Company Accounts - Principles Of Accounting
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The capital of a limited company is divided into shares. A person can become the member of a company if he buys a share. Then he is known as the shareholder. If the shareholder has paid in full for the shares he has taken, his liability is limited to the nominal value of those shares only. When the company loses its assets, it cannot ask the shareholders to pay anything out of their private property in respect of the company’s losses. If the shareholder has paid partly only for the shares, he can be forced to pay the balance owing on the shares. In short, the liability of each member is limited to the nominal value of the shares he has taken. This is known as limited liability and the company is known as limited company. Share capital (different meaning) 1. Authorized/registered/nominal share capital. This is the total of the share capital which the is allowed to issue to the shareholders.
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2. Issued share capital: This is the total of the share capital actually issued to the shareholders. 3. Called up capital: Where only part of the amounts payable on each share has been asked for, total amount asked for on all the shares is known as the called up capital.
the
4. Uncalled capital: This is the total amount which is to be received in future, but which has not yet been asked for. 5. Calls in arrears: The total amount for which payment has been asked but has not been paid by share holders.
/ http://www.principlesofaccounting2.com/ 6. Paid up capital: This is the total of the amount of share capital which has been actually paid by the shareholders.(Paid up capital = Called up capital – Calls in arrears) Types of shares
Preference shares: the preference shares will be having some preferential rights over ordinary shares. The preference dividend will be paid prior to the ordinary shares dividends. The preference dividend is fixed.
Ordinary shares: The ordinary share holders are the real owners of the company Their dividend will vary according to the amount of profit available. Ordinary share dividend will be paid after the payment of preference share dividend.
Debentures: Debentures are the credit documents issued for borrowing from the public. Debenture holders are long term creditors of the company. They get fixed rate of interest.
Difference between Ordinary shares and preference shares.
Preference share holders get fixed rate if dividend, ordinary share dividend varies year to year according to the amount of profits available. Preference share holders get dividend first before ordinary share holders. Ordinary shares holders get dividend after preference share holders are paid.
At the time of liquidation, preference share holders get capital back first before ordinary share holders. Ordinary share holders get capital back last.
Difference between Debentures and shares. Debenture holders are long term creditors of the company. But share holders are the owners of the company.
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Debenture holders get fixed rate of interest. But share holders are getting dividend. Debenture holders do not have voting rights. But share holders have voting rights.
Types of Capital: Authorized share capital .
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The maximum amount of share capital that a company is allowed to be raised. It is also called nominal or registered share capital. Issued share capital The part of authorized capital which is already issued to the public. It is the total value of shares issued. Paid up capital It is the actual amount of share value paid to the company by its share holders Limited companies Limited company Limited company means an organization owned by its shareholders whose liability is limited to the share capital.
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Share capital (different meaning) 1. 1.
Authorized/registered/nominal share capital
This is the total of the share capital which the company is allowed to issue to the shareholders 1. 2.
Issued share capital
This is the total of share capital actually issued to the share holders 1. 3.
Called up capital
Where only part of the amount payable on each share has been asked for, the total amount asked for on all the shares is known as the called up capital 1. 4.
Uncalled capital
This is the total amount which is to be received in future, but which has not yet been asked for 1. 5.
Calls in arrears:
The total amount for which payment has been asked but has not been paid by share holders 1. 6.
Paid up capital
This is the total of the amount of share capital which has been actually paid by the share holders Paid up capital =called up capital-calls in arrears
/ http://www.principlesofaccounting2.com/ Features of ordinary share v Owners of the company v They have voting rights v No fixed % of dividend
Features of preference shares v Not the Owners of the company v Have no voting rights v Have fixed % of dividend
Debentures v Debentures are the loan to the company v They are creditors of the company v A fixed % of interest is paid each year whether profit made or not
Key points 1. 1.
Debentures
Loan to the company from the public carrying fixed rate of interest
1. 2.
Debenture interest
This is the interest paid on debentures to the debentures holders. This is as expense to be charged in the profit and loss account and if it owes it is known as a current liability in the balance sheet (it is nor the item to be entered In the appropriation account)
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Long term loan interest
This is also an expense to be charged in the profit and loss account (not in the appropriation account) and it owes it is known as a current liability
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1. 4.
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Ordinary shares
Shares entitled to divided after the preference shareholder have been paid their dividends
1. 5.
Preference shares
Shares that are entitled to an agreed rate of dividend before the ordinary shareholders receive anything
1. 6.
Dividends
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ The profit that is being distributed to the shareholders is called dividends
1. 7.
Interim dividend
The dividend paid to the share holders in between two annual general meetings (it is the item to be entered in appropriation account)
1. 8.
Proposed divided
This is the dividend agreed by the board of directors, but not paid. It is deducted from the profit and loss appropriation account and shown as a current liability in the balance sheet
1. 9.
Dividend is calculated on the paid up capital only
If all issued have been paid up, then both the same
1. 10. Reserves The transfer of apportioned profits to accounts for use in future
1. 11. Director’s remuneration
/ http://www.principlesofaccounting2.com/ This is the remuneration given to the directors and an expense to be shown in the profit and loss account (it is not the item to be entered in appropriation account)
1. 12. For preference shares prefixed rate of dividend is paid Preference dividend =issued preference share capital X Rate
1. 13. For ordinary shares If dividend paid is as percentage of capital Dividend =issued ordinary share capital X Rate If dividend is payable per share Dividend =Number of issued ordinary share capital X Dividend per share Distinction between shares and debentures Shares
Debentures
1 2
Owner’s capital. Owners/ Share holders.
1 2
Loan capital. Creditors.
3
Dividend paid is appropriation of profit.
3
Interest paid is a charge or expense
4
Dividends paid according to the 4 profit earned and at the direction of
5
the directors. Not repaid or redeemed except
6
redeemable preference shares. Unsecured. The shareholders will get 6
5
Interest payment is compulsory whether profits are earned or not. Redeemed after certain period at the option or discretion of the company. Normally having fixed charge or floating
the repayment of capital on winding charge on the assets of the company. up, only if there is surplus. 14. Distinction between ordinary shares and preference shares
1 2
Ordinary shares Ultimate control of the company Dividend is available only if there are sufficient profits.
1 2
Preference shares No control of the company Fixed rate of dividends. If cumulative preference shareholders miss dividends in
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3
No preferential treatment of dividend
3
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Preferential treatment of dividend and repayment of capital
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Treated as own capital
4
Treated as prior charge capital, that is part of loan capital
Profit and loss appropriation account. This is the account prepared after the preparation of the trading and profit & loss account of a limited company. This account starts with the net profit obtained from the profit & loss account and the last year’s retained profit (if any). The appropriations of profits are shown in this account. After the appropriation, if there is any profit left over, it is called retained profit and it will be carried forward to the next year. Formats:
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Balance sheet extract
/ http://www.principlesofaccounting2.com/ MCQ 1. A company which can offer its shares for subscription to the public is known as: A. Private company
B. Public limited company
C. Public corporation
D.Corporation
2. What is the authorized share capital of a limited company? A. The issued share capital
B. Issued share capital plus reserves
C. Issued share capital plus debentures D. The shares that a company is allowed to issue by law 3. The liability of share holders of a public limited company is limited to: A. paid up value of shares
B. nominal value of shares
C. extent of private assets
D. called up share capital
4. What is the other name of authorized capital? A. issued capital
B. Nominal capital
C. Uncalled capital
D. Calls in arrears
5. The debenture interest paid is recorded in which part of the final accounts of a limited company? A. Trading account
B. Profit and loss account
C. Profit and loss appropriation account
D. Balance sheet
6. The dividend is calculated on which of the following values of shares? A. Authorized share capital
B. Issued share capital
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ C. Called up share capital
D. Paid up share capital
7. Which of the following is not included in the share holders’ funds? A. Debentures
B. General reserves
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C. Ordinary share capital
D. Preference share capital
8. Retained profit of a limited company belongs to the: A. directors’
B. debenture holders’
C. shareholders
D. company
9. Proposed dividends are: A. shown as a current liability on the balance sheet B. debited with other business expenses in the profit and loss account C. paid from capital reserves D. credited to the appropriation account 10. In the final accounts of a limited company, directors’ remuneration is:
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ A. debited in the trading account
B. debited in the profit and loss account
C. debited in the appropriation account
D. deducted from share capital in the B.S
11. Under which heading is share premium account shown? A. Current assets
B. Current liabilities
C. Share capital
D. Reserves & Surplus
12. The interim dividend paid is shown in the: A. profit and loss account
B. profit and loss appropriation account only
C. profit and loss account and balance sheet D. profit and loss appropriation account and balance sheet Assignment Questions Q 1. share
Union ltd. is registered with an authorized capital of $ 800 000 divided into 300 000 Ordinary
of $ 2 each and 200 000, 10 % preference shares of $ 1 each. On 30 the April, 2001 after the completion of trading and profit & loss account the following balances remained in the books. Account balances Ordinary share capital
Debit $
Credit $ 5 00 000 1 00 000
10 % Preference Share Capital Premises at cost
3 80 000
Machinery and Plant at cost Motor vans at cost
3 10 000 60 000
/ http://www.principlesofaccounting2.com/ 10 000 10 000
Retained earnings b/f Preference dividends owing
Ordinary share dividend owing Stock
20 000 52 000
Debtors Creditors
40 000
Cash in hand and at bank Provision for depreciation
31 000
15 000
Machinery and Plant Motor vans
1 35 000 20 000 30 000 3 000
!0% Debentures redeemable 2010 Debenture interest owing
30 000 Share premium 8 73 000 8 73 000 Total Prepare for Union Ltd. a balance sheet at 30.04.2001 showing clearly the working capital and the shareholders’ fund. Q2 .
The final accounts of Moir Ltd. are prepared on 30th April each year. On 30th April, 2002 after the
profit and loss account had been prepared the following information was available. $ Authorized capital 300 000 Ordinary shares of $ 1 each
300 000
Issued capital, fully paid 120 000 ordinary shares of $ 1 each Freehold premises at cost Plant and Machinery at cost Provision for depreciation on Plant and Machinery
120 000 100 000 75 000 35 000
Profit and loss account credit balance
33 190
10 % debentures
10 000
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th
8 500
April, 2002
Trade creditors
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25 000 9 450
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Trade debtors
8 200
Expenses prepaid
940
General reserve
10 000
From the above information prepare a balance sheet as at 30th April, 2002. Your balance sheet must show sub-totals for fixed and current assets, current and long-term liabilities. Working capital must be identified within your balance sheet.
Q 3. Summertime Ltd, has an authorized capital of $ 10 00 000 consisting of $ 8 00 000 Ordinary Shares of $ 1 each and $ 2 00 000, 10% Preference Shares of $ 1 each. After completing the trading, profit & loss a/c for the year ended 31.03.2003, the following balances remain in their books:-
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Debit
$
Credit
Issued Share Capital Ordinary Shares
$
8 00 000 1 00 000
10 % Preference Shares Land and buildings at cost
6 64 000 2 40 000
Motor vehicles at cost Fixtures & Fittings at cost
1 50 000
Provision for depreciation Motor Vehicles
60 000 38 000
Fixtures & Fittings Debtors & Creditors
18 000 68 000
Stocks Bank
12 000
60 000 4 000
Cash General Reserve
32 000 1 40 000
Profit for the year Retained Earnings
12 000 50 000
9% Debentures Interim Dividend paid
40 000 12 44 000
Total The directors proposed:
12 44 000
1. to pay the preference dividend in full 2. to pay a final dividend of 8% on the ordinary shares
/ http://www.principlesofaccounting2.com/ 3. to transfer $ 20 000 to general reserve
Prepare the profit and loss appropriation a/c and the balance sheet of the company. Q4.
