Accounting for companies

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					INTRODUCTION TO ACCOUNTING II



     ACCOUNTING FOR COMPANIES



                   Prepared by
            Teddy Ossei Kwakye
              Lecturer in Accounting
             Zenith University College
                   Learning Objectives

Explain the nature of limited liability companies according to the Company’s Act


Explain the differences between the different classes of shares


Account for the issuance of shares


Explain the purpose of and prepare an income surplus account.

Prepare the income statement and the statement of financial position of limited
liability companies

                                                                               2
              Definition of a Company
A company is “a body corporate formed and registered under the Companies Act
or an existing company”



A body corporate is “a corporation formed under (the Company’s Act) or
otherwise and whether in Ghana or elsewhere”. (First Schedule)


“No company, association or partnership consisting of more than twenty persons
shall be formed for the purpose of carrying on business … unless it is registered as
a company under (the Company’s Act) or formed in pursuance of some other
enactment for the time being in force. (Section 5)

                                                                                3
        Characteristics of Companies
Separate legal Entity
 • A company formed under the Act assumes the status of natural person with full capacity,
   except to the extent that its Regulations otherwise provide, for the furtherance of its
   objects and of any business carried on by it and authorized by its Regulations.
 • As a body corporate, it exists as a legal entity separate and distinct from its members.
   (Section 24)

Separation of management and ownership

Limited liability

Perpetual succession

Transferability of interests

                                                                                        4
                Formation of Companies
The minimum number of persons who can form a company is ONE and
Section 180 requires a minimum number of two (2) directors

The total number of members and debenture holders for a private company
is restricted to FIFTY. (Section 8)

Formation requires:

 • Comply with the provisions in the Act and satisfy registrar general.
 • Certificate of Incorporation issued to the Promoters and after meeting the minimum capital
   requirement
 • Certificate of Commencement of Business will be issued to start trading.
 • Regulations of the company - content includes the name of the company, nature of
   business(es), status (section 24), names of first directors and their powers.

                                                                                            5
    Types of Companies (Section 9)
Limited Companies
• Limited by Shares - liability of members is limited to the
  amount, if any, unpaid on the shares respectively held by
  them.
• Limited by guarantee - liability of its members is limited to
  the amount the members may respectively undertake to
  contribute to the assets of the company in the event of its
  being wound up.

Unlimited companies
• The liabilities of its members is not limited

                                                                  6
         Types of Companies cont’d
Private Companies

• Restricts the right to transfer its shares
• The total number of members and debenture holders is restricted to
  50, excluding the bona fide current and former employees.
• Prohibits the company from making any invitation to the public to
  acquire any shares or debentures of the company.
• prohibits the company from making any invitation to the public to
  deposit money for fixed period or payable at call, whether bearing or
  not bearing interest.

Public Companies

• “Any other company shall be a public company”. (Section 9 (4))

                                                                          7
Accounting and Audit Requirements (Section 123-136)

Keeping of books of account and circulation of periodic financial reports and any
other reports.

The financial reports should contain the financial statements, particulars of
Directors emoluments and pensions, particulars of amounts due from officers
etc.

The reports should be signed and accounts should be published to include
Directors’ report, Auditors’ report,


Keep records on the appointment and remuneration of auditors, removal of
auditors and duties and powers of auditor


                                                                                    8
                            Shares

A share represents the right of ownership in a company.

• The ownership is in proportion to the number of shares held.
• The amount paid for the shares is not the basis of claiming more
  ownership but the number of shares acquired.

“All shares created after the commencement of this code
shall be shares of no par value”. (Section 40)
• Shares in Ghana do not have a fixed amount or price attached to it
  upon its creation.
• Shares can neither be issued at a premium nor discount.
                                                                       9
                    Types of Shares
Preference Shares

• Shares that do not entitle the holder thereof to any right to participate
  beyond a specified amount in any distribution whether by way of dividend,
  or on redemption, in a winding up or otherwise.
• They have priority over equity/ordinary shares in the distribution of
  dividend and capital in the event of winding up.

