Company Accounts.doc

Adv Acc Company Accounts MEMORANDUM OF ASSOCIATION: Memorandum of association is the basic document of a joint stock company. It is known as the Charter of the Company. It defines the limits outside which the company can not go. Its main purpose is to enable shareholders, creditors and all those who deal with the company to know what the permitted range of enterprise is. Clauses of Memorandum:  Name clause It states name of the company. Company can use any name but it should not be similar to name of any other company. It should also not include words like king, queen, government, UNO etc. Company name must end with the word “Limited”. In case of private limited companies, the words “(Private) Limited should be used at the end”.  Situation clause It states the exact address and name of the city where company is located.  Object clause It defines the sphere of the company’s activities. It includes a series of objectives for which the company is started.  Liability clause This clause of memorandum declares that liability of the members of the company is limited to the extent of the value of shares purchased by them.  Capital clause It defines the values of “Authorized Capital or Registered Capital”. The capital is divided into shares of a certain value which is specified in the capital clause.  Association and subscription clause This clause contains a declaration by the subscribers (7 persons in public company and 2 in a private Ltd. company) that they are desirous of forming a company and agree to have number of shares written against their respective names.

1

Adv Acc Company Accounts

ARTICLES OF ASSOCIATION: It is a legal document which is second in importance to Memorandum of Association. The Articles of Association are the regulations or by laws which govern the internal organization and conduct of a company. In other words, it is concerned with the procedural matters in the routine conduct of company affairs. Remember!  Being subordinate to Memorandum of Association, Articles of Association can not go beyond the limits defined by it.  The articles of association describe the powers of directors, other officers and of shareholders etc. Contents of Articles: 1) Amount of share capital issued, transmission of shares 2) Rights of shareholders 3) Rules for issuance of shares and debentures 4) Procedures as well as regulations for making calls on shares 5) Manner to transfer shares 6) Rules for appointment of directors & managing directors, agents, secretaries and treasures 7) Number, qualifications, remunerations, powers and liabilities of directors 8) Declaration of dividends 9) Convening and conduct of meetings with reference to notice, quorum, poll, proxy, resolutions etc 10) Rules regarding forfeitures and surrender of shares 11) Matters relating to account and audit 12) Rules for winding up of the company

2

Adv Acc Company Accounts

PROSPECTUS: After receipt of “Certificate of Incorporation”, from the registrar of companies, the promoters of a public company invite the public and financial institutions to subscribe to the capital of the company. This notice, advertisement or other documents inviting offers for subscription to the share capital of the company is called Prospectus. Only public companies can issue a prospectus. Following are the purposes for issuing prospectus;  To bring into notice of the public that a new company has been formed.  To convince those who have saving to invest about genuineness of the company and its future prospects.  To keep an authenticated record of the conditions on which the capital has been raised.  To secure that directors of the company accept responsibility for the statements in prospectus.

3

Adv Acc Company Accounts

FINANCIAL STATEMENTS OF JOINT STOCK COMPANIES All types of businesses have to prepare their financial statements at the end of the financial year because it is the requirement of companies law and IAS 1. Followings are the financial statements; 

Statement of comprehensive income



Statement of financial position



Statement of cash flow



Statement of changes in equity

All these things you have already studied in IAF but not in detail. Now we are going to study, first two statements in detail. Grasp the following terms and these will help you not only in understanding the topic but also in practical life. 

Dividend



Cash dividend



Stock dividend



Interim dividend



Proposed dividend



Fund/ Reserve/ Provision



Deferred Cost:

An advance payment which has been paid for goods and services which are to be supplied latter or where benefit is to be received later. e.g., 1) Preliminary expenses 2) Discount allowed on issue of shares Debentures – The term debenture is used when a limited company receives money on (long term)loan, and certificates called debenture certificates are issued to the lender. Interest will be paid to the holder, the rate of interest being shown on the certificate. Debenture interest have to paid whether profits are made or not they are therefore 4

Adv Acc Company Accounts different from shares where dividends depends on profits being made. A debenture may redeemable (repayable at or by a particular date) or irredeemable ( normally repayable only when the company is officially terminated by its going into liquidation.

