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Financial Accounting of Companies :check: - Coggle Diagram
Financial Accounting
of Companies
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Accounting concepts &
unique ledger accounts
Directors
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A board of director acts on behalf of company
They have a duty to protect the company's assets & ensure assets are efficiently used
Shareholders may appoint or remove its directors
They must keep the shareholders informed about their investment in the company
They see to the day-to-day running of the company & appoint managers to help with smooth running of company
They have to act honestly & loyally &all their decisions must be for the benefit of the company
They have to comply with guidelines of the Companies Act
Memorandum of Incorporation
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It includes details of how the company will operate, the roles & responsibilities of the directors & shareholders
Income tax / provisional income tax
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The Minister of finance may change the tax rate when drafting the country's budget
Income tax for a company is currently
28%
of taxable income
Companies also pay secondary tax which is
10%
of the total dividends they pay
Dividends
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Portion of the company's profits that goes to shareholders after taxation
A company does
not
have to pay dividends to its shareholders
Directors
propose
a dividend
Shareholders must approve it at the annual general meet (AGM)
Most companies pay dividends
twice a year
Year-end
dividends
:
Final
dividends
Dividends
during the year:
Interim
dividends
Issue Price
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The 'IP' of the shares is the price the shares sell for
Earnings
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The shareholders' earnings are the dividends that they receive from the company
Shares
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Company divides its capital or equity into units or shares
When company needs to raise capital, they can either borrow from bank or sell additional shares
They need to repay the loans, but they don't need to repay the capital that the shares raise
Companies advertise their shares in a prospectus & offers them for sale
Any legal person can buy shares in company
Shareholders
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Company keeps record of each shareholder in a share register
They earn dividends which the company pays out of its profits
Shareholders become part owners of company & have a right to vote on certain company matters
They have the protection of limited liability
Limited liability
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The limit of a shareholder's liability is the amount invested in the company
Separation of ownership from control
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Company is a legal person in its own right, meaning:
The company owns all the assets of the company rather than the shareholders
All profits belong to the company & not the shareholders
Directors act on behalf of the company and the shareholders
the company is responsible for all debts & the shareholders are only liable for the amount they've invested in the company
the company has its own rights that are separate from the shareholders & directors
Retained income
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Refers to the portion of the net profit that the business keeps back for future use
In a partnership, they transfer the net profit in the profit & loss account to the Appropriation account
They decide the entire profit among the partners in the form of their primary & secondary distributions
A company doesn't appropriate all the net profit
The company needs to take income tax into account & the directors decide on the amount of dividends to declare each year
This depends on how much of the net profit after tax they wish to keep in the company
Retained Income allows the company to have funds at its disposal to use for future expansion in the business
Share capital
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A company sells shares to raise capital
Difference is authorized share capital is the unissued shares
The prospectus may be in the form of a brochure or a newspaper ad
Authorized
shared capital
The total of share capital that the company is allowed to issue or sell according to the Memorandum of Incorporation
Issued
share capital
When authorized share capital sells, they'll decide on price at particular time (this is the Issue Price)
Each shareholder gets certificate as proof of ownership
The company records the names of shareholders in share register
(JSE) Johannesburg Securities Exchange
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A marketplace for the buying & selling in a public company
JSE offers company's a place to trade their shares easily & safety
JSE is a major source of financial into & it provides protection for the investor
Stockbrokers facilitate transactions between shareholders & companies
The JSE lists share prices on the stock market in cents (per share)
Registrar of companies: Registration certificate
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Registrar has to ensure that the company complies with legal requirements
Company will then receive a registration certificate & come into existence
The Companies Act
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New act brings the procedure into line with International best practice
Public & Private companies
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Public Company
Name ends with the word
'Limited'
or abrev.
'Ltd'
Min. number of members or shareholders is one
Public can buy shares through the JSE
Shares are freely transferable
Private Company
Name ends with the words
'(Proprietary) Limited'
or the abrev.
