1. Company Accounts
Final Accounts

2. Introduction
Companies are formed and incorporated under the Companies Ordinance.
An incorporated company(also called ‘incorporation’) is a legal entity using the term ‘company’ in its name

3. Advantages of incorporation
An incorporated company is a separate legal entity which enjoys similar legal authority to a natural person
An incorporated company has an unlimited life
Ownership of a company can be easily transferred to new owners
For a limited company, shareholders’ liability is limited to the amount they have invested in shares

4. Types of Corporation
Unlimited Company
Limited Liability Company

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

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

7. Company limited by shares
Private Company
Public company

8. Private Company
According to the Companies Ordinance, the Articles of Association A private company contains the following restrictions:
The maximum number of members is limited to 50
Prohibited to subscribe for any shares or debentures to the public
Strict the right to transfer its shares

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

10. Listed Company
Listed companies are companies which have their securities listed on the stock exchange of Hong Kong
Apart from the Companies Ordinance, listed companies are also under the strict control of other regulations such as Securities Ordinance etc.

11. Means of funding
Share Capital
Debentures
Reserves

12. Types of Share Capital
Preference Shares
Ordinary Shares

13. Preference Shares
Preference shares are entitled to a fixed percentage of dividends before any ordinary dividends are paid
They usually do not have voting rights
The different types of preference shares are:
Cumulative preference shares
Non-cumulative preference shares

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

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

16. Ordinary Shares
The dividends of ordinary shares are not fixed. They depend on the return of the company
Ordinary shareholders are paid only after all other claim (e.g. loan interest and preference share dividends) have been met
Ordinary shareholders usually have voting rights

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

18. Reserves
Reserves are profits or gains which accrue to ordinary shareholders
They are undistributed profits which have been retained within the company
There are two types of reserves:
Revenue reserves
Capital reserves

19. Revenue reserves They are undistributed trading profits
They can be used to pay dividends
E.g. the balance on the profit and loss account and general reserve

20. Capital reserves
They are gains or profits arising from non-trading or non-operating activities
They are not available for distribution as dividends
E.g. Share premium, revaluation reserve, capital redemption reserve and debenture redemption reserve

21. Share premium
When a company issues shares at a price above par, the excess amount is called share premium
The reserve is restricted to be used in the following ways:
To write off preliminary expenses
To write off expenses of issuing shares
To write off commission paid and discounts on shares
To pay up a bonus issue
To provide premium on redemption of debentures

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

23. Capital redemption reserve and Debenture redemption reserve
This arises as a result of a company redeeming its shares or debentures by using its retained profits

24. Final Accounts

25. Final accounts
For internal reporting and management purposes, the final accounts of the limited liability companies are similar as those of the sole trader and partnership with the exception of certain types of expenses and the appropriation of net profit

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

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

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

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

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

31. Debenture interest
The amount of the debenture interest will be calculated according to the pre-set percentage of debenture as the interest expenses of the company

32. Example Ans.: Trial Balance as at 31 Dec 20-1 Dr Cr
10% Debentures
Debenture interest
Paid debenture interest
Ans.:
Trading and profit and loss a/c for the year ended 31 Dec 20-2
$ $
Gross profit X
Less: Expenses
Actual debenture interest
Debenture interest (10000*10%)
Balance Sheet as at 31 Dec 21-1
$ $
Less: Current Liabilities
Accrued expenses
( )
Debenture interest not yet paid

33. Director’s fee/emolument
Directors fee and director’s emolument are salaries and services charges of the directors of the limited company
It will be treated as one of expenses in the profit and loss account

34. Preliminary expenses/Formation expenses
They are incurred by an enterprise during the period prior to the commencement of commercial operations
These include, for example, legal expenses and various government taxes
They should be written off when they are incurred
Pre-operating expenses capitalized in prior years should be written off against the opening retained profits as a prior year adjustments

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

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

37. Profit tax
It is shown as a deduction from profit for the year before taxation (i.e. this is the net profit figure) to show the net result (i.e. profit for the year after taxation)
Accounting entries:
Dr. Profit and Loss
Cr. Provision for taxation

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

39. Profit and loss Account for the year ended 31 December 2003$
Net Profit
Less Profit tax
Profit after tax
Balance Sheet as at 31 December 2003 $
Current Liabilities
Provision for taxation

40. Example Overprovision of profit tax
Trial Balance as at 31 December 2003
Dr Cr.
Net Profit
Overprovision of profit tax
** The profit tax is estimated at $1500 for the year
Solution:
Provision for taxation
Bal b/f
Bal c/f
P/L

41. Profit and loss Account for the year ended 31 December 2003$
Net Profit
Less Profit tax ( )
Profit after tax
Balance Sheet as at 31 December 2003 $
Current Liabilities
Provision for taxation

42. Example Underprovision of profit tax
Trial Balance as at 31 December 2003
Dr Cr.
Net Profit
Overprovision of profit tax 300
** The profit tax is estimated at $1500 for the year
Solution:
Provision for taxation
Bal b/f
Bal c/f
P/L

43. Profit and loss Account for the year ended 31 December 2003$
Net Profit
Less Profit tax ( )
Profit after tax
Balance Sheet as at 31 December 2003 $
Current Liabilities
Provision for taxation

44. Retained profit to next year/ from last year
All profits may not be appropriated during a period
This then will be balance on the appropriation account as brought forward from the previous year or carried forward to next year

45. Dividends
Net profit from ordinary activities of the business of a company will be distributed to its shareholders of preference shares and ordinary shares according to the level of net profit and the dividend policy of the company
Dividend can be divided into:
Interim/paid dividend
Final/proposed dividend
Dividend = Nominal value * % of dividend paid OR
= no. of shares * Amount of dividend per share

46. Interim/Paid Dividend
Interim dividend is the paid dividend to the shareholders in the middle of the financial year
The amount of interim dividend will be subject to the performance of the business in the first half of the financial year
Descriptions
Book-keeping entries
Interim dividend paid
Dr Interim Dividend
Cr Bank
Transfer interim dividend paid to appropriation account
Dr Profit & loss appropriation
Cr Interim Dividend

47. Proposed/Final Dividend
The amount of proposed dividend will be subjected to the performance of the business in whole financial year and the shareholders’ approvals in the Annual General Meeting
Proposed dividend will be paid in the early of next financial year, it will be treated as one of appropriations to the shareholders in the profit & loss account of current financial year and should be disclosed on the face of the balance sheet as a separate component of equity(I.e. part of the shareholders’ fund)

48. Descriptions
Book-keeping entries
Transfer proposed dividend to appropriation account
* Proposed dividend will be shown in balance sheet under the heading of current liabilities
Dr Profit & loss appropriation
Cr Proposed dividend

49. Transfer to /(from) Reserve
Part of the net profit for the financial year may be transferred from the appropriation account to the reserves to meet the future requirements or specific reason
Revenue reserve can be transferred back to appropriation account for dividends purposes in the future financial period

50. Descriptions
Book-keeping entries
Transfer part of net profit from appropriation account to specific reserves
Dr Profit & loss appropriation account
Cr Reserves
Transfer specific reserves back to appropriation account
Dr Reserves
Cr Profit & loss appropriation

51. Example Dr Cr Trial Balance as at 31 Dec 2000(extract)
ordinary shares of $0.5 each, fully paid
% preference shares of $1 each, fully paid
General reserves
Interim ordinary dividend
Interim preference dividend
Additional information:
The director proposed a final dividend of $0.05 per ordinary share
The director resolved to transfer $5000 to the general reserve

52. Ans.: Trading and profit and loss a/c for the year ended 31 Dec 20-2
$ $
Net profit X
Add: Retained profit from last year X X
Less: Appropriation
Preference dividend – interim
- final (250000* ) 17000
Ordinary dividend - interim
- final (400000*0.05)
Transfer to general reserve

53. Balance Sheet as at 31 Dec 21-1
$ $
Capital and Reserve
Reserves
General reserves ( )
Dividend owning( )
Dividend not yet paid to shareholders

54. Limited Liability Company
The capital of a limited company is divided into shares
The par value of each share can be $1,$5 or other
A person who buy the shares, become the member of company called shareholder

55. Capital Structure Authorized Capital
It is the maximum amount of share capital which the company is allowed to issue
Issued Capital
It is the nominal value of a portion of the authorized capital which has been taken up (purchased) by shareholders
Called Up Capital
It is the amount of issued capital which the company has called to be paid
Paid Up Capital
It the amount of issued capital which has actually been received
Calls in Arrears
It the amount of called up capital which has not been received

56. Issue of Shares/Debentures

57. Raising of Capital-Issue of shares and debentures
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’

58. Issue of shares

59. Descriptions Accounting entries Application Monies Received Dr. Bank
Cr. Ordinary Share Applicants
*”No. of Application” * “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
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 per
Each Share” will be recorded in Share Premium

60. 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
Cr. Bank
* “No. of Application Oversubscribed” X “Issue Price”

61. Note:
The issue is oversubscribed when the number of applications is greater than the number of shares available for issue. Excess application money will be refunded to the unsuccessful applicants
The issue is undersubscribed when the number of applications is smaller than the number of shares available for issue. Hence, no refund will be required
If the number of applications is below the predetermined minimum amount, no shares will be issued and all the application money will be refunded

62. Example – Issue at par
Tai Fat Ltd made a public offering of its 1000 ordinary shares of $1 each
The shares were issued at par

63. The Journal
Dr. Cr.
Bank (1000*$1)
Ordinary Share Applicants
Being money received on application
Ordinary Share Applicants
Ordinary Share Capital
Being allotment of 1000 ordinary shares

64. Shares issued at par Bank Ordinary share applicants 1000
Ordinary share capital
Bank
Ordinary Share Capital
Ordinary share applicants 1000

65. Example – Issue at premium
Tai Fat Ltd made a public offering of its 1000 ordinary shares of $1 each
The shares were issued at premium of 20%

66. The Journal
Dr. Cr.
Bank (1000*$1.2)
Ordinary Share Applicants
Being money received on application
Ordinary Share Applicants
Ordinary Share Capital (1000*$1)
Share premium (1000*$0.2)
Being allotment of 1000 ordinary shares

67. Shares issued at premium
Bank
Ordinary share applicants 1200
Ordinary Share Applicants
Ordinary share capital
Bank
Share premium
Ordinary Share Capital
Ordinary share applicants 1200
Share premium
Ordinary share applicants 200

68. Example – Issue at discount
Tai Fat Ltd made a public offering of its 1000 ordinary shares of $1 each
The shares were issued at a discount of 10%

69. The Journal
Dr. Cr.
Bank (1000*$0.9)
Ordinary Share Applicants
Being money received on application
Ordinary Share Applicants
Discounts on shares (1000*$0.1)
Ordinary Share Capital (1000*$1)
Being allotment of 1000 ordinary shares

70. Shares issued at discount
Bank
Ordinary share applicants 900
Ordinary Share Applicants
Ordinary share capital
Bank
Discount on shares
Ordinary Share Capital
Ordinary share applicants 1000
Discount on shares
Ordinary share applicants 100

71. Bonus Shares/Script Issue
Bonus shares are ‘free’ shares issued to shareholders without any cash being paid for them
The reserves are utilised for the purpose
The accounting entry is:
Dr Reserve/Share premium/Retained earnings
Cr Ordinary share capital

72. Example Ans: $ 20000 Ordinary Share Capital of $1 each 20000
Reserves
A bonus issue of 1 for 4 were made. (i.e. 1 bonus share for every 4
shares already held)
Ans:
Bonus issue (20000/4)=5000 shares
The entry: Dr Reverse (5000*$1) $5000
Cr Ordinary share capital $5000
Ordinary share capital ( )
Reserve ( )

73. Debentures 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

74. Types of debentures Redeemable and irredeemable debentures
Debentures with fixed charge
Debentures with floating charge
Unsecured/naked/simple debentures

75. Redeemable and irredeemable debentures
Redeemable debentures are repayable at or by a specified date
Irredeemable debenture are nor repayable
However, the borrowing company can purchase its own debentures on the open market when the price of debentures is very low

76. Debentures with fixed charge
Debentures are secured by means of mortgaging specific assets, e.g. premises.
The borrowing company cannot sell these assets without the prior consent of the debenture holders

77. Debentures with floating charge
Debentures are secured by means of mortgaging a group of assets, e.g. premises
The borrowing can trade in the assets which are subject to a floating charge
If the company defaults on its interest or capital repayment, the floating charge will crystallize on the group of assets
The debenture holders can sell the assets to recover the amount due to them

78. Unsecured/naked/simple debentures
They are not secured by any of the company’s assets

79. Issue of debentures

80. Issue of Debentures
The accounting treatment of debenture is the same as that of shares, except for the change in the name of the accounts
Debenture can be issued at par, at premium or at a discount

81. Descriptions Accounting entries Issue of Debentures (a) Issue at Par
Dr. Bank
Cr. Debentures
(b) Issue at a Premium
Cr. Debentures Premium
( c) Issue at a Discount
Debenture Discount (note)

82. Note:
The debenture discount account can be written off using either method:
It can be written off immediately against the share premium on profit and loss appropriation account. The debentures should be disclosed in the balance sheet at a nominal value
It can also be written off over the life of debentures to the profit or loss account. The debentures should then be disclosed in the balance sheet at a nominal value less unamortized discount