AN INTRODUCTION TO

FINANCIAL STATEMENTS
OF A COMPANY
COMPANY ACCOUNTS
INTRODUCTION
In this chapter you will learn about the different types of companies
that can exist and about the different types of long- term funds they
can raise in order to fund their activities. You will learn how to prepare
the financial statements for companies and about the treatment of
goodwill in company accounts and its treatment in the accounts of
partnerships and sole traders.
NEED FOR LIMITED COMPANIES
Limited liability companies, more commonly called Limited companies
come into existence because of the growth in size of the business, and
the need to have more people invest in the business who would not be
able to take part in the day today running of the business.
The Zambian law that allows the formation of Limited liability
companies and the rules that govern their existence is found in the
companies act.
LIMITED LIABILITY
The capital of the limited company is divided into shares. The shares can be of
any nominal value-5n, 10n, 25n, 50n, K1, K5, K10 or any other amount per share.
To become a member of a limited liability company, or a shareholder, one has to
buy at least one share.
If shareholders have paid in full for their shares, their liability is limited to what
they have paid for those shares. If the company loses all its assets, all those
shareholders can lose is their shares. They can not be forced to pay anything
more in respect of the company loses.
Shareholders who have only paid partly for their shares can be forced to pay the
balance owing on their shares and nothing more than that.
Shareholders are said to have limited liability and that’s why companies are
called limited liability companies.
PUBLIC AND PRIVATE COMPANIES
There are two types of companies, the public company and a private company.
In the companies Act, a public company is defines as one which fulfills the
following conditions:
• Its memorandum states that it is a public company and that it has registered
as such.
• It has an authorized share capital of at least k250,000
• Minimum membership is one and it has no maximum membership.
• Its name must end with public limited company (PLC)
PLCs can but don’t have to, offer their shares for sale on the stock exchange. It
is through the stock exchange that the large membership can be established.
PRIVATE COMPANIES
A private company is usually but not always smaller company and may be
formed by one or more person. It is defined by the act as a company which is
not a public company.
The main difference between a public company and a private company are
that
• a private company can have authorized share capital of less than K250,000
and
• It cannot offer its shares to the public at large.
This means that if you were to walk in a bank or a similar public place and
you see a prospectus offering anyone a chance to take up shares in a
company, then that company will be a PLC.
DIRECTORS OF THE COMPANY
The day to day running of the company is not carried out by the
shareholders. The possession of the share normally confers the right to
vote for the shareholder at the Annual General Meeting (AGM).At the
AGM, the shareholders vote for the Directors who will be responsible
for the day to day running of the company. At the AGM, the directors
report their stewardship of the company to the shareholders and this
report is accompanied with a set of financial statements and other
documents called the annual report.
LEGAL STATUS OF A LIMITED
COMPANY
A limited company is said to have a separate legal entity with its
shareholders. This means that a company is not seen as exactly the
same as its shareholders. For instance the company sue one or more of
its shareholders and any shareholder can sue the company. This would
not be the case if the company and its shareholders were not separate,
as one cannot sue oneself. This concept is referred to as the veil of
incorporation.
SHARE CAPITAL
Shareholders of a limited company obtain their reward in the form of a share of
the profits, known as dividends. The directors decided on the amount of profits
which are placed in reserves (ie retained profits). The directors then propose the
payment of a certain amount of dividend from the remaining profits. It is
important to note that the shareholders cannot propose a higher dividend for
themselves than that proposed by the directors. They can however, propose a
lesser dividend should be paid, although this is rare. If the directors propose that
no dividend should be paid, then the shareholders are powerless to alter the
decision.
The decision by the directors as to the amount proposed as dividend is a complex
one and cannot be discussed here. Such points as government directive to reduce
dividends, the effect of taxation, the availability of bank balances to pay the
dividends, the possibility of a takeover bids and so on will be taken into account.
SHARE CAPITAL
The dividend is usually expressed as a percentage. A dividend of 10% in
company A of 500,000 of ordinary share capital of K1 will amount to
k50,000. A dividend of k6 of company B on 200,000 ordinary shares of
K2 will amount to K24000.
A shareholder having 100 shares in each in each business would receive
k10 in company A and K12 in company B.
Preference shares. Holders of these shares get an agreed percentage of
the dividends before the ordinary shareholders receive anything.
Ordinary shares. Holders of these shares receive the remainder of the
total profits available for dividends.
 EXAMPLE
If a company had 50,000 5% preference shares of K1 each and 200,000
ordinary shares of K1 each, then the dividends could be payable as
follows:

