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COMPANY ACCOUNT 1.1
What is a company?
It is a voluntary association of persons formed to carry out some business for profit , with capital divisible into transferable shares, having a corporate legal entity and a common seal.
In law a company can be defined as a fictitious but legal person that can enter into contract sue others and being sued by others, having a banning A/C in its own name owe money or be a creditor and can do any other things which it has been formed.
Characteristics of a Company:-
(a) Voluntary association
(b) Independent legal entity
– A company is distinct and separate from its members.
(c) Limited liability
Usually the liability of a company is limited to the extent of unpaid value of shares held by the members.
(d) Common seal
The company acts through natural persons called directors. The directions are the agents of the company.
All the act of the company are authorized by its common seal. The common seal is the official signature of a company. Any document not bearing the common seal will not binding on company.
(e) Transferability of shares:-
Usually in a limited company shares are freely transferable. But in the case of a private limited company share are transferable subject to conditions laid down by the company’s articles.
(f) Perpetual existence;-
In this case the life of a company is perpetual and so it can never be affected by the life of its members.
TYPES OF COMPANIES
1. STATUTORY COMPANIES
These are companies formed by a special act passed in parliament. Usually such companies are established in order to carry out some special public undertaking requiring extra – ordinary power and privilege.
Such companies are established not to earn profit but serve people.
2. GOVERNMENT COMPANIES (PARASTATAL COMPANIES)
These are companies which not less than 51% of its issued paid up capital is held by the central government.
3. REGISTERED COMPANIES:-
These are companies formed and registered under companies acts. Here in Tanzania it is the 1961 act cap. 212. Such companies may be limited by shares guarantee or unlimited companies.
1) Companies limited by shares:-
In this case the liability of members is limited
into the extent of the unpaid value of the shares held by them.
into the extent of the unpaid value of the shares held by them.
2) Companies limited by guarantee:-
In this case the liability of members is limited to the amount that they undertake to contribute in the event of bankruptcy.
3) Unlimited companies:-
In this case the liability of members is not restricted.
FORMATION / FLOATATION OF A COMPANY
It is the promoter who thinks about the idea of a business to be carried out by a proposed company.
They undertake extensive investigations to its successful operation viability and feasibility.
They then prepare the following documents and send them to the register with a request to register the company.
1) Memorandum of Association
– It is the main document of a company.
– It is a charter or constitution of a company’s power and scope of operation.
This document contains the following things:-
(a) The name of a company with the world Ltd at the end of the name. Name clause
(b) The objective of a company i.e. the purpose of formation. It should state:-
(i) The main of the company’s objective
(ii) Objective incidental to the main objectives.
(iii) Others objectives.
(iv) Objective clause
(c) A declaration that the liability of a members is limited ‘’liability clause”
(d) The domicile of the company i.e. the place of the company’s registered office , situation clause.
(e) Association clause:-
Under this clause it is stated here that people putting their signatures to the memorandum are desirous of forming themselves into company.
The memorandum should be signed by at least two persons in the case of a private company and seven persons in the case of a public company agreeing in both case to take up to at least one share each.
2). ARTICLES OF ASSOCIATION:-
It is a document defining rules and regulations for the conduct of the company’s business.
It establishes a contract between the company on one hand and the shareholders on the other and between the shareholders.
It has the following content:-
a) Share capital and its division into various types and the right attaching there to.
b) Direct their members power duties and qualifications
c) Proceeding of the directors meeting general and extra ordinary investing.
d) Calls on shares.
e) Common seal.
f) Accounts and Audit.
g) Forfeiture of shares.
h) Dividend and reserves.
i) Voting rights of members.
j) Notices
3). A statement of nominal capital:-
It specifies the different classes of shares that comprises the share capital of a Company.
4). A list of persons who have consented to act as directors.
5). A written consent by the directors to act in that capacity.
6). A written undertaking by the directors to take up and pay for their qualification shares.
7) Particulars of directors and secretary.
8) A notice of the address of the company’s registered office.
9) A declaration by a solicitor, attorney, accountant or secretary that all the requirements of the company’s acts have been complied with.
On receipt of such documents the register will then scrutinize them to see to it that they are okay and if he find them to be order he will issue or certificate of incorporation (after payment of the registration fees.)
This certificate signifies that a company has legal existence the register then will put the name of the company into the register.
A private limited company may commence a business on its incorporation but not for the public ltd company.
The caller has to receive a certificate of commencement of business Trading certificate) prior to its commencement of business.
A private company is a company which by its articles:-
(i) Does restrict the rights of its shareholders to transfer shares.
(ii) Limit the number of its shareholders to fifty excluding the post and present employees who are also the members of the company.
