POA SECTION 9
PART 1 ACCOUNTING FOR CORPORATIONS (LIMITED LIABILITY COMPANIES)
What is a Corporation?
A Corporation, also known as a Limited Liability Company, is a commercial business entity
created under the Companies Act 2006, offering its owners limited liability and legal
protection.
Companies are legal entities created under the Companies Act 2006. Most companies are limited
liability companies in that the liabilities of their shareholders are limited to the face /par value of
the shares.
There are two types of companies:
1. Public limited companies
2. Private limited companies
These two types of companies will be compared using the following:
Public Limited companies Private Limited companies
Examples Trinidad Cement Limited
Grace Kennedy
(Any Company on the Stock
Exchange)
Number of owners 2 or 7 - Infinity Two and the maximum is restricted
and subject to the approval of other
shareholders 2-50
Source of Capital The Public - securities are traded Owned by family members and
on a stock exchange close friends
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How are Companies Formed?
Forming a limited liability company requires registration with the respective country’s Registrar
of Companies.
Stages in the Formation of a Company
✓ Company must be registered – Ministry of Legal Affairs (Naming and Incorporation
process)
✓ Articles of Association and Memorandum of Association
✓ Raising Capital Process
✓ Other legal processes (Tax, licences, other preliminary processes)
✓ Commencement of Business
The main requirement for registering a limited company is the preparation of 2 essential legal
documents.
1. The Memorandum of Association (MOA) and
2. The Articles of Association (AOA)
MOA- a document that discloses the terms and conditions governing the company’s relationship
with the outside world.
AOA- a document that discloses the terms and conditions governing the company's internal
operations.
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Characteristics of a Corporation
Size – Medium to very large and complex
Source of Capital – Shareholders contribute capital by purchasing shares /stock
representing part ownership in the business. Shares are bought/ sold.
Liability – Limited. Shareholders cannot be held personally liable for the business's
debts. Shareholders cannot lose more than what they invested.
Formation and Management – More difficult to establish (must be registered with the
Government). Shareholders are not necessarily involved in daily operations but may
appoint a board of directors, CEOs, etc., to handle operations and make decisions.
Separate Entity – the Company is a separate legal person from its shareholders/owners. It
has the capacity to sue and be sued in its own name.
A Company is regarded as a separate legal entity, i.e. it has a separate existence from its
members or shareholders. It can, therefore, sue and be sued and enter into contracts in its own
name.
Advantages of a Company Disadvantages of a Company
Ease of raising capital. Double Taxation.
Limited liability of shareholders. Heavily regulated
Transfer of ownership without affecting Risk of takeover or Loss of Control.
operations.
Perpetual Existence/ Continuity Ensured.
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POA SECTION 9
Accounting for a Company
METHODS OF RAISING CAPITAL
There are three methods used to raise capital to acquire assets.
1. Equity or share capital.
➢ A share is the interest of a person in the company. That interest comprises rights and
obligations and mutual covenants entered by all shareholders inter se (among
themselves).
➢ Represents ownership in the company.
There are two types of shares.
Ordinary Shares Preference Shares
❖ Voting rights ❖ No voting rights.
❖ Dividend depends on profits. ❖ Dividend not dependent on
profits
❖ Dividends are declared by the ❖ Dividends are based on a fixed
Board of Directors interest rate.
❖ Shareholders bear the most risks. ❖ Shareholders bear little risks.
❖ Shareholders are paid dividends ❖ Shareholders are paid dividends
after preference shareholders. before ordinary shareholders.
❖ Flexible rate of dividends paid to ❖ Fixed rate of Dividend paid to
shareholders. shareholders
Authorised Share Capital – The maximum amount of Capital that the company can raise from
the public buying shares.
Issued Share Capital – The portion of authorised capital that has been issued/distributed/sold to
the public for cash.
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2. Loan Capital.
Another way to raise capital for a company is through the issue of debentures to investors. These
are official documents given by the company showing that it has borrowed money.
a) Loans – from friends/family, Banks, other financial institutions, and government
agencies (Private Limited Companies and Entrepreneurs who start companies)
b) Debentures are long-term loans to the company and bear a fixed interest rate. The
interest is an expense to the company and must be paid to the investor (Debenture
holder) whether profits are made.
c) Bonds are another form of long-term loans bearing interest rates. However, they are
secured, i.e., tied to specific assets being pledged as security. (charges)
d) Treasury Bills are short-term loans of approximately 3, 6 or 9 months to the company,
redeemable at a specific date and amount.
3. Portions of Net Profit reinvested into the Company – (Retained Earnings and Reserves)
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Accounts prepared by a Company
1. Accounting for Capital Invested
As mentioned earlier, there are two main sources of capital: Share Capital and Loan Capital. A
journal entry is used to record capital invested. This Journal entry is recorded in your General
Journal. This capital comes in the form of issuing of shares and debentures.
Example
Avengers Ltd is authorised to issue 100,000 ordinary shares at $5 each and 75,000 10%
preference shares at $6 each. On 22nd January 2023, Avengers Ltd decided to issue the
following:
• 85,000 ordinary shares
• 45,000 10% preference shares (The 10% represents the fixed dividend rate)
• 200 15% Debentures at $500 each (The 15% represents the fixed interest rate)
ISSUED SHARE CAPITAL WORKING
Ordinary Share Capital = 85000 x $5 = $425 000
Preference Share Capital = 45000 x $6 = $270 000
Debentures = 200 x $500 = $100 000
Avengers Ltd
The General Journal
Date Details Debit $ Credit $
2019
January 22 Cash/Bank 795,000
10% Preference Share Capital 270,000
Ordinary Share Capital 425,000
15% Debentures (long-term loan) 100,000
To record the issuance of shares and debentures
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2. Ledger Accounts
Once the journal entry is recorded, Accounts for each Asset, Liability and Share Capital Account
are opened, and the information is recorded. The same steps, formats, and rules as Sole
Proprietorship.
3. Income Statement
The Income Statement (Trading, Profit and Loss Account) for a Company is the same as the
Income Statement of a Sole Proprietorship.
➢ Trading Section – The format is the same as a sole trader or partnership
➢ Profit and Loss Section - The format is the same as a sole trader or partnership,
but it includes TWO (2) expenses that do not apply to Sole traders and
Partnerships.
i. Debenture Interest Incurred/paid (the percentage of the Debenture value)
ii. Directors Remuneration (Salaries to the Board of Directors)
4. Appropriation Account
After calculating net profit or net loss (Using the Income Statement), this account is
prepared to show how that Net Profit or Net Loss is distributed (shared). It can be
prepared as an extension of the Income Statement or on its own. It documents the items
that represent Income earned by the Company and Items that represent Expenses incurred
by the Company that are appropriated from Net Profits. Income earned will be credited
(added) to Net Profit/Loss, and Expenses incurred will be debited (subtracted) from net
Profit/Loss as Appropriations. The residual income (Retained Earnings) will be
transferred to the Balance Sheet (Reserves Section).
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Income added to Net Profit/Net Expenses (Appropriations) subtracted from
Loss Net Profit /Loss
Retained earnings b/d – the • Corporation tax is a percentage of net
remainder of profits from the income given to the government. This is
previous financial year. treated as an appropriation and NOT an
Operating Expense.
• Reserves – portions of net profit set aside
for general or specific reasons.
• Goodwill Written Off – This is the
company's good image, name, or reputation.
This goodwill is amortised yearly and
written off as an appropriation, not an
operating expense.
• Preliminary expenses – these are expenses
that are incurred prior to (before) the
company begins its operations and will not
be incurred at any time during its
operations. (legal fees, company
incorporation fees, expenses for raising
initial capital, stamp duties, and name
approval fees.
• Dividends – These are the returns the
shareholders pay on the invested money.
Directors declare these dividends but are not
always paid till the next financial year.
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Name of the Company
Appropriation Account for the year ended (Day Month Year)
$ $ $
Net Profit XXX
LESS: Corporation Tax (XXX)
ADD: Retained earnings b/d XXX
XXX
LESS APPROPRIATIONS
Transfer to Reserves:
General Reserves XXX
Fixed Asset Reserves XXX
XXX
Goodwill Written off XXX
Preliminary expenses XXX
Proposed Dividends:
Preference Share Dividends XXX
Ordinary Share Dividends XXX
XXX
Total Appropriations (xxx)
Retained Earnings c/d XXX
The Retained Earnings c/d will be transferred into the Balance Sheet (Reserves Section)
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5. Balance Sheet
This Balance Sheet of a Limited Liability Company has the same format as Sole Proprietorship
and Partnership. However, there are a few additions.
➢ Proposed dividends are included in the Current Liabilities Section because they are
expenses that are owed.
➢ If the Debenture interest is accrued (owing), it will also be included in the Current
Liabilities Section
➢ Retained Earnings c/d is included in the Reserves Section
➢ The Financed by Section has some variation. (See below)
Name of Company
Balance Sheet (Capital Section ONLY) as at (Day, Month, Year)
$ $ $
Financed by:
SHARE CAPITAL
Preference Share Capital xxx
Ordinary Share Capital xxx
xxx
LOAN CAPITAL
Debentures xxx
Mortgage xxx
xxx
RESERVES
General Reserves (previous balance + current amount from appropriation xxx
account)
Fixed Asset Reserves (previous balance + current amount from xxx
appropriation account)
Retained Earnings b/d (amount from appropriation account) xxx
xxx
XXX
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