Company Accounts
Final Accounts
1
Introduction
Companies are formed and incorporated
under the Companies Ordinance.
 An incorporated company(also called
‘incorporation’) is a legal entity using the
term ‘company’ in its name

2
Advantages of incorporation
An incorporated company is a separate
legal entity which enjoys similar legal
authority to a natural person
 An incorporated company has an unlimited
life
 Ownership of a company can be easily
transferred to new owners
 For a limited company, shareholders’
liability is limited to the amount they have
invested in shares

3
Types of Corporation
Unlimited Company
 Limited Liability Company

4
Unlimited Company

The unlimited company does not have any
limits on the liability of its owners
5
Limited liability company
Company limited by shares
 Company limited by guarantee

6
Company limited by shares
Private Company
 Public company

7
Private Company

According to the Companies Ordinance,
the Articles of Association A private
company contains the following
restrictions:



The maximum number of members is limited
to 50
Prohibited to subscribe for any shares or
debentures to the public
Strict the right to transfer its shares
8
Public company

Unlike the private company, there are no
such restrictions on the public company
9
Listed Company
Listed companies are companies which
have their securities listed on the stock
exchange of Hong Kong
 Apart from the Companies Ordinance,
listed companies are also under the strict
control of other regulations such as
Securities Ordinance etc.

10
Means of funding
Share Capital
 Debentures
 Reserves

11
Types of Share Capital
Preference Shares
 Ordinary Shares

12
Preference Shares
Preference shares are entitled to a fixed
percentage of dividends before any
ordinary dividends are paid
 They usually do not have voting rights
 The different types of preference shares
are:



Cumulative preference shares
Non-cumulative preference shares
13
Cumulative preference shares

Any unpaid dividends on cumulative
preference shares can be carried forward
to a later year
14
Non-cumulative preference shares

If the profits are insufficient to pay the
dividends, the unpaid dividends cannot be
carried forward to later years
15
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 claim (e.g. loan interest and
preference share dividends) have been
met
 Ordinary shareholders usually have voting
rights

16
Debentures

Debentures are long-term loans evidenced
by deeds which set out the rate of interest
payable and the date of redemption
17
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
Capital reserves
18
Revenue reserves
They are undistributed trading profits
 They can be used to pay dividends
 E.g. the balance on the profit and loss
account and general reserve

19
Capital reserves
They are gains or profits arising from nontrading or non-operating activities
 They are not available for distribution as
dividends
 E.g. Share premium, revaluation reserve,
capital redemption reserve and debenture
redemption reserve

20
Share premium
When a company issues shares at a price
above par, the excess amount is called
share premium
 The reserve is restricted to be used in the
following ways:






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
21
Revaluation reserve

This is the unrealized gain from an
increase in the value of an asset after
revaluation
22
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
23
Final Accounts
24
Final accounts

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
25
XX Ltd. Company
Income Statement for the year ended 31 Dec XXXX
Sales
Less: Returns inwards
Less: Cost of Sales
Opening Inventory
Add: Purchases
Add: Carriage inwards
Less: Returns outwards
Less: Closing Inventory
Gross profit
Add: Other revenues
Less: Operating Expenses
Administrative Expenses
Selling and distribution expenses
Finance cost
Other operating expenses
Net profit
Less: Profit Tax
Profit after taxation (PAT)
X
X
(X)
X
X
X
(X)
(X)
X
X
X
X
X
X
X
X
X
(X)
X
26
Add: Retained profit b/f
Less: Appropriations:
Transfer to general reserve
Preference dividend – interim (paid)
- proposed (final)
Ordinary dividend - interim (paid)
- proposed (final)
Retained profit c/f
X
X
X
X
X
X
X
X
X
27
Balance Sheet as at 31 Dec XXXX
Non-currents Assets
Cost
Machinery
X
Furniture
X
Current Assets
Stock
Debtors
Bank
Less: Current Liabilities
Creditors
Proposed dividend
Debenture interest accrued
Provision for taxation
Working Capital
Capital and Reserve
Share Capital
XXXX Ordinary Shares of $1 each
XXXX 8%Preference Shares of $1 each
No. of shares
Par value
Dep
X
X
Net
X
X
X
X
X
X
X
X
X
X
X
X
X
Authorized Issued
X
X
X
X
X
X
28
Reserves
Share Premium
General Reserve
Profit and loss
Long-term Liabilities
10% Debentures
X
X
X
X
X
X
29
Special types of expenses
Debenture interest
 Director’s remunerations/fees/emolument
 Preliminary expenses/formation expenses
 Goodwill written off