(iii) Does not invite the public to the subscription of shares or debentures.
A public Ltd company is a company which is not as private Ltd company i.e. it does not observe any of the above characteristics;-
Before receiving the trading certificate the private Ltd Company has to issue a prospectus and its copy then being kept by the register.
A prospectus
This is a circular, advertisement or any document inviting offers from the public to the subscription of any shares or debenture of anybody corporate.
The prospectus invites public to buy its shares or debentures in order to raise the necessary funds.
Some of the matters contained in this prospectus:-
(i) Contents of the memorandum.
(ii) Names and addresses of the directors.
(iii) Names and addresses of the auditor if any.
(iv) Qualification and remuneration of the directors.
(v) The minimum subscription and the amount payable on application and allotment.
(vi) Brokerage or underwriting commission on placing shares or debentures.
(vii) In case of already established company import by the auditors about the dividend or profit paid in each of 3 proceeding years.
ALLOTMENT OF SHARES:-
After the issue of prospectus, the prospective investors will start applying for the shares, through filling in application forms and paying application money (which should at least be 5% of a face or normal value a shares.)
If the application do not amount to the minimum subscription within 40 days of the issue of the prospective then the whole application money has to be refunded by the directors to the applicants within 8 days, otherwise they will liable to repay it with 5% interest as a penalty.
If the applications amount to the minimum subscription then the directors will start considering each application. They may allot the full number of shares applied for or less than that or none at all without giving any reason.
CLASSES OF SHARES:-
What is a share?
Shares are unit of uniform values into which the share capital of the company is divided.
What is share capital?
Share capital is the sum total of the nominal value of shares of a company.
(a) Ordinary shares or Equity shares;-
Do not give preferential rights in respect of fixed dividends and in regard to the repayment of capital in case of winding up.
(b) Preferred ordinary shares Have a right to receive dividends after the preference shareholders have received their dividends.
(c) Deferred ordinary shares:-
Have a right to receive dividend after the preferred ordinary shares, have received their dividend.
(d) Preference shares:-
Give preferential rights in respect of a fixed dividend and in regard to the repayment of capital in case of winding up.
(e) Cumulative preference shares:-
In this case any arrears of dividend go on accumulating until paid up.
(f) Participating preference shares:-
Entitle their holders to receive not only a fixed rate of dividend but also share in the surplus profit after the other classes of shareholders have received their specified rate of dividend.
(g) Guaranteed preference shares;
Entitle their holders to receive a fixed rate of dividend quarantined by vendors or any third party. In case of a bad year (i.e no profit declared the guarantees have to pay the guaranteed dividend out of their personal recourses.).
(h) Deferred founder or management shares:-
Have a right to receive dividend after all other classes of shareholders have received their dividend.
Such shares do belong to promoters or fo
unders of the company. When shares are offered to the public, the cost of such shares is usually payable by installments. The installments may be made of application allotment and calls.
unders of the company. When shares are offered to the public, the cost of such shares is usually payable by installments. The installments may be made of application allotment and calls.
A call is the amount of installments payable for each share following the installments payable on allotment.
When the company allots the shares, it signifies acceptance of the offer made by the applicants, when the prospective investment apply for the shares, this does not guarantee that they receive such shares money may be refunded to the unsuccessful applicant with a letter of regret. On allotment a binding contract will exist between the company and their shareholders.
ISSUE OF SHARES
Shares may be issued by a joint stock company for different consideration:-
(i) For consideration other than cash: In this case the company may purchase a running business and pay money / consideration to the vendors in the form of shares.
(ii) For cash: – In this case shares can be issued at (a) part (b) premium Discount.
(a) At par:-
In this case the shareholders are required to pay the nominal value of the shares.
(b)At premium
In this case the shareholders are required to pay more than the nominal value of the shares. That is shares are issued at a profit for example a share of Tsh. 100 being issued at Tshs. 110, Tshs, 10 is the premium.
(c) At discount:-
There are some restrictions on issuing shares at a discount but all the same the shares are issued at less than the nominal value. For example a share of 10 Tshs being issued at Tshs. 9, Tshs. 1 is the amount o
f discount.
f discount.
Issue of shares at a premium:-
When the company issues shares above par, the excess termed as premium is held in a separate account called share premium A/c in accordance with the requirements of the company Act. The amount of share premium is called a capital gain and it is usually recorded in the balance sheet on the liabilities side under “Reserve and surplus”.
The share premium can be used in the following ways:-
(i) To pay up the un issued shares for distribution to member as bonus shares.
(ii) To write off preliminary expenses in the formation of a company.
(iii) To write off expenses on issuing shares or debentures..
(iv). To write off commission paid or discount allowed on issuing shares and debentures.
(v). To provide for a premium payable on redemption usually the amount of share premium is payable for in a lump sum on allotment
ENTRIES:-
(a) On amount being due
DR. Application allotment A/c
CR. Share capital A/c
CR. Share premium A/c
(b) When the allotment money is received:-
Dr. Cash / Bank A/c
Cr. Application and allotment A/c
UNDER OR OVER SUBSCRIPTION FOR SHARE
Under – su
bscription for shares:-
bscription for shares:-
It is a situation where by applications are received for a number shares less than that offered by the company for subscription.
In this case entries for application allotment and call will be made on the applications received.
And if the applications do not amount to minimum subscription the whole application money shall be returned to the applicants.
Over – subscription for shares:-
It is a situation where by applications are received for a number of shares more than that offered by the company for subscription. The excess application money is usually used in making goods the allotment money. And the excess application money can be utilized in the following way:-
(i) Some applications may be returned to the unsuccessful applications i.e. rejected and money being returned to the unsuccessful applications.
(2) Partial allotment may be made:-
This is the allotment of a smaller number of shares than that applied for example of 4000 shares being allotted 2000 shares where as a holder of 8000 being allotted 2600 shares.
3) Prorate allotment may be made:-
This means the allotment of share to an applicant or group of application on proportional basis.
Examples: Given shares applied = 16,000
Shares rejected = 1000
Shares issued = 10,000
PRORATE
Applied Issued / allotments.
16000 10,000
Less: (1000)
Net: 15,000: 10,000
Prorate 3: 2
This means for every 3 shares applied, 2 shares shall be allotted.
NB: A company cannot allot more than the shares issued.
CALLS IN ARREARS
Represents the extent that the shareholders have not paid the amount due on call made to them.
Dr. Calls in arrears A/c
Cr. Call A/c (appropriate)
Money alter allotment is called a call.
CALLS IN ADVANCE
Money may be received before call in due entries.
(j) Dr. Cash / Bank A/c
Cr. Call in advance A/c (Amount received in advance of calls).
(ii) Dr. Call in advance A/c
Cr. Call A/c (Appropriate) (When the call is made)
EXAMPLE:
Baja Compan
y Ltd has an authorized capital of 100,000 Tshs divided into 20,000 ordinary shares of 50 sh. each the whole of the shares were issued at par. Payments being made as follows;-
y Ltd has an authorized capital of 100,000 Tshs divided into 20,000 ordinary shares of 50 sh. each the whole of the shares were issued at par. Payments being made as follows;-
Payable on applications 5 Tshs.
Payable on allotments 15 Tshs.
1st call 20 Tshs.
2nd call 10 Tshs.
Applications were received for 32,600. It was decided to refund application money on 2600 shares and to allot shares the basis of 2 for every 3 applied for. The excess application moneys sent by the successful applicants is not to be returned but it is to be held and so reduced the amount payable on allotment the calls were made and paid in full with the exception of one member holding 100 shares who paid neither the first and the second another who didn’t pay second call on 20 shares. The member of the second call the first each on his 200 shares.
Required:
Prepare the relevant ledger A/c to record the above Ledger Account
DR BANK ACCOUNT CR
Application & allotment(5×32600) | 163,000 | Application & allotment(5×2500) | 13000 |
Application & allotment | 250,000 | ||
first call | 398000 | ||
call in advance | 2000 | Balance c/d | 996,800 |
second call | 196800 | ||
1,009,800 | 1,009,800 |
DR APPLICATION & ALLOTMENT CR
Bank (refund) | 13,000 | bank ( Application money) | 163,000 |
ord.share capital (5+15)20000) | 400,000 | bank ( Application money) | 250,000 |
413,000 | 413,000 |
DR ORDINARY SHARE CAPITAL CR
Balance c/d | 1,000,000 | Application & allotment | 400,000 |
1st call | 400,000 | ||
2nd call | 200,000 | ||
1,000,000 | 1,000,000 |
DR 1ST CALL ACCOUNT CR
ordinary shares capital (20×20000) | 400,000 | Bank | |
call in arrear (20 x 100) | 2,000 | ||
400,000 | 400,000 |
DR 2ND CALL AND FINAL CALL ACCOUNT CR
Ordinary share capital(10×20000) | 200,000 | Bank | 196,800 |
call in advance | 2,000 | ||
call in arrear (10x(100 +20) | 1,200 | ||
200,000 | 200,000 |
DR CALL IN ARREAR ACCOUNT CR
1st call | 2000 | Balance c/d | 3,200 |
2nd call | 1200 | ||
3200 | 3200 |
BALANCE SHEET (EXTRACT) AS AT
Authorized share capital | Fixed Assets | ||||
Ordinary shares Tshs. 500 | xxx | cost | Acc.deprec. | Net | |
premises | xxx | xxx | xxx | ||
Issued and paid up capital | machinery | xxx | xxx | xxx | |
20000 ord. share of Tshs. 50 each | 1,000,000 | xxx | xxx | xxx | |
Reserves & surplus | current assets | ||||
share premium | xxx | stock | xxx | ||
long-term liabilities | calls in arrear | 3200 | |||
Debentures | xxx | bank balance | 996800 | ||
current liabilities | |||||
creditors | xx | ||||
Dividend payable | xx | ||||
corporation tax | xx | ||||
1,000,000 | 1,000,000 | ||||
EXERCISE
1. Ujamaa & Co. Ltd, offered its ordinary shares for sale to the public as follows:-
January 3: Application invited for 10,000/= ordinary shares of Tshs. 100/= each. Applicants were asked to enclose application money of 29/= per share.
January 10: Applications received for 10,000/= ordinary shares.
February 17: Allotment money dully received.
March 5: First call of Tshs. 45/-per share made
March 22: First call duly received.
You are required to show:-
(a) Journal entries to record the above transactions.
(b) All relevant ledger A/c
(c) Assuming the company has made no transaction other than the ones listed above, the company on 22nd March, 1984.
Solution for exercise 1
JOURNAL ENTRIES
Solution for exercise 1
JOURNAL ENTRIES
S/N | DETAILS | DR | CR |
1 | Bank | 290,000 | |
Application | 290,000 | ||
2 | Bank | 260,000 | |
Allotment | 260,000 | ||
3 | Bank | 450,000 | |
1st call | |||
4 | Application | 290,000 | |
O/share capital | 290,000 | ||
5 | Allotment | 260,000 | |
O/share capital | 260,000 | ||
6 | 1st call | 450,000 | |
O/share capital | 450,000 |
2. Nyamasama Co. Ltd offered 25,000 ordinary shares of Tshs. 50 each for public subscription as follows:-
Tshs. 10 on application
Tshs. 15 on allotment to include share premium
Tshs. 15 on 1st call
Tshs. 20 on 2nd call
Application were received for 38,000/= share. The promoters decided to:-
(i) Reject 8000 applications and to refund the money received against them.
(ii) A
llot 5 shares for every 6 applied for by the remaining applicants.
llot 5 shares for every 6 applied for by the remaining applicants.
Excess application money received from these applicants was transferred to an allotment money A/c
Allotment money was duly received. The first call was made and money promptly received from all but one shareholder who held 500 shares. The second call was paid by all shareholders except two, one who held 500 shares and who had earlier failed to pay the first call, and another who held 200 shares.
Required:-
(a) Show the relevant ledger A/c of the company.
(b) Show the company’s opening balance sheet after all the above transactions have been made.
2. (a)
JOURNAL ENTRIES
DATE | DETAILS | DEBIT | CREDIT |
10-Jan | Bank A/c | 250,000 | |
Allotment & application | 250,000 | ||
17-Jan | Bank A/c | 375,000 | |
Allotment & application | 300,000 | ||
15-Mar | First call A/c | 450,000 | |
Ordinary share capital | 450,000 | ||
22-Mar | Bank | 450,000 | |
First call A/c | 450,000 |
(b)
DR BANK ACCOUNT CR
DATE | AMOUNT | DATE | DETAILS | AMOUNT | |
10-Jan | Applic& allotment(10,000×25) | 250,000 | |||
6-Jan | Allotment & applic(30x 10,000) | 300,000 | |||
5-Mar | ordinary share(1st call) | 450,000 | Balance c/d | 1,000,000 | |
1,000,000 | 1,000,000 |
DR APPLICATION & ALLOTMENT CR
ordinary share | 550,000 | Bank(applied money) | 250,000 | ||
Bank(allot money) | 300,000 | ||||
550,000 | 550,000 |
DR ORDINARY SHARE ACCOUNT CR
Balance c/d | 1,000,000 | 1st call | 450,000 | ||
Application & allotment | 550,000 | ||||
1,000,000 | 1,000,000 |
DR 1ST CALL ACCOUNT CR
5-Mar | ordinary share(45 x10,000) | 450,000 | Bank | ||
450,000 | 450,000 | ||||
BALANCE SHEET AS AT 31ST/ 3/1984
Authorized share capital | Current assets | ||
ordinary shares(10,000 x100) | 1,000,000 | Bank | 1,000,000 |
1,000,000 | 1,000,000 | ||
SOLUTION FOR EXERCISE 2
