COMPONENTS OF FINANCIAL STATEMENTS

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.

financial accounting accounting  COMPONENTS OF FINANCIAL STATEMENTS

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 members 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.

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

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 Capital Share Premiu m Account Reserves Profit & Loss A/c Total
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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