COMPANY ACCOUNTS

It is an association of many persons who contribute money or money’s worth to a common stock
and employs it for a common purpose and according to the provisions of Company’s act, a
company is formed and registered.

 A company is therefore created by law (as per the requirements of company’s Act). It has
no physical existence. The right to act as a natural is granted to it by law.
 It is a law that creates a company and can dissolve it.

Characteristics of a company

i) Voluntary association — voluntary association of persons. A company neither

compels a person to become its member or to give up its membership.
ii) Independent legal entity Legal entity separate from its members.
iii) Perpetual existence — The mode of incorporation and dissolution is determined by
law. The existence of a company can be terminated only by law. Members may come
and go but the company remains in existence forever.
iv) Common seal. Being an artificial person a company acts through other natural
persons (directors). All acts of the company are authorized by its common seal.
v) Limited liability: The liability of the members generally is Ltd to the extent of the un
paid value of the shares held by them.
vi) Free transfer of shares except for private company’s where transferring of shares is
restricted by company articles of association

Types of companies

- Private companies — minimum 2 maximum 50

- Public mm 7 no max
- Government company’s — parastatals
- Private companies — cannot invite public to subscribe to its shares and debentures.
- It cannot issue a prospectus
Read about Formation of a company.
Accounting for issue of shares
Issues of shares
 A share in a company is one of the Units into which the total share capital of a company
is divided.
 In a company, shares are divided into preference and ordinary shares and share
premiums.
 The sum of the above categories of shares gives a figure in total share capital of the
company.

Share capital of the company can further be divided into.

1. Authorized share capital

2. Issued share capital
3. Called up share capital
4. Un called up share capital
5. Paid up capital
6. Un paid up capital
7. Reserve capital

Authorized share capital

It is the maximum amount the company requires and this is the amount indicated in the capital
clause — in its memorandum of association. To avoid changing the memorandum of association
and its legal and cost implications, this figure is usually overstated. It is also called the total
nominal capital or registered capital

Issued share capital.

It is part of the authorized capital representing the capital the company required at the moment.
Called up capital
A portion of issued capital which has been called up by a company at a particular period.
Un called up capital

Part of issued share capital that is not yet called up to be subscribed.

Paid up capital
A portion of the called up capital to which payments have been received. Some subscribers may
fail to honor their obligations and therefore paid up capital is the actual amount from
subscribers. The reverse is unpaid up capital.

Issue of shares
Shares can be issued in exchange of any asset e.g. buildings, cars, cash, cheques, etc in exchange
of a share. Shares can be issued either at par value/nominal value/face value or at a premium or
at a discount.
By law, and for a new venture, it is not accepted to issue a share at discount. For a Premium
(face value of a share is less than the market value) and the reverse is true for a discount.
Note: Shares can be issued where the full payment will be made on application or where the
share price is paid in installments.

Steps in issuing shares where payments are made in installments.

Most companies generally issue shares for cash the procedure involved is as follows.
1. Invitation of the public through a prospectus
The company issues a prospectus inviting the public to subscribe for its shares. The prospectus
contains the details of the amount that the applicants have to pay as application and allotment
money.
2. Receiving application
The potential shareholders may only be required to pay part of the issue price (amount due in
application)
3. Allotment of shares
After receiving share applications, the directors of the company will get a detailed list of the
applicants prepared. They will call directors meetings and decide about the persons to whom
shares have to be allotted and the number of shares to be allotted. Applicants to who shares have
been allotted to will receive a written notice and will also be required to pay allotment money as
per terms of the prospectus. If the number of share applied for exceeds the number of offer’ (the
issue is oversubscribed). The company will have to decide on how the shares should be rationed
out. (There is no standard method). The excess application money is either repaid or may be kept
by the company & offset Vs the next payment due. Most companies allot shares on a pro-rata
basis i.e. the ratio given by offer divided by application.
After allotment, the successful shareholders are asked to make the next payment i.e. amount due
on allotment
4. Calls. After allotment, whenever the need arises, the directors may demand further money
from shareholders towards payment of the value of shares purchased by them. There are usually
a maximum of 3 calls.

Accounting entries
1. On receipt of application monies
Dr Bank A/C with the actual amount received on application
Cr application & allotment A/C

2. On allotment
Dr application and allotment A/C
Cr share capital A/c} with the nominal value of share capital on application & allotment
Cr share premium} with the premium component on application and allotment

3. On receipt of allotment money

Dr bank /cash A/c with the actual amount received on allotment
Cr application & allotment A/c
4. On making a share call
Dr share call A/c with nominal value of share capital on call
Cr share capital

5. On receipt of call monies

Dr Bank/cash A/c with the actual amount received on call
Cr share call }

Illustration

A company issued 2,000 ordinary shares at shs l00 payable as

10% on application 40% on first call
20% on allotment 30% on 2’ call
Applications were received for 3200 shares. A refund of the money was made in respect of 200
shares while the remaining 3000 shares applied for were allotted on the basis of 2 shares for
every 3 applied for. The excess application monies are set off Vs the allotment monies asked for.
The remaining installments were paid in full on their due dates.

Required: Shows all the accounts to record the above transactions.

Solution.
Accounts will include:
 application and allotment account
 Bank account
 Share capital account
 Share calls account and 2” call accounts
 Application and allotment account

Share capital 600,000 Bank 320,000

Bank refund 20,000 Bank (Actual received) 3000,000
620.000 620.000

Bank account

Application & allotment 320,000 Application &

allotment (refund) 20,000
Bank refund 300,000 2,000,000
1st call A/c 800,000 620.000
2nd call A/c 600,000 2,020,000
2,020,000

Share capital account

Bal c/d 2,000,000 Application allotment & A/C 600,000

1st call a/c 800,000
300,000 2nd call a/c 600,000
2,000,000 2,000.000

1st call account

Share capital 800,000 Bank a/c 800,000
 2nd call account
Share capital 600,000 Bank a/c 600,000

Summary

Offer 200 shares

Price = shs 1000@share applications - 3200 shares
Application = 10% = 100
Allotment = 20% = 200 Refund - 200 shares
1St call = 40% = 400
2nd call = 30% = 300
Actual amount received for application = 100 x 3200 = 320,000=
Total expected amount of application and allotment

300x2000 = 600,000
Refund 200 shares x 100 = 20,000

Excess application money –

100 applications x 1000 = 100,000

Amount due on allotment = 200 x 2,000 = 400,000
Less excess application money = 100,000
Actual amount received = 300,000
OR expected from application and allotment

(200+l00) x 2,000 = 600,000

Less Net amount received on application (320,000 — 20,000) = 300,000
300,000
1st call amount = 400 x 2,000 = 800,000
2nd call amount 300 x 2,000 = 600,000
Question
MX ltd issued 200,000 ordinary shares at $500@ payable as: 20% on application, 40% on
allotment and 40% on share call. Applications were received for 265,000 shares and it was
agreed by company Board of Directors that applications for 15,000 shares be rejected and a
refund be made for their application money, while the remaining 250,000 shares applied for be
allotted on the basis of 4 shares for every 5 applied for. It was also agreed that the excess
application money on these share be retained and reduced from what is due on allotment. The
installment on share call was paid in full on its due date.
Required: Shows all the accounts to record the above transactions.

FORFEITURE AND RE-ISSUE OF SHARES

Where a call remains UN paid and the time allowed for its payment has expired. The company
can forfeit those shares. The articles of association usually give the directors the right to forfeit
shares of a shareholder who fails to pay the amount required. The defaulter is not refunded the
amount already paid.

The minimum price being the amount unpaid by the defaulter and if a higher amount is received,
it is considered to be a share premium. A notice of demand requiring the shareholders to pay
calls within the specified period and specifying the amount must be given before the board of
Directors passes a resolution for forfeiture of shares.

