Company Accounts

www.desapoint.
com
Introduction to Company Accounts

In previous chapters, accounting for single proprietorships, partnerships and not-for-profit
organizations have been discussed. Although most of organisations operating in Tanzania fall in
the above categories, the large ones in terms of assets, capital and turnover are companies. A
company is a legal entity, a juridical being established by law. As such, the accounting
requirements for companies which are specified by law are more demanding. In this chapter, the
focus is on the legal and accounting requirements related to the formation of companies,
preparation and publication of financial statements.
Legal definition of a company

Section 3(1) of the Companies Act [No. 12] of 2002 refers to a company in the following terms:
Any two or more persons, associated for any lawful purpose may, by subscribing their names
to a memorandum of association and otherwise complying with the requirements of this Act in
respect of company registration, form an incorporated company, with or without limited
liability.
Such a company may be either

a company having the liability of its members limited by the memorandum to the amount, if
any, unpaid on the shares respectively held by them (in this Act termed ''a company limited by
shares''); or
a company having the liability of its members limited by the memorandum to such amount as
the members may respectively thereby undertake to contribute to the assets of the company in
the event of its being wound up (in this Act termed ''a company limited by guarantee"); or
a company not having any limit on the liability of its members (in this Act termed ''an
unlimited company'').
Legal considerations
In Tanzania the Companies Act [No. 12] of 2002 regulates the formation, operation and all other
matters pertaining to registered companies. In order to be incorporated a company must be
registered with the Registrar of Companies within the offices of Business Registration and
Licensing Agency (BRELA) who issues a certificate of incorporation. This is done by lodging
and registering its Memorandum and Articles of Association to the Registrar as specified in
Section 14 of the Companies Act [No. 12] of 2002.
The Memorandum is a legal document which must contain the following information (Section 4.
the Companies Act [No. 12] of 2002).
(a) the name of the company, with "Limited" as the last word of the name in the case of a
limited company.
(b) the objects of the company.
(c) that in case of a limited company, it must state that the liability of its members is limited.
2 Introductory Financial Accounting
(d) the amount of authorized share capital divided into shares of a fixed amount which is
termed as the par or nominal value of each share. The authorized share capital is the
maximum amount the company may issue without the need to change its memorandum.
The memorandum of every company shall be printed in the English language and shall state the
following:
(i) the name of the company, with ''public limited company'' as the last
words of the name in the case of a public company, or with ''limited'' as
the last word of the name in the case of a company limited by shares or
by guarantee (not being a public company);
(ii) the objects of the company;
(iii) The memorandum of a company limited by shares or by guarantee must also state
that the liability of its members is limited;
(iv) The memorandum of a company limited by guarantee must also state
that each member undertakes to contribute to the assets of the company
in the event of its being wound up while he is a member, or within one
year after he ceases to be a member, for payment of the debts and
liabilities of the company contracted before he ceases to be a member,
and of the costs, charges and expenses of winding up, and for adjustment
of the rights of the contributories among themselves, such amount as
may be required, not exceeding a specified amount.
(v) In the case of a company having a share capital the memorandum must
also, unless the company is an unlimited company, state the amount of
share capital with which the company proposes to be registered and the
division thereof into shares of a fixed amount; no subscriber of the
memorandum may take less than one share; there must be shown in the
memorandum against the name of each subscriber the number of shares
he takes.
The Articles of Association contain the prescribed regulations for the company (Section 9). They
deal with such matters as voting rights of shareholders, powers and duties of directors, etc.
From the date of incorporation stated in the Certificate of Incorporation the subscribers to the
Memorandum together with such persons as may from time to time become members of the
company, shall be a body corporate capable of exercising all the functions of an incorporated
company, with power to hold land, and having perpetual succession and a common seal.
In addition to the legal requirements regarding the registration and incorporation of companies,
the Companies Act No. 12 of 2002 also contains specific provisions related to: issue and transfer
of shares, keeping of statutory books, annual returns, published annual accounts, disclosure
requirements and other audit and accounting requirements. These provisions will be referred to in
subsequent sections where applicable.
Types of companies
A company may either be public or private and limited or unlimited.
Public and private companies
The Companies Act No. 12 of 2002 [section 3] defines a ''public company'' as a company limited
by shares or limited by guarantee and having a share capital, and being a company the
Introduction to Company Accounts 3
memorandum of which states that it is to be a public company. A public company should have no
fewer than seven members but with no maximum number. Its shares may be issued to the general
public and there is no restriction on the transfer of shares.
A private company is defined in the Companies Act No. 12 of 2002 [section 27] as one whose
Articles includes the following aspects:
(vi) restricts the right to transfer its shares;

(vii) limits the number of its members to fifty, not including persons who are
in the employment of the company and persons who, having been
formerly in the employment of the company, were while in that
employment, and have continued after the determination of that
employment to be, members of the company, and
(viii) prohibits any invitation to the public to subscribe for any shares or
debentures of the company.
Limited and Unlimited Companies
A limited company may be either one having the liability of its members limited by the
Memorandum to the amount unpaid on the shares held by them, known as a company limited by
shares. It may on the other hand have the liability of its members limited to such amount as the
members may undertake to contribute to the assets of the company in the event of winding-up,
termed as company limited by guarantee.
An unlimited company is one not having any limit on the liability of its members. This type of
company is not very common, as one specific advantage of forming a company is the limited
liability of its owners/shareholders.
The focus of this chapter is on limited liability companies and whenever the term company is
used it implies a company limited by shares.
Characteristics of a limited company

