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Introduction to Company Accounting

Learning Outcomes: Understand the concepts and the environments associated

with companies Understand different types of capital structures Understand different types of shares Understand the financial reporting requirements in Malaysia

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Limited companies A business structure in which shareholder

responsibility for company debt is limited to the amount he/she has invested in the company.

Types of limited companies: Public companies Private companies Exempt companies

Types of Companies

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Unlimited companies A business structure in which shareholders are liable

for all debts of the company. It is not common in Malaysia and exists to some extent

among mutual funds, a type of investment company

Special companies Banking companies – Any bank defined in the Banking

Act. Under Company Act , banks are given certain privileges and provisions.

Life insurance companies – Companies registered under the Life Insurance Act.

Cont.

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Advantages Limited liability Broad source of capital Continuity of existence Use of professional management

Disadvantages Greater governmental regulations Separation of ownership and management

Advantages & Disadvantages

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Memorandum of Association (MA) Initial legal document, represents the initial agreement

between the people forming the company regulates the company relation with outside person i.e.

external affair of the business Contents:

The name, location of the company Activities in which the company may legally operate Statement that the liability of the members is limited or

unlimited The amount of authorised capital for each class of shares

and the nominal value of each share

Forming a Company

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Article of Association (AA) set out the rules covering the internal affairs of the

company such as the right of shareholder and the power and the duties of management

Contents: The rights of different classes of shareholders The duties, powers and proceedings of directors Notice and proceedings of meetings

Cont.

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The Prospectus

Any offer or invitation by a company to issue shares must be accompanied by a registrable prospectus

It contains all such information as:

i. assets, liabilities, financial position and prospects of the

company

ii. The rights attached to the securities being issued

Cont.

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Capital Equity:

Authorised/Nominal/Registered Capital Unissued Capital Uncalled Up Capital Paid up Capital

Capital Structure

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AUTHORISED CAPITAL

Maximum number of shares that a company is permitted to issue and the par value per share.

Authorised capital = no. of shares x par value per share

*Par value – an amount per share placed on the shares at the time of formation

Company can increase it’s authorised capital by altering its memorandum at a company general meeting

Cont.

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UNISSUED CAPITAL

Represents that part of the company’s authorised capital which has not been issued to shareholders

Also know as unallotted shares

The difference between authorised capital and unissued capital is the total amount of issued capital

Cont.

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UNCALLED CAPITAL

A company, when it decides to issue shares, may not require the shareholders to pay in the total par value of the shares all at one time.

The pay value may be called up by the company in installments.

Uncalled capital represents the amount of issued capital which has not yet been called up by the company

Cont.

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PAID UP CAPITAL

The amount of called up capital that has been paid up by the subscribers.

CALL IN ARREARS

This is the amount of called up capital that the subscribers failed to pay

Cont.

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Under the Corporate Act 1965, paid up capital is determined using the following approach:

RM

Authorised capital XX

Less: Unissued capital X

Issued capital XX

Less: Uncalled capital X

Called up capital XX

Less: Unpaid capital X

Paid up capital XX

Cont.

Capital StructureStatement of Financial Position Extract

Authorized Capital RM

200,000 , 10% Preference shares of RM1/each 200,000500,000, Ordinary shares of RM1/each 500,000

700,000Issued and Paid Up Capital

100,000, 10%preference shares of RM1/each, fully paid up 100,000200,000 ,ordinary shares of RM1/each, called and paid up to 70sen each 140,000

240,000

ReservesShare Premium 40,000Retained Profits 150,000Total Shareholders Equity 430,000

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Loan capital (Debenture/Bond)

Companies Act 1965 allowed companies to obtain fund to finance their operations through borrowings

One form of borrowing is by issuing debentures or bonds

A debenture or a bond is a document issued by the company which acknowledges the company’s debt to the creditors called debenture holders or bondholders

Cont.

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Cont.

DEBENTURE Fixed rate of interest Debenture holder are

creditors Debenture holder do not

have right to vote Debenture holder have

priority to claim over to asset of company

Debenture interest is expenses

SHARES Dividend of ordinary share

not compulsory Shareholder are owners

of the company Shareholder have right to

vote Dividend are distribution

of profit

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The practice of accounting is governed by the following legislations:

i. Companies Act 1965

Under this act, the company is required to maintain accounting and other records so as to enable its management to prepare financial statements (FS) that reflect a true and fair view of the financial results, the financial position and the cash flow.

The FS are to be prepared in accordance with the approved accounting standards.

Financial Reporting in Malaysia

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The minimum disclosure requirements are set forth in the Ninth Schedule to the Act.

Statement of Comprehensive Income Statement of Financial Position Other Requirements

ii. Accountants Act 1967

This Act provides for the establishment of MIA. The objective of MIA is to regulate the accounting profession

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iii. Financial Reporting Act 1997 & Accounting Standards

This Act provides the guidelines for accountants in the form of accounting standards and other guidelines in the preparation of FS

A broad requirement of FS has provided for in the Companies Act 1965

This Act established standards setting body, Malaysian Accounting Standards Board (MASB).

Cont.