COMPANY ACCOUNTING

CONCEPT ON LEGAL CAPACITY It means the legal ability to enter into a contract. With individuals, if they are mentally disordered or are minors, the contracts they made are generally voidable at their option. With companies, they must act within their legal limitations. FORM OF COMPANIES Sole proprietor A natural person registers to carry a business, the proprietor with responsibility for all liabilities. Partnership More than two individuals set up a joint vehicle to carry a business. Each partner takes a joint and several liabilities to the business. Company A legal form of corporation, normally the company is incorporated under the Companies Ordinance in Hong Kong. A company carries its own legal status. A shareholder(s) liabilities only limited to their paid up capital. So, we call this form of company a Limited Company. Listed Public Company This kind of company accepts general public as shareholders. They are trading under the Hong Kong Exchange & Clearing Limited. Corporate Governance of a Limited Company The Memorandum of Association is a document to govern the operation of the company and the rights and duties of the directors.

LIMITED COMPANIES A limited company is a separate legal entity with a continuous life that is independent of the owners. The ownership in a corporation may be transferred freely from one owner to another. An individual owner has no personal liability for the limited company's liabilities. With a limited company, there are many formalities to be observed. A limited company's account must be audited. The final accounts and balance sheet must be published in set format. The owners of limited companies are people who have bought shares in the company - the shareholders. There is a board of directors to act on behalf of the company and these directors are legally responsible for the day-to-day administration and overall running of the business.
HKU SPACE, Adv Dip in Corp Admin. (Basic Accounting)

Normally, shareholders will, having invested their money in the shares, let the directors run the business, hoping that the accounts will show profits. What they receive as their share of profits is called a dividend. Memorandum and Articles of Association A limited company is legally formed (incorporated) by filing certain documents such as a memorandum (the rule affecting the company and the outside world) and articles of association (the internal rules of the business). After approval by the Government, an initial issue of shares is made, a board of directors is elected and the board appoints the executives of the company.

Share Registration Share refers to the ownership unit in a company. A pre-numbered legal document called a share certificate is issued to each shareholder. This certificate indicates the number of shares owned and the par value of each share. A record for each shareholder is kept in the shareholders' ledger. As shares are issued or exchanged, the information is recorded. A distinction must be made between authorised, issued, called up and paid up share capital. (a) Authorised capital is the maximum amount of share capital that a company is empowered to issue. The amount of authorised share capital varies from company to company, and can change by agreement. For example, a company's authorised share capital might be 500,000 ordinary shares of $1 each. This would then be the maximum number of shares it could issue, unless the maximum were to be changed by agreement. (b) issued capital is the nominal amount of share capital that has been issued to shareholders. The amount of issued capital cannot exceed the amount of authorised capital. (c) Called up capital - when shares are issued or allotted, a company does not always expect to be paid the full amount for the shares at once. It might instead 'call up' only a part of the issue price, and wait until a later time before it calls up the remainder. (d) Paid up capital - like everyone else, investors are not always prompt or reliable payers. When capital is called up, some shareholders might delay their payment (or even default on payment). Paid-up capital is the amount of called-up capital that has been paid.

