CHAPTER - 19-Introduction to company accounting.pdf

Notes

1. Part F-PREPARING BASIC FINANCIAL STATEMENTS
CHAPTER -19
Introduction to company accounting
Part 1
27
th
Oct 2020
ACCA F3
FINANCIAL ACCOUNTING (FA/FFA)
By: Dr. Roslin Lazarus

2. CHAPTER -19, Introduction to company accounting
Learning objectives
Upon completion of this chapter , you will be able to understand :
1.Limited liability and accounting records
2.Sharecapital
3.Reserves
4.Bonus and right issues
5.Relevant journalentries

3. CHAPTER -19, Introduction to company accounting
Capital structure and finance cost
EQUITY DEBT
SHARE
CAPITAL
OTHER
RESERVES

4. CHAPTER -19, Introduction to company accounting
Ordinary share capital
Issued share capital is the share capital that has been issued by the
company to shareholders in exchange for monetary value –usually cash.
Called up share capital is the amount of the nominal value paid by the
shareholder plus any further amounts agreed to be paid in the future.
Paid up share capital is the amount of the nominal value which has been
paid at the current date
Anordinaryshareholdingisevidenceofownershipofacompanyand the
shareholdersreceivetheresidualinterestinthebusinessonceitceasesto
tradeinproportiontothesizeoftheirshareholdings.
Ordinarysharesareshownunderequityonthestatementoffinancial
position.
Dividend notadeductionfromprofit;itisadistributionofprofittothe
rightfulownersofit.

5. CHAPTER -19, Introduction to company accounting
Preferenceshares
Preferenceshares:thesecanbeeitherdebtorequity,dependingontheir
terms.
➢Ifthereisanyobligationtorepaythepreference
shareholder(redeemable) thenthisisevidenceofadebt.
➢Theseareshownasliabilitiesonthestatementoffinancialpositionand
anydividends paidtotheseshareholderswouldbetreatedasfinance
charges.
➢Irredeemablepreferencesharesaresharesthatdonothavetoberepaid
.
➢They arethereforetreatedasequityinthestatementoffinancial
position.

6. CHAPTER -19, Introduction to company accounting
Preferenceshares
✓Theyarenotthesameasordinarysharesastheydonotentitlethe
ownertoaresidualinterestinthebusiness.
✓Theaccompanyingdividendsare,however,treatedthesameasordinary
dividendsinthefinancialstatements.
✓Dividendsonpreferencesharesareusuallybasedonapre-
determinedamount,suchas5%ofthenominalvalueofthe
shareholding.

7. CHAPTER -19, Introduction to company accounting
Preferenceshares
✓Theyarenotthesameasordinarysharesastheydonotentitlethe
ownertoaresidualinterestinthebusiness.
✓Theaccompanyingdividendsare,however,treatedthesameasordinary
dividendsinthefinancialstatements.
✓Dividendsonpreferencesharesareusuallybasedonapre-
determinedamount,suchas5%ofthenominalvalueofthe
shareholding.

8. CHAPTER -19, Introduction to company accounting
Loannotes:
✓underthetermsofloannoteagreementsdirectorsareusuallyrequired
topaytheloanholderanannualinterestamountandareobligedto
repaythefulldebtatafixedpointintime.
✓Thisisthereforeaformofdebtandappearsasaliabilityonthe
statementoffinancialposition.
✓Theinterestpaymentistreatedasafinancecharge,whichisshown as
anexpenseinthestatementofprofitorloss.Thisisadeductionfrom
profit.

9. CHAPTER -19, Introduction to company accounting
Accounting for the issue of shares
Shares issued at nominal
value
Shares issued above the
nominal value (premium)
Dr Cash received
Cr Share capital at NV
Dr Cash received
Cr Share capital at NV
Cr Share premium
Share premium reflects the
cash received in excess of
nominal value of shares issued

10. CHAPTER -19, Introduction to company accounting
Rights issue
The offer of new shares to existing shareholders in proportion to their
existing shareholding at a stated price –at less than their current market
value to encourage current shareholders to take up the share issue.
Advantages
✓Cheap to raise finance
✓More successful than selling
shares to the public
Disadvantages
✓More expensive than issuing
debt
✓The rights issue may not be
taken up by the shareholders

11. CHAPTER -19, Introduction to company accounting
Bonus issue
The issue of new shares to existing shareholders in proportion to their
existing shareholding. No cash is received from a bonus issue.
Advantages
✓Market value per share is
reduced and therefore
becomes more marketable.
✓Issued share capital is
brought more into line with
assets employed
Disadvantages
✓Admin costs of making the
bonus issue

12. CHAPTER -19, Introduction to company accounting
Accounting entries -bonus issue
Dr Share premium Nominal value
Cr Share capital Nominal value

13. CHAPTER -19, Introduction to company accounting
Dividends
Ordinary dividends –interim dividend
The distribution of retained earnings to shareholders e.g. 10c per share or 10% of
nominal value
Dr Retained earnings (dividend paid)
Cr Bank
Dividends are normally accounted for only when they are paid –proposed
dividends are not accounted for a liabilities.
Preference dividends
Usually based on a predetermined dividend rate, such as 5% of the nominal
value of the shareholding

14. CHAPTER -19, Introduction to company accounting
Loan notes (loan stock)
Fixed term loans
A ‘loan note’ is the document that is evidence of the debt
Accounting entries:
✓When the finance is first raised
Dr Cash at bank
Cr Long term liability
✓Annual finance charge
Dr Finance charges
Cr Cash at bank /current liabilities

15. CHAPTER -19, Introduction to company accounting
Preference shares
Redeemable
The accounting treatment is
the same as loan notes
Irredeemable
Shareholding and dividends
treated the same as ordinary
shares

16. CHAPTER -19, Introduction to company accounting
Other reserves
Revaluation surplus
✓Records the unrealised
gains on PPE
✓Cannot be paid out as a
dividend
Retained earnings
✓Records the accumulated
total of profits and losses
to date
✓Can be distributed as a
dividend

17. CHAPTER -19, Introduction to company accounting
Tax on the income of a company
✓The profits generated by a company are subject to tax.
✓In the UK, this is known as corporation tax.
✓International accounting standards terminology refers to income
tax –i.e. tax on the income of a company.
✓Do not confuse this terminology with income tax paid by
employees in the UK.

18. CHAPTER -19, Introduction to company accounting
Tax on the income of a company
✓Thechargeforincometaxisbaseduponthelevelofprofitsearnedby
thecompanyandthetaxratesinplaceatthetimeofcalculation.
✓Companyyearendsandtaxyearendsrarelymatch.
✓Thereforecompaniesmustestimatetheirincometaxliabilityatthe
endofeachaccountingperiodandrecordanappropriateestimateof
theliabilitylikelytobepaid.
✓Theseestimatesareunlikelytobeentirelyaccurate(theyareusuallya
'bestestimate'whentheaccountsarebeingprepared)and,assuch,
companiestendtoeitheroverorunder estimatetheprovisionfor
incometax,whichisadjustedforinthefollowingyear'saccounts.

19. CHAPTER -19, Introduction to company accounting
Tax on the income of a company
✓Thechargeforincometaxisbaseduponthelevelofprofitsearnedby
thecompanyandthetaxratesinplaceatthetimeofcalculation.
✓Companyyearendsandtaxyearendsrarelymatch.
✓Thereforecompaniesmustestimatetheirincometaxliabilityatthe
endofeachaccountingperiodandrecordanappropriateestimateof
theliabilitylikelytobepaid.
✓Theseestimatesareunlikelytobeentirelyaccurate(theyareusuallya
'bestestimate'whentheaccountsarebeingprepared)and,assuch,
companiestendtoeitheroverorunder estimatetheprovisionfor
incometax,whichisadjustedforinthefollowingyear'saccounts.

20. CHAPTER -19, Introduction to company accounting
Tax on the income of a company
✓Estimated tax liability at year end
Dr Income tax charge SPL
Cr Income tax liability
✓Tax liability paid
Dr Income tax liability
Cr Cash at bank a/c

21. CHAPTER -19, Introduction to company accounting
Corporation (income) tax
✓Over-provision in the prior year
Dr Income tax liability
Cr Income tax charge
✓Under-provision in the prior year
Dr Income tax charge
Cr Income tax liability

22. CHAPTER -19, Introduction to company accounting
References:
ACCAPaperF3,KaplanPublishingUK
ACCA Paper F3,BBP Learning Media Ltd