,000
850,000
Journal
Dr
$
Cr
$
1. Bank (3,000,000 X $0.30)
900,000
Application and Allotment
900,000
Being money received for 3,000,000 shares on application
2. Application and Allotment
90,000
Bank (300,000 X $0.3)
Being return of application money to unsuccessful applicants for
300,000 shares
3. Application and Allotment ($0.9 X 1,700,000)
Ordinary Shares ($0.5 X 1,700,000)
Share Premium ($0.4 X 1,700,000)
Being allotment of 1,700,000 ordinary shares
4. Bank (1,700,000 X $0.60 - 1,000,000 X $0.30)
Application and Allotment
Being receipt of the amount due on allotment
90,000
1,530,000
850,000
680,000
720,000
720,000
28
Journal
Dr
$
5. First and Final Call
Ordinary Shares (1,700,000 X $0.5)
Being call on shares
850,000
6. Bank
850,000
First and Final Call
Cr
$
850,000
850,000
29
Forfeiture and Reissue of Shares
If a member fails to pay the calls
requested from him, the directors may
declare the shares as the ‘ Forfeited
Shares’ and reissue the shares to
another shareholder
30
Descriptions
Accounting entries
Declaration of
Forfeited Shares
(a) Forfeited Shares were Declared when they were
not paid
Dr. Bank
Forfeited Shares
Cr. Application and Allotment, OR Call
* “No. of Shares Declared as Forfeited” x “Issue Value at
that Stage” will be recorded in Forfeited Shares.
(b) Forfeited Shares were NOT Declared when they
were not paid
Dr. Bank
Allotment / Call in Arrears
Cr. Application and Allotment, OR Call
* “No. of Shares Unpaid” x “Issue Value at that Stage” will
be recorded in Allotment / Call in Arrears
Unpaid Value Declared as Forfeited Shares
Dr. Forfeited Shares
Cr. Allotment / Call in Arrears
Transfer the Value of Allotment / Call in Arrears to
Forfeited Shares
31
Descriptions
Accounting entries
Transfer the call-up value
of Forfeited share from
issued share capital to
Forfeited shares
Dr. Ordinary Share Capital
Cr. Forfeited Shares
*”No. of shares Declared as Forfeited” x “Call-up
value of Shares Forfeited” will be transferred to
Forfeited Shares
Transfer the called-up value
of Forfeited share from
issued share capital to
Forfeited shares
Dr. Ordinary Share Capital
Cr. Forfeited Shares
*”No. of shares Declared as Forfeited” x “Call-up
value of Shares Forfeited” will be transferred to
Forfeited Shares
Reissue of Forfeited Shares Forfeited Shares are “NOT Reissued”
or not
Dr. Forfeited Shares
Cr. Share Premium
Any paid amount of the Forfeited Shares will be
transferred to the Share Premium
Forfeited Shares Account is closed
32
Descriptions
Accounting entries
Reissue of Ordinary Shares
Dr. Forfeited Shares
Cr. Ordinary Share Capital
* “No. of Shares Reissued” x “Called-up value of
shares forfeited” will be recorded in Ordinary Share
Capital
Receipts from the reissue of Dr. Bank
shares
Cr. Forfeited Shares
*”No. of shares Reissued” x “Issue Value of Each
Reissued Share”
Transfer of the excess
amount over the called-up
nominal value of the shares
reissued
Dr. Forfeited Shares
Cr. Share Premium
Any balance of the Reissue of Forfeited Shares will
be transferred to
the Share Premium
33
Example 2
34
Example 2
Tai Cheong Limited made a public offering of its 1,000,000 ordinary shares of $1
each at $1.5 per shares
The shares were issued on the following terms:
Per share
$
Application
0.6
Allotment on 1 April 1997
0.2
$1.5
First call on 1 June 1997
0.5
Final call on 1 September 1997
0.2
On 1 March 1997, applications for 1,000,000 shares were received. They were given
full allotment. All sums due on received on 10 April 1997. All money for the first
call was received on 10 June, except for one shareholder who had been allotted
1,000 shares.
Case 1
All money for the final call was received on 15 September 1997, except for the
shareholder who failed to pay the first call. The directors had not declared the shares
forfeit by 31 December 1997.
Case 2
All money for the final call was received on 15 September 1997. Except for the
shareholder who failed to pay the first call. The directors declared the shares
forfeit on 1 October 1997.
Case 3
The directors declared the shares forfeit on 1 July 1997. On 1 August 1997,
600 shares were reissued for $0.9 each, subject to a final call. On 1 September 1997,
the directors made the final call and all sums due
were received.
