Company Accounts
1. Types of Business
| Type | Owners | Key points |
|---|---|---|
| Sole trader | one person / one family | owner usually runs it day-to-day; can be tiny (tuck shop) or big (department store) |
| Partnership | 2 or more persons | raise more finance than one person can; normally max 20 partners |
| Company | shareholders | group of people formed for profit; private or public |
Public company: shares can be bought by anyone, normally traded on a stock market (= listed company); capital at least $50,000 and registered as public.
2. Company Income Statement — only ONE difference
Same as a sole trader (Sales − cost of sales = gross profit, + other income, − expenses) except interest:
Loan / debenture interest is NOT deducted with expenses — it is deducted at the very end.
Less: Debenture / loan interest (amount × rate %)
= Profit after interest (= profit for the year)
Why? Shareholders (owners) see how much profit was earned, and how much of it went to outsiders (lenders/creditors). What is left is the profit saved for the year.
3. Equity & Statement of Changes in Equity (SOCIE)
Equity = ownership of the business = what is left after paying off all liabilities (residual interest) = owner's capital = shareholder equity.
SOCIE: a company's financial statements must include it to comply with IAS 1 – Presentation of Financial Statements. It is part of the FS together with the statement of financial position, statement of comprehensive income, statement of cash flows and notes.
- For each component of equity it shows: amount at start → changes during period → amount at end.
- Purpose: to show how total equity changed during the year, which parts increased / decreased, and by how much.
4. Share Capital — Ordinary vs Preference
Capital = money invested by shareholders. Two types:
| Ordinary shares | Preference shares | |
|---|---|---|
| Owners? | the real owners | not real owners (privileged class) |
| Dividend | not fixed — unlimited, paid last | fixed % (e.g. 5% = $5 per $100) — paid first |
| If company closes (bankrupt) | repaid last | repaid before ordinary |
| Voting at AGM | YES — vote on directors, auditors, expansion, raising finance | NO |
Bankrupt = assets < liabilities ⇒ equity is negative.
Why buy ordinary shares then? (1) voting rights, (2) dividend has no upper limit.
Nominal (par / face) value = original value of a share; if not given in exam assume $1.
e.g. $60,000 ÷ $2 = 30,000 shares (if $1 shares: 60,000 shares)
Share premium = extra charged above nominal value (issue $1 share at $1.50 ⇒ $0.50 premium).
5. Reserves
Reserve: surplus not yet distributed as profit to shareholders — saved for "rainy days" (like the reserve tank in a car: a warning light, but you can still run 10–15 km).
① Revenue reserves — from profits earned but not paid as dividend
They increase the company's wealth and are available to pay dividends.
- Retained earnings = past profits not distributed (also called accumulated profits / accumulated funds / profit & loss a/c). Used only for paying dividends. (Household: dad earns 100,000, mum spends 80,000, saves 20,000.)
- General reserve = profit set aside for no specific purpose: expand business, buy / replace non-current assets, cover future losses, pay future dividends.
- Non-current asset replacement reserve = like general reserve but for replacing a specific high-value asset (e.g. plant); still a revenue reserve.
② Capital reserves — NOT from profits, so can't be paid as dividend
- Share premium — extra received when shares are issued above nominal value (issued only on special occasions, not day-to-day).
- Revaluation reserve (surplus) — gain when a non-current asset is revalued. Land bought $100,000 now worth $120,000 ⇒ Dr Land, Cr Revaluation surplus $20,000. It is an unrealised gain (not sold yet).
6. Dividends
Dividend = return paid to shareholders on their investment (e.g. Unilever pays you per share you hold).
| Interim dividend | Final dividend |
|---|---|
| paid during the year (e.g. after Mar, Jun … on quarterly accounts) — can be more than one | paid at the end of the year; one only; paid in the next year because accounts take 2–3 months to finalise |
- Dividends are paid from retained earnings first; if exhausted, from general reserve (second priority). Total equity ↓.
- Dividend per share ⇒ × number of shares. Dividend as % (usually preference) ⇒ × dollar value of the shares.
