Limited Companies (Copy)

Limited Companies – Cheat Sheet

1. Ordinary Shares and Accounting Treatment

• Ordinary Shares represent ownership in the company and are issued to raise capital. They are recorded in the share capital account.
• Issue of Shares at Par:

Debit: Bank (Asset)   [Amount Raised]
Credit: Share Capital (Equity)   [Amount Raised]

• Issue of Shares at a Premium:

Debit: Bank (Asset)   [Amount Raised]
Credit: Share Capital (Equity)   [Nominal Value]
Credit: Share Premium (Equity)   [Premium Raised]

2. Bonus Issues and Rights Issues

• Bonus Issue: A company issues additional shares to its existing shareholders, based on the number of shares they already hold.

Debit: Retained Earnings (Equity)   [Value of Bonus Issue]
Credit: Share Capital (Equity)   [Value of Bonus Issue]

• Rights Issue: A company offers existing shareholders the right to buy additional shares at a discount to the current market price.

Rights Issue at Par:

Debit: Bank (Asset)   [Amount Raised]
Credit: Share Capital (Equity)   [Amount Raised]

Rights Issue at a Premium:

Debit: Bank (Asset)   [Amount Raised]
Credit: Share Capital (Equity)   [Nominal Value]
Credit: Share Premium (Equity)   [Premium Raised]

3. Debentures and Their Accounting Treatment

• Debentures are long-term loans issued by a company to raise funds. They usually have fixed interest payments and a maturity date.

Debenture Issue at Par:

Debit: Bank (Asset)   [Amount Raised]
Credit: Debentures (Liability)   [Amount Raised]

Debenture Issue at a Discount:

Debit: Bank (Asset)   [Amount Raised]
Debit: Discount on Debentures (Liability)   [Discount Amount]
Credit: Debentures (Liability)   [Face Value]

Debenture Interest Payment:

Debit: Interest Expense (Profit and Loss)   [Interest Amount]
Credit: Bank (Asset)   [Interest Amount]

4. Capital Reserves vs. Revenue Reserves

1. Capital Reserves: Reserves created from capital transactions like share premium and revaluation reserves.
   • Share Premium: The amount received over and above the nominal value of shares when issued at a premium.
   • Revaluation Reserve: The increase in the value of fixed assets recorded in the balance sheet.
2. Revenue Reserves: Reserves created from the company’s earnings, such as retained earnings and general reserves.
   • Retained Earnings: Profits that have been retained in the business rather than paid out as dividends.
   • General Reserve: A reserve created for general purposes, typically for future growth or contingencies.

5. Financial Statements for Limited Companies

• Statement of Profit or Loss (Income Statement): Shows the revenues and expenses of the company to calculate net profit or net loss.
• Statement of Financial Position (Balance Sheet): Shows the assets, liabilities, and equity of the company.
• Statement of Changes in Equity: Shows the changes in the capital, reserves, and retained earnings over a period.

6. Example Journal Entries for Share Issues

1. Issue of Ordinary Shares at Par:

Debit: Bank (Asset)   100,000
Credit: Share Capital (Equity)   100,000

2. Issue of Ordinary Shares at a Premium:

Debit: Bank (Asset)   120,000
Credit: Share Capital (Equity)   100,000
Credit: Share Premium (Equity)   20,000

3. Rights Issue at Par:

Debit: Bank (Asset)   150,000
Credit: Share Capital (Equity)   150,000

4. Rights Issue at Premium:

Debit: Bank (Asset)   180,000
Credit: Share Capital (Equity)   150,000
Credit: Share Premium (Equity)   30,000

5. Bonus Issue:

Debit: Retained Earnings (Equity)   50,000
Credit: Share Capital (Equity)   50,000