A limited company has certain attributes which distinguish it from other forms of business
organization. Some of the distinguishing characteristics are discussed below:
Separate legal entity
A company is separate and distinct from its shareholders who are the owners. As a separate legal
entity, a company may conduct its business operations with the same legal rights, duties and
responsibilities as a person. For example, it has a right to own and possess land and property; a
right to enter into contracts; a right to sue and be sued in its own name.
Limited shareholders' liability
As a separate legal entity, a company is responsible for its own acts and its own liabilities
resulting from its business operations. The shareholders' liability is limited to the amount of
contributed capital invested in the company.
Transferability of ownership
The ownership in a company is represented by shares which can easily be transferred from one
shareholder to another without need for consent from other owners. This is especially true for
public companies where trading of shares is done in a stock exchange.
Indefinite life
A company may continue in existence indefinitely when business is operating successfully. It is

not affected by the changes in ownership or shareholders and therefore it has a more stable life.
Separation of ownership and management
It is usual for management of large companies to be delegated to a Board of Directors duly

elected by the owners/shareholders. Besides the right to vote for the Directors, the
owners/shareholders have no other involvement in the management of the company. However,
small private companies may continue to have a major shareholder acting as Managing Director
and other shareholders holding positions as directors or officers of the company. This aspect of
separation of ownership and management has recently given rise to serious corporate governance
problems – an aspect to which a brief section has been written in Chapter 16.
Share capital
Capital of a limited company is divided into shares of a fixed amount. The amount stated in the
Memorandum is known as the Authorized Share Capital. For example, this may be shs. 10
million divided into 100,000 shares of shs. 100 per share. This fixed amount per share is called its
par or nominal value. A company may not issue share capital in excess of what has been
authorized. The actual amount that has been issued to shareholders is termed Issued Share
Capital. If in the above example only 80,000 shares have been issued, then the company's issued
capital is shs. 8 million.
The steps followed when a company issues shares are:
Invitation
The company invites the public to apply for its shares through a Prospectus which is an offer
document that invites the public to subscribe and purchase shares of a company. A Prospectus
gives objectives and information on attractiveness of the company.
Application
The public applies for shares in the company, usually bringing in a portion of the issue price. This
is known as application money.
Allotment
Taking account of the number of applicants and applications together with the number of shares
available for issue, the company decides on how applicants will be awarded company shares. If
applications exceed number of shares available for issue, shares are known to have been
oversubscribed. When shares are oversubscribed a mechanism will be designed to allocate the
shares to applicants. This may involve refund of application money received at the previous stage.
It can also be decided that shares be issued on a pro-rata basis. For example, if 30,000 shares are
available for issue and 40,000 shares are applied for, one option would be to refund application
moneys to applicants for 10,000 shares and allot in full the 30,000 shares to the remaining
applicants. The other option would be to allot 3 shares for every 4 shares applied for, this is a pro-
rata allotment. Once a decision to allot is made applicants are informed and allotment money has
to be paid. Only at the stage of allotment is a company stated to have issued share capital.
Calls
When companies issue shares they may not require immediately the full issue price. It is normal
for companies to demand payment of issue price from shareholders by instalments depending on
company needs for funds. For example, payments for a fresh issue of shares of shs. 100 each par
value may be made as follows:
Shs. 20 (20%) on application

Shs. 30 (30%) on allotment
Shs. 30 (30%) on first call
Shs. 20 (20%) on final call
The last two instalments are calls.

Called-up Capital
This is the portion of the issued capital in which the amount payable per share has been requested
[called]. In the above example, the amount called per share may be shs. 80. In this case, the called
- up capital is shs. 6.4 million (80,000 shares x shs. 80). The balance remaining of shs. 1.6 million
is termed uncalled capital. This may be called for payment at a later date.
Calls in arrear
This is the amount of Issued Share Capital which has been called but has not been paid at its due
date. In our example, it is possible that 1,000 shares of the called-up capital have not been paid.
The calls-in-arrear will amount to shs. 30,000 (1000 shares*30).
Calls in advance
This is the amount which has not yet been called but already paid. It is possible for shareholders
to pay the full value of the share instead of the amount requested at a certain date. For example a
shareholder with 200 shares could have paid the full amount of shs. 20,000 (200 shares x 100)
instead of what has been called for of shs. 16,000 (200 shares*80). the difference of shs. 4,000 is
known as calls in advance.
Paid - up - capital - this is the portion of share capital that has been paid. It consists of the called-
up capital plus calls in advance, less calls in arrear. In our example this will be shs. 6,374,000.
All the above information will be shown in the shareholders' equity section of the Statement of
Financial Position as follows:
Authorised shares capital shs.

100,000 ordinary shares of shs. 100 each 10,000,000
Issued share capital
80,000 ordinary shares of shs. 100 each, shs. 80 called 6,400,000

