COMPANIES ACCOUNTS

simple and most understandable basis of companies accounts relating to:
issuing of shares. share capital accounts.
                                     ..grab a pen an paper and begin..

1.0: INTRODUCTION

The word company ordinarily means an association of a number of individuals formed for some common object. When such an association is registered under the Companies Act. it becomes an artificial person with perpetual succession and a common seal. It is a corporate body established for purpose of carrying on business for profit.

According to section 3 (1) (i) of the companies Act, a company means, "A company formed and registered under this Act or an existing company ” An existing company means a company formed and registered under any of the previous company’s law.

The definition given in the companies Act is not exhaustive and does not reveal the true characteristics of a company Lord Justice Lindley has given a comprehensive definition of a company According to him, a company is, “An association of many person who contribute money or money’s worth to a common stock and employed for a common purpose. The common stock so contributed is denoted in money and is capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted."

1.1: Characteristic of a Company

On being incorporated, a company enjoys certain advantages over other associations Such advantages are termed as the characteristic of a company and are discussed as under

1.    Perpetual succession: Unlike a nature person a company never dies. It is an entity with a perpetual succession. Its existence is not affected by the death, lunacy and insolvency of its members. A company is an immortal person. Member may come and members may go but the company continues its operation unless it is wound up. The existence of the company is not affected by the death of all the shareholders even. Thus, where all the members of a company were killed by a bomb, company was deemed to survive.

2.    Limited Liability: Limited liability of members is another important characteristic of a company It is the reason why a great many people invest their money in limited companies Liability of a member is limited to the face value of shares subscribed to by him If the share are the fully paid up, his liability is limited unlike a partnership concern, where the liability of each partner is unlimited In an incorporated company the members cannot be asked to pay ¹

anything more than what is due on the shares held by them. It may be noted that it is only the members' liability for the company's debts which is limited. The company itself, the artificial legal person, is always fully liable and so has unlimited liability.

3.    Common seal: As a company is an artificial person it cannot sign its name on contracts. So it functions with the help of a seal. Common seal is used as a substitute for its signature. Every company must have a seal with its name engraved on it. Anything done under an agreement between the company and the third party requires recognition of the company in the form of an official seal unless exempted by the Act

4.    Transferability of shares: The shares of a company are freely transferable and can be sold or purchased in the share market. This is one of the reasons why people prefer to form companies than partnership Section 82 of the companies Act recognizes the right of transferability of shares and provides that, 'the share or other interest of any member shall be movable property transferable in the manner provided for in the articles of the company."

5.    Capacity to sue and be sued: On incorporation a company acquires a separate and independent legal personality. As a legal person it can sue be sued in its own name.

6.    Separation of ownership from management: As we know that the entity of a company is quite distinct from that of the members or shareholders who compose it. a shareholder cannot bind the company for his acts. All the shareholders do not manage the company themselves but they leave the management into the hands of their representative and trustees i.e The Board of Directors

2.0: Accounting for Issue, Forfeiture, Re-issue of Share & redemption of Preference shares:

The cost involved to issue new shares for public Companies are extremely high. Thus, the number of shares issued must be sufficient to make the cost worthwhile. Normally shares can be issued being payable immediately after applications, that is on allotment or by installments

Therefore issue of shares may take place on the following terms connected with the price of shares

(a)    Shares issued at par this would involve a share of shs 1,000 nominal value being issued for shs 1000 each

(b) Shares issued at a premium in this situation a share of shs I,000nominal value would be issued for a price more than shs 1000 each say for shs 1 400 each

(c)    Shares issued at a discount - Under restrictive conditions provided in the companies ordinance (which will be spelt out later) Companies can issue shares at a price lower than the nominal value Say a share of nominal value shs ¹,000could be issued at shs 800 each

2.1: Issue of shares payable immediately after allotment

Shares issued under this system, the entries for recording are very similar to those made for recording trading activities. Taking a case of a company which is involved inselling motor vehicles.

The company advertises cars for sale at shs 600,000,000 each, but in order to establish seriousness of the request is accompanied by a deposit of shs 100,000,000 It is made dear that in case a car s allotted the buyer w ¹ be required to pay the shs 500,000,000 before removing the car If for some reasons the company fails to allot a car the deposit will be refunded in full.

Assuming that the company received application on for one car from Mr Ali, the receipt of deposit would be recorded into books of the company as follows

Dr, Cash A/C shs 100,000.000

Cr, Mr. Allis A/C shs 100,000,000

When Mr. Ali is notified that a car has been allotted to him the entries will bel

Dr. Mr All's A/C    Shs 600.000.000

Cr Sales of car A/C    Shs 600.000.000

When the balance is paid by Mr. Ali the entries will be

Dr. Car A/C    Shs. 500,000,000

Cr Mr All's A/C    Shs.  500,000,000

That means similar entries are made when shares are issued. Assume that shares of shs. 100,000 each are issued for public subscription payable shs. 20.000, on application and the balance on allotment. Further assume that Bakari applied for 1000 for which were paid in full on allotment.

The entries for application would be:

Dr. Cash A/C (1.000 x 20.000) shs 20.000.000

Dr Application & Allotment A/C shs 20,000,000 

The entries for allotment of shares; Entries for receiving money from allotment 

            Dr Cash A/C (1,000 x 80 000) shs 80 000,000

            Cr. Application and allotment sh. 80,000,000

2.2: Issue of shares payable under installments:

A company issuing shares may opt to allow its shareholders to withhold part of the money due for each share until a later date when such amounts are actually required for the company's purpose and would then be called up by its directors. For instance, a company issuing shs. 2,000 shares may stipulate that shs. 400 are paid on application shs. 800 on allotment and the balance paid on CALL.

The balance to be paid may even be spread over more than one call, the several calls being identified in that event as the First Call, second call and so on. The dates on which such calls are to be paid may sometimes be specified in the terms of share issued, or may be left unspecified so that the Directors may feel free to call them accordingly. Therefore issue of shares payable under installments is probably more common with public companies than with private companies. Thus the various stages, after the initial invitation has been made to the public to buy shares by means of advertisement (if it is a public company) are as follows:

(i)    Applications are received together with the application monies.

(ii)    The applications are vetted and shares allotted, letter of allotment being sent out                     to notify the successful applicants.

(iii) The excess application monies from wholly unsuccessful, or where the application monies received exceed both the application and allotment monies required, and partly unsuccessful applicants, are returned to them. Usually, if a person has been partly unsuccessful excess application monies are held by the company and will reduce the amount required to be paid by him on allotment.

(iv).    Allotment monies are received.

(v)    The next installment, known as the first call is requested.

(vi).   The monies are received from the first call.

(vii)  The next installment known as the second call is requested

(viii). The monies are received from the second call This goes on until the full number of calls has been called It should be noted that, the application and Allotment Account and every call Account are debtors control accounts A shareholder will appear as a debtor in the Application and Allotment account in case he has defaulted his allotment money, and as a debtor in call Account in case he has defaulted payment of that call

2.1: Issue of shares at Par:

A share is issued at par when sold at a price equal to the nominal value of a share.

Upon each event on which an allotment of shares is made, an entry must be made in the journal, debiting an account called Application and Allotment with the amount payable on application and allotment in respect of the shares so allotted, and in case the shares have been issued at par crediting share capital Account. If more than one class of capital has been issued separate accounts must be opened in the ledger of each class

Similarly entries must be made debiting the vendor or other persons and crediting share capital account in respect of all share issued for a consideration other than shares, reference obviously being made to the minutes of allotment and to the contract under which the shares are issued. When calls are made, an entry must be made debiting call Account and crediting share capital Account with the total amount due in respect of the call.

Example 1:

Absolute Ltd Issued 1,000,000 ordinary shares of TAS 1,000, for public subscription on January, 2011. Payments for the share were:

-    On application TAS. 200

-    On allotment TAS. 400

-    On first calls TAS. 300

-    On second call TAS, 100

The exact number of applications was received for the shares and get full allotment The money due from allotment to second call was received in full.

REQUIRED: Show the Journal entries {FIGURES “000” for monetary values}:

2.2.2: Issue of share at Premium:

A company may issue shares at a premium, like that, for an annual amount in excess of their nominal value That means the buyer pays higher than the share certificate value (face value) Such an issue might be made by a successful company which has paid high dividends on its existing capital and where shares as a result, already stand at a premium on the market When shares are issued at a premium whether for cash or otherwise the premium must be credited to an account called the share premium Account The amount credited to share Premium Account can only be applied as follows 

1. In a scheme for reduction of capital 

2. For issue of bonus shares

3. For writing off preliminary Expenses of the company

4. For writing off the expenses of or commission paid or discount allowed on any issue of shares of debentures of the company and

5 For writing off premium paid on redemption of preference shares but only has not been out of the proceeds of a fresh issue of shares

Example 2:

Blue Crew Co Ltd issued 100,000 ordinary shares of TAS 1,000 at a premium of shs. 200 each payable as follows: -    On application shs. 300

-    An allotment shs 500 (including premium)

-    On first call shs 250

-    On final call shs. 150

Applications were received for 150,000 shares. Out these applications for 50.000 shares were rejected and refunded immediately. The other applicants were allotted shares in full and paid all money due from allotment to final call. REQUIRED: Journal entries to record the above.

2.2.3: Issue of Share at Discount:

The shares are said to have been issued at discount when sold at a price lower than the nominal value. Technically such an issue amounts to issue of shares at a loss. Therefore if the existing shares of a company are quoted below their nominal value on the market, it would be impracticable for a company to obtain subscriptions for an issue of further shares of the same class at the full nominal value, and it may be thought expedite to issue shares at a discount.

The issue of shares at a discount is illegal the Companies Ordinance is not willing therefore to permit a company to issue shares at a discount except under strict conditions stipulated by section 40 as follows

(i)    No Company may issue shares at discount unless

(a; at least one year has elapsed from the date the Company was entitled to commence business and (b) The shares being issued at a discount must be of a class already issued

(ii)    The issue at a discount must be authorized by a resolution passed in a general meeting of the Company and this resolution must specify the maximum rate of discount

(iii) The issue at discount must be sanctioned by court and shares must be issued at a discount within one month of receiving such court sanction

Thus accounting for shares at a discount will not be a problem if the following two points are borne in mind.

 

(i)             As already observed shares are reflected in the share capital account, at any point of     time, at their full called up value.

(ii)           Just as the share premium is assumed to have been paid along with the allotment money, the discount, if any is allowed to the applicants at the point the shares are allotted.

 

 

 

Example 3:

Abrigado co Ltd issued 100,000 ordinary shares for public subscription of TAS 1000 par at discount of 10% payable as follows:

-    An application    shs.    200

-    An allotment    shs    400

-    On first and final call    shs.    300

Application were received for 120,000 shares, out of these, applications for 20.000 shares were rejected and refunded immediately. Money due from allotment and final call was received in full from all allottees. REQUIRED: Show journal entries to record the above

2.3: Calls in arrears and Advance:

At the balance sheet date some shareholders will not have paid all the calls made, these are all together known as calls in arrears which can be shares in arrear for allotment and calls whereas some shareholders may have paid money in respect of calls not yet requested at the balance sheet date These are called calls in advance. Calls in advance can be advance payment made by shareholders for any call not yet requested for payment. Calls in arrear are shown in the balance sheet as share capital whereas call in advance is shown as a liability Strictly speaking calls on arrear are debtors' awaiting for collection by the company

Example 4:

D &D Co Ltd Issued 100,000 ordinary shares of TAS 1,000at a premium of shs. 200 payable as follows

-    On    application shs 400

-    On    allotment shs 500

-    On    first call shs 200

-    On    final call shs 100

Applications were received for 120,000 shares, out of these; applications for 20,000 were rejected and got refunded immediately. The remaining applicants were allotted shares in full. Payments for allotment and first call (when the balance was made) were received in full except for

(a)    All holder of 2,000 shares failed to pay for both allotment and first call

(b)    Bakari holder of 3,000shares failed to pay for first call However, Chale. a holder of

5,000shares paid his first call money plus final call The Balance sheet of D&D Co Ltd Was made up before the final call was made

REQUIRED:

(i) Journal entries to record the above

(II) The statement of Financial Position of D &D Co Ltd

2.4: Forfeiture and Reissue of Shares:

Sometimes although it is probably fairly rare in certain times, a shareholder fails to pay the calls requested from him Therefore, the directors' of a company are usually empowered by the Articles of associations to PORFEIT shares

The points which should be noted Foremost is forfeiture is possible only if the Articles of the Company concern permit it Table A' of the Tanzania Companies Ordinances permits such forfeiture by regulation 25 Secondly, forfeiture will have to be strictly in accordance with the procedure prescribed in the Articles Table A stipulates that

(i). Where a call or installment is in arrears a notice must be served to the shareholder concerned requiring payment within fourteen days and threatening forfeiture in the event of noncompliance.