Ordinary Shares

• They are not entitled to a fixed amount of dividend and can only be paid
  after preference shareholders have been paid.
• They are also entitled to residual capital in the event of winding up. i.e.
  they bear the residual risk of the company.
• They have unrestricted voting rights


                                                                                10
                   Issuance of Shares

Company may issue shares up to the total number
authorized by its regulations (Section 41).
• Shares may be issued at such times and for such consideration as the company
  may determine and shall be paid for at such times as agreed by the member
  and the company or as may be specified in the regulations, except in
  capitalization issue.

Shares shall be issued for valuable consideration and paid
for in cash, except otherwise agreed. (Section 42)


                                                                           11
     Forms of Issuing Shares
Initial Public Offer

• Sale of shares by a private company for the first
  time to the public.

Private Placement

• The sale of shares of companies to private
  investors without the use of a public market
  exchanges.

                                                      12
Forms of Issuing Shares cont’d …
 Capitalization/Bonus/Scrip Issue

 • Monies in a companies reserve is converted into capital
   and then distributed to shareholders as new shares in
   proportion to their existing shareholdings.

 Rights Issue

 • Shares are issued to existing shareholders in proportion
   to their current shareholding, respecting their pre-
   emption rights and usually at a lower price than the
   current share price of the company.

                                                              13
      Payment of Shares Issued
Payable on Application

• All the amount to be paid for the shares are made at
  the time of application

Payable by Installments

• Payment of the amount for shares are paid at
  different periods i.e. during application, allotment
  and call periods

                                                         14
      Procedure for Issuance of Shares

Invitation to the Public to apply for shares

Application (offer from the public to the company
accompanied by cash from the public)
Allotment of shares (acceptance or rejection by the
company)

Calls for arrears on share values

Forfeiture of shares

                                                      15
            Treasury Shares

Shares which were once issued
but have been recalled by the
company through
• Forfeiture of shares
• Redemption of shares
• Purchase / Acquisition of shares
                                     16
             Share Deals Account

Account required by the Act for certain dealings in
treasury shares
• When shares are reissued the proceeds are credited to this account.
• When the company redeems or acquires it own shares, the transfer
  from Income Surplus account is also credited to this account.
• All expenses incurred in the redemption and acquisition of shares are
  charged to this account.

This account prevents reductions in a company’s stated
capital.

                                                                      17
          Components of Owner’s Equity
Stated Capital
 • Either from the cash or other consideration from the issue of shares or transfers
   made into the stated capital account from the income surplus (capitalization
   issue)
Share Deals Account

Income Surplus Account
 • Retained earnings of the company over the years

Capital Surplus Account
 • Usually results from revaluation of fixed assets (appreciation). Usually, it is not
   intended to be distributed as dividend as they are unrealized surpluses.

                                                                                   18
       Shares Payable by Installments
Accounting for shares payable by installments will be
discussed by considering the procedure for issuance of
shares

Invitation to the public does not constitute a transaction,
therefore no accounting entries are made.


No entries are to be made in the stated capital account
until shares are allotted

                                                          19
               Application Stage
When cash/cheque is received on application

• Dr     Bank/cash Account
  • Cr Application Account
• with the total amount of cash received

When consideration other than cash is received

• Dr     The relevant asset account
  • Cr Application account
• with the agreed value of the consideration received.


                                                         20
                Allotment Stage
Transfer to Stated Capital Account

• Dr     Application Account
  • Cr Stated Capital Account
• with the total application amount received in respect of shares
  allotted

Refund of money for rejected applications

• Dr     Application Account
  • Cr Bank/Cash account
• with the amount received on applications in respect of total
  applications rejected.

                                                                    21
        Allotment Stage cont’d …
Retention of excess funds for other stages (partly successful applicants)


• Dr    Application Account
  • Cr Allotment Account
• with amounts received in respect of rejected portions of applications


On receipt of allotment monies (cash/cheque) due on shares issued


• Dr    Cash/Bank Account
  • Cr Allotment Account
• with monies received on allotment

                                                                            22
    Allotment Stage cont’d …

Transfer to the stated capital

• Dr     Allotment account
  • Cr Stated capital account
• with the total sum received on
  allotment.