Add: Call in advance 4,000
6,404,000
Less: Calls in arrears 30,000
Paid up capital 6,374,000
Classes of shares
The share capital of a company which is divided into shares may be of different classes. The most
common ones are preference shares and ordinary shares.
Preference shares
These are shares which are entitled to a fixed amount of dividend and have priority over ordinary
shares in receiving dividend when declared. For example, 12% Preference Shares will be entitled
to dividend equal to 12% multiplied by the nominal value of Issued Preference Share Capital.
Preference shares may be further distinguished between cumulative or non-cumulative.
Cumulative preference shares are entitled to receive yearly dividend. If no dividend is declared in
a particular year, this entitlement is carried forward as arrears of dividend to the following year.
Thus, it is possible for several years' dividend entitlement to accumulate and once declared, this
total accumulated dividend has priority for payment over the ordinary shareholders' claim for
dividend. The usual assumption is preference shares are cumulative unless stated otherwise. Non-
cumulative preference shares do not carry forward dividend entitlements to a subsequent year.
Ordinary shares
These are shares which a company is required to issue if it has only one type of shares. They
usually carry the right to vote on company matters; for example in electing the Board of
Directors. Thus, it is possible for a majority shareholder to exercise control over the company
with his votes. Ordinary shares are entitled to all the profits that remain after the preference
shares have been paid.
Issue of shares
A company may issue shares at par or nominal value, which is the fixed amount stated in the
share certificate; at a premium, which is an amount in excess of the nominal value; and at a
discount, which is an amount less than the par value. Issuing shares at a discount is subject to
many regulations and restrictions [Section 60(1)] that it is rarely done in practice.
The accounting entries for shares issued at par or at a premium are illustrated in the following
section. Although the examples refer to ordinary shares, the same treatment applies to preference
shares.
Example:
Taifa Company Limited has an authorized share capital of shs. 20 million divided into 200,000
ordinary shares with a nominal value of shs. 100 per share.
Transactions related to the issue of shares were as follows:
(a) Cash was received for 20,000 shares issued at shs. 100 per share.
(b) Cash was received for 30,000 shares issued at shs. 120 per share.
(c) Applications were invited for the issue of 50,000 shares at shs. 130 per share payable by
installments:
shs.
On application 20
On allotment [including the premium] 60
On first call 25
On final call 25
Applications are received for 60,000 shares; of which 40,000 shares were allotted in full and
20,000 shares were granted half. There were 5,000 shares not able to pay the amount due for the
final call.
The entries to record these transactions would be:
[a] Date Description Folio Debit Credit

Jan 1 Cash 2,000,000
Share Capital 2,000,000
To record issue of 20,000 ordinary
shares at par value.
[b] Date Description Folio Debit Credit

Jan 1 Cash 3,600,000
Share Capital 3,000,000
Share Premium 600,000
To record issue of 30,000 ordinary
shares at shs. 120.
In [c] 60,000 shares have been applied for while there are only 50,000 shares available. There is
an oversubscription of 10,000 shares. Allotment is to be made as follows:
Applications Allotment
40,000 1 40,000
20,000 0.5 10,000
60,000 50,000
On allotment the 40,000 applicants will be required to bring in shs. 2,400,000. The remaining
20,000 applicants were allotted only 10,000 shares. Therefore, the allotment money needed for
the 10,000 shares is shs. 600,000 (10,000 shares x shs. 60). However, they had applied for 20,000
shares bringing in shs. 400,000 of application money. They have excess application money of shs.
200,000 from the 10,000 shares not allotted to them and would bring in only shs. 400,000 to make
up the shs. 600,000 required on allotment. Total cash receivable on allotment therefore, is:
Shares shs.
40,000 2,400,000
10,000 400,000
50,000 2,800,000
Journal entries to record all remaining events in this issue are as follows:
Date Description Folio Debit Credit

Cash 1,200,000
Applications and Allotment 1,200,000
To record receipt of application
money for 60,000 ordinary shares
each shs. 20.

Ordinary Share Capital 2,500,000
Share Premium 1,500,000
To record allotment of 50,000 shares
issued at a premium.

Cash 2,800,000
To record receipt of allotment money
for 50,000 ordinary shares.

First Call 1,250,000
To record the first call for 50,000
ordinary shares each shs. 25.

Cash 1,250,000
To record receipt of money on first
call.

Final Call 1,250,000
To record the first call for 50,000
ordinary shares each shs. 25.

Cash 1,125,000
Final Call 1,125,000

To record receipt of money on final
call.
Note that the 5,000 shares which were not able to pay the final call will have calls in arrear
amounting to shs. 125,000 (5,000 shares*25).
The relevant general ledger accounts after these entries were made are shown below:
Application and Allotment

Date Details Folio Debit Date Details Folio Credit
Share Capital 2,500,000 Cash 1,200,000
Share Premium 1,500,000 Cash 2,800,000
4,000,000 4,000,000
First Call
1,250,000 1,250,000
Final Call
Calls in arrear 125,000
1,250,000 1,250,000
Calls in Arrear
Final call 125,000 Balance c/d 125,000
125,000 125,000
Balance b/d 125,000
Share Capital
Cash 2,000,000
Cash 3,000,000
Application &
Allotment 2,500,000
Balance c/d 10,000,000 Final Call 1,250,000
10,000,000 10,000,000
Balance b/d 10,000,000
Share Premium
Cash 600,000
Application
Balance c/d 2,100,000 & Allotment 1,500,000
2,100,000 2,100,000
The shareholders equity section of Taifa Company Limited's Statement of Financial Position will
look as follows:

less: Calls in arrears, 5,000 shares 125,000
Share premium 2,100,000
Forfeited shares
The Companies Act No. 12 of 2002 [section 29-32] makes specific provisions for the company’s
right to forfeit shares with calls that remain unpaid. Following are the provisions with respect to
the forfeiting of shares.
If a call remains unpaid after it has become due and payable, the directors may give to the person
from whom it is due not less than fourteen clear days notice requiring payment of the amount
unpaid, together with any interest which may have accrued. The notice shall name the place
where payment is to be made and shall state that if the notice is not complied with, the shares in
respect of which the call was made will be liable to be forfeited [section 29].
If the notice is not complied with, any share in respect of which it was given may, before the
payment required by the notice has been made, be forfeited by a resolution of the directors to that
effect and the forfeiture shall include all dividends or other moneys payable in respect of the
forfeited shares and not paid before the forfeiture [section 30].
Subject to the provisions of the Companies Act No. 12 of 2002, a forfeited share maybe sold, re-
allotted or otherwise disposed of on such terms and in such manner as the directors determine
either to the person who was before the forfeiture the holder or to any other person, and at any
time before a sale, re-allotment or other disposition the forfeiture may be cancelled on such terms
as the directors think fit. [section 31].
A person any of whose shares have been forfeited shall cease to be a member in respect of the
forfeited shares and shall surrender to the company for cancellation the certificate for the shares
forfeited, but shall remain liable to the company for all moneys which, at the date of forfeiture,
were payable by him to the company in respect of the shares, but his liability shall cease if and
when the company shall have received payment in full of all such moneys in respect of the shares,
but the directors may waive payment wholly or in part or enforce payment without any allowance
for the value of the shares at the time of forfeiture of for any consideration received on their
disposal [section 32].
Any amounts of money paid for the shares by the subscriber from whom the shares are forfeited
would be retained by the company. These shares will be shown separately in the Statement of
Financial Position under Reserves as Forfeited Shares.
Example:
Assuming the 5,000 shares with calls on arrear were forfeited by Taifa Company. The entries to
record this would be as follows:

