Introduction to Company Accounts

A company is a legal entity formed by a group of individuals to engage in and operate a business enterprise. In Nigeria, the formation and operation of companies are governed by the Companies and Allied Matters Act (CAMA).

1. Formation and Classification of Companies

Companies are generally classified into:

• Private Limited Company: Restricted from inviting the public to subscribe for shares, limits membership (usually 2 to 50 excluding employees), and restricts share transferability.
• Public Limited Company (PLC): Can invite the public to subscribe for shares, has a minimum of 7 members and no maximum limit, and shares are freely transferable on the stock exchange.
• Limited by Guarantee: Often formed for non-profit purposes; members' liability is limited to the amount they agree to contribute in the event of winding up.
• Unlimited Company: Members have no limit on their liability for the company's debts.

Key documents in formation include the Memorandum of Association (external relations) and Articles of Association (internal regulations).

2. Issue of Shares and Debentures

Companies raise capital by issuing shares. The process involves:

• Authorized Capital: Maximum capital the company is allowed to issue.
• Issued Capital: The portion of authorized capital offered to the public.
• Called-up Capital: The amount the company has requested shareholders to pay.
• Paid-up Capital: The actual amount paid by shareholders.

Accounting Entries:
1. On Application: Dr Bank, Cr Share Application.
2. On Allotment: Dr Share Application/Allotment, Cr Share Capital.
3. On Calls: Dr Share Call Account, Cr Share Capital.

Debentures: These are long-term loans or debt instruments issued by a company under its seal. Unlike shareholders, debenture holders are creditors and receive interest regardless of profit.

3. Final Accounts of Companies

Company final accounts include the Statement of Profit or Loss and Other Comprehensive Income (with an Appropriation section) and the Statement of Financial Position (Balance Sheet).

• Appropriation Account: This shows how profits are distributed. Items include transfers to reserves, proposed dividends (interim and final), and directors' fees.
• Capital Reserves: Created from non-trading activities (e.g., Share Premium, Revaluation Reserve). They cannot be used to pay dividends.
• Revenue Reserves: Created from trading profits (e.g., General Reserve, Retained Earnings). They are available for dividend distribution.

4. Interpretation of Accounts using Ratios

Financial ratios help stakeholders analyze performance and liquidity:

• Current Ratio: Current Assets / Current Liabilities. It measures the ability to pay short-term debts.
• Acid Test (Quick) Ratio: (Current Assets - Closing Stock) / Current Liabilities. A more stringent measure of liquidity.
• Stock Turnover Ratio: Cost of Goods Sold / Average Stock. Measures how many times stock is replaced during a period.