‘O Level’ Company Accounts

ACCOUNTS FOR LIMITED LIABILITY COMPANIES

A company is a legal entity, which is formed by registration under the Companies Act [Chapter
24:03], in Zimbabwe. Legally a company is recognised as a person, i.e. it can own property, dispose
of it, employ people, sue and be sued just like a natural person.

Limited liability
A company has limited liability, that is, its affairs are independent of those of its members
(shareholders) and its management. This concept means that in the event of the business failing to
pay its debts the members will only lose the amount of paid share capital. It therefore follows that no
personal assets of the owners will be taken to cover the liability of the company.

The memorandum and the articles of association

➢ The Memorandum governs the company with outside world. The following are the provisions,
which should appear in the memorandum.
a) The name of the company, which shall have limited as the last word.
b) The objectives of the company.
c) A statement that the liability of members is limited
d) The amount of share capital with which the company propose to be registered.
➢ The articles contain rules that regulate the internal affairs of the Company. The following are
some of the articles:
a) Powers and duties of directors.
b) Disqualification of directors.
c) Proceedings at general meetings.
d) Votes of members.

Private and public limited companies

➢ These are the companies where the liability of the members is limited to the maximum amount
of capital paid or credited on the shares received.
➢ The following are some of the attributes of a private limited company:
a) It is prohibited by the Act to offer its shares to the public for subscription.
b) An individual can form a private company.
c) The number of its members is limited to fifty.
d) Cannot trade its shares on the Stock Market.
➢ With a public limited company,
a) It is allowed to offer its shares to the public for subscription.

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b) The shares can be traded on the Stock Market.
c) There is no limit to the number of members forming a public company.
d) A minimum of 7 members can form a public company.

Ordinary and preference share capital

• People who buy shares in a company are known as shareholders.
• The capital that shareholders invest in a company is known as share capital.
• The main classes of share capital are ordinary shares and Preference shares.
• The following are some of the characteristics of the ordinary share capital:
a) Ordinary shares carry voting rights.
b) Ordinary shares do not carry a fixed rate of dividend.
c) Ordinary share dividend is paid after preference dividend and is proposed by the directors of the
company at each annual general meeting. The shareholders do not have the power to force the
company to pay them a dividend if the director decides not to pay them.
d) Ordinary shares are traded on the Stock market, in the case of a public company.
• Preference shares are attributed to the following:
a) They do not carry voting rights.
b) If a preference share dividend is in arrears for 3 consecutive years, preference shareholders
are given some voting rights.
c) Cannot be traded on the stock market.
d) Carries a fixed rate of dividend, which should be paid whether the company has made some
profits, or not.
e) Preference share dividend is paid before the ordinary share dividend is paid.

Authorised share capital

o This is the maximum share capital that a Company may issue as Authorised by the registrar of
Companies. It is also known as the registered capital OR nominal capital.

Issued Share Capital

o These are shares issued to shareholders and can be less than or equal to the Authorised share
capital.
o In return for their investment, the shareholders will receive a dividend that is a share of profit.
They are of two types; interim and final.
o A company in addition to issue shares can also issue debenture which is a loan to the company
carrying a fixed rate of interest per annum based on the nominal value and should be paid whether
a company makes a profit or not.

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o Debentures are not part of the share capital.
o These are long-term debt capital.
o Debenture holders are not owners of the company but rather they are creditors to the company.
o Debentures carry a fixed rate of interest e.g. 10% Debentures. 10% percent is the rate of interest
on those debentures. The debenture interest is an expense to the company not an appropriation of
profits.
o A debenture may be either:
✓ Redeemable, i.e. repayable at or by a particular date, or
✓ Irredeemable, normally repayable only when the company is officially terminated by its
going into liquidation. (Also sometimes referred to as ‘perpetual’ debentures.)
❖ Called-up capital. Where only part of the amount payable on each issued share has been asked
for, the total amount asked for on all the issued shares is known as the called-up capital.
❖ Uncalled capital. This is the total amount which is to be received in future relating to issued
share capital, but which has not yet been asked for.
❖ Calls in arrears. The total amount for which payment has been asked for (i.e. ‘called for’), but
has not yet been paid by shareholders.
❖ Paid-up capital. This is the total of the amount of share capital which has been paid for by
shareholders. Consider this illustration:

Final Accounts of a limited company

➢ The manufacturing and trading accounts of limited companies are basically the same as those of
sole traders and partnerships.
➢ The profit and loss account of a limited company like that of a partnership is divided into sections
– the profit and loss account and the appropriation account.
➢ In addition to the normal revenue and expense, the Statement of comprehensive income of a
limited company also shows the following expenses and incomes:
(a) Directors’ emoluments – these are the salaries and fees paid to the company directors. They
are charged to the profit and loss accounts because directors are employees of the company.
(b) Debenture interest – this is interest paid on long term loan.

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(c) Auditors’ remuneration – this is referring to salaries paid to auditors.
(d) Income from investment, which is dividends or interest, received from another company in
which the company bought shares or debentures

The format of the Statement of comprehensive income and appropriation account (After
Net Profit Section)

The format of the Statement of Financial Position

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Provisions and Reserves
✓ A provision is an amount of pre-tax profit set aside for a known expense whose amount is
uncertain. E.g. Provision for depreciation, Provision for bad debts, Provision for damages on a
case, which is before the courts and where it is almost certain that the company will lose the case.
✓ A reserve is any post tax profit set aside which is not a provision e.g. General reserve, Distribution
reserve; however, there are other reserves which do not arise from profit but from the requirement
of the Companies Act. E.g. share premium.
✓ Provision can be distinguished from reserves in that Provisions are entered in the Statement of
comprehensive income as an expenses (in case of increases) and as income (in case of decreases)
whereas reserves are appropriation of profits.