Ordinary Share Capital 500,000
Forfeited Shares 500,000
To record nominal value of 5,000
ordinary shares forfeited.

Forfeited Shares 125,000
Calls in Arrears 125,000
To transfer the unpaid final call on
5,000 ordinary shares forfeited.
After these entries are recorded the Share Capital account will have a balance of shs. 9,500,000
(10,000,000 - 500,000). It should be noted that the share premium account remains the same.
Share Capital
Cash 2,000,000
Cash 3,000,000
Application &
Allotment 2,500,000
Balance c/d 10,000,000 Final Call 1,250,000
10,000,000 10,000,000
Forfeited Shares 500,000 Balance b/d 10,000,000
9,500,000 Balance c/d 9,500,000
Calls in Arrear
Final call 125,000 Balance c/d 125,000
125,000 125,000
Balance b/d 125,000 Forfeited Shares 125,000
Forfeited Shares
Calls in arrear 125,000 Share Capital 500,000
Balance c/d 375,000
500,000 500,000
The shareholders' equity section of the Statement of Financial Position will now look as follows:

less: Calls in arrears, 5,000 shares 125,000
Forfeited shares 375,000
Reserves
The accounting treatment of the profit or loss resulting from the business operations of a sole
proprietorship or a partnership is such that in the case of a single proprietorship, the owner gets
all the profit or loss which is closed to his capital account at the end of the accounting period. In
the case of a partnership, the profit or loss is shared among the partners and transferred to each
one's personal account. In both cases, the owner or partners may withdraw a portion or the whole
profit by way of drawings in cash or in kind. In a company where the ownership is represented by
shares the entitlement and distribution of profits is handled differently. In a company shareholders
get a return on their invested capital by way of dividends and capital gain if and when the share
price appreciates in value.
Companies therefore, have profits that are available for distribution but they also may have
profits that are not available for distribution. All types of profits included in companies are
known as reserves. However, those that are available for distribution are known as revenue
reserves while those that are not available for distribution are known as capital reserves.
Revenue reserves
All profits of the companies earned through operations are available for distribution as dividends.
However, a company could place some restrictions on amounts of profits set aside for specific
activities. For example, a Reserve for Research and Development may be set up to make funds
available for this purpose if the company intends to expand its business. Such a reserve remains a
revenue reserve which may revert to becoming distributable earnings if the purpose for which it
was intended is no longer needed.
Profits that have not been earmarked for a specific purpose are transferred to a general reserve
account also known as retained earnings. The Companies Ordinance allows distribution of all
profits arising from the ordinary business operations of the company. Often profits are distributed
through dividend payouts.
Capital reserves
Profits that are not available for distribution as dividends are capital reserved. Normally these are
profits and gains outside normal operations of the business. Common examples of these are:
(a) Share Premium

(b) Non Current Asset Revaluation Reserve
(c) Capital Redemption Reserve
It is prohibited to use capital reserves for payment of cash dividends. These reserves are shown
separately in the shareholders' equity section of the Statement of Financial Position.
Declaration and distribution of dividends
The Board of Directors is empowered to declare and approve interim dividends payable before
the end of an accounting period. A final dividend is usually approved at the annual general
meeting of shareholders. It is important for a company to maintain an up-to-date register of
shareholders to be able to identify who will be entitled to receive dividends.
In this regard, there are three important dates to consider:
Date of declaration of dividend
This is the date when the Board of Directors proposes the payment of dividend. Dividends are
usually declared as a certain amount payable to each share. For example, shs. 30 per share; where
a shareholder holding 100 shares on the date of record will be entitled to receive shs. 3,000 on the
date of payment. The relevant bookkeeping entry related to declaration of dividends is as follows:

Retained Earnings 105,000
Proposed Dividends Payable 105,000
To record declaration of dividends to
ordinary shareholders.
Date of record
This is the date fixed by the Board, whereby all shareholders listed in the Company's register on
this date will be entitled to the proposed dividend.
Date of payment of dividend
This is the date when the proposed dividend will be paid to shareholders. The relevant
bookkeeping entry related to payment of dividends is as follows:

Proposed Dividends Payable 105,000
Cash 105,000
To record payment of dividends to
ordinary shareholders.
If the dividends payment occurs after the end of the accounting period, the Dividends Payable
will be shown in the Statement of Financial Position among the Current Liabilities.
Financial statements of companies

Generally financial statements of a company are in many respects similar to those of a sole trader
or a partnership except for the shareholders' equity section of the Statement of Financial Position.
The shareholders' equity section consists of the Share Capital, Retained Earnings and Reserves. A
typical example is shown below:
Statement of Financial Position (extract)

50,000 10% preference shares of shs. 200 each 10,000,000
30,000,000
Issued and paid up share capital
50,000 10% preference shares of shs. 200 each 10,000,000
20,000,000
Reserves
Retained earnings 3,400,000
5,900,000
Total shareholders’ equity 25,900,000
International Accounting Standard [IAS] 1: Presentation of Financial Statements
IAS 1: Presentation of Financial Statements was issued in December 2003 and became applicable
for annual periods beginning on or after 1 January 2005. IAS 1 prescribes the basis for
presentation of general purpose financial statements, to ensure comparability both with the
entity’s financial statements of previous periods and with the financial statements of other
entities.
As per IAS 1 a complete set of financial statements comprises the following:
i. a Statement of Financial Position;

ii. a Statement of Comprehensive Income;
iii. a statement of changes in equity;
iv. a cash flow statement; and
v. notes, comprising a summary of significant accounting policies and other explanatory
notes.
International Financial Reporting Standards
Fair presentation of financial statements requires faithful representation of the effects of

transactions, events and conditions. A framework exists to facilitate preparation of financial
statements using International Financial Reporting Standards [IFRS]. The application of IFRSs
with additional disclosure when necessary, is presumed to result in financial statements that
achieve a fair presentation. An entity must make an explicit and unreserved statement of
compliance with IFRSs in the notes to the financial statements. Such a statement is only made on
compliance with all the requirement of IFRSs. A departure from IFRSs is acceptable only in the
extremely rare circumstances in which compliance with IFRSs conflicts with providing
information useful to users in making economic decisions. IAS 1 specifies the disclosures
required when an entity departs from a requirement of an IFRS.
In the end IAS 1 specifies the following about the preparation and presentation of financial
statements:
Financial statements are prepared on a going concern basis unless management either intends to
liquidate the entity or to cease trading, or has no realistic alternative but to do so.
Financial statements, except for cash flow information, are prepared using the accrual basis of
accounting.
The presentation and classification of items in the financial statements are usually retained from
one period to the next..
Each material class of similar items is presented separately. Dissimilar items are presented
separately unless they are immaterial. Omissions or misstatements of items are material if they
could, individually or collectively; influence the economic decisions of users taken on the basis of
the financial statements.
Assets and liabilities, and income and expenses, are not offset unless required or permitted by an
IFRS.
Comparative information is disclosed for all amounts reported in the financial statements, unless
an IFRS requires or permits otherwise.
Financial statements are presented at least annually.
IAS 1 also specifies the minimum line item disclosures on the face of, or in the notes to, the
Statement of Financial Position, the Statement of Comprehensive Income, and the statement of
changes in equity. Current and non-current assets and current and non-current liabilities are
presented as separate classifications on the face of the Statement of Financial Position.
Illustration
The following illustration provides an example of a Statement of Comprehensive Income and

Statement of Financial Position that meet only the minimum requirements of presentation of the
faces of these two financial statements. The intricacies of the Financial Statements for publication
will be dealt with in advanced accounting course.
The Trial Balance as at 31 December, 20X2 of Binafsi Company, Limited is shown below:
T.Shs.'000 T.Shs.'000
Authorized & Issued Share Capital:
100,000 shares of shs. 200 each 20,000
Share Premium 2,000
Retained Earnings 600
Trade Creditors 840
Building 15,000
Accumulated. Depreciation - Building 1,500
Equipment 3,500
Accumulated. Depreciation - Equipment 350
Motor Vehicle 8,000
Accumulated. Depreciation - Motor Vehicle 1,600
Stock, 1st January 720
Trade Debtors 800
Allowance for Receivables 32
T.Shs.'000 T.Shs.'000
Cash at Bank 2,400
Cash on Hand 580
Sales 14,498
Returns Inward 250
Purchases 6,740
Carriage Inward 130
Administrative Expenses 1,800
Selling & Distribution Expenses 1,200
Directors' Remuneration 300
41,420 41,420
Additional information:
(a) The Building and Equipment are depreciated at 10% per annum on cost.
(b) The Motor Vehicle is depreciated at 20% per annum on net book value.
(c) Provision for doubtful debts should be equal to 5% of Trade Debtors.
(d) Stock at 31st December amounts to shs. 500,000
(e) The Audit fee will be shs. 120,000
(f) Corporation tax is 40% of net profit.
(g) The Directors have proposed a dividend of shs. 5 per share.
Required:
Prepare the Statement of Comprehensive Income of Binafsi Company Ltd. for the year and its
Statement of Financial Position as at 31 December, 20X2.
Binafsi Company Limited

Statement of Comprehensive Income
For the Year Ended 31 December, 20X2
T.Shs.'000 T.Shs.'000
Sales 14,498
Less: Returns Inwards 250
Net Sales 14,248
Less: Cost of Goods Sold
Opening Stock 720
Purchases 6,740
Carriage Inward 130
Goods available for sale 7,590
Less: Closing Stock 500 7,090
Gross Profit 7,158
Less: Administrative Expenses 1,800
Selling & Distribution Exp. 1,200
Directors' Remuneration 300
Depreciation - Building 1,500
Depreciation - Equipment 350
Depreciation - Motor vehicle 1,280
Doubtful Debts 8
T.Shs.'000 T.Shs.'000
Audit fee 120 6,558
Net Profit before tax 600
Corporation tax 40% 240
Profit after tax 360
Add: Retained Earnings - 1st January 600
Total Unappropriated Profit 960
Less: Proposed Dividend 500
Retained Earnings - c/f 460
Binafsi Company Limited

Statement of Financial Position
As at 31 December 20X2
T.Shs.'000 T.Shs.'000 T.Shs.'000
Non Current Assets Cost Accum. Depr. Book Value
Building 15,000 3,000 12,000
Equipment 3,500 700 2,800
Motor Vehicle 8,000 2,880 5,120
Total 26,500 6,580 19,920
Current Assets
Stock 500
Trade Debtors 800
Less: Prov. for Doubtful Debts 40 760
Cash at Bank 2,400
Cash in Hand 580
Total Current Assets 4,240
24,160
Liabilities and Shareholders' Equity

Authorized & Issued Share Capital
100,000 shares of T.shs. 200 each 20,000
Share Premium 2,000
Retained Earnings 460
Total Shareholders' Equity 22,460
Current Liabilities:
Trade Creditors 840
Audit Fee Payable 120
Corporation Tax Payable 240
Dividend Payable 500 1,700
Total Liabilities & Shareholders’ Equity 24,160
Audits of financial statements
As legal entities, companies are required by law to have their financial statements audited and
made public at a general meeting. Sections 170-179 of the Companies Act No. 12 of 2002` cover
the legal provisions regarding the appointment, remuneration, resignation or removal of auditors.
Corporate Governance Issues

The high-profile corporate collapses of recent years have highlighted corporate governance
failures on a global dimension. Consequently, there have been a variety of responses that have
brought the issue of corporate governance and accountability to the attention of important
corporate stakeholders such as regulatory and legal authorities as well as the public generally.
For example, in response to the corporate scandals, the US Congress enacted the Sarbanes-
Oxley Act in 2002, which is a very comprehensive legislative package.
The Sarbanes-Oxley Act introduced sweeping reforms in corporate governance systems of

publicly traded companies aimed at increasing the disciplinary systems of managers and
gatekeepers. In an attempt to restore public trust and confidence in corporate accounting and
reporting, the Sarbanes-Oxley Act was designed to improve the governance and accountability
of boards, managers and gatekeepers by inducing increased oversight and monitoring of US-
listed companies and reputational intermediaries.
In addition to the audit reforms, the Sarbanes-Oxley Act put in place a number of measures
specifically designed to counter the governance failures. These include requiring CEOs and
CFOs to certify, on pain of criminal penalties, their firms’ periodic reports and the
effectiveness of internal controls; the imposition of obligations on corporate lawyers to report
any evidence of suspected violations of securities law; the prohibition of corporate loans to
managers or directors; restrictions on stock sales by executives during ‘blackout periods’; and
requiring firms to establish an independent audit committee, of which at least one member
must be a financial expert.
The wave of US regulatory reform that followed the collapse of Enron has spilled over into the
rest of the world. First directly as the SOXA applies to non-US firms that are listed on a US
Exchanges.
Internal Controls
The first regulatory challenge relates to compliance with SOXA’s internal controls standards.
According to the SOXA, management of a US-listed company is required to file a report that
should state:
i) management's responsibilities for establishing and maintaining adequate internal
controls and procedures over financial reporting;
ii) management’s assessment about the effectiveness of the company's internal
controls as of the end of the company's most recent fiscal year, including a
statement as to whether the controls are effective;
iii) any ‘material weaknesses’ in internal controls that management has identified;
iv) the framework used by management to evaluate the effectiveness of the company's
internal controls; and v)
v) an outside auditor’s attestation to and report on management’s evaluation of the
company’s internal controls and procedures for financial reporting.
Moreover, managers are responsible for creating, maintaining and regularly evaluating the
effectiveness of a system of ‘disclosure controls and procedures’. As noted above, the CEO
and CFO are accountable for reliability and accuracy of both the financial and non -financial
information contained in their periodic reports and internal accounting controls. They must
personally certify for compliance and take personal responsibility (criminal penalties) for non-
compliance.
Auditing Standards
The second regulatory challenge concerns the recent shift in auditing standards. In an effort to
create a more independent and accountable audit environment, the SOXA puts significant
emphasis on the regulation of not only accounting and auditing practices of a registered public
accounting firm but also that of any Certified Public Accountant (CPA) associated therewith,
and any CPA working as an auditor of a publicly traded company.
The SOXA establishes a direct reporting responsibility between the auditor and the audit
committee of the issuer, subjects audit and non-audit services to pre-approval by the audit
committee, limits non-audit services to be provided by an auditor to the issuer, clearly defines
rules for audit and non-audit service fees, regulates the conflict of interest between the auditor
and the issuer, and requires more frequent rotation of lead and review audit partners.
Moreover, following the SOXA’s enactment, the SEC ended a long era of self -regulation and
established PCAOB as a regulator. Subject to SEC oversight and aimed at protecting public
interest in “informative, accurate, and independent audit reports” for publicly traded
companies, the function of PCAOB is to:
i) register public accounting firms;

ii) establish, or adopt, by rule, “auditing, quality control, ethics, independence, and
other standards relating to the preparation of audit reports for issuers”;
iii) conduct inspections of accounting firms;
iv) conduct investigations and disciplinary proceedings, and impose appropriate
sanctions;
v) perform such other duties or functions as necessary or appropriate;
vi) enforce compliance with the Act, the rules of the Board, professional standards,
and the securities laws relating to the preparation and issuance of audit reports and
the obligations and liabilities of accountants with respect thereto.
As we have already seen, the fact that PCAOB authority extends to any non- US accounting
firm that ‘prepares and furnishes’ audit and accounting services to any US-listed company has
further sharpened the focus of transatlantic regulatory dialogue.
Accounting Standards
The third challenge in the transatlantic regulatory dialogue relates to the introduction of a
single set of global accounting standards. As of January 1, 2005, all listed European companies
have to comply with reporting requirements of the International Financial Reporting Standards
(IFRS).
Cost of Corporate Governance

