Company
What is a Company
• These are corporate bodies that consists of group of
persons of common interest coming together to
facilitate trade with the hope of making a profit.
• A board of directors is elected to control the decision
making of the company.
• An individual can be a part of a company by buying
shares. When they do this they become
Shareholders.
• Profit made by the company will be paid to the
shareholders as dividend.
Types of companies:
• Private Limited company: A business organization
that cannot sell shares to the public and is usually
owned by family members. E.g. Azan supercenter. It is
usually owned by 1-50 shareholders
• Public Limited Company: a business that is owned
by large number of shareholder that can sell shares to
the public. E.g. Grace Kennedy . It is usually owned by
1-unlimied shareholders
Advantages
• Larger amount of capital is available.
• The founder of the business can keep
control of the business by holding a
majority of the shares.
• More employment is created.
• Profits are retained by the owners.
Disadvantages:
• When a company is too large it can become
burdensome by too much paper work or red
tape.
• Decisions take longer time to put into
practice.
• Management of these large business can
become difficult.
Two main documents of a Company
Debentures
• A Debenture is a loan (Long term liability) to
the company upon which affixed rated of
interest is paid annually.
• It is another way of raising finance for the
company.
• The interest (Debenture interest) must be
paid even if the company makes a loss . This
is recorded as an expense in the business.
• Debentures loan is usually secured on the
assets of the business.
Companies ~ issuance of shares
Companies have shareholders who are issued shares in
exchange for money which will be invested into the
business.
Owners equity in a company is called shareholder’s
equity or share capital. On the balance sheet it consists
of:
• Authorised and Issued capital
• Retained earnings
• Reserves
Authorised vs. Issued Share Capital
Types of Shares
Types of Shares
Shares
• Ordinary shares typically have a “face” or par value
(nominal or dollar value written on the face of the
share).
• Share premium is the amount by which the selling
price of a share exceeds its face value (par value).
Issue of Shares
Example 1
• On May 20 Sarah J. Parker and her sister invested
$300,000 cash in exchange for shares in a business.
▫ Debit – cash (increases the company’s asset of cash)
▫ Credit – share capital (increases the company’s equity)
The Journal
Dr. Cash $300,000
Cr. Share capital $300,000
Example 2 ~ Share premium
• Helsinki and his sisters decide to incorporate their
business. They sold shares to the public at $120 each.
The shares had a par value of $100. They are
authorised to issue 200,000 shares.
• One person bought 1000 shares
Journal entry
Dr. Cash $120,000
Cr. Ordinary shares Capital $100,000
Cr. Share Premium $20,000
** Recording the issue of 1000 shares in excess of par value
Activity
K. Gooding Ltd is seeking to issue 10 000 shares of Ordinary
shares on 1 May 2015 and 5,000, 10%, preference Shares .
Record the following in the journal.
1. Ordinary Shares issued at par $3.00
2. Ordinary Shares issued at market value of $5.00 with par
value $3.00 per share.
3. Preference Shares issued at par $2.00
4. Preference Shares issued at market value of $2.50
General Journal
Date Details Debit $ Credit $
May 1 Cash (10,000 x$3) 30,000
Ordinary Share Capital 30,000
Issue 10,000 shares at par
Cash (10,000 x $5) 50,000
Ordinary Share Capital (10,000 x $3) 30,000
Share Premium (10,000 x $2) 20,000
Issue 10,000 shares at premium
Bank (5,000 x $2) 10,000
Preference Share Capital (5,000 x $2) 10,000
Bank (5,000 x $2.50) 12,500
Preference Share Capital (5,000 x $2) 10,000
Share Premium (5,000 x $0.50) 2,500
Activity-Prepare the journal to record
the following:
Nov 17 Issued 5 000 shares of $3 per common
stock at $15.50.
Dec 4 Sold 800, Class A preferred stock at
$5.00, for $4 000 cash.
Dec 15 Received inventory valued at $25 000
and equipment with market value of $25000
for 10,000 shares of $1 par common stock.
Dec 29 Issued 2 000 shares of 6% par
preferred stock with stated value of $65 per share.
The issue price was cash of $73 per share.
Dividends
• Legally, dividends can be declared and paid from retained
earnings. Economically however, retained earnings are
relied on for the growth of the company.
• Cash dividends are distributions of cash to shareholders
(owners) that reduce the retained earnings of the company.
When paid out, they provide a return on shareholder’s
investment but is constrained by the amount of cash on
hand or available.
** Many companies do not pay cash dividends since
these funds are retained for financing future growth.
Dividends
• The Board of Directors (BOD) will decide if and
when cash dividends are paid to shareholders.
• Declared dividends entail two accounting
transactions, upon declaration shareholders
become creditors as the dividend becomes a
legal liability of the company.
• The liability is reduced only when payment is
made
Dividends
• When dividend is declared, preference
shareholders are paid first. If preference shares
are cumulative, they should receive payments
before any allocation is given to ordinary
shareholders.
• If preference shares are non-cumulative, only
the current year’s dividends must be paid to the
preference shareholder.
Example
• On March 31, the Helsinki Bed & Breakfast declares and
pays dividends of $0.50 per share to the owners of its
3,000 shares totalling $1,500.
Journal entry
Dr. Dividends $1,500
Cr. Cash $1,500
** The declaration of dividends reduces share capital (Dr.) and
the pay out of cash reduces the asset of cash (Cr.)
Final Accounts of Company
Company prepare:
1. Trading, Profit and Loss Appropriation
Account
2. Balance Sheet
Trading, Profit and Loss Appropriation
Account
• Trading, Profit and loss remains the same with
the addition of Directors remuneration and
Debenture interest as new expenses
• Appropriation Account- This is a new section
Profit and Loss Appropriation Account
Balance Sheet
• Fixed Assets and Current Assets remain the
same
• Current Liability includes proposed dividend
• Long term liability includes Debentures
Balance Sheet