Year 1 2 3 4 5
K K K K K
Profits appropriated for
dividends 6500 10500 13500 28500 17500
Preference dividends (5%) 2500 2500 2500 2500 2500
Ordinary
dividend
s 2% 4000 4% 8000 5.50% 11000 13% 26000 7.50% 15000
6500 10500 13500 28500 17500
TYPES OF CUMULATIVE PREFERENCE
SHARES
The two main types of preference shares are the cumulative and non
cumulative preference shares:
Non-cumulative preference shares. These can receive up to an agreed
percentage each year. If the amount paid is less than the maximum
agreed amount, the shortfall is lost by the shareholder. The shortfall
cannot be carried forward and paid in the future year.
Cumulative preference shares. These also have an agreed minimum
percentage dividend. However, any shortfall of the dividend paid can be
carried forward. These arears of the dividends will have to paid before
the ordinary shareholders are paid in future.
EXAMPLE
A company has 500,000 ordinary shares of K1 and 100,000 5%
preference shares of K1 each. The profits available for dividends are:
Year 1 K145,000, Year 2 K2000, Year 3 K44000, Year 4 K118,000, Year 5
K264,000. Assuming all profits available are paid in dividends, the
amounts to be paid to each class of shareholder is:
Year 1 2 3 4 5
Profits appropriated for
dividends 145000 2000 44000 118000 264000
Preference dividend(Non-
cumulative) 5000 2000 5000 5000 5000

Ordinary 140000 0 39000 113000 259000

145000 2000 44000 118000 264000

CUMULATIVE PREFERENCE
Assuming that the above preference dividends have been cumulative,
the payout would have been as follows:

Year 1 2 3 4 5
Profits appropriated for
dividends 145000 2000 44000 118000 264000
Preference
dividend(Cumulative) 5000 2000 8000 5000 5000

Ordinary 140000 0 36000 113000 259000

145000 2000 44000 118000 264000

SHARE CAPITAL
The term share capital can have any of the following meanings:
1. Authorised share capital: this is the total of the share capital the company is allowed
to issue to shareholders.
2. Issued share capital: this is the total of the actual share capital issued to shareholders.
3. Called up capital: where only part of the amount has been payable for the issued
share has been asked for, the total amount asked for on all the issued shares is known
as called up capital.
4. Un called capital: this is the total amount which is to be received in future relating to
the issued share capital, but which has not yet been asked for.
5. Calls in arears: the total amount for which payment has been asked for, but not yet
been paid by shareholders.
6. Paid up capital: the total amount of capital that has been paid for by shareholders.
ILLUSTRATIONS
1. Better savings was formed with the legal right to issue 1 million
shares od K1 each.
2. The company has actually issued 750,000 shares
3. Non of the shares has been fully paid for. So far the company has
called K0.80 per share.
4. All the calls have been paid by the shareholders except for k200
owing from one shareholder.
BONUS SHARES
Bonus shares are free shares issued to shareholders without their
having to pay anything for them. The reserves are utilized for the
purpose. Thus, if before the bonus issue there were K20,000 of issued
share capital and K12,000 of reserves, and a bonus issue of 1 for 4 were
made ( ie 1 bonus share for every 4 shares in issue) the bonus issue
would amount to K5,000. The share capital then becomes K25,000 and
the reserves K7,000.
LOAN NOTES
The term loan note is used when a limited company receives money on loan and a
document called a loan note certificate is issued to the lender. Interest will be paid to
the holder, the rate being written on the certificate.
Interest on the loan note has to be paid whether a profit or loss has been made by the
borrower. They are therefore, different from the shares where a dividend is only payable
when declared and when profit has been made.
A loan note may either be:
• Redeemable ie payable at or by a particular date or
• Irredeemable ie payable only when the company is officially terminated by going into
liquidation.
If dates are shown on the face of the loan notes eg 2013/2020, it means that a company
can redeem it within the years indicated, in this case within 2013 and 2020 inclusive.
GOODWILL
Companies can recognize goodwill arising on acquisition as an
intangible non-current asset. However, every year they must consider
whether the value at which it is carried at has been impaired, when this
happens, the reduction must be shown in the profit and loss section as
an expense. The rules relating to this are to be found in IFRS 3 Business
combinations, IAS 36(impairment of assets) and IAS 38 (intangible
assets).
STATEMENT OF PROFIT OR LOSS FOR
COMPANIES
The statement of profit or loss for private and public companies are
written in the same way.
The trading account section of the profit or loss of a company is exactly
the same as for a sole trader or partnership. However, the some
differences may be found in the profit or loss section where two more
expenses are actually included in the company account which is
different from the other types of business accounts.
Two expenses that would only be found in company accounts are the
director’s remunerations and loan note interest.
DIRECTORS REMUNERATION
As directors only exist in companies, these accounts are only found in
company accounts.
Directors are legally employees of the company,appointed by the
shareholders. Their remuneration is charged to the profit and loss
section of the financial statements.
LOAN NOTES
The interest payable for the use of money borrowed from is an expense
of the company and is payable whether profits have been made or
note. This means that interest on loan notes is charged as an expense
in the profit and loss.
STATEMENT OF CHANGES IN EQUITY
Unlike partnership statements of profit or loss, following the profit or
loss account section of company statements of profit or loss, there is no
section called the profit or loss appropriation account. Instead
companies produce the statement of changes in equity. This shows
separately:
(a) The retained profit for the period
(b) Distributions of equity(Dividends) and contributions of
equity(shares).
(c) A reconciliation of the opening and closing carrying amount of each
component of equity.
EXAMPLE
The following trial balance is extracted from the books of Kambobe Ltd
as at 31st December 2022.
TRIAL BALANCE AS AT 31ST DECEMBER 2022
Dr Cr
10% Preference share capital 200,000
Ordinary share capital 700,000
10% Loan notes repayable 2025 300,000
Goodwill at cost 255,000
Buildings at cost 1,050,000
Equipment at cost 120,000
Motor vehicles at cost 172,000
Provision for depreciation: Buildings 1.1.2022 100,000
Provision for depreciation : Equipment 1.1.2022 24,000
Provision for depreciation: Motor vehicles 1.1.2022 51,600
Inventory 1.1.2022 84,912
Sales 1,022,000
Purchases 439,100
Carriage inwards 6,200
Salaries and wages 192,400
Directors's remuneration 123,000
Motor expenses 3,120
Business rates and insurance 8,690
General expenses 5,600
Loan note interest 15,000
Accounts receivable 186,100
Accounts payable 113,700
Bank 8,390
General reserve 50,000
Share premium account 100,000
Interim ordinary dividend paid 35,000
Retained profits 31.12.2021 43,212