'(Pty) Ltd'
Min. number of members or shareholders is one
Public may not buy shares
Requires 1 director
Accounting concepts unique to companies
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Promoters apply to the Registrar of Companies for registering their business as a company
Advantages of a company over sole traders & partnerships:
A company can raise more capital
A company ensures continuity
Shareholders of a company are liable only for their investment in the company
Auditors
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The Companies Act requires public companies to have a qualified chartered accountant audit their financial statements every year
Auditors submit report of their opinion on accuracy of financial statements
It protects the company's shareholders & its creditors
Internal
auditors
Monitor & assess all the activities & evaluate the control measures of the business
Focuses on future events as a result of continuous review & evaluation of their control measures & processes
Their role is to achieve the company's objectives
They measure risk & prevent fraud
External
auditors
Assess the financial statements & provide an opinion on whether statements are true & fair reflection of the company's financial position
They check & evaluate whether the statements comply with GAAP
unqualified report
or 'clean bill of health'
present a
fair
assessment in accordance with the Companies Act
qualified report
may present an
unfairly
representation of financial position
may not comply with the Companies Act
may detect fraud
GAAP Principles
GAAP
(Generally Accepted Accounting Practice)
Specific GAAP Principles
Business Entity
Business & owner are two separate entities. Financial affairs of business & owner are kept separate
Historical Cost
We record fixed (tangible) assets at their original price. If you ought something years ago for R100 000, you'll still record it in books at the same price even if its worth changes
Prudence
The accountant may provide for possible expected losses even before they know the exact amount. However they won't consider any expected income
Going Concern
This concept assumes the business will continue in the foreseeable future
If business suddenly closes down & has to sell its assets at a lower price, they show historical cost not the lower price
Matching
When recording incomes & expenses, they must match in the current accounting period
Link any accounts that match, for e.g. When recording
sale (income)
, you record the
cost of the sale (expense)
Materiality
This concept means we have to look at the importance of transactions
We may record certain expenses together instead of having separate accounts for them
For
e.g.
grouping service fess, cash deposit fees & credit card levies & record them as bank charges, keeping interest on overdraft
Another
e.g.
is that
cents are of no importance in the financial statements
It is important to follow guidelines of GAAP & IFRS so that the financial recording is consistent in all business & to reduce fraud. It makes it easier to read for interested parties like shareholders, bank managers & SARS
IFRS
(International Financial Reporting Standards)
Fair reporting means that you can trust the financial statements
Sets out how to report certain types of transactions in financial statements
Bookkeeping of Companies
Accounting Cycle of a company
Trial balance
We draft Trial Balance after balancing or totaling all the ledger accounts at the end of each month
Balance accounts in the Balance Sheet account section & total the account in pencil in the Nominal account section
If nominal account has amounts on both sides, show the difference as a pencil total on the larger side
If you applied the double entry principles correctly, the total of debit column should equal the total of credit column
Easier to find errors each month than trying to do this once at the end of the year
Post-adjustment
Trial Balance
After taking year-end adjustments into account & posting them to ledger;
Draw up a post-adjustment Trial Balance to check accuracy of entries
This Trial Balance will include all the account in the General ledger
Post-closing
Trial Balance
After closing off all nominal accounts to the final accounts at the end of the year
It will contain only the accounts from the Balance Sheet account section of the ledger
Ledger accounts
We post the entries from all the journals to the ledger accounts at the end of each month
Journals
All transactions of business must pass through a journal first
We obtain the into for the journal entries from various source documents
Transactions
Audit fees
The external auditors charge audit fees for their services
It's an expense to the company
Director's fees
The directors receive a sum of money in payment for their services running the company
It's an expense to the company
Dividends
The company regards dividends as an expense but distributes from the net profit and shows them in the Appropriation account
When the company declares dividends at year end, it creates a liability because they owe the amounts to shareholders. This is the final dividend
Buying back shares
A company may buy back its own shares if the board authorizes it
A buy-back is usually from the company's retained income
Buying back shares reduces the company's issued shares
The shares bought back will no longer be issued shares
A buy-back of shares usually indicates that the directors believe the company's shares are undervalued
Company can buy back shares from shareholders to own larger percentage of the company
The company can later put the shares back on the market when the share price increases
Buying back shares can reduce the number of outstanding shares
Loans & interest
When a company takes a loan from financial institution like a bank, it becomes a liability because they owe money to the bank
Loans are
non-current
liabilities because the settlement period is longer than a year
A business takes mortgage loan to finance the purchase of property; The financial institution will have claim against the asset until the mortgage loan is settled
Interest on mortgage loan is capitalized; meaning we add the amount of interest to the amount of mortgage loan and liability increases
Issuing shares at issue price
Provisional tax payments
Tax assessment from SARS
The accountant calculates the income tax owing at the end of the year as a percentage of profits and dividends
SARS sends the tax assessment for the year with the actual tax due; this amount becomes the company's tax liability for the year because it's the amount they owe to SARS
SARS is now a creditor because the company owes them tax for the year if the liability for the year is greater than the provisional amounts already paid