Accounting entries

1. On failure to pay
Dr. Share call in arrears/allotment in arrears a/c
Cr. Share call a/c /application and allotment a/c . with the amount not received from
Share call/allotment

2. When shares are forfeited.

a) Dr. Share capital A/c ( with the nominal value of called up capital for forfeited shares )
Cr. Forfeited shares a/c
 b) Dr. forfeited shares A/c
Cr. Share call in arrears/allotment in arrears A/c with the amount in arrears.

Note: Forfeited shares is a form of raising finance in the company and therefore treated in the
financed by section in the balance sheet
2. On re issue of forfeiture shares
a) Dr. forfeited shares A/c ( with the whole normal value for shares forfeited)
Cr. Share capital A/c
b) On receiving the money
Dr. Bank /eash A/c } with the actual amount
Cr. Forfeited shares A/c) received on resue.
3. In case of profit on re-issue
Dr. forfeited shares A/c
Cr. Share premium A/c

The profit on re-issue will arise when the actual amount received on re-issue is greater than the
outstanding balance

i.e Actual amount received on re-issue xx

Less out standing balance xx

Profit on re-issue XX

Forfeited share account

Call/allot in arrears xx Share capital xx

Share capital xx Bank xx
Profit (share premium) xx
Example (forfeiture after 2 call)

Badge Ltd had authorized share capital of £ 100,000 divided into 20,000 ordinary shares of 5@•
The shares were issued at £ 6@ and payment was made as follows

Payable on application £1
PayabLe on allotment £2 (including premium)
1st call £2
2nd call £1

Applications were received for 32,600 sharçs. It was decided that a refund be made for the
application money of 2600 shares and shares were allotted on the basis of 2 for every 3 shares
applied for. The excess application monies for the successful applicants were not refunded but
held to reduce the amount payable on allotment. The calls were made and paid in full with
exception of one member holding 100 shares who paid neither the 1St call nor the 2” call and
another who did not pay the 2nd call on 20 shares. After several request by the directors the
shares were forfeited. They were later re-issued to David at a price of £4 per share.

Required. Draft ledger accounts to record the transactions.

Solution

Ledger accounts

application and allotment a/c

Bank refund 2,600 BVank (applications) 32,600

Share capital 40,000 Bank 30,000
Share premium 20,000 62,6000
 Bank account
Application & allot 32,600 Application & allotment 2,600
(Refund)
Application & allotment 30,000 xx
1St call 39,800 Bal/c/d 120,160
2nd call 19,880
Forfeited shares 480
122,760 122,760

Expected on allotment 2 x 20,000 = 40,000

Less excess application money (30,00020,000)* 1 = 10,000
Actual received on allotment 30,000

OR expected on app & allotment (1+2) x 20,000 = 60,000

Less received on application (32,600 — 2,600) = 30.000
Actual amount received = 30.000

Share capital A/c

Forfeited shares A/c 600 Application & allotment 40,000
Bal.c/d 100,000 1St call 40,000
xx 2nd call 20,000
forfeited shares 600
100,600 100,600

Share premium accounts

Bal c/d 20,160 Application 20,000

Bal.c/d Profit on re-issue 160
20.160 2nd call 20,160
 1st call Account
Share capital 40,000 Bank 39800
Bal.c/d Profit on re-issue 200
20,160 2nd call 40,000

Expected money on 1st call = 2 x 20,000 = 40,000

Money not subscribed 2 x 100 = 2,100 = 200

39,800

2nd call Account

Share capital 20,000 Bank 19,880
Bal.c/d Share call in areas 120
20,000 2nd call 20,000

Share in arrears Account

1st call 200 Forfeited shares 320

2nd call 120 Profit on re-issue ----
320 2nd call 320

Forfeited shares Account

Share call in arrears 320 Share capital 600

Share capital 600 Bank 4800
Chare premium 160 2nd call 1,080
Forfeited shares = 120 x (1 + 2 + 2 + 1- 1) = 600

Share capital is reduced by share capital component of £5.