5

Adv Acc Company Accounts Question – 1: The following is the trial balance of the Oman Cement Company for the year ending 31 December 2007. Stock Premises Plant and Machinery Debtors Purchases Cash at bank Cash in hand Custom duty

50,000 144,000 171,000 39,000 90,000 30,000 800 5,000 150,00 0 200,00 0 17,500 240,00 0 1,200

Paid up Capital 6% Debentures Retained profit of 2006 Sales Bad debts provision Directors fee Repair and renewal Salaries Insurance Bad debts Preliminary expenses Interim dividend Furniture & Fixture General Reserve Share Premium Creditors Bills payable Investment

4,000 2,400 46,000 4,100 1,000 4,000 9,000 30,000 10,000 9,500 18,100 10,000 26,000 656,300

656,30 0

The following additional information is also provided: 1) Create a reserve for bad debts @5% on debtors. 2) Provide depreciation on Plant and machinery at 10% and furniture at 5% 6

Adv Acc Company Accounts 3) Directors recommended following in annual general meeting, which is; a. Proposed final dividend of 10%. 4) Closing stock as on 31 December 2007 is valued at 74,000 5) Market value of the investment on 31 December 2007 on MSM was RO. 19,000. Required:

Prepare Statement of comprehensive income and Statement of financial

position . Question – 2: Al Omania Company SAOG presents the following data for the year ending 31 December 2006. Sales Salaries General expenses Creditors Opening stock Purchases Share capital General Reserve Retained profit Bank loan @ 6% Share premium Sundry Assets Patent Cash Land & Building Plant & Machinery Preliminary expenses Director's fee Auditor's fee Wages Manufacturing expenses Advertising

75,000 6,250 1,875 4,375 8,125 41,250 50,000 12,500 3,125 25,000 2,500 7,500 11,250 1,875 38,750 42,500 1,875 375 250 7,500 2,500 625 172,500

The following adjustments are given: 7

172,50 0

Adv Acc Company Accounts 

Directors recommended a dividend of 10%.



Depreciation should be provided at the following rates o Land and building 5% o Plant and machinery 10%



General expenses include prepaid insurance of RO. 40



The closing stock on 31 December 2006 was RO. 6750.



The company has an authorised capital of RO. 200,000

Required:

Prepare Statement of comprehensive income and Statement of financial

position. Question – 3: Following is the trial balance of Beeta company for the year ending 31 December 2007.

Cash at bank Preliminary expenses Audit fee Carriage Plant and Machinery Sales Creditors Profit & Loss of last year Office salaries Director's Remuneration Premises Furniture Stock Returns Manufacturing expenses 9% Bank Loan Cash in hand Investments Share Capital Debtors Purchases

Dr 6,510 18,667 10,000 3,333 49,467

386,967 20,530 10,000 23,000 8,820 65,333 11,667 62,140 4,227 13,080

3,283 16,000

3,333 16,000 133,333 35,133 239,403 570,113

8

Cr

570,113

Adv Acc Company Accounts

The following additional information is given: 

Provide a final dividend of 5%



Interest on bank loan is not paid.



Provision for bad debts is for RO. 3,000



Charge depreciation on plant and machinery 10% & furniture by 5%



Closing stock is valued at RO. 50,000



Office salaries unpaid are RO. 4,000

Required:

Prepare Statement of comprehensive income and Statement of financial

position

Question – 4: Following is the trial balance of Sohar furniture company SAOG for the year ending 31 December 2007. Dr Sales Carriage 11,500 Purchases 260,000 Insurance 3,000 Rent 5,000 Issued and paid up capital General Expenses 6,900 Debtors 40,000 Advertisement 500 Salaries 25,000 Bad debts 1,600 Plant and Machinery 90,500 Equipment 100,000 Furniture 60,000 Profit and loss account of last year General Reserve Stock 45,000 Cash at bank 21,400 670,400 9

Cr 400,000

250,000

8,000 12,400 670,400

Adv Acc Company Accounts

Further adjustments are: 1) Closing stock is RO. 105,000 2) Insurance of RO. 300 is paid in advance 3) Depreciation is to be charged @ 10% on plant and equipment and 5% on furniture. 4) Rent of RO. 600 is outstanding 5) Debtors worth 400 are bad and create a provision of 5% on remaining. 6) Directors proposed a dividend of 5% 7) Make a provision of 2,500 for income tax. Required: position .

10

Prepare Statement of comprehensive income and Statement of financial