Company Accounts

Company Accounts

Definition of Company

According to the Companies Code, 1963 (Act 179) (Ghana), a company may be defined as "a body corporate formed and registered under the code, or a body corporate formed and registered under the Companies Ordinance (cap 193) and has not been dissolved before the commencement of the code." This implies that a company is a legal entity created for the purpose of conducting business that remains separate from its owners, known as shareholders. Notably, a company has the characteristic of continuing its existence despite changes in ownership or the death of its owners. Additionally, a company has the capacity to own assets, sue, and be sued in its own name.

The Companies Code

In Ghana, companies function under the regulatory framework established by the Companies Code, 1963 (Act 179).

Characteristics of Companies

1. Limited Liability: The liability of members in a company is limited. For companies limited by shares, the liability of its members extends only to the nominal value of shares held by them. In the case of companies limited by guarantee, members' liability is confined to the fixed amount they guarantee to contribute in the event of liquidation.

2. Perpetual Succession: A company is an artificial person and does not die. The death or insolvency of members does not influence the company's existence except through legal termination.

3. Share: The ownership of a company is structured as shares, which signify a form of property that can be transferred to others under regulations imposed by the company.

4. Separate Legal Entity: A company is legally distinct from its members. It operates independently, capable of entering contracts, owning property, and incurring debt in its own name.

5. Regulation: As an artificial entity with no consciousness, a company is subject to regulation by statutory authorities to ensure adherence to the law.

Promoter

According to the Companies Code, 1963 (Act 179) (Ghana), a promoter is defined as "one who undertakes or takes part in the formation of a company or has been engaged or interested in the formation of a company."

Formation Process of a Company

A company is established through the following procedural steps:
(i) A proposed Regulation of the company, compliant with the code, must be submitted to the Registrar for registration.

(ii) The Registrar may refuse registration based on certain conditions:
(a) Non-compliance with the code.
(b) Unlawfulness of the company's objects or business.
(c) If any of the subscribers are minors or mentally incapable.
(d) If any listed directors are deemed incompetent.

(iii) Upon approval, the Registrar certifies incorporation by providing a certificate under his seal, confirming the limited liability for members.

(iv) The company exists from the date of registration mentioned in the certificate and is capable of exercising all functions of a corporation.

(v) A notice about the registration is published in the Gazette.

(vi) The certificate or related Gazette notice serves as conclusive proof of the company's registration, protecting it from annulment in court.

Advantages and Disadvantages of Companies

Advantages

1. Limited liability protects shareholders from losses beyