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Company Accounts

Company Accounts. Final Accounts. 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. Advantages of incorporation.

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Company Accounts

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  1. Company Accounts Final Accounts

  2. 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

  3. 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

  4. Types of Corporation • Unlimited Company • Limited Liability Company

  5. Unlimited Company • The unlimited company does not have any limits on the liability of its owners

  6. Limited liability company • Company limited by shares • Company limited by guarantee

  7. Company limited by shares • Private Company • Public company

  8. 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

  9. Public company • Unlike the private company, there are no such restrictions on the public company

  10. 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.

  11. Means of funding • Share Capital • Debentures • Reserves

  12. Types of Share Capital • Preference Shares • Ordinary Shares

  13. 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

  14. Cumulative preference shares • Any unpaid dividends on cumulative preference shares can be carried forward to a later year

  15. Non-cumulative preference shares • If the profits are insufficient to pay the dividends, the unpaid dividends cannot be carried forward to later years

  16. 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

  17. Debentures • Debentures are long-term loans evidenced by deeds which set out the rate of interest payable and the date of redemption

  18. 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

  19. 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

  20. Capital reserves • They are gains or profits arising from non-trading 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

  21. 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

  22. Revaluation reserve • This is the unrealized gain from an increase in the value of an asset after revaluation

  23. 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

  24. Final Accounts

  25. 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

  26. XX Ltd. Company Income Statement for the year ended 31 Dec XXXX Sales X Less: Returns inwards X (X) Less: Cost of Sales Opening Inventory X Add: Purchases X Add: Carriage inwards X Less: Returns outwards (X) Less: Closing Inventory (X) X Gross profit X Add: Other revenues X X Less: Operating Expenses Administrative Expenses Selling and distribution expenses X Finance cost X Other operating expenses X X Net profit X Less: Profit Tax (X) Profit after taxation (PAT) X

  27. Add: Retained profit b/f X X Less: Appropriations: Transfer to general reserve X Preference dividend – interim (paid) X - proposed (final) X Ordinary dividend - interim (paid) X - proposed (final) X X Retained profit c/f X

  28. Balance Sheet as at 31 Dec XXXX Non-currents Assets Cost Dep Net Machinery X X X Furniture X X X X Current Assets Stock X Debtors X Bank X X Less: Current Liabilities Creditors X Proposed dividend X Debenture interest accrued X Provision for taxation X Working Capital X X Capital and Reserve Share Capital Authorized Issued XXXX Ordinary Shares of $1 each X X XXXX 8%Preference Shares of $1 each X X X X No. of shares Par value

  29. Reserves Share Premium X General Reserve X Profit and loss X X Long-term Liabilities 10% Debentures X X

  30. Special types of expenses • Debenture interest • Director’s remunerations/fees/emolument • Preliminary expenses/formation expenses • Goodwill written off

  31. 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

  32. Example Trial Balance as at 31 Dec 20-1 Dr Cr 10% Debentures 10000 Debenture interest 5000 Paid debenture interest Ans.: Trading and profit and loss a/c for the year ended 31 Dec 20-2 $ $ Gross profit X Less: Expenses Actual debenture interest 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

  33. 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

  34. 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

  35. Amounts written off as goodwill • According to SSAP(Statement of Standard Accounting Practice), goodwill should be amortized over its useful economic life

  36. Appropriation of net profit • Profit Tax • Retained profit from last year/after next year • Dividends • Transfer to/(from) reserve

  37. 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

  38. Example • No under/overprovision of profit tax Trial Balance as at 31 December 2003 Dr Cr. Net Profit 10000 ** The profit tax is estimated at $1500 for the year Solution: Provision for taxation Bal c/f 1500 P/L 1500

  39. 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

  40. 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 300 Bal c/f 1500 P/L 1200 1500 1500

  41. 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

  42. 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 P/L 1800 1800 1800

  43. 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

  44. 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

  45. 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

  46. 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

  47. 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)

  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

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