36
Case 1
37
Case 1
Application and Allotment
Apr 1 Ordinary Shares
(1,000,000*$0.3)
Apr 1 Shares Premium
(1,000,000*$0.5)
300,000 Mar 1
500,000
Bank (1,000,000 X $0.60)
600,000
Apr 10 Bank (1,000,000 X $0.20)
200,000
800,000
800,000
Ordinary Shares
Apr 1
Application and Allotment
300,000
Share Premium
Dec 31
Balance c/f
Mar 1 Application
Apr 15 Allotment
500,000
Apr 1
Application and Allotment
500,000
Bank
600000
200000
38
First Call
June 1
Ordinary Shares
500,000
June 10
Bank (1,000,000 - 1,000) x $0.5 499,500
June 10
Calls in Arrears
500
500,000
500,000
Final Call
Sep 1
Ordinary Shares
200,000 Sep 15
Sep 15
Bank (1,000,000 - 1,000) X $0.2 199,800
Calls in Arrears
200,000
200
200,000
Calls in Arrears
June 10 First Call
Sep 15 Final Call
500 Dec 31
200
700
700
700
Bank
Mar 1 Application
Apr 15 Allotment
June 1 First call
Final call
600000
200000
499500
199800
39
Ordinary Shares
Apr 1
Application and Allotment
June First call
Sept 1 Final call
300,000
500000
200000
Balance Sheet as at 31 December 1997 (Extract)
$
Current Assets
Called-up Capital not yet paid
Share Capital
Issued and Fully Paid
1,000,000 Ordinary Shares of $1 each
Reserves
Share Premium
700
1000000
500000
40
Case 2
41
Case 2
Ordinary Shares
Oct 1 Forfeited shares (1000*$1) 1000 Apr 1 Application and Allotment 300,000
June First call
500000
Dec 31 Bal c/d
999000
Sept 1 Final call
200000
1000000
June 10 First Call
Sep 15 Final Call
1000000
Calls in Arrears
500 Oct 1 Forfeited shares
200
700
700
700
Forfeited shares
Oct 1
Call in Arrears
Dec 31 Bal c/f
700 Oct 1 Ordinary shares
300 (1000*$1)
1000
1000
1000
42
Balance Sheet as at 31 December 1997 (Extract)
Share Capital
Issued and Fully Paid
999,000 Ordinary Shares of $1 each
Reserves
Share Premium
Forfeited Shares
999000
500000
300
43
Case 3
44
Case 3
July 1
Dec 31
Forfeited Shares
(1,000 x $0.80)
Balance c/f
Ordinary Shares
800
Apr 1
June 1
999,600 Aug 1
Sept 1
1,000,400
Application and Allotment
First Call
Forfeited Shares (600 x $0.80)
300,000
500,000
480
Final Call (999,600 X $0.2)
199,920
Reissue
1,000,400
Share Premium
Dec 31
Balance c/f
500,240
Apr 1
Application and Allotment
500,000
Aug 1
Forfeited Shares
240
500,240
500,240
Calls in Arrears
June 10
First Call
500
July 1 Forfeited Shares (1000*$0.5)
500
Forfeited shares
July 1 Calls in arrears
Aug 1 Ordinary shares (600*$0.8)
Aug 1 Share premium
Dec 31 Bal c/d
500 July 1 Ordinary shares (1000*$0.8) 800
480 Aug 1 Bank (600*$0.9)
540
240
120
1340
1340
45
Final call
Sept 1 Ordinary shares
(999600*$0.2)
199920 Sept 15
Bank
199920
Bank
Mar 1 Application
Apr 10 Allotment
June 10First call
Aug 1 Forfeited shares
Sept 15 Final call
600000
200000
499500
540
199920
*Amount transferred to share premium:
Receipt from original holder (600*$0.8)
Less: Share premium (600*$0.5)
Add: Receipt from second holder (600*$0.9)
Less: Called-up nominal value (600*$0.9)
480
300
180
540
720
480
46
240
Balance Sheet as at 31 December 1997 (Extract)
Share Capital
Issued and Fully Paid
999,000 Ordinary Shares of $1 each
Reserves
Share Premium
Forfeited Shares
999600
500240
120
47
Right issue
Right issue is an offer to the existing
shareholders to subscribe for more
shares, in proportion to their existing
shareholding, usually at a relatively
cheap price.
48
Bonus issue
Bonus shares are issued when there is a build-up of
reserves (e.g. undistributed profits) in the company.
Those profit will often not be represented by cash, since
the profits have been invested in other assets to expand
the business.
It is done by changing the company’s reserves into share
capital and allotting shares to existing shareholders por
rata, e.g. one share for every two shares held
This decrease the amount of retained earnings and
increases the share capital. There is no entry on cash or
bank account because mp cash changes hands, the
bonus shares are issued free.
Dr. Profit and Loss (retained earnings) account
Cr. Share Capital account (with the nominal value of shares
allotted as fully paid bonus shares)
49
Debenture
A debenture is a written acknowledgement of
debt.
Debenture are long-term loans which attract
a large number of investors.
The terms of debentures such as the rate of
interest payable, the date of redemption (if
applicable) and security given by the
borrowing company are governed by a trust
deed
50
Issue of debenture
The accounting treatment of debenture
is the same as that of shares, except for
the change in the name of the accounts
Debenture may be issued payable in full
or payable by instalments
Debenture can be issued at par, at
premium or at a discount
51
52
53
54
55
Better Enterprises Ltd was formed with the legal right to be able to
issue 100,000 shares of $1 each.
The company has actually issued 75,000 shares.
None of the shares has yet been fully paid up. So far the company
has made calls of $0.80 per share.
All the calls have been paid by shareholders except for $200
owing from one shareholder.
Authorised share capital =
Called-up capital =
Paid-up capital =
Issued share capital =
Calls in arrear =
$1,000,000
$75,000
$60,000
$200
59,800
57