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Introduction to Company Accounts and Issue of Shares and

Debentures

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Companies

Limited Companies Unlimited Companies

Authorized Capital

Issued Capital

Called up Capital

Paid Up Capital

Share Capital Other Funding

Preference Share Ordinary Share Debenture Reserves

Issue of shares and debenture

Revenue Reserve Capital Reserve

Price:- at par- at premium- at discount

Payment:- Payable in full- by instalments

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Introduction

A limited liability company is a legal entity and the existence of the limited liability companiesThe owners of a limited liability company will be named as “members” or “shareholders” of the companyEach company is governed by two documents, known as the Memorandum of Association and the Articles of Association

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A. Unlimited Company

B. Limited Company

- Companies do not have limited liability.

- The liability of a company can be limited by shares.

- A limited company has a separate legal personality. This means that it can sue or enter into contracts in its own name.

Types of Limited liability companies

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Types of Limited Liability Companies

There are two types of limited liability companies as follows:

(I) Public Limited Company(II) Private Limited Company

Descriptions Public Limited Company Private Limited Company

Share Transfer No restriction Restriction

Number of Shareholders No restriction Restriction (2 to unlimited) (2 to 50)

Raising fund from Public No restriction Restriction

Shares can be traded on Yes No Stock Exchange or not

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Distinction between Partnerships and Limited Liability Companies

Description Partnerships Limited Companies

Number of Members 2 to 20 (except in certain professional 2 to Unlimited (except private limited business) companies up to 50)

Liabilities of Members Unlimited liability of each partner Limited liability of each shareholder (except Limited Partners) to their agreed amounts of contributions

on their shares held

Amount of Capital Stated in the Partnership Agreement Restricted to the amount of Authorized and subject to each partner’s Capital financial resources

Management of the Partners are entitled to take part in Directors are appointed on behalf ofBusiness the operations of the business shareholders to manage the business

Distribution of Profits and losses are shared to By way of dividend, profits are shared Profit each partner in their agreed profit to shareholders in respect of their

and loss sharing ratio shares heldPart of the profits may be

unappropriated and retained by the company for future business purposes

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Classification of Capital

Authorized CapitalAuthorized Capital is the total number of shares and the total amount of Share Capital which a limited liability company is allowed to issue and it is stated in the Memorandum of Association. Authorized Capital may be changed and increased to cope with the growth of the company by the approvals of the shareholder

Issued CapitalIssued Capital is the part of the Authorized Capital actually issued to the shareholders.

Called-Up CapitalCalled-Up Capital is the amount of the Issued Capital that the limited liability companies request their shareholders to pay.

Paid-up CapitalPaid-up capital is the actual amount received from the Called-Up Capital. The amounts of the Called-Up Capital which has not yet been received will be named as “Calls in Arrears”. Calls in Advance”refers to the advance payment of the Un-called Capital from the shareholders.

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Types of Share Capital

A. Preference Shares

Preference shareholders are entitled to fixed % of dividends before any ordinarydividends are paid.No voting rights.

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

II) Non-cumulative preference shares the unpaid dividends cannot be carried forward to later years.

B. 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 claims have been met.

- Ordinary shareholders usually have voting rights.

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Example: Cumulative preference sharesYear 1 Year 2 Year 3 $ $ $

Net Profit / (Loss) for the year beforeappropriations (1,000) (2,000) 50,000

5,000 10% Cumulative PreferenceShares of $1 each

Dividend Nil Nil 1,500

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Example: Non-cumulative preference shares

Year 1 Year 2 Year 3 $ $ $

Net Profit / (Loss) for the year beforeappropriations (1,000) (2,000) 50,000

5,000 10% Cumulative Preference Shares of $1 each

Dividend Nil Nil 500

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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 claims (e.g, loan interest and preference share dividends ) have been met.- Ordinary shareholders usually have voting rights

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Other Means of Funding

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

B. 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 and capital reserves.

I) Revenue reserves - They are undistributed trading profits. - They can be used to pay dividends. - Examples are the balance on the profit and loss account and general reserve.

II) Capital reserves - They are gains or profits arising from non-trading or non-operating activities. - They are not available for distribution as dividends.