                                   23
                        On Calls Stage
On receipt of cash/cheque

• Dr     Bank/cash account
  • Cr   Call account


Refund of excess money to applicants, if any, after full payment.

• Dr     Call account
  • Cr   Bank account


Transfer to Stated Capital account

• Dr     Call account
  • Cr   Stated capital account

                                                                    24
           Forfeiture of Shares
Upon forfeiture of shares; no entry is made


On Re-issue of forfeited shares
• Dr     Cash/bank account
  • Cr   Share Deals account

Capitalization/Bonus issue
• Dr     Income Surplus account
  • Cr   Stated capital account

                                              25
  Shares Payable on Application
Receipt of monies on application

• Dr     Cash/Bank Account
  • Cr Application account
• with the total amount received with applications

Refunds of reject applications

• Dr    Application account
  • Cr Cash/Bank account
• with amount refunded to rejected applicants

                                                     26
Shares Payable on Application cont’d …

 Transfer to Stated Capital

 •Dr     Application account
  •Cr    Stated Capital account
 •with amount received for shares
  issued
                                    27
         Issuance of Treasury Shares
Treasury shares have all rights and obligations attached to
shares of similar class in the company.

Full payment on application method is adopted.


Accounting entries:

• Dr     Cash/Bank account
  • Cr Share Deals account
• with the total amount received in respect of shares issued

                                                               28
 Financial Statements of Companies
Income statement

Income surplus Account

Statement of Financial Position

Statement of Cash flow

Notes to the statements
                                  29
                         Income Statement
                                                      Notes   2005    2004

                                                               ¢m     ¢m
Turnover                                               1      xxxxx   xxxx
Cost of sales                                          2      (xxx)   (xxx)
Gross profit                                                  xxxx    xxxx
General administrative and selling expenses            3      (xxx)   (xxx)
Operating profit                                              xxxx    xxxx
Other income                                           4      xxxx    xxxx
Profit Before Interest and Taxation                           xxxx    xxxx
Interest/financial charges                             5      (xxx)   (xxxx)
Profit before taxation                                        xxxx    xxxx
Taxation                                               6      (xxx)   (xxx)
Profit after taxation transferred to income surplus           xxxx    xxxx
                                                                               30
            Payment of Dividends

A company can only pay dividend to shareholders if:
• After such payment the company will be able to pay its debts as
  they are due
• The amount of such payment does not exceed the income surplus
  of the company immediately prior the payment.

Dividend payment could be:
• Cash or non-cash
• Interim or/and proposed


                                                              31
             Income Surplus Account
                                     ¢          ¢         ¢          ¢

Balance b/fwd
                                         xxx                  xxx
Profit for the year
                                         xxx                  xxxx

                                         xxxx                 xxxx
Less: proposed dividend-interim    xxx              xxx

                       Final       xxx   xxx        xxx       xxx

Transfers to capital surplus a/c         xxx                  xxx

Balance c/fwd
                                         xxxx                 xxxx       32
             Statement of Financial Position
                                   Notes          2005           2004

                                           ¢m     ¢m      ¢m     ¢m
Fixed Assets                        7             xxxx           xxxx
Investments                         8             xxx            xxx
Current Assets
Stocks                                     xxx            xxx
Debtors                             9      xxx            xxx
Short-term investments                     xxxx           xxxx
Cash and bank balance                      xxxx           xxxx

Current Liabilities
Bank overdraft                      10     xxx            xxx
Creditors                           11     xxx            xxx
Dividends payable                   12     xxx            xxx
Taxation payable                    13     xxx            xxxx
                                           xxxx           xxxx
Net current Assets/(Liabilities)                  xxxx           xxxx

Long term Liabilities
Term loan                           14            (xxx)          (xxx)

Net Assets                                        xxxx           xxxx

Financed By:
Stated Capital                      15            xxxx           xxxx
Income Surplus                                    xxx            xxx
Share Deals                                       xxx            xxx
Capital Surplus                     16            xxx              33
                                                                 xxx
                                                  xxxx           xxxx

				
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Description: Joint Venture, Company Accounts and allotment of shares