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In today’s class, we will be talking about the introduction to company accounts. Enjoy the class!
Introduction to Company Accounts
- Definition of Company
- Kinds of company
- Formation of Company & its statutory requirement
A Company is a business owned, managed, controlled and financed by an association of people who possess legal entity with the usual motive of maximizing owners’ wealth.
Kind of companies
There are three kinds of companies. They are:
- Company Limited by Share: This is a company whose owners liabilities is limited to the value of share subscribed in the company.
- Company Limited by Guarantee: These are companies whose owners liabilities are limited to the value of share subscribed in the company plus additional fund they undertake to pay into the company in case of liquidation.
- Unlimited Company: This is a company whose liabilities of the owner are unlimited.
Characteristics of limited companies
- It is a separate legal entity.
- The liabilities of the owners are limited
- The company enjoys continuity.
- The company objective is to maximize the owner’s wealth.
Types of limited companies
Basically, there are two types of limited companies. They are:
- Private Limited Company: Section 21 of the Companies and Allied Matters Act of 1990 defined it as a company which by its articles.
- Restricts the right to transfer its shares.
- Limits the number of its members to fifty.
- Prohibit invitation to subscribe for its shares.
- End the name of the company with the word ‘Limited’
- Public Limited Companies: These are companies which can invite the public to subscribe for its shares. The minimum number of shareholders to form the business is seven. There is no restriction on the maximum number of shareholders. The name of the company ends with the word “PLC” or public Limited liability Company.
Formation of a company and its statutory requirement
In the formation of a limited liability company, the following procedures must be followed.
- Get the promoters who have the idea of a company and undertake to fulfil the legal requirements of the company.
- Having done that, the following documents should be sent to the Register of Companies Corporate Affairs Commission (C.A.C), Abuja.
- Articles of Association.
- Memorandum of Association.
- Statement of Nominal share capital.
- Directors list and their particulars.
- Statement to show that the Company will always obey the rules and regulation of the Commission as amended.
- Documents stamped duties paid.
- If the Registrar of companies perused the documents mentioned above and is satisfied with them, he will issue the Certificate of Incorporation. Meaning that the company is registered.
Definition of terms
- Articles of Association: This is a document which states the internal regulations of a limited company. It states the regulations which govern the internal management of the company affairs. It contains the following:
- The rights and responsibilities of shareholders.
- The duties and powers of directors.
- The company borrowing power.
- How directors and auditors can be appointed.
- The voting rights of the shareholders, etc.
- Memorandum of Association: This is a document which interacts the company with the outside world. It contains the following:
- The name of the company ending with the words ‘Ltd’ or ‘Plc.’.
- The address of the registered office of the company.
- The object clause of the company.
- A declaration that it is a limited liability company.
- The amount of authorized share capital.
- Prospectus: This is a document issued by limited companies, inviting the public to subscribe to its shares. Its contains the following:
- A brief history of the company.
- Chairman and director speech.
- Names of the directors and their particulars, etc.
- Certificate of Incorporation: This is a document which gives legal authority to the company to operate as a legal entity.
- What is the Company?
- Mention and explain three types of companies.
Major accounts kept by the company
- Trading profit & loss account.
- Appropriation account.
- Balance sheet.
Format of Trading Profit & Loss account
Trading Profit & Loss account for the year ended 31/12/9x
Opening Stock x Stock x
Add purchases x Less return inward x
Less return outward x x Gross loss x
Cost of goods available x
Less closing stock x
Cost of sales x
Gross profit c/d x
Expenses Gross profit b/d x
Wages & salaries x Income from quoted In. x
Rent & Rate x Rent receivable x
Depreciation of assets x Discount received x
Directors remuneration x Other incomes x
Auditors remuneration x x
Hire of plant x
Debenture interest x
Other expenses x
Net profit x
Corporate tax x Balance b/f from last year x
General reserve x Net profit b/d x
Revenue reserve x
Dividend interim x
Proposed dividend x
Goodwill written off x
Retained profit c/d x
Balance sheet format
Authorized capital N Fixed asset
Cost Dep. NBN
Ordinary share @ N1 each x Land & build X (x) X
10% Preference Share @ N 1 each x Furniture x (x) x
X Machinery x (x) x
Issued share capital Premises x (x) x
Ordinary share @ N 1 each x Goodwill x
10% preference share @ N 1 each x investments
Reserves Quoted x
Share premium x Unquoted x
General reserve x Current assets x
Retained profit x Stock x
Capital redemption reserve x Debtors x
Long-term liabilities Cash x
10% Debenture x Bank x
Current liabilities Bill receivable x
Bill payable x Prepayment x
Income in advance x Accrued income x x
Corporate tax x Preliminary expenses x
Proposed dividend x
Accruals x x
- List five documents that are used in the formation of companies.
- State six contents of the Memorandum of Association.
- State five reasons why organizations separate their operations into different departments
- List six errors that will not affect the agreement of the trial balance
- Explain four classifications of the cost found in the preparation of manufacturing accounts
- Explain the following (a) prime cost (b) work – in – progress (c) manufacturing profit
- List five prime books of the account used in recording financial transactions
Essential Financial Accounting pages 299-319.
- When a company can sue in its own name and right, we say it possesses (a) legal entity (b) legal jargons (c) legal portfolio (d) legal value
- The company whose liabilities of its owners are limited to the value of share bought in the company is called (a) limited by share (b) limited by guarantee (c) unlimited by share (d) limited by decree
- The amount of capital a company is allowed to raise in the capital market is (a) authorized capital (b) issue capital (c) called up capital (d) un-issued capital
- The name of a private limited company ends with (a) Ltd (b) Plc (c) & co (d) Ent.
- The name of a public limited company ends with (a) Corporation (b) Ltd (c) Plc (d) Authority
- Mention four documents that must be sent to the Corporate Affairs Commission before a company can be registered.
- What is a prospectus?
In our next class, we will be talking about Final Accounts of Limited Liability Companies. We hope you enjoyed the class.
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