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- e.g. 1. Share premium a) to write off preliminary expenses b) to write off expenses of issuing shares c) to write off commissions paid and discounts on shares d) to pay up a bonus issue e) to provide premium on redemption of debentures. 2. Revaluation reserve This is the unrealized gain from an increase in the value of an asset after revaluation. 3. 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.

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Distinction between Shares and Debentures

Description Ordinary Shares Preference Shares Debentures

Relationship between the Members/Shareholders Member/Shareholders Creditors of the holders and the company of the companyof the company company

Dividends/Interest No fixed percentage A fixed rate of dividends A fixed rate of or amounts of dividends interest will paid The dividends will be whether or not the subjected to the company makes a profitability and profit dividends policy of the company

Priority of Distribution After the distribution Before to Ordinary Before any dividend of the dividends to Shareholders distributable to Preference Shareholders Ordinary and Preference

Shareholders

Treatment in Balance Ordinary Share Capital Preference Share Treated as a long termSheet Capital liability if the period of

repayment is longer than one year Treated as a current liab. If repayment < 1 yr.

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Issue Price

Issue at Par-The issue price is same as the “PAR”, “NOMINAL” or “FACE” value of the shares and debentures.

Issue at a Premium-The issue price may be HIGHER than the par value of the shares and debentures. The difference between the issue price and the par value of the shares or debentures is named as “SHARE PREMIUM”

Issue at a Discount-The issue price may be LOWER than the par value of the shares and debentures. The difference between the issue price and the part value of the shares or debentures is named as “SHARE DISCOUNT’

Raising of Capital-Issue of shares and debentures

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Methods of Payment

Payment in FullPayable by instalments

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The full amount of the issue price of the shares and debentures should be paid to the company on application whether or not the applicants will allot the shares and debentures.

Payment in full

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Descriptions Accounting entriesApplication Monies Received Dr. Bank

Cr. Ordinary Share Applicants*”No. of Application” X “Issue Price”

Issue of Ordinary Shares Capital (a) Issue at Par Dr. Ordinary Share Applicants Cr. Ordinary Share Capital•“No of Shares Actually Issued” X “Par Value of Each Share”(b) Issue at a Premium Dr. Ordinary Share Applicants Cr. Ordinary Share Capital Cr. Share Premium* “No. of Share Actually Issued” X “Par Value of Each Share” will be recorded in Ordinary Share Capital* “No. of Shares Actually Issued” X “The Value of Share Premium perEach Share” will be recorded in Share Premium

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Descriptions Accounting entries( c) Issue at a Discount Dr. Ordinary Share Applicants Share Discount Cr. Ordinary Share Capital * “No. of Shares Actually Issued” X “Par Value of Each Share” will be recorded in Ordinary Share Capital* “No. of Shares Actually Issued” X “The Value of Share Discount per Each Share” will be recorded in Share Discount

Refund of Oversubscribed Dr. Ordinary Share ApplicantsCr. Bank* “No. of Application Oversubscribed” X “Issue Price”

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The full amount of the issue price of the shares and debentures will be paid to the company by instalmentsin following steps:

Step 1 Receipt of application moneyStep 2 Return of application money to unsuccessful applicantsStep 3 Allotment of sharesStep 4 Receipt of allotment moneyStep 5 Call on sharesStep 6 Receipt of call money

These steps are demonstrated in the following example:

Payable by instalments

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Descriptions Accounting entriesApplication Monies Received

Dr. BankCr. Ordinary Share Applicants* “No. of Application” X “Issue Price”

Issue of Ordinary Shares

Capital

(a) Issue at ParDr. Ordinary Share ApplicantsCr. Ordinary Share Capital* “No. of Shares Actually Issued” X “Par Value of Each Share”

(b) Issue at a PremiumDr. Ordinary Share ApplicantsCr. Ordinary Share CapitalCr. Share Premium* “No. of Share Actually Issued” X “Par Value of Each Share” will be recorded in Ordinary Share Capital* “No. of Shares Actually Issued” X “The Value of Share Premium per Each Share” will be recorded in Share Premium