The following balances appeared in the books of XL ltd, as at 31.12.2003 $
Premises
1 06 000
Equipment Authorized & Issued Capital 10% Debentures
27 000 70 000 20 000
Stock in trade
4 500
Debenture interest owing
1 500
Profit & loss a/c on 01.01.03
3 200
Cash at bank
5 220
Creditors
6 000
Debtors Provision for depreciation on equipment
3 000 12 600
Net Profit for the year
32 420
The following additional information is also available: 1. $ 5 000 is to be transferred to general reserve 2. A dividend of 12% is proposed on ordinary shares Prepare the profit & loss appropriation a/c for the year ended 31.12.2003 and a balance sheet extract showing working capital and shareholders’ funds.
Q 5. 000
Sound Sense plc. has an authorized share capital of 500 000 ordinary shares of $ 1 each and 200 10% preference shares of $ 2 each.
After the trading and profit & loss a/c had been prepared for the year ended 31.03.2003, the following balances appeared in the books of the company. $
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Issued Share Capital
400 000 ordinary shares of $ 1 each
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4 00 000
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50 000, 10% preference shares of $ 2 each
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1 00 000
Net trading profit for the year
60 000
Retained earnings b/f
17 000
Debtors
26 000
Creditors
14 000
Bank (credit balance)
10 000
General Reserve
12 000
Interim ordinary dividend paid
12 000
Premises at cost
3 00 000
Equipment at cost
2 25 000
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86 000
Provision for depreciation on Equipment
62 000
on Motor Vehicles
20 000
Closing Stock
46 000
Additional Information; 1. $ 35 000 should be transferred to general reserve 2. Preference dividend to be paid in full 3. A final dividend of 2% on ordinary shares is proposed by the directors
Prepare the profit & loss appropriation a/c for the year ended 31.12.2003 and a balance sheet extract showing working capital shareholders’ funds. Q 6. Hallom Limited has a registered capital of $ 6 00 000 divided into 4 00 000 ordinary shares of $1 each and 2 00 000 6% preference shares of $ 1 each. The following balances remained in the accounts of the company after the trading and profit and loss accounts had been prepared for the year ended 30th April 2003.
/ http://www.principlesofaccounting2.com/ Debit $
7% debentures Ordinary share capital: fully paid
4 00 000 10 000
6% preference share capital: fully paid Cash at bank
25 000
Profit and loss account balance on 1st May 2002 Debtors & creditors
20 000
Net profit for the year ended 30th April 2003 Machinery and plant at cost Provision for depreciation on machinery and plant Stock Premises at cost General reserve Total
Credit $
175 15 000
Debenture interest accrued
90 000 8 600 40 400
200 000 50 000 39 175 3 50 000 6 34 175
20 000 6 34 175
The directors have recommended the following:1. a transfer of $ 5000 to general reserve 2. an ordinary share dividend of 10% 3. a provision for the full years preference share dividend You are asked to:1. Prepare the profit and loss appropriation account for the year ended 30th April 2003 2. Prepare a balance sheet at 30th April 2003, showing fixed assets, current assets, current liabilities, working capital and shareholders’ fund.
Q 7. Perez plc. had an authorized capital of $ 2 00 000 divided into 1 50 000 0rdinary shares of $ 1 each and 50 000 8% preference shares of $1each. The following balances remained in the accounts of the company after the trading and profit loss accounts had been prepared for the year ended 31st Dec 2003. Debit $ Ordinary share capital; fully paid 8% preference shares; fully paid Machinery and plant at cost
Credit $ 1 00 000 20 000
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Provision for depreciation on machinery and plant Premises at cost
60 000
20 000
1 00 000
Profit and loss account balance(1-1-2003)
16 450
Net profit (for the year ended 31st Dec. 2003)
18 052
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560
Light and heat Cash at bank
8 500
Stock Debtors and creditors
6 000 2 200
1 788
150 Insurance 1 76 850 1 76 850 Total Directors have recommended an ordinary dividend of 7% and wish to provide payment of the preference share dividend for the year. Prepare for the Perez plc:1. the profit and loss appropriation account for the year ended 31st Dec 2003 2. the balance sheet as at 31st Dec 2003 only the part which shows the share holders fund and the working capital.