30
Debenture interest

The amount of the debenture interest will
be calculated according to the pre-set
percentage of debenture as the interest
expenses of the company
31
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
$
$
Gross profit
Actual debenture interest
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
$
32
Director’s fee/emolument
Directors fee and director’s emolument are
salaries and services charges of the
directors of the limited company
 It will be treated as one of expenses in the
profit and loss account

33
Preliminary expenses/Formation
expenses




They are incurred by an enterprise during the
period prior to the commencement of commercial
operations
These include, for example, legal expenses and
various government taxes
They should be written off when they are
incurred
Pre-operating expenses capitalized in prior years
should be written off against the opening
retained profits as a prior year adjustments
34
Amounts written off as goodwill

According to SSAP(Statement of Standard
Accounting Practice), goodwill should be
amortized over its useful economic life
35
Appropriation of net profit
Profit Tax
 Retained profit from last year/after next
year
 Dividends
 Transfer to/(from) reserve

36
Profit tax
It is shown as a deduction from 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)
 Accounting entries:



Dr. Profit and Loss
Cr. Provision for taxation
37
Example

No under/overprovision of profit tax
Net Profit
Trial Balance as at 31 December 2003
Dr
Cr.
10000
** The profit tax is estimated at $1500 for the year
Solution:
Bal c/f
Provision for taxation
1500
P/L
1500
38
Profit and loss Account for the year ended 31 December 2003
$
Net Profit
10000
Less Profit tax
1500
Profit after tax
8500
Balance Sheet as at 31 December 2003
Current Liabilities
Provision for taxation
$
1500
39
Example

Overprovision of profit tax
Trial Balance as at 31 December 2003
Dr
Cr.
Net Profit
10000
Overprovision of profit tax
300
** The profit tax is estimated at $1500 for the year
Solution:
Provision for taxation
Bal b/f
Bal c/f
1500
1500
P/L
300
1200
1500
40
Profit and loss Account for the year ended 31 December 2003
$
Net Profit
10000
Less Profit tax (1500-300)
1200
Profit after tax
8800
Balance Sheet as at 31 December 2003
Current Liabilities
Provision for taxation
$
1500
41
Example

Underprovision of profit tax
Trial Balance as at 31 December 2003
Dr
Cr.
Net Profit
10000
Overprovision of profit tax
300
** The profit tax is estimated at $1500 for the year
Solution:
Provision for taxation
Bal b/f
300
Bal c/f
1500
1800
P/L
1800
1800
42
Profit and loss Account for the year ended 31 December 2003
$
Net Profit
10000
Less Profit tax (1500+300)
1800
Profit after tax
8200
Balance Sheet as at 31 December 2003
Current Liabilities
Provision for taxation
$
1500
43
Retained profit to next year/ from last
year
All profits may not be appropriated during
a period
 This then will be balance on the
appropriation account as brought forward
from the previous year or carried forward
to next year

44
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
 Dividend can be divided into:



Interim/paid dividend
Final/proposed dividend
Dividend = Nominal value * % of dividend paid
OR
= no. of shares * Amount of dividend per share
45
Interim/Paid Dividend
Interim dividend is the paid dividend to
the shareholders in the middle of the
financial year
 The amount of interim dividend will be
subject to the performance of the business
in the first half of the financial year

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
46
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
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 should
be disclosed on the face of the balance sheet as a
separate component of equity(I.e. part of the
shareholders’ fund)
47
Descriptions
Book-keeping entries
Transfer proposed
Dr Profit & loss
dividend to appropriation appropriation
account
Cr Proposed dividend
* Proposed dividend will
be shown in balance
sheet under the heading
of current liabilities
48
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
 Revenue reserve can be transferred back
to appropriation account for dividends
purposes in the future financial period

49
Descriptions
Book-keeping entries
Transfer part of net profit
from appropriation
account to specific
reserves
Transfer specific reserves
back to appropriation
account
Dr Profit & loss
appropriation account
Cr Reserves
Dr Reserves
Cr Profit & loss
appropriation
50
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
51
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
5000
20000
5000
52
Balance Sheet as at 31 Dec 21-1
$
$
Capital and Reserve
Reserves
General reserves (1500+5000)
20000
Dividend owning(17000+20000)
37000
Dividend not yet paid to shareholders
53
Limited Liability Company
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

54
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
55
which has not been received
Issue of
Shares/Debentures
56
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’
57
Issue of shares
58
Descriptions
Accounting entries
Application Monies Received
Dr. Bank
Cr. Ordinary Share Applicants
*”No. of Application” * “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
59
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”
60
Note:



The issue is oversubscribed when the number of
applications is greater than the number of shares
available for issue. Excess application money will
be refunded to the unsuccessful applicants
The issue is undersubscribed when the number of
applications is smaller than the number of shares
available for issue. Hence, no refund will be
required
If the number of applications is below the
predetermined minimum amount, no shares will
be issued and all the application money will be
refunded
61
Example – Issue at par
Tai Fat Ltd made a public offering of its
1000 ordinary shares of $1 each
 The shares were issued at par

62
The Journal
Dr.
Bank
(1000*$1)
Ordinary Share Applicants
Being money received on application
1000
Ordinary Share Applicants
Ordinary Share Capital
Being allotment of 1000 ordinary shares
1000
Cr.
1000
1000
63
Shares issued at par
Bank
Ordinary share applicants 1000
Ordinary Share Applicants
Ordinary share capital
1000
Bank
1000
Ordinary Share Capital
Ordinary share applicants 1000
64
Example – Issue at premium
Tai Fat Ltd made a public offering of its
1000 ordinary shares of $1 each
 The shares were issued at premium of
20%

65
The Journal
Bank
(1000*$1.2)
Ordinary Share Applicants
Being money received on application
Ordinary Share Applicants
Ordinary Share Capital (1000*$1)
Share premium (1000*$0.2)
Being allotment of 1000 ordinary shares
Dr.
1200
1200
Cr.
1200
1000
200
66
Shares issued at premium
Bank
Ordinary share applicants 1200
Ordinary Share Applicants
Ordinary share capital
Share premium
1000
200
Bank
1200
Ordinary Share Capital
Ordinary share applicants 1200
Share premium
Ordinary share applicants 200
67
Example – Issue at discount
Tai Fat Ltd made a public offering of its
1000 ordinary shares of $1 each
 The shares were issued at a discount of
10%

68
The Journal
Bank
(1000*$0.9)
Ordinary Share Applicants
Being money received on application
Ordinary Share Applicants
Discounts on shares (1000*$0.1)
Ordinary Share Capital (1000*$1)
Being allotment of 1000 ordinary shares
Dr.
900
900
Cr.
900
100
1000
69
Shares issued at discount
Bank
Ordinary share applicants 900
Ordinary Share Applicants
Ordinary share capital
1000
Bank
Discount on shares
900
100
Ordinary Share Capital
Ordinary share applicants 1000
Discount on shares
Ordinary share applicants 100
70
Bonus Shares/Script Issue
Bonus shares are ‘free’ shares issued to
shareholders without any cash being paid
for them
 The reserves are utilised for the purpose
 The accounting entry is:



Dr Reserve/Share premium/Retained earnings
Cr Ordinary share capital
71
Example
$
20000
12000
20000 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
Ordinary share capital (20000+5000)
Reserve (12000-5000)
$5000
$5000
25000
7000
72
Debentures
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

73
Types of debentures
Redeemable and irredeemable debentures
 Debentures with fixed charge
 Debentures with floating charge
 Unsecured/naked/simple debentures

74
Redeemable and irredeemable
debentures
Redeemable debentures are repayable at
or by a specified date
 Irredeemable debenture are nor repayable
 However, the borrowing company can
purchase its own debentures on the open
market when the price of debentures is
very low

75
Debentures with fixed charge
Debentures are secured by means of
mortgaging specific assets, e.g. premises.
 The borrowing company cannot sell these
assets without the prior consent of the
debenture holders

76
Debentures with floating charge
Debentures are secured by means of
mortgaging a group of assets, e.g.
premises
 The borrowing can trade in the assets
which are subject to a floating charge
 If the company defaults on its interest or
capital repayment, the floating charge will
crystallize on the group of assets
 The debenture holders can sell the assets
to recover the amount due to them

77
Unsecured/naked/simple
debentures

They are not secured by any of the
company’s assets
78
Issue of debentures
79
Issue of Debentures
The accounting treatment of debenture is
the same as that of shares, except for the
change in the name of the accounts
 Debenture can be issued at par, at
premium or at a discount

80
Descriptions
Accounting entries
Issue of Debentures
(a) Issue at Par
Dr. Bank
Cr. Debentures
(b) Issue at a Premium
Dr. Bank
Cr. Debentures
Cr. Debentures Premium
( c) Issue at a Discount
Dr. Bank
Debenture Discount (note)
Cr. Debentures
81
Note:

The debenture discount account can be
written off using either method:


It can be written off immediately against the
share premium on profit and loss appropriation
account. The debentures should be disclosed in
the balance sheet at a nominal value
It can also be written off over the life of
debentures to the profit or loss account. The
debentures should then be disclosed in the
balance sheet at a nominal value less
unamortized discount
82