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Descriptions Accounting entries( c ) Issue at a DiscountDr. Ordinary Share Applicants Share DiscountCr. Ordinary Share Capital* “No. of Shares Actually Issued” x “Par Value of Each share” will be recorded in Ordinary Share Capital* “No. of Shares Actually Issued” x “The Value of Share Discount per Each Share” will be recorded in Share Discount

Refund of Oversubscribed or Rejected Application Monies

Dr. Application and AllotmentCr. Bank* “No. of Application Oversubscribed or Rejected” x “Issue Value of Application”

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Descriptions Accounting entriesAllotment Monies Received

Dr. BankCr. Application and Allotment* “No. of Share Actually Issued” X “Issue Value at Allotment”* Sometimes, oversubscribed application monies may be carried forward and offset against the allotment monies due.The difference between original allotment monies received and oversubscribed application monies will be recorded in these entries

Issue of Ordinary Shares at Call

Dr. CallCr. Ordinary Share Capital* “No. of Shares Actually Issued” x “Par Value of Each Share at Call” will be recorded in Ordinary Share Capital

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Descriptions Accounting entriesCall Monies Received Dr. Call

Cr. Ordinary Share Capital* “No. of Shares Actually Issued” x “Par Value of Each Share at Call” will be recorded in Ordinary Share Capital

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Example 1

Example 1Tai Fat Limited made a public offering of its 1,700,000 ordinary shares of $1 each at $1.4 per share. The shares were issued on the following terms:

Per share $

Application 0.3Allotment 0.6First and final call 0.5

•On 1 February 1997, applications for 3,000,000 shares were received.•Applications for 300,000 shares were unsuccessful and the money involved was returned on 3 February 1997.•Applications for 700,000 shares were given full allotment.•The remainder of the available shares were allotted among the other applicants on a pro-rata basis.•The balance of the sums received on application was applied to the amounts due on allotment.•The balances due on allotment were received on 1 March 1997.•On 1 April 1997, the first and final call was made and paid in full.

$1.4

Application and Allotment 900,000

First and Final Call 850,000

Application and Allotment 90,000

Application and Allotment

Bank 90,000(300,000*$0.3)

Ordinary Shares 850,000(1,700,000*$0.5)

Share Premium 680,000(1,700,000*$0.4)

Bank 900,000(3,000,000*$0.3)

Bank 720,000(1,700,000*$0.6-1,000,000*$0.3)

1,620,0001,620,000

Application and Allotment 720,000

Bank

Ordinary SharesBalance c/f 1,700,000 Application and Allotment 850,000

First and Final Call 850,000

1,700,000 1,700,000

First and Final CallOrdinary Shares 850,000 Bank 850,000

Share PremiumBalance c/f 680,000

Application and Allotment 680,000

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1. Bank (3,000,000 X $0.30) 900,000 Application and Allotment 900,000 Being money received for 3,000,000 shares on application

Journal

Dr Cr $ $

2. Application and Allotment 90,000Bank (300,000 X $0.3) 90,000

Being return of application money to unsuccessful applicants for 300,000 shares

3. Application and Allotment ($0.9 X 1,700,000) 1,530,000Ordinary Shares ($0.5 X 1,700,000) 850,000Share Premium ($0.4 X 1,700,000) 680,000

Being allotment of 1,700,000 ordinary shares

4. Bank (1,700,000 X $0.60 - 1,000,000 X $0.30) 720,000Application and Allotment 720,000

Being receipt of the amount due on allotment

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Journal

Dr Cr $ $

5. First and Final Call 850,000Ordinary Shares (1,700,000 X $0.5) 850,000

Being call on shares

6. Bank 850,000First and Final Call 850,000

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Forfeiture and Reissue of Shares

If a member fails to pay the calls requested from him, the directors may declare the shares as the ‘ Forfeited Shares’ and reissue the shares to another shareholder

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Descriptions Accounting entriesDeclaration of Forfeited Shares

(a) Forfeited Shares were Declared when they were not paidDr. Bank Forfeited SharesCr. Application and Allotment, OR Call* “No. of Shares Declared as Forfeited” x “Issue Value at that Stage” will be recorded in Forfeited Shares.(b) Forfeited Shares were NOT Declared when they were not paidDr. Bank Allotment / Call in ArrearsCr. Application and Allotment, OR Call* “No. of Shares Unpaid” x “Issue Value at that Stage” will be recorded in Allotment / Call in ArrearsUnpaid Value Declared as Forfeited SharesDr. Forfeited SharesCr. Allotment / Call in ArrearsTransfer the Value of Allotment / Call in Arrears to Forfeited Shares