As a consequence of sweeping changes in corporate governance, accounting and auditing
practices in the US and their across-the-board application to all US-listed companies, the cost
of regulatory compliance, possible delisting and deregistration from the US markets by
European companies became yet another challenge on the EU and US regulatory agenda.
Challenges of Corporate Governance in Emerging Economies
There is no doubt that CG is relevant for low income countries. What distinguishes LIC is a
deficient legal framework, lack of enforcement capacity, low CG awareness, and a different
ownership structure dominated by small and family controlled businesses. Consequently, the
cost of good CG is high relative to operating costs in smaller firms, which are prevalent in LIC.
This does not mean that efforts to improve CG in LIC should be abandoned, but rather that
they should be put in the right perspective. To justify the CG cost, companies have to see that
CG raises corporate value and lowers the cost of financing.
CG awareness (including director training)

Awareness ensures the buy-in of country leaders and the effective enforcement of CG rules.
Convincing external finance providers of their interest in their clients’ good CG eases
enforcement and raise CG reform viability.
Simple Rules
Due to the high costs of implementation and compliance with good CG norms. The simpler the
rules, the more likely their effective enforcement, with fewer training and resources usage.
- rules tailored to address the unique CG issues that are problematic in that country: Rules
perceived as irrelevant will not be credibly enforced. “The concepts themselves need to be
made indigenous rather than trying to adapt American or Western European models and
terminology.”
Disclosure and Transparency
Ensure the availability of a modicum of information: e.g. reliable annual accounts, good
ownership and material facts disclosure. “All this has become inexpensive in the current digital
age. It's more a question of attitude than expense.”
Shift CG Focus
from listed firms to the prevalent corporate form in a country: e.g. state-owned enterprises,
financial firms, family firms.
CG of unlisted firms:
CG is also about private contracting and private oversight, especially in unlisted companies. In
LIC, this is problematic due to weak liability, inexperienced courts, opacity of non-listed firms.
Bright-line rules that the court could easily follow will ease private enforcement (e.g.
oppressed minority rules, whereby minority investors can request to be bought out by the
majority investor or the company at some fair price).
Review questions
1. What are the characteristics of a limited company?
2. What are the types of companies?
3. Distinguish between a company, a partnership and single proprietorship.
4. What is a Memorandum of Association? List some information it must contain.
5. What is an Articles of Association?
6. What are the different classes of shares a company may issue?
7. Define or describe the following terms:
(a) par or nominal value

(b) share premium
(c) authorized share capital
(d) share capital issued and paid-up
(e) calls-in-arrear
(f) forfeited shares
8. What is the difference between a Revenue Reserve and Capital Reserve? Give an
example for each.
9. What is the main difference in the financial statements for a sole trader and a company?
Illustrate by giving an example.
10. Why is no bookkeeping entry needed when shares are transferred from one shareholder
to another?
11. How do you record a dividend declaration? A dividend payment?
12. How is it determined who will be entitled to receive dividends?
13. What is the difference between cumulative preference shares and participating preference
shares?
14. What is meant by the phrase "dividends in arrears"?

Exercises
1. Kumekucha Company Ltd. is authorized to issue 200,000 ordinary shares of shs. 50 par value
and 100,000 preference shares of shs. 80 par value. The company issued for cash, 50,000
ordinary shares at shs. 50 and 20,000 preference shares at shs. 100.
(a) show the journal entries to record the issue of shares.
(b) show the Shareholders' Equity section of the Statement of Financial Position.
2. Mambo Leo Company Ltd. is authorized to issue 100,000 Ordinary shares of shs. 200 par
value. Record the following transactions in the company's books.
(a) Issued 5,000 shares for cash at shs. 200 per share.
(b) Issued 10,000 shares for cash at shs. 220 per share.
(c) Issued 20,000 shares in exchange for a plot of land with appraisal value of shs. 4.3
million.
(d) (d)Issued 200 shares to the surveyor of the above plot of land as fees for his services.
3. Lucky Company, Ltd. invited subscription for 20,000 ordinary shares at shs. 100 par value
with the following arrangement: shs. 50 payable on application and allotment, shs. 30 on
first call and shs. 20 on final call.
Show the journal entries assuming all the 20,000 shares were subscribed for and allotted;
and all cash due on application, first call and final call were received.
4. Tumaini owned 100 ordinary shares of shs. 500 par value of Pugu Company Ltd on 1st June,
2009. Dividends of 80 per share were declared on 15th June for shareholders on record as at
30th June, and payable on 31st July, 2009. On 20th June, 2009 Tumaini sold 30 shares of
Pugu Company, and on 10th July, 2009 he sold another 20 shares of Pugu Company.
Calculate the amount of dividend Tumaini will receive for his shareholding.
Problems
1. The Azam Co. Ltd was registered with a capital of 100,000 ordinary shares of shs. 100
each and 20,000, 6% preference shares of shs. 100 each. No preference shares had been
issued but 40,000 ordinary shares had been issued at par and were fully paid.
All the remaining authorised capital was then offered for subscription on the following
terms:
Ordinary Preference
T.Shs. T.Shs.
On Application 25.00 12.50
On allotment 37.50 37.50
On First Call 25.00 25.00
On Second Call 12.50 37.50
Applications were received for 73,120 ordinary shares and 18,200 preference shares. One
application for 1,000 ordinary shares was refused. With the exception of the application
money on these shares, the excess application money was retained against the allotment
money due.
The first and second call money on 600 preference shares was received with the
allotment money. All sums due were received except the first and second call money on
800 ordinary shares.
Some time later those 800 ordinary shares were forfeited for non-payment of the first and
second calls and 600 of the forfeited shares were then re-issued as fully-paid for shs. 75
each.
(a) Ledger accounts (including bank account) recording the above.
(b) Statement of Financial Position extracts illustrating how the share capital and
other accounts affected would appear:-
(i) before the second call was made

(ii) after forfeiture of the 800 ordinary shares and before the re-issue, and
(iii) after the re-issue of 600 of the forfeited ordinary shares.
2. The following is the information drawn from the books of Tapel & Co. Ltd. for the year
ended December 31, 2009:-
TAS. ‘000’
Ordinary Share Capital 350,000
Preference Share Capital 175,000
8% Debentures 87,500
Stock January 1, 2009 385,000
Purchases 1,330,000
Transportation In 52,500
Rent 52,500
TAS. ‘000’
Salaries 26,250
Miscellaneous Expenses 31,500
Rates and Taxes 5,250
Traveling Expenses 10,500
Fuel, light and water 4,200
Insurance 2,100
Sales 1,750,000
Debtors 315,000
Creditors 227,500
Bills Receivable 52,500
Freehold Premises 147,000
Managing directors' Salary 35,000
Director’s fees 17,500
Stationary and Printing 5,950
Discount allowed 21,000
Preference Dividend (½ year to 30 June, 2009) 5,250
Debenture interest (½ year to 30 June, 2009) 3,500
Cash and Bank 108,500
Statement of Comprehensive Income 21,000
Other data:-
(i) Provide shs. 175,000 for doubtful debts.

(ii) The stock at December 31, 2009 was shs. 308,000,000
(iii) Transfer shs. 6,000,000 to Non Current Assets Replacement reserve and shs.
4,000,000 to General Reserve.
(iv) Proposed dividends on ordinary shares 1.5% on issued shares.
(v) The nominal capital of the company is shs. 875,000,000 divided into 105,000
ordinary shares of shs. 5,000 each and 50,000; 6% cumulative preference shares
of shs. 7,000 each. All the shares issued are fully paid.
Required:
Prepare a Statement of Comprehensive Income for the year ended December 31st, 2009;
and Statement of Financial Position as at December 31st, 1989.
3. Vutakamba Co. Ltd, with an authorized capital of shs. 150,000,000 and issued capital of
shs. 100,000,000 all in shs. 100 ordinary shares, issues the remaining shares for cash at a
price of shs. 180. shs. 30 payable on application, shs. 100 on allotment (including the shs.
80 premium), and shs. 50 on first and final call.
The accounting year ends on 31st December. Applications are received for 2,500,000
shares; small applications for 1,000,000 shares are rejected, and the application money
returned on 8 April, seven days after being received. On the same day the whole issue is
allotted to the remaining applicants pro-rata. The allotment moneys are all received by 30
April. The first and final call is made on 1 June, and the call moneys received by 30 June,
except those on 800 shares. These are forfeited on 31 December.
Required:
Show how the above events would be recorded in general ledger accounts.
4. Applications were invited by the directors of Gro-small Ltd for 1,500 of its shs. 100
ordinary shares at shs. 115 per share payable as follows:
T.Shs per share

On application 1 April 19-3 75
On allotment 30 April 19-3 (including shs. 15 premium) 20
On first and final call on 31 May 19-3 20
Applications were received for 1800 shares and it was decided to deal with these as
follows:
(1) To refuse allotment to applicants for 80 shares.

(2) To give full allotment to applicants for 220 shares.
(3) To allot the remainder of the available shares pro-rata among other applicants.
(4) To utilise the surplus received on applications in part payment of amounts due
on allotment.
An applicant, to whom 4 shares had been allotted failed to pay the amount due on the
first and final call and his shares were declared forfeited on 31 July 19-3.
Required:
Show how the transactions above would be recorded in the company's books.

Company Accounts

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Company Accounts

Загружено:

Авторское право:

Доступные форматы

www.desapoint.

Introduction to Company Accounts

Legal definition of a company

Such a company may be either

Public and private companies

(vi) restricts the right to transfer its shares;

Limited and Unlimited Companies

Characteristics of a limited company

Separate legal entity

Limited shareholders' liability

A company may continue in existence indefinitely when business is operating successfully. It is

Separation of ownership and management

It is usual for management of large companies to be delegated to a Board of Directors duly

The steps followed when a company issues shares are:

Shs. 20 (20%) on application

The last two instalments are calls.

Authorised shares capital shs.

80,000 ordinary shares of shs. 100 each, shs. 80 called 6,400,000

Transactions related to the issue of shares were as follows:

The entries to record these transactions would be:

[a] Date Description Folio Debit Credit

[b] Date Description Folio Debit Credit

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Final Call 1,125,000

Application and Allotment

Authorised shares capital shs.

disposal [section 32].

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Authorised shares capital shs.

(a) Share Premium

Declaration and distribution of dividends

In this regard, there are three important dates to consider:

Date of declaration of dividend

Date Description Folio Debit Credit

Date of payment of dividend

Date Description Folio Debit Credit

Financial statements of companies

Statement of Financial Position (extract)

International Accounting Standard [IAS] 1: Presentation of Financial Statements

As per IAS 1 a complete set of financial statements comprises the following:

i. a Statement of Financial Position;

International Financial Reporting Standards

Fair presentation of financial statements requires faithful representation of the effects of

The following illustration provides an example of a Statement of Comprehensive Income and

Binafsi Company Limited

Binafsi Company Limited

Liabilities and Shareholders' Equity

Audits of financial statements

Corporate Governance Issues

The Sarbanes-Oxley Act introduced sweeping reforms in corporate governance systems of

i) register public accounting firms;

Cost of Corporate Governance

Challenges of Corporate Governance in Emerging Economies

CG awareness (including director training)

Disclosure and Transparency

2. What are the types of companies?

3. Distinguish between a company, a partnership and single proprietorship.