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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-37
SHARE CAPITAL
The maximum amount with which a company gets registration/incorporation is called authorized
share capital of that company.
This capital can be increased with the prior approval of security and exchange commission. This
capital is further divided in to smaller denominations called shares.
Each share usually has a face value equal to Rs. 10. According to Companies Ordinance, this face
value can be increased but can not be decreased.
The value of share written on its face is called face value.
Shares are issued for cash as well as for any asset. For example, if any member of the company sell
his/her land to the company. In return, company issue him/her fully paid shares instead of paying
cash. Those shares are also part of paid up capital because company has received the benefit of that
amount.
SHARE CERTIFICATE
Share Certificate is the evidence of ownership of the number of shares held by a member of the
company. When a company issue more than one share to its member, it does not issue that number
of shares to him/her. Instead, it issues a certificate under the stamp of the company that a particular
number of shares are issued to -------- member of the company.
SHARES ISSUED AT PREMIUM
When a company has a good reputation and earns huge profits, the demand of its shares increases in the
market. In that case, the company is allowed by the Companies Ordinance 1984, to issue shares at a higher
price than their face value. Such an issue is called Shares Issued at Premium. The amount received; in excess
of the face value of the shares is transferred to an account called "Share Premium Account". This account is
used to:
 Write off Preliminary Expenses of the company.
 Write off the balance amount, in issuing shares on discount.
 Issue fully paid Bonus Shares.
SHARES ISSUED ON DISCOUNT
When a company is not making huge profits, rather it is sustaining loss, the demand of its shares decreases in
the market. If the company needs extra funds, then it is allowed by the Companies Ordinance 1984, to issue
shares at lesser price than their face value. Such an issue is called Shares Issued on discount.
The difference of face value and the amount received is met by share premium account, if available. If there
is no share premium account available, this difference is shown in the profit and loss account of that period,
in which shares are issued as loss on issue of shares at discount.
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Financial Accounting (Mgt-101)
VU
CERTIFICATE OF INCORPORATION/REGISTRATION
When Security and Exchange Commission of Pakistan receives application for registration of a company, the
registrar of SECP makes investigation in respect of compliance with legal requirements. When he is satisfied
that all legal requirements are complied with. He issues a Certificate of Incorporation/registration to the
company. This certificate is evidence that a separate legal entity has formed. The company, after
incorporation/Registration has the right to sue and to be sued in its own name.
DIVIDEND
Profit distributed to the share holders for their investment in the company is called Dividend.
Dividend is approved by the share holders in the annual general meeting at the recommendation of
the directors.
Dividend is paid out of profits. If, in any year, company could not make any profit. No dividend will
be paid to share holders.
Dividend is paid to registered share holders of the company.
Registered share holders are those members of the company, who are enlisted in the register of
share holders of the company.
SUBSCRIBERS / SPONSORS OF THE COMPANY
Subscribers / Sponsors are the persons who sign articles and memorandum of the company and contribute
in the initial share capital of the company.
ISSUANCE OF FURTHER CAPITAL
Where a company wants to issue further capital (called raising the capital), shares are first offered to
current shareholders.
The issuance of further capital to Present Shareholders is called Right Issue.
This issue is in proportion to current shares held by the shareholders.
The shareholders can accept or reject the offer.
If shareholders refuse to accept these shares then these are offered to other people.
JOURNAL ENTRIES
Shares issued against cash
Debit:
Cash / Bank Account
Credit:
Share Capital Account
Shares issued against transfer of asset:
Debit:
Asset Account
Credit:
Share Capital Account
This is called issuance of asset in kind.
BONUS SHARES
 This is another way of distributing dividend.
 When a company decides, not to give cash to the share holders as dividend, it issued shares called
bonus shares, to the share holders for which it receives no cash.
 These are fully paid shares.
FINANCIAL STATEMENTS OF LIMITED COMPANIES
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Financial Accounting (Mgt-101)
VU
In Pakistan, Financial Statements of limited companies are prepared in accordance with:
International accounting standards adopted in Pakistan.
Companies Ordinance 1984.
In case of conflict the requirements of Companies Ordinance would prevail over Accounting
Standards.
COMPONENTS OF FINANCIAL STATEMENTS
Components of companies' financial statements are as follows:
 Balance Sheet
 Profit and Loss Account
 Cash Flow Statement
 Statement of Changes in Equity
 Notes to the Accounts
 Comparative figures of Previous Period
EQUITY
Equity is the total of capital, reserves and undistributed profit. That means the amount contributed by share
holders plus accumulated profits of the company. Equity, therefore, represents the total of shareholders fund
in the company.
STATEMENT OF CHANGES IN EQUITY
The statement of changes in equity shows the movement in the shareholders equity (capital and
reserves) during the year.
We can say that it replaces profit and loss appropriation account of partnership business.
FORMAT OF STATEMENT OF CHANGES IN EQUITY
Name of the Company
Statement of Changes in Equity for Year Ended June 30, 2002
Share
Share
Reserves
Profit  & Total
Capital
Premium
Loss A/c
Account
Balance On Jun 30, 2000
X
X
X
X
X
Movements During the Year
X
X
Balance On Jun 30, 2001
X
X
X
X
X
Movements During the Year
X
X
Balance On June 30, 2002
X
X
X
X
X
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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES