FINAL ACCOUNTS FOR COMPANIES INTRODUCTION Because of a peculiar nature of companies whereby shareholders have no direct role in the

day to day management of the enterprise, the companys final accounts are regulated by the companies Act. It requires the board of directors of a limited liability company communicate a wide range of financial information to its shareholders in a general meeting at the end of each financial year. The company must also submit returns to the registrar of companies which will include final accounts. The following are items in the final accounts balance sheet that do not appear in neither the proprietors account nor the partnership accounts.

a. Directors salaries and fees expenses The day- to day management of the company is done by the board of directors on behalf of the shareholders. Salaries and fees paid to them are charged in the profit and loss account as an operating expense. b. Auditors fees and expenses It is mandatory to have the accounts of a company audited every year. The annual returns must include the auditors report. Fees and expenses for the audit are shown in the periods profit and loss account as an operating expense. c. Debentures interest While the company raises the bulk of its capital by issuing shares, the share capital may not be sufficient to finance all its financial activities and operations. The company may have to borrow from outside. An example of such source of borrowing is debentures. A debenture is a legal instrument which evidences that a company has borrowed a specified sum of money from a person named on its face, and undertakes to pay a fixed interest rate per annum for the loan. Unlike shareholders, debenture holders are creditors to the company and consequently, interest chargeable is a periodic charge to the company in the profit and loss account. The principal sum on the debentures not yet repaid in the balance sheet is shown as a non- current liability. d. Dividend A dividend is the gain or profit which a shareholder earns on his investment in shares. Dividends paid during the year before ascertaining profits are called interim dividends. Those paid at the end of the year are known as final dividends. The proposed dividends not paid by the end of the financial period are shown in the balance sheet under current liabilities. e. Corporation tax A company is a legal entity in its own right and therefore pays corporation tax on its profits as is provided for under the tax laws of the land. The tax paid must be computed according to the prevailing tax rate, against the profits made for the year. It is set aside as a provision if
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the exact amount is not yet been agreed upon with tax authorities. Once the exact figure is finally decided, the amount is subsequently paid. f. Share capital structure In the balance sheet under capital and reserve, the following should be shown distinctly for each and every class of shares: i. Authorized share capital ii. Issued share capital if different from authorized share capital iii. Reserves, clearly distinguishing between capital reserves, e.g. the premium account balance and revenue reserves such as general reserves and the profit and loss account balance. g. Provision for depreciation It is mandatory for companies to show their profit and loss account the amount charged to revenue as provision for depreciation.

4.2 TRADING, PROFIT AND LOSS ACCOUNT This is the usual income statement which: i) ii) Total revenue generated during the year is matched against expenditure directly incurred to earn the said revenue, in order to ascertain gross profit on operations Gross profit is matched against operating expenditure for the period to determine the net profit for the period. These are complied in the usual manner similar to the sole proprietorships and the partnerships. However, the profit and loss account will have charges in respect of auditors fees and expenses, interest on debentures if any, directors fees and salaries, interest earned on investments if any, corporation tax etc. PROFIT AND LOSS APPROPRIATION ACCOUNT After the company has determined its net profit on operations and after deducting the years charge for corporation tax, the profit and loss after tax is transferred to the profit and loss appropriation account for appropriations by the shareholders, in a general meeting acting on the recommendations of the board of directors. The appropriations may consist of: i) ii) iii) Transfer to reserves Writing off capital expenses such as preliminary expenses Dividends The amount of profit or loss on the profit and loss appropriation account not allocated is carried forward to the next accounting period as un-appropriated profits or retained earnings.

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The profit and loss appropriation account is therefore a permanent account in the books of the company to which is posted net profit or loss after tax for the year. The credit balance on the account is shown in the balance sheet in the shareholders equity section as a revenue reserve. THE BALANCE SHEET A company must present a balance sheet to its members in a general meeting every year. Every balance sheet so presented should give a true and fair view of the state of affairs of the company as at the end of the financial year. Assets and liabilities and the owners interest are shown. However, the company assets may include intangible assets such as goodwill; capitalized expenditure such as discount on shares; and preliminary expenses. The liabilities may include long term debts such as debentures, and short term debts such as interest on debentures payables, dividends payables and taxes payable. Share capital items should appear under the separate headings of i) authorized share capital, ii) issued share capital, if the different from authorized share capital and reserves, as illustrated below: Authorized capital: 20000 ordinary shares of shs.500 each Issued share capital 20000 ordinary shares of shs.500 each, fully called Less: shares forfeited Capital reserves: Forfeited shares account Share premium account 12500 1000000 10000000 (50000) 9950000 10000000

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QUESTION Question

Tengeza ltd extracted the following trial balance as on 31 Dec, 2004. Share capital 250000 ord shares of shs.100 each 25000000 125000 10% pref shares of shs.100 each 10% debentures Freehold premises at cost Motor vehicle at cost Fixtures & fittings Plant & machinery at cost Profit & loss a/c 1.1.04 Sales Stock1.1.04 Bad debts written off Purchases Dividend paid at 30.06.04 Preference dividends Ordinary dividends Debenture interest paid 30.6.04 Debtors & creditors Accumulated depreciation Plant & machinery Motor vehicle Fixture & fittings Salaries & wages Cash & bank Investments Office expenses General reserve Selling & distribution expenses Directors emoluments Auditors remuneration Preliminary expenses Sundry income Bank charges Income from investments

12500000 10000000 25000000 7500000 1300000 2500000 2685000 59475000 10775000 125000 16900000 625000 1250000 500000 2700000

1500000

1025000 2250000 800000 4100000 4745000 22500000 2300000 1000000 13750000 3700000 800000 1200000 1625000 60000 4500000 122360000 122360000

Additional information 1. Stock shs.3750000

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2. Depreciation: motor vehicle 20% on cost; fixtures and fittings at 12.5% on book value There were no disposals and acquisition on non- current assets during the year 3. Expenses due but unpaid include salaries and wages 62500 and office expenses paid in advance amount to 120000 4. Provision for bad debts is to be set up at 2.5% of sundry debtors 5. Debenture interest is payable half yearly, the half year to 31 Dec 2004 being due on that date 6. Corporation tax is chargeable at 30% on the current assets of the year of tax liabilities 7. The directors recommend appropriation as follows: i) Preliminary expenses to be written off in full ii) Transfer to be made from profit & loss a/c as follows: - General reserve 1500000 iii) Payments of final dividend of 12.5% on the ordinary share capital Required: a) Trading, profit and loss a/c b) Profit and loss appropriation a/c c) Balance sheet

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