2,704,512.00 2,704,512.00
The following adjustments are needed:
(i) Inventory at 31.12.2022 was K91,413

(ii) Depreciate buildings at K10,000, Motor vehicles at K18,000 and Equipment at K12,000

(iii) Accrue Loan note interest at K15,000

(iv) Provide for preference dividend at K20,000 and final ordinary dividend of 10%.
(v) Write off goodwill impairment of
K30,000
(vi) Transfer K10,000 to general reserve
(vii) Authorised share capital is K200,000 in preference shares and K1 million in ordinary shares
(Viii) Provide for corporation tax at
K50,000

Required
:

(a) Prepare a statement of profit or Loss for the year ended 31.12.2022
(b) Prepare a statement of financial position as at
31.12.2022
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31.12.2022
K K
Revenue 1,022,000
Less: cost of goods sold
Opening inventory 84,912
Purchases 439,100
Carriage inwards 6,200
530,212
Less: closing inventory 91,413
438,799
Gross profit 583,201
Less expanses
Salaries and wages 192,400
Motor expenses 3,120
Business rates and insurance 8,690
General expenses 5,600
Directors' remunerations A 123,000
Loan note interest B 30,000
Goodwill impairment 30,000
Depreciations: Buildings 10,000
Equipment 12,000
Motor Vehicles 18,000
432,810
Profit for the year 150,391
Less: corporation tax -50,000
Retained profit 100,391
NOTE: Dividend paid C 35,000
NOTES

A Directors remuneration are shown as an expense in the profit or loss statement

B Loan note interest is an expense to shown in the profit or loss statement

C The final dividend of 10% is based on the issued ordinary share capital and not

on the authorised ordinary share capital. It is therefore, K70,000. However, both it

and the preference dividend of K20,000should only be included as notes to the

statement of profit and loss. They should note be treated as current liabilities and

should not appear in any financial statements. As only the interim dividend was paid

during the year, this is the only one of these three dividend items that will appear in

the statement of changes in equity.

(b) STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2022
K K K

COST ACCUMULATED DEPRECIATION NET BOOK VALUE

NON-CURRENT ASSETS
Goodwill 255,000 30,000 225,000
Buildings 1,050,000 110,000 940,000
Equipment 120,000 36,000 84,000
Motor Vehicles 172,000 69,600 102,400
1,597,000 245,600 1,351,400
CURRENT ASSETS
Inventory 91,413
Accounts receivable 186,100
Bank 8,390
285,903
TOTAL ASSETS 1,637,303
EQUITY AND LIABILITIES
EQUITY
Share capital Authorised Issued
Preference shares 200,000 200,000
Ordinary shares 1,000,000 700,000
1,200,000 900,000
Reserves
Share premium 100,000
General reserve 60,000
Retained profits 98,603
258,603
TOTAL EQUITY 1,158,603
NON CURRENT LIABILITIES
10% Loan notes 300,000
CURRENT LIABILITIES
Accounts payable 113,700
Loan note accrued 15,000
Taxation 50,000
178,700
TOTAL EQUITY AND LIABILITIES 1,637,303

The proposed dividend should be shown in the note.