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Q 8. Graphic Limited has the registered capital of $ 5 00 000, divided into 3 00 000 ordinary shares of $1 each and 2 00 000 10 % preference shares of $ 1 each. The following balances remained in the books
of the company after the trading and profit and loss accounts had been prepared for the year ended 30th April 2003:Debit $ 3 20 000
Premises at cost
Credit $ 2 00 000
Ordinary share capital(fully paid) 10% preference shares ( fully paid)
1 00 000 8 000
General reserve 8% debentures
30 000 10 000
Share premium Cash at bank
10 000 9 800
Debtors & creditors Profit and loss account balance on 1st May 2002 Net profit during the year Machinery and plant at cost Provision for deprecation on machinery and plant Good will Stock Provision for bad debts
15 000 60 000 40 000
1 70 000 95 000 20 000 15 920 920 1 200
/ http://www.principlesofaccounting2.com/ Debenture interest accrued Salaries
600
5 000
Insurance Interim ordinary dividend paid
10 000 5 60 720
Total
5 60 720
At 30th April 2003, the directors recommended:1. to increase the general reserve by $ 20 000 2. an ordinary share dividend of ¢ 8 per share on ordinary share capital 3. a provision for preference share dividend in full Required to prepare at 30th April 2003 1. the profit and loss appropriation account 2. the extracts of balance sheet showing shareholders fund.
Q 9. The authorized capital of XYZ Limited is $ 5 00 000 divided into 5 00 000 0rdinary share of $ 1 each. The following balance sheet was extracted from the companies’ books for the year ended 30th September 2003:Assets Land and buildings Motor vehicles Machinery Stock Trade debtors Cash in hand Cash at bank Total
$Liabilities 1 50 000Issued and paid up capital 170 000Ordinary shares of $1 each 1 20 000Trade creditors 30 000Bank loan 13 000General reserves 17 000Retained profit 25 000 5 25 000Total
$ 4 00 000 17 500 27 500 50 000 30 000 5 25 000
During the 1st week of October 2003, the following transactions took place:1. $ 10 000 of the debtors was paid by cash $ 9 500 in full settlement. 2. Remaining ordinary shares were issued and fully paid up by cheque. 3. $ 21 000 cost of goods was sold for $ 28 000 on credit. 4. One old motor vehicle was sold for $ 10 000. The payment was received by cheque immediately. The book value of the motor vehicle was $ 9 500. 5. Cash deposited in the bank $ 10 000
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Prepare the balance sheet of XYZ Limited in vertical form at 7th October 2003, after showing the adjustments to each item regarding the above transactions.(the adjustments should be shown in
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brackets) Q 10. The following trial balance was extracted from the books of a Limited Co. at 31st Dec 2002, immediately after the preparation of its Trading & profit and Loss A/C. Its Authorized capital consists of 3 00 0000 ordinary shares of $ 1 each and 1 50 0000 preference shares of $ 1 each.
Dr $
Account balances Issued share capital
2 00 000 1 00 000
2 00 000 ordinary share of $ 1 each 1 00 000 15% Preference shares of $ 1 each 12% Debentures Interim dividend paid on Ordinary shares
Cr $
15 000
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5 000
Share Premium Account Good will Debtors and Creditors Salaries owing
8 000
16 000
Plant & machinery at cost Buildings at cost
1 50 000 1 10 000
Stock of goods Cash at Bank and in hand
42 500 23 300
Net profit during the year Furniture & fixtures at cost
40 000
57 000
Provision for depreciation on:Plant and Machinery
5 000 5 500 4 000
Buildings Furniture and Fixtures Total Additional information:-
9 000 1 300
4 01 800
4 01 800
1. The Co decided to pay the dividend on preference share capital 2. A final dividend of 5p per share is to be paid on ordinary share capital 3. $ 5 000 should be transferred to the General Reserve Account. Required to:1. Prepare the Profit and Loss appropriation A/C and the Balance Sheet as at 31st Dec. 2000 2. After preparing the balance sheet, calculate:-
/ http://www.principlesofaccounting2.com/ 1. the current ratio 2. the liquid ratio
3. the N/P to sales ratio if the cost of goods sold was $ 1 25 000 and G/P was 1/5 on cost. Incoming search terms:
appropriation of shares and dividends in accounting called up share accounting entry
paid up capital not paid accounting entry
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