Company Accounts (Introduction): Share Capital, Debentures and Appropriation of Profit
This domain introduces the limited company: separate legal personality, limited liability, share capital, debentures and the appropriation of profit. Questions ask you to distinguish capital from reserves, compute dividends, or prepare the appropriation section and the equity part of the balance sheet.
Share capital
A company is a separate legal person and its owners have limited liability. Share capital is recorded at nominal or par value; issued capital is what has actually been allotted. Ordinary shares carry votes and a variable dividend. Preference shares carry a fixed dividend rate and usually priority on winding up. Amounts received above par go to share premium, a capital reserve that is not distributable as a dividend. Calls in arrears are amounts not yet received on allotted shares and are deducted from called-up capital.
Debentures
Debentures are long-term borrowings, not capital. Their interest is a finance cost charged in the profit and loss account before tax, and the debenture itself appears as a non-current liability, never in equity.
Appropriation of profit
Start with profit after tax, deduct transfers to reserves and dividends (preference first, then ordinary). The remainder is retained profit for the year, added to retained earnings brought forward.
Published-account concepts
Non-current assets, current assets, current liabilities, non-current liabilities and equity. Revenue reserves are distributable; capital reserves such as share premium are not. Going concern, accruals and prudence apply as they do for a sole trader, but the equity section replaces the single capital account.
Worked example
Issued: 100,000 ordinary shares of 1,000 FCFA and 50,000 8% preference shares of 1,000 FCFA. Profit after tax 25,000,000; transfer to general reserve 3,000,000; ordinary dividend 1,200 per share. Preference dividend = 8% × 50,000,000 = 4,000,000. Ordinary dividend = 100,000 × 1,200 = 12,000,000. Retained profit = 25,000,000 − 4,000,000 − 3,000,000 − 12,000,000 = 6,000,000. Both dividends are appropriations, not expenses, so they do not reduce profit before tax.
Traps
- Treating debenture interest as an appropriation instead of a finance cost.
- Treating share premium as revenue profit available for dividends.
- Charging dividends as an expense in the income statement.
- Recording share capital at issue price rather than par value.