7. Statement of Changes in Equity — Format
Heading: Company name · Statement of Changes in Equity for the year ended 31 Dec 20XX (write it only if not given). Total equity column is optional if no format is given; if the format has it — you must fill it.
| Pref. Share Capital | Ord. Share Capital | General Reserve | Retained Earnings | Total Equity | |
|---|---|---|---|---|---|
| Balance at start | XXX | XXX | XXX | XXX | XXXX |
| Profit / (Loss) after interest | XX / (XX) | XX / (XX) | |||
| Dividends paid | (XX) | (XX) | |||
| Transfer to General Reserve | XX | (XX) | nil | ||
| Balance at end | XXX | XXX | XXX | XXX | XXXX |
Opening balance = last year's closing balances (1 Jan; e.g. year ended 31 Dec 2017 starts 1 Jan 2017).
| Item | Column(s) affected | Total equity |
|---|---|---|
| Profit for the year (after interest) | + Retained earnings | ↑ increases |
| Loss for the year | − Retained earnings | ↓ decreases |
| Dividend paid | − Retained earnings (then GR if RE used up) | ↓ decreases |
| Transfer to general reserve | + General reserve, − Retained earnings | no effect (right pocket → left pocket) |
| Issue of ordinary / pref. shares | + the share capital column | ↑ increases |
| Issue at a premium ($1 share at $1.60) | + $1.00 capital, + $0.60 share premium column | ↑ by 1.60 per share |
Interest note: if the question gives profit before interest, deduct the interest first in a separate rough working (income-statement item) — never show interest in the SOCIE.
8. Statement of Financial Position (Equity section)
Only the equity & reserves part differs from a sole trader. Sole trader / manufacturing: opening capital + profit − drawings. Partnership: capital a/c + current a/c. Company: "Equity & Reserves" — copy the official item names from the question (e.g. "750,000 ordinary shares of $1 each") and use closing values. An extract = only part of the SFP.
| ARD Limited — Statement of Financial Position Extract as at 31 Dec 2015 | |||
| Equity & Reserves | $ | $ | $ |
| AUTHORIZED SHARE CAPITAL (not carried forward — 1 mark) | |||
| Preference shares capital | XXX | ||
| Ordinary share capital | XXX | XXX | |
| ISSUED / CALLED UP / PAID UP SHARE CAPITAL | |||
| Preference share capital | XXX | ||
| Ordinary share capital | XXX | XXX | |
| General reserves | XXX | ||
| Retained earnings | XXX | ||
| Total Shareholder funds | XXX | ||
| Add: Debentures / Bank loan | XXX | ||
| Capital Employed | XXX | ||
= total invested by owners and outsiders — only calculate it if the examiner asks
Order: preference first, then ordinary, then reserves (general reserve & retained earnings = revenue; share premium & revaluation = capital, A Level). After this line comes non-current liabilities, current liabilities…
9. Worked Example 1 — Dharolia Ltd (Video 25)
31 Dec 2012 SFP: ordinary share capital ($1 shares) $60,000 · general reserve $13,000 · retained earnings $9,000.
During 2013: issued 40,000 more $1 ordinary shares · paid final dividend $4,000 from previous year · paid interim $0.10/share on shares held at start of year · profit for the year $28,000.
At 31 Dec 2013 directors: transferred $10,000 to general reserve · proposed final dividend $0.20/share ⇒ IGNORE, no entry.
Required: SOCIE and SFP extract for year ended 31 Dec 2013.
| Dharolia Ltd — Statement of Changes in Equity for the year ended 31 Dec 2013 | ||||
| Ordinary Share Capital $ | General Reserve $ | Retained Earnings $ | Total Equity $ | |
|---|---|---|---|---|
| Balance at 1 Jan 13 | 60,000 | 13,000 | 9,000 | 82,000 |
| Profit after interest | 28,000 | 28,000 | ||
| Ordinary dividend paid: → Interim [60,000 shares × $0.10] → Final (previous year) |
(6,000) (4,000) |
(6,000) (4,000) |
||
| New shares issue [40,000 shares × $1] | 40,000 | 40,000 | ||
| Transfer to General Reserve | 10,000 | (10,000) | – | |
| Balance at 31 Dec 13 | 100,000 | 23,000 | 17,000 | 140,000 |
| Dharolia Ltd — Statement of Financial Position Extract as at 31 Dec 2013 | ||
| Equity & Reserves | $ | $ |
| Ordinary share capital ($1 shares) | 100,000 | |
| General reserve | 23,000 | |
| Retained earnings | 17,000 | |
| Total shareholders' funds | 140,000 | |
10. Worked Example 2 — Whittlesford plc (Video 26, A Level)
31 Dec 2011: 500,000 ordinary shares of $1 = $500,000 · share premium $200,000 · general reserve $70,000 · retained earnings $298,300.
- Draft profit for year ended 31 Dec 2012 = $122,800.
- 1 Jan 2012: property revalued $520,000 → $780,000.
- 31 Jan 2012: rights issue 1 for every 5 held at premium of $0.25 each.
- 30 Jun 2012: interim dividend $0.08 per share paid.