COMPANY ACCOUNTING
Two types of shares: Preference shares carry the right to a final dividend which is expressed as a percentage of their nominal value: a 6% 1 preference share carries a right to an annual dividend of 6p. Preference dividends usually have priority over ordinary dividends; in other words, if the directors of a company wish to pay a dividend (which they are not obliged to do) they must pay any preference dividend first. Otherwise, no ordinary dividend may be paid. The rights attaching to preference shares are set out in the company's constitution. They may vary from company to company, but typically: (a) preference shareholders have a priority right over ordinary shareholders to a return of their capital if the company goes into liquidation; (b) preference shares do not carry a right to vote; (c) if the preference shares are cumulative, it means that before a company can pay an ordinary dividend it must not only pay the current year's preference dividend, but must also make good any arrears of preference dividends unpaid in previous years. Ordinary shares carry no right to a fixed dividend but are entitled to all profits left after payment of any preference dividend. Generally, however, only a part of such remaining profits is distributed, the rest being kept in reserve. The amount of ordinary dividends fluctuates although there is a general expectation that it will increase from year to year. Should the company be wound up, any surplus is shared between the ordinary shareholders. Ordinary shares normally carry voting rights. Par value Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par (at the par value), over par (over par value) and under par (under par value). Par value stock has no relation to market value and, as a concept, is somewhat archaic. The par value of a stock was the share price upon initial offering; the issuing company promised not to issue further shares below par value, so investors could be confident that no one else was receiving a more favorable issue price. Thus, par value is a nominal value of a security which is determined by an issuing company as a minimum price. This was far more important in unregulated equity markets than in the regulated markets that exist today. The term "par value" has several meanings depending on context and geography. i) When we issue a new share at par, this transaction will be accounted for by Debit Bank Credit Paid up capital

HKU SPACE, Adv Dip in Corp Admin. (Basic Accounting)

Share Premium / Capital Surplus Capital surplus term that frequently appears as a balance sheet item as a component of shareholders' equity. Capital surplus is used to account for that a firm raises in excess of the par value (nominal value) of the shares (common stock). Taken together, common stock (and sometimes preferred stock) issued and paid plus capital surplus represent the total amount actually paid by investors for shares when issued (assuming no subsequent adjustments or changes). Shares for which there is no par value will generally not have any form of capital surplus on the balance sheet; all funds from issuing shares will be credited to common stock issued. Some other scenarios of causing Capital Surplus include Government donate a piece of land to the company. The Capital surplus/Share premium account (SPA) is not distributable, however, in restricted circumstances it can be reduced: to write off the expenses/commission relating to the issue of those shares; to make a bonus issue of fully paid-up shares. It may also be used to account for any gains the firm may derive from selling treasury stock, although this is less commonly seen. When we issue a new share on premium, this transaction will be accounted for by Debit Bank Credit Paid up capital Credit Share Premium

Example A company issues 100 ordinary shares of a nominal value of $1 each at a subscription price of $4 per share. The $300 difference will go to the share premium account. At the same time, the company issues 50 8% preference shares with a par value of $0.5. These shares are bought by investors for $1 each.

COMPANY ACCOUNTING
The firm's balance sheet at this point consists of only four items: Assets: Cash $450 Liabilities: Nil Shareholders' equity: Common stock :$100 Preference stock: $25 Share premium :$325
SPA = Number of new shares issued x (issue price - par value)

Reserve In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting Standards Board. Equity reserves are created from several possible sources: Reserves created from shareholders' contributions, the most common examples of which are: legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital share premium - amount paid by shareholders for shares in excess of their nominal value Reserves created from profit, especially retained earnings, i.e. accumulated accounting profits. However, profits may be distributed also to other types of reserves, for example: legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits remuneration reserve - will be used later to pay bonuses to employees or management. translation reserve - arises during consolidation of entities with different reporting currencies In general, reserve is the profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days.

HKU SPACE, Adv Dip in Corp Admin. (Basic Accounting)

Dividend Profits paid out to shareholders are called dividends. Dividends are appropriations of profit after tax. A company might pay dividends in two stages during the course of their accounting year: a) in mid year, after the half-year financial results are known, the company might pay an interim dividend; b) at the end of the year, the company might pay a further final dividend. Cash dividends are paid to each shareholders based on the number of shares that a shareholder owns. Stock dividend is a pro-rata distribution of additional shares of a company's own shares to its shareholders and is usually issued out of authorized but unissued shares. As no company assets are distributed, total capital is not changed. The only effect is a re-arrangement of the components of shareholders' equity. A separate account will be kept for the dividends for each different class of shares (preference, ordinary). j) Dividends declared out of profits will be accounted for by Debit P & L appropriation account Credit Dividends payable account Dividends payable (but not yet paid) are a current liability. (ii) When dividends are paid, we then have Debit Dividends payable account Credit Cash