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Descriptions Accounting entriesTransfer the call-up value of Forfeited share from issued share capital to Forfeited shares

Dr. Ordinary Share CapitalCr. Forfeited Shares *”No. of shares Declared as Forfeited” x “Call-up value of Shares Forfeited” will be transferred to Forfeited Shares

Transfer the called-up value of Forfeited share from issued share capital to Forfeited shares

Dr. Ordinary Share CapitalCr. Forfeited Shares*”No. of shares Declared as Forfeited” x “Call-up value of Shares Forfeited” will be transferred to Forfeited Shares

Reissue of Forfeited Shares or not

Forfeited Shares are “NOT Reissued”Dr. Forfeited SharesCr. Share PremiumAny paid amount of the Forfeited Shares will be transferred to the Share PremiumForfeited Shares Account is closed

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Descriptions Accounting entriesReissue of Ordinary Shares Dr. Forfeited Shares

Cr. Ordinary Share Capital* “No. of Shares Reissued” x “Called-up value of shares forfeited” will be recorded in Ordinary Share Capital

Receipts from the reissue of shares

Dr. BankCr. Forfeited Shares*”No. of shares Reissued” x “Issue Value of Each Reissued Share”

Transfer of the excess amount over the called-up nominal value of the shares reissued

Dr. Forfeited SharesCr. Share PremiumAny balance of the Reissue of Forfeited Shares will be transferred to the Share Premium

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Example 2

Example 2Tai Cheong Limited made a public offering of its 1,000,000 ordinary shares of $1 each at $1.5 per sharesThe shares were issued on the following terms:

Per share $

Application 0.6Allotment on 1 April 1997 0.2First call on 1 June 1997 0.5Final call on 1 September 1997 0.2

On 1 March 1997, applications for 1,000,000 shares were received. They were given full allotment. All sums due on received on 10 April 1997. All money for the first call was received on 10 June, except for one shareholder who had been allotted 1,000 shares.

$1.5

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Case 1All money for the final call was received on 15 September 1997, except for the shareholder who failed to pay the first call. The directors had not declared the shares forfeit by 31 December 1997.

Case 2All money for the final call was received on 15 September 1997. Except for the shareholder who failed to pay the first call. The directors declared the shares forfeit on 1 October 1997.

Case 3The directors declared the shares forfeit on 1 July 1997. On 1 August 1997, 600 shares were reissued for $0.9 each, subject to a final call. On 1 September 1997, the directors made the final call and all sums due were received.

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Case 1

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Application and AllotmentApr 1 Ordinary Shares 300,000(1,000,000*$0.3)Apr 1 Shares Premium 500,000 (1,000,000*$0.5)

Mar 1 Bank (1,000,000 X $0.60) 600,000

Apr 10 Bank (1,000,000 X $0.20) 200,000

800,000 800,000

Case 1

Ordinary SharesApr 1 Application and Allotment 300,000

Share PremiumDec 31 Balance c/f 500,000 Apr 1 Application and Allotment 500,000

Bank

Mar 1 Application 600000

Apr 15 Allotment 200000

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Final CallSep 1 Ordinary Shares 200,000 Sep 15 Bank (1,000,000 - 1,000) X $0.2 199,800

Sep 15 Calls in Arrears 200

200,000 200,000

Calls in ArrearsJune 10 First Call 500 Dec 31 700

700 700

First CallJune 1 Ordinary Shares 500,000 June 10 Bank (1,000,000 - 1,000) x $0.5 499,500

June 10 Calls in Arrears 500

500,000 500,000

Bank

Mar 1 Application 600000

Apr 15 Allotment 200000June 1 First call 499500Final call 199800

Sep 15 Final Call 200

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Balance Sheet as at 31 December 1997 (Extract)

$Current AssetsCalled-up Capital not yet paidShare CapitalIssued and Fully Paid1,000,000 Ordinary Shares of $1 eachReservesShare Premium

