Accounting For Close Corporations

ACCOUNTING FOR
CLOSE CORPORATIONS
Characteristics
Sources of finance
Formation
Producing information
1
© Kolitz & Quinn, 2005
OUTCOMES
 Recall the characteristics of a CC

 Describe the sources of finance, distinction
between members’ contributions and
profits retained and equity of a CC
 Describe the formation process of a CC
 Produce financial information for a CC
2
INTRODUCTION
 In 1988 an additional form of business
ownership was introduced into Namibian law
when the Close Corporation Act no. 26 of 1988
was passed by Parliament
3
CHARACTERISTICS OF A
CLOSE CORPORATION
 Enables smaller undertakings to acquire
corporate status, with a legal personality
distinct from its owners
 owners known as members
 may not be more than 10 members
 Owners and management will normally be
the same group of persons
© Kolitz & Quinn, 2005 4

Characteristics of a close
corporation ...
 Implications of separate legal entity status
of the CC
 members have limited liability
 CC has perpetual succession
 Advantages and disadvantages

SOURCES OF FINANCE FOR A
CLOSE CORPORATION
 Like other entity

forms, can be
financed from two
sources, investors
funds and borrowed
funds

Sources of finance for a close
corporation. . .
 Investors funds
 known as members contribution
 each member has an interest expressed
as a percentage
 no requirement for a member’s interest to
be in proportion to his share of member’s
contribution
 Borrowed funds
 from members, known as loans from
members
 from external sources
Members contribution and
retained profit
 Members contribution is long term
investment by owner
 Members do not have an automatic claim
to the profits
 CC pays tax on its profits
 after tax profit is available for distribution to
members
 amounts authorised for payment are known as
distributions
 profits retained are known as undrawn profit

Equity of a close corporation
 Equity comprises
 Members’ contributions
 Undrawn profit
 Revaluation surplus
 Equity of a CC also known as members
funds
 as a separate legal entity, members funds
belong to the CC and not to the members
 members funds not allocated to members on
SOFP
FORMATION OF A CLOSE
CORPORATION
 Incorporation requires only a founding
statement
 details relating to the CC
 details relating to the members
 After incorporation, a new member
acquires an interest by
 purchasing an interest
 making a contribution, where interest
determined by agreement
PRODUCING INFORMATION
FOR A CLOSE
CORPORATION
 Financial statements of a CC should meet
needs of members, both as owners and
management
 Determination of profit
 same as for sole proprietor and partnership
 interest on loans to members and members
salaries are treated as an expense

Taxation
 As a separate legal entity, a CC is
subject to normal tax on its taxable
income
 A CC is require to make provisional
payments during the year
Dr Cr
Receiver of Revenue 45 000
Bank 45 000
 When tax charge is established

Dr Cr
Taxation expense 50 400
Receiver of revenue 50 400
Distribution to members
 A member does not have an automatic
claim to the undrawn profit of the CC
 Formal decision required to authorise a
distribution
Dr Cr
Distribution 100 000
Short-term loan from member- Simon 50 000
Short-term loan from member - Gary 50 000

Revaluation surplus
 The gain on revaluation is reported in a
separate revaluation surplus account
 part of equity
 not distributable to members unless
properly authorised
 Not prudent to distribute an
unrealised surplus
Dr Cr
Land and buildings 60 000
Revaluation surplus 60 000
Preparation of the financial
statements
 The CC act requires the
financial statements to
Chapter refers to
consist of : statement of financial
position and statement
 B/S of comprehensive
income (where there
 I/S are items of
 Report of accounting comprehensive
income)
officer
 SOCIE should also be
prepared

Preparation of the financial
statements . . .
 The CC act also requires the FS to disclose
the aggregate amount at end of the
year and movement during the year in
each of
 members contributions
 undrawn profit
 revaluation surplus
 loans from members
 A members net investment statement
is prepared for this
 A transactions with members
statement should also be prepared
Closing entries for a close
corporation
 Profit from P & L a/c is transferred to
the undrawn profit a/c
Dr Cr
Profit & loss 180 000
Undrawn profit 180 000
 Taxation expense a/c and distribution

a/c transferred to undrawn profit
Dr Cr
Taxation expense 54 000

Distributions 100 000


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Accounting For Close Corporations

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ACCOUNTING FOR

 Recall the characteristics of a CC

© Kolitz & Quinn, 2005 4

© Kolitz & Quinn, 2005 5

 Like other entity

© Kolitz & Quinn, 2005 6

© Kolitz & Quinn, 2005 8

© Kolitz & Quinn, 2005 11

 When tax charge is established

© Kolitz & Quinn, 2005 13

© Kolitz & Quinn, 2005 15

 Taxation expense a/c and distribution

Undrawn profit 100 000

© Kolitz & Quinn, 2005 17

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