Re-issue
Dr forfeited shares A/c
Cr. Share capital A/c

On receiving the amount from David

Dr. Bank A/c 480

Cr. Forfeited shares A/c 480

Amount received on re-issue = £ 480

Outstanding amount 320
Profit on re-issue 160

Example (Forfeiture on allotment)

The authorized and issued share capital of Cosyfires Ltd was £75,000 divided into 75,000
ordinary shares of1 @ fully paid. On 2nd Jan 1997, the authorized capital was increased
by further £ 85,000 ordinary shares of £1 @ to 160,000. On the same date, 40,000
ordinary shares of £1 @ were offered to the public at £ 1.25 per share payables as £0.6 on
application (including the premium), £0.35 on allotment and £ 0.3 on 6th April 1997.

The lists were closed on 10th Jan 1997 and by that date; applications for 65,000 shares had been
received. Applications for 5,000 shares received no allotment and the cash paid in respect of
such shares was refunded all shares were then allocated to the remaining applicants’ prorata to
their original application. The balance of the monies received on applications was retained and
deducted from the amount due on allotment.
The balance due on allotment was received on 3l Jan 1997 with exception of one allottee of 500
shares. These were declared forfeited on 4th April 1997, They were reissued fully paid on 2 May
1997 at £1.10 per share. The call due on 6 April 1997 was fully paid by the other share holders.

Required: Prepare ledger accounts for Cosyfires Ltd

Solution
Authorised capital £75,000
Increased by £85,000
160,000

Offer — 40,000 at £ 1 ,25@

Nominal value @ share £1
Applications - £0.6 including a premium
Allotment £0.35
6th Apr11 1st and last call £ 0.3
10th /1 applications received for 65,000 shares
Refund for 5,000 shares
60,000 shares

Application and allotment Account

Bank 3,000 Bank 19,880
Share capital (0.7x40,000) 28,000 Bank 1,975
Share premium (0.25x40,000) 10,000 Allotment in arrears 25
41,000 41,000

Bank Account
Bal b/f 75,000 Application &allotment (refund) 30,000
Application &allotment 39,000 Bal/c/d 125,375
Application &allotment 1,975
1 share capital 11,850
Forfeited shares 550
128,375 128,375

Share premium Account

Bank 3,000 Application and allotment 10,880

Bal c/d 10,375 Forfeited shares 375

10,375 41,000

Expected on application and allotment = 0.95 x 40,000 £ 38,000

Less: Net received on application = (39,000 - 3,000) 36,000
Amount due on allotment 2,000
Expected an application and allotment of 500 shares
0.95 x500 = 475
Less received on application 750 x 0.6 450
Actual amount received on allotment 1,975

allotment in arrears
Application and allotment 25 forfeiture 25

Forfeited shares Account

Allotment in arrears 3,000 Share capital 350
Share capital (1x500) 500 Bank 550
Share premium 370
900 900

Share call Account

Share capital 11,850 Bank 11,850

On 4th called up capital = 0.6

= 0.35
= 0.95
= 0.95
0.2
Nominal value 0.7
on 2nd called up = 1.25
0.25
1.00

Profit on re-issue

Amount received 550

Less arrears (0.3 x 500) + 25 175
Net profit on re- issue 375

Received on application (0.6 x 65,000) = 39,000

Excess application money (0.6 x 20,000) = 12,000

Expected on allotment 0.35 x 40,000 = £ 14,000

Excess application 0.6 x 20,000 £ 12,000
Due 2,000

Expected allot for 500 shares =0.35 x 500 = 175

Excess applications 250 shares x 0.6= 150
Allotment on arrears 25
Received on allotment 1,975

Revision Question (forfeiture on first call before 2nd call

Excel Ltd had authorized share capital of shs80, 000,000 divided into 20,000 ordinary shares of
shs. 4,000@. The shares were issued at shs. 4,500@ and payment was made as follows;
Payable on application shs. 1000
Payable on allotment shs. 1500 (including a premium)
1St call shs.l200
2nd call shs.800

Applications were received for 33,000 shares. It was decided that a refund be made for the
application money of 3000 shares and the remaining shares were allotted to the successful
applicants on the basis of 2 for every 3 shares applied for. The excess application money for the
successful applicants ‘s not refunded but held to reduce the amount payable on allotment. The 1st
call was made and paid in full with exception of one member holding 120 shares that never paid.
After several requests by the directors the shares were forfeited. The second call was also made
and paid for in full. The forfeited shares on the first call were later re-issued to David at a price
of shs.2500 per share.

Required: Draft ledger accounts to record the transactions in the company books.

ISSUE OF DEBENTURES
A debenture is a certificate issued by a company under its own seal accepting a debt due by it to
its holder. The most essential characteristic of a debenture is a record of indebtedness.
Debentures are also a form of raising, funds to the company. They help companies to borrow
funds from a large section of the general public.

Classification of debentures

There are different kinds of debentures:

Naked debentures:

These are debentures where the holder is not given any security as to the payment of interest and
repayment of capital

Mortgage debentures: Debentures which are secured by a mortgage or charge on the whole or
part of the assets of the company.

Redeemable debentures: Debentures which provide for the payment of the principal amount on
the expiry of a certain period.

Perpetual/irredeemable debentures: These are debentures issued and the company does not
give any undertaking of repaying the money borrowed after a fixed time or within a fixed period
during the continuance of business by the company.

Convertible debentures: Debentures which are convertible into shares of the company as per
terms of their issue

Issue of debentures
The entries for issue of debentures are similar to those for shares. Debentures can also be issued
as per, premium, or discount.
When money is received from debentures issued.
Dr. Banic/cash A/c
Cr debenture A/C
When interest is paid on debentures
Dr. Interest expense A/c
Cr. Cash /Bank
In case it is not paid at the closing of the year
Dr. Interest expense A/c
Cr interest payable A/c

BONUS ISSUES
They are also called script issues and are made when there are large accumulated results which
can’t either by law or a matter of financial prudence be distributed in cash to shareholders as
cash dividends. Reserves that can be distributed as cash dividends are mainly share premium and
retained earnings.
Entries of bonus issue
Dr. the reserve A/c
Cr. $hare capital A/c
Note: No cash is paid to acquire bonus shares i.e bonus issues arise as a capitalization of
part of company reserves (e.g retained earnings).

Example

Net assets 173,000,000

Financed by
Authorized & issued
Share capital 100,000 shares - 100,000,000
Share premium - 10,000,000
Revaluation reserves - 3,000,000
Retained earning - 60.000,000
Total 173,000,000

The bonus issue is to be made at one for every two shareholdings

Then the bonus issue would be
½ x 100,000 shares x share price i.e
50,000 shares x 1,000= 50,000,000

If the bonus issue is from retained earnings

Dr. retained earnings A/c 50,000,000
Cr. Share capital A/c 50,000,000

The balance sheet (component of financed by work appear as)

Net Assets = 173,000,000

Financed by
Share capital 150,000 shares at @ 1,000 = 150,000,000
Share premium 10,000,000
Revaluation reserves 3,000,000
Retained earnings 10,000.000
Total 173,000,000

The effect of bonus issue is to increase the share capital and reducing reserves. The total net
worth of the firm remains uncharged.

RIGHTS ISSUES
In case of rights issues, the existing shareholders are given right certificates which entitle them to
take up a specified number of shares at a specified price.
 It is the way to reduce the costs for raising new long term capital by issuing shares to the
public or if the ownership is to be controlled.
 The existing shareholders pay and the assets increase.
Dr. Assets/BanklCash account
Cr. Share capital account
There are no procedures of applications, allotment, etc.