Ordinary SharesApr 1 Application and Allotment 300,000

June First call 500000Sept 1 Final call 200000

700

1000000

500000

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Case 2

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Ordinary SharesApr 1 Application and Allotment 300,000June First call 500000Sept 1 Final call 200000

Oct 1 Forfeited shares (1000*$1) 1000

Dec 31 Bal c/d 999000

1000000 1000000

Calls in ArrearsJune 10 First Call 500

700 700Sep 15 Final Call 200 Oct 1 Forfeited shares 700

Forfeited shares

Oct 1 Call in Arrears 700Dec 31 Bal c/f 300

Case 2

Oct 1 Ordinary shares(1000*$1) 1000

1000 1000

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Balance Sheet as at 31 December 1997 (Extract)

Share CapitalIssued and Fully Paid999,000 Ordinary Shares of $1 eachReservesShare PremiumForfeited Shares 300

500000

999000

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Case 3

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Ordinary Shares

Dec 31 Balance c/f 999,600

Apr 1 Application and Allotment 300,000

June 1 First Call 500,000

1,000,400 1,000,400

Share Premium

July 1 Forfeited Shares (1000*$0.5) 500

Sept 1 Final Call (999,600 X $0.2) 199,920

June 10 First Call 500Calls in Arrears

Aug 1 Forfeited Shares 240 500,240

Apr 1 Application and Allotment 500,000Dec 31 Balance c/f 500,240

500,240

Case 3

Aug 1 Forfeited Shares (600 x $0.80) 480

July 1 Forfeited Shares 800 (1,000 x $0.80)

Forfeited shares

July 1 Calls in arrears 500Aug 1 Ordinary shares (600*$0.8) 480

Aug 1 Share premium 240Dec 31 Bal c/d 120

July 1 Ordinary shares (1000*$0.8) 800Aug 1 Bank (600*$0.9) 540

1340 1340

Reissue

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*Amount transferred to share premium:

Receipt from original holder (600*$0.8) 480Less: Share premium (600*$0.5) 300 180Add: Receipt from second holder (600*$0.9) 540

720Less: Called-up nominal value (600*$0.9) 480

240

Final call

Bank

Sept 1 Ordinary shares 199920 (999600*$0.2)

Sept 15 Bank 199920

Mar 1 Application 600000Apr 10 Allotment 200000June 10First call 499500Aug 1 Forfeited shares 540Sept 15 Final call 199920

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Balance Sheet as at 31 December 1997 (Extract)

Share CapitalIssued and Fully Paid999,000 Ordinary Shares of $1 each ReservesShare Premium Forfeited Shares

999600

500240

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Right issue

Right issue is an offer to the existing shareholders to subscribe for more shares, in proportion to their existing shareholding, usually at a relatively cheap price.

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Bonus issueBonus shares are issued when there is a build-up of reserves (e.g. undistributed profits) in the company.Those profit will often not be represented by cash, since the profits have been invested in other assets to expand the business.It is done by changing the company’s reserves into share capital and allotting shares to existing shareholders por rata, e.g. one share for every two shares heldThis decrease the amount of retained earnings and increases the share capital. There is no entry on cash or bank account because mp cash changes hands, the bonus shares are issued free.

Dr. Profit and Loss (retained earnings) accountCr. Share Capital account (with the nominal value of shares allotted as fully paid bonus shares)

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Debenture

A debenture is a written acknowledgement of debt.Debenture are long-term loans which attract a large number of investors.The terms of debentures such as the rate of interest payable, the date of redemption (if applicable) and security given by the borrowing company are governed by a trust deed

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Issue of debenture

The accounting treatment of debenture is the same as that of shares, except for the change in the name of the accountsDebenture may be issued payable in full or payable by instalmentsDebenture can be issued at par, at premium or at a discount

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Better Enterprises Ltd was formed with the legal right to be able to issue 100,000 shares of $1 each.

The company has actually issued 75,000 shares.

None of the shares has yet been fully paid up. So far the company has made calls of $0.80 per share.

All the calls have been paid by shareholders except for $200 owing from one shareholder.

Authorised share capital = Issued share capital =

Called-up capital = Calls in arrear =

Paid-up capital =

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$1,000,000

$75,000

$60,000

$200

59,800