Capital reserves
A capital reserve is sometimes referred to as a non- distributable reserve because it cannot be
used to pay cash dividends. It is created by the requirements of the Companies Act, example
capital reserves are;
1. Share premium
This reserve is created when shares are issued at a price that is above their par value. Let’s suppose
that shares with a par value of $1 are being issued at a price of $1.50. The par value of $1 per share
should be transferred to a share capital account whilst the balance of 50c representing share premium
should be transferred to a share premium account created for that purpose.
2. Capital redemption reserve
This reserve is created when shares are being redeemed out of internally generated finance. It
is created by transferring an amount equal to the nominal value of shares being redeemed from
a suitable revenue reserve to the capital redemption reserve.
3. Revaluation reserve
This reserve is created when fixed assets are revalued. Let’s take an example of land and buildings
that increase in value from $450 000 to $500 000. The difference between the two values represents
a revaluation reserve and it should be transferred to a revaluation reserve in accordance with
requirements of the companies act.

Revenue reserves
✓ They are referred to distributable reserves in the sense that they can be used to pay cash dividends.
✓ Transferring some funds from the Statement of comprehensive income to such a reserve creates
these reserves. For example, transferring undistributed profit from the profit and loss
appropriation account to the general reserve account creates a general reserve. In turn, such a

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reserve can be used to pay cash dividends in the event that retained profits for the year are
insufficient to meet such an obligation.
✓ A common example of a revenue reserve is retained profits in the appropriation account.

Example 1
The following information was taken from the books of Summit Investments Limited on 31
December 1997.

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Example 2

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SOLUTION

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PAST EXAMINATION QUESTIONS

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QUESTION 10 NOVEMBER 2018 P2 5(b)

The following information is available from the books of Liberty Clothing Company Ltd on 30 June
2016, after preparation of the company’s Appropriation Account.

REQUIRED

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(a) Prepare a Statement of Financial Position extract at 30 June 2016, showing the details and
totals of the capital fund. [9]
(b) Calculate the preference dividend for the year ended 30 June 2016. [1]

QUESTION 11 JUNE 2019 P2 Q2 2

The following information relates to Garbon Ltd on 31 December 2018.

[8]

Statement of changes in equity

➢ It summarises the changes during the year to the ordinary share capital, non-redeemable
preference share capital, retained earnings and general reserve.
➢ Profits are distributed to the shareholders of a limited company in the form of dividends.
➢ An interim dividend is a half way dividend.
➢ At the end of each financial year the directors of a company propose that ordinary share dividends
(and possibly dividends on non-redeemable preference shares) are paid and these will be paid
early in the following year.
➢ These proposed dividends are not included in the financial statements for the current year (but
may appear as a note).

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➢ They are included in the statement of changes in equity in the year in which they are actually paid
NOT in the current year’s statement of changes in equity.
➢ Very often limited companies do not distribute the whole of the profit for the year as dividends.
➢ Even if a limited company wished to distribute the whole profit it would not be possible if there
was not enough cash available.
➢ Any profit that is not appropriated for dividends is carried forward to the following year. This is
known as retained earnings and will appear in the equity and reserves section of the statement
of financial position i.e. it has a credit balance in the appropriation account.
➢ In addition to leaving a balance of retained earnings, many companies will transfer an amount
from the profit for the year to a general reserve. This is another means of ploughing back profits
into the company to help it grow.
➢ The general reserve also appears in the equity and reserves section of the statement of financial
position.
➢ NB: Net profit is amount available to ordinary shareholders after payment of preference share
dividend,

Statement of changes in equity of ---- for the year ended ------

Issued Ordinary General Retained

Total
share capital Reserve earnings

Opening Balance XXX XXX XXX XXX

Net Profit -- -- XXX XXX
Dividends paid (final) -- -- (XXX) (XXX)
Dividends paid (interim) -- -- (XXX) (XXX)
Transfer to general --
-- XXX (XXX)
reserve
Closing Balance XXX XXX XXX XXX

The statement is checked for arithmetic accuracy vertically then horizontally.

Question one
Anand Limited was formed on 1 July 2003. By 30 June 2006 a total of 200 000 5% redeemable
preference shares of $1 each and 600 000 ordinary shares of $0.50 each had been issued and were
fully paid.
The following information is provided:
1. The profit for the year ended 30 June 2006 before the preference share dividend was $58 000.

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2. On 1 July 2005 the retained earnings brought forward amounted to $41 000 and the general
reserve amounted to $45 000.
3. Half of the preference share dividend was paid on 31 December 2005. On 30 June 2006 the
remaining preference share dividend was outstanding.
4. The proposed final ordinary share dividend of $30 000 for the year ended 30 June 2005 was
paid on 30 September 2005.
5. An interim dividend of $24 000 was paid on 31 March 2006.
6. On 30 June 2006 the directors recommended a transfer of $8 000 to the general reserve and the
payment of an ordinary share dividend of 8%.

REQUIRED
Prepare a statement of changes in equity of Anand Limited for the year ended 30 June 2006.

QUESTION 12 November 2019 P2 Q5 (a)

The authorised and issued capital of Magamba Ltd comprised of the following:
360 000 Ordinary shares of $1 each
300 000 8% Preference shares of $2 each
On 1 January 2015, the Profit and Loss Appropriation Account had a credit balance of $73 200.

The net profit for the year ended 31 December 2015 was $139 600.

On 31 December 2015, the directors recommended that

(i) a payment of preference share dividend be done,
(ii) a dividend of 10% on ordinary shares be paid,
(iii) $60 000 be transferred to the general reserve.

Prepare a Statement of changes in equity for the year ended 31 December 2015.

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