- 31 Oct 2012: bonus issue 1 for every 4 held; directors keep reserves in most flexible form.
- 31 Dec 2012: $40,000 transferred to general reserve; final dividend $0.12/share proposed (no entry).
- (from the lecture) 5 Jan 2013: a customer owing $4,200 at year-end declared bankrupt; inventory cost $3,000 water-damaged, can only be sold for $600. (the board's question page is cut off at this note)
Parts: (a) explain "reserves in most flexible form" · (b) SOCIE · (c) adjusting / non-adjusting event · (d) audit report · (e) (not answered on board) · (f) SFP extract.
(a) "Keeping reserves in their most flexible form"
Why: dividends can be paid only from revenue (distributable) reserves; capital reserves are undistributable and can't pay dividends — so use them up first for non-cash transactions like a bonus issue.
(b) Adjustments — workings
| Whittlesford plc — Statement of Changes in Equity for the year ended 31 Dec 2012 | ||||||
| Ordinary Share Capital $ | ① Share Premium $ | ② Revaluation Reserve $ | ③ General Reserve $ | ④ Retained Earnings $ | Total Equity $ | |
|---|---|---|---|---|---|---|
| Balance at 1 Jan 2012 | 500,000 | 200,000 | – | 70,000 | 298,300 | 1,068,300 |
| Profit after interest & tax (w1) | 116,200 | 116,200 | ||||
| Revaluation of property | 260,000 | 260,000 | ||||
| Rights issue | 100,000 | 25,000 | 125,000 | |||
| Dividend paid | (48,000) | (48,000) | ||||
| Bonus issue | 150,000 | (150,000) | NIL | |||
| Transfer to General Reserve | 40,000 | (40,000) | NIL | |||
| Balance at 31 Dec 12 | 750,000 | 75,000 | 260,000 | 110,000 | 326,500 | 1,521,500 |
(c) Adjusting or non-adjusting event?
Non-adjusting — it does not affect conditions which existed on 31 Dec 2012 (IAS 10 Events after the reporting period; the board's answer, the event note itself is cut off in the PDF).
(d) Audit report
- A report to shareholders.
- Prepared by an independent person.
- Prepared by a suitably qualified person.
- Prepared following an inspection of the company's books.
- Contains the auditor's stated opinion as to whether the financial statements give a true & fair view.
(e) Not answered on the board — the teacher left part (e) blank (its question text is not visible in the PDF).
(f) SFP extract
| Whittlesford plc — Statement of Financial Position Extract as at 31 Dec 2012 | ||
| Equity & Reserves | $ | $ |
| 750,000 Ordinary shares of $1 each | 750,000 | |
| Revaluation reserves | 260,000 | |
| Share Premium | 75,000 | |
| General Reserve | 110,000 | |
| Retained Earnings | 326,500 | |
| Total Shareholder funds | 1,521,500 | |
Copy the examiner's wording ("750,000 ordinary shares of $1 each" — total after rights + bonus issue). If asked "also show capital employed": + debentures / loans. "Total shareholder funds" = 1 mark.
Quick Recap — Company Accounts Cheat-Sheet
- Company I/S: expenses (excl. interest) ⇒ profit before interest (operating profit) − interest (amount × rate%) ⇒ profit after interest = profit for the year.
- SOCIE (IAS 1): opening → changes → closing for each equity component; opening = last year's closing.
- Profit / loss ⇒ retained earnings only. Dividend paid ⇒ RE (then GR). Declared / proposed ⇒ no entry.
- Dividend per share × no. of shares (shares at the right date); % × $ value. Current year = this interim + last year's final.
- Transfer to GR: GR ↑, RE ↓, total equity nil. New shares: capital ↑ (+ premium column), total ↑.
- Rights issue: cash in, at premium, 1 for n of existing shares. Bonus issue: free, no premium, total NIL, debit reserves in order ① share premium ② revaluation ③ general ④ retained earnings.
- Revaluation: Dr asset, Cr revaluation reserve (new − old); total ↑. Capital reserves are undistributable.
- Pref. shares: fixed %, paid first, no vote. Ordinary: real owners, vote, dividend unlimited, paid last. Bankruptcy order: lenders → preference → ordinary.
- No. of shares = capital ÷ nominal value (assume $1 if not given).
- Check: vertical total of Total Equity column = horizontal total of closing balances.
- SFP extract: Equity & Reserves — authorized (show only, 1 mark) → issued/called/paid up capital → reserves → Total shareholder funds (+ debentures/loan = capital employed).
- Bad debt ↓ profit; inventory at lower of cost & NRV (IAS 2). Audit report = independent, qualified, true & fair view opinion.