And 

(ii). Forfeiture thereafter by a resolution of the directors to the effect

(iii). Thirdly forfeiture is permitted only for nonpayment of amounts payable in respect of shares including premium payable thereon Forfeiture for any other reason would constitute an illegal reduction of share capital of the Company. 

Also the directors are empowered to reissue shares that have been forfeited or to cancel the

Forfeiture on such terms as they think fit. A person whose shares have been forfeited ceases to be a member of the Company in respect o^f those shares. The amounts owed credit balance in the appropriate share capital Account, would, on forfeiture be no longer regarded as payable to him, and forfeited shares Account.

At the same the amounts receivable from him in respect of the same shares and appearing as part of the debit balance in one or more call accounts and or the Application and allotment Account are all regarded as uncollectable and written off against the gain reflected in the forfeited shares Account.

The difference between the gain on forfeiture and the losses arising by having to write off the amount in areas in respect of the same shares may ^for conveniences be referred to as the Gross gain on forfeiture

The gross gain on forfeiture will always be equal to the amount of money actually received from shares forfeited It’s called gross again simply because the payer cannot receive any refund after default Therefore the gross gain on forfeiture continues to appear as a credit balance in the forte tea sha^res account and reflected on every balance sheet as part of the Retained profits (categorized as not available for dividends) until the shares to which relate are reissued.

Reissue of forfeited sha^res as are very often at a price below the par value. Although this virtual amounts to issue of share at discount, which does not need the formalities of court sanction. This is because these shares are reissued which had been issued earlier and sums received by the company on that earlier issue (the grass gain on forfeiture) will be available for absorbing the discount on reissue

The gross gain after netting off any loss on reissue may be referred to as net gain on forfeiture of forfeited shares (after reissue) should which be carefully determined and transferred to the share premium account leaving the gross gain relating to the other shares to remain in the forfeited share accent until these shares too are reissued

Example 5:

Edinburg Co Ltd invited applications for 100.000 ordinary shares of shs 100 each payable as follows

-    On application               shs. 30

-    On allotment                                 shs. 40

-    On first call                      shs. 20

-    On final call                      shs.10

Applications were received for 100 000 shares and all were allotted shares in full. All calls other than final call have been made by September 30^th and all accounts received other than the allotments 1000 shares and first call 2000 shares.
On the same date directors resolved for forfeit all shares in arrears for allotment and first call however, the final call made on October 30^th 1200 out of forfeited share were reissued on November 15 at tsh. 80 per share By December 31 all amounts receivable on shares had been received in full other than the final call on 300 shares. 
Required

(a)   Prepare Journal entries to record the above transactions.

(b)  The balance sheet as at December 31^st.

 

2.5: Issue of Shares under Pro rata

Where the number of shares exceeds the number offered for issue, the directors of the company may decide to allot the shares proportionately. For instance ⁿ case 3u COu scares are applied for when the offer is only for 20,000 shares the directors ~ay decide to allot 2 shares for every 3 applied for. This no doubt is a fair decision which dees not discriminate against any shareholder The main problem that arises, however is that an applicant for 10 shares will become entitled on the above basis for 6 2/3 shares

Companies do not issue fractions of shares, so that shareholders themselves outside the company, either selling or buying fractional entitlements to make up whoie shares In such pro rata issue of shares since the number of shares allotted will be low than the number applied for by any person there would arise a question of excess application money receive by the company. Such amounts are usually not immediately refunded, but retained with the company and adjusted against what becomes due at the point of allotment

There will be no difference whatever in the accounting entries recording receipts of application money and recording allotment of shares. The only problem would be the arithmetical one of determining the amount payable during the allotment taking into account that some of the money has been receive in advance 

Example 6:

A&B Ltd invited applications for 1,000 ordinary shares of shs. 100 each payable as follows

-    On application                           shs.    30

-       On allotment                              shs.    40

-    On first call May    1                  shs.    30

-       On final call 1^st October           shs.    20

Applications were received for 1,500 ordinary shares: Directors resolved to

(i).   Reject applications for 300 shares and refund application money thereon and

(ii). Allot shares to remaining applicants on a pro rata basis retaining excess application money against amounts due on allotment By 31^s’ December the payment position in respect of these shares were as follows 30 shares we^re in arrears for allotment money, 40 were in arrears for the first call and 45 shares were in arrears for the final call.

REQUIRED: Prepare the ledger accounts for the above transaction.