Redemption of shares (preference share capital)

A company cannot return its share capital to its shareholders during its lifetime without a court
permission
Redeemable preference shares are only category which the company can redeem during its
lifetime eg per the provisions of the company Act
Preference shares can be redeemed only when they are fully paid and can be redeemed using
profits available for dividends or out of the proceeds of fresh issue of shares.
Redemption of debentures
A company can redeem its debentures by any of the following methods.
1. Redemption in installments
A company may redeem its debentures in installments as per the terms of the issues of
debentures.
a) Redemption of a fixed sum of debentures: the terms of issue may provide that from a
particular year, the company will be redeeming debentures of a fixed amount

2. Redemption by conversion
Debenture holders may be given a option to get their existing debentures converted into shares or
new debentures. In case this option is taken journal entries would be.
Dr. Debentures (Old) A/c
Cr. Debentures (new) or new share capital A/c
3. Redemption in a lump sum after the expiry of a fixed period
The company may redeem the debentures in a lump sum after the expiry of a fixed period as
per terms of issue. This involves huge funds and therefore it is appropriate in the company, to
make adequate provision in the funds for redemption right from the very beginning.

Financial statement
Income statement
The trading A/c of a limited company is not different from that of a sole trader or partnership.
The differences appear in P &/A/c & these are.
1. Directors remunerations. These are employees of the company, legally appointed by the
shareholders. There remuneration is charged on P & A/c.
2. Debentures interest
Appropriations
It contains the following elements.
- Net profit in the year
- Transfer to reserves
- Amounts written off as good will/authorized
- Preliminary expenses eg legal fees
- Taxation (Corporation tax)
- Dividends i.e interim and final
- Balance c/d

Revision questions
Question one

MX ltd issued 300,000 ordinary shares at $400@ payable as: 25% on application, 35% on
allotment and 40% on share call. Applications were received for 370,000 shares and it was
agreed by company Board of Directors that applications for 20,000 shares be rejected and a
refund be made for their application money, while the remaining 350,000 shares applied for be
allotted on the basis of 6 shares for every 7 applied for. It was also agreed that the excess
application money on these share be retained and reduced from what is due on allotment. The
installment on share call was paid in full on its due date.

Required: Shows all the accounts to record the above transactions.

Question two
Excel Ltd had authorized share capital of $240,000 divided into 40,000 ordinary shares of
$6@. The shares were issued at $7.5@ and payment was made as follows

Payable on application $2
Payable on allotment $2.5 (including premium)
call $1
2nd call $2

Applications were received for 52,500 shares. It was decided that a refund be made for the
application money of 2500 shares and shares were allotted on the basis of 4 for every 5 shares
applied for. The excess application money for the successful applicants was not refunded but
held to reduce the amount payable on allotment. The calls were made and paid in full with
exception of one member holding 200 shares who never paid on1s call and 2nd call and another
shareholder who did not pay the 2nd call on 50 shares. After several request by the directors the
shares were forfeited. They were later re-issued to Jamwa at a price of $3.5 per share.
Required. Draft Ledger accounts to record the transactions.

Question three

Excel Ltd had authorized share capital of shs 100, 000,000 divided into 40,000 ordinary shares of
shs. 2,500 @ Shares were issued at shs. 3,000@ and payment was made as follows

Payable on application shs.500

Payable on allotment shs. 1500 (including a premium)
1St call shs.600
2nd call shs.400

Applications were received for 64,000 shares. It was decided that a refund be made for the
application money of 4000 shares and the remaining shares were allotted to the successful
applicants on the basis of 2 for every 3 shares applied for. The excess application money for the
successful applicants was not refunded but held to reduce the amount payable on allotment. The
1st call was made and paid in full with exception of one member holding 150 shares that never
paid. After several requests by the directors the shares were forfeited. The second call was also
made and paid for in full. The forfeited shares on the first call were later re-issued to Musa at a
price of shs. 1,250 per share.

Required: Draft ledger accounts to record the transactions in the company books.

Question four
The following information relates to extacts from the statement of financial position of
MM ltd as at 31st December, 2009.
$
Net assets 330,000,000
Financed by
Authorized & issued
Share capital 120,000 shares of $2,000@ 240,000,000
Share premium 10,000,000
Revaluation reserves 5,000,000
Retained earning 75.000.000
Total 330,000,000
On 2nid February, 2010 the company’s Board of directors agreed to make a bonus issue of one
share for every 4 shareholdings out of retained earnings.

Required:
Calculate and show the effect of the above decision on the extract of the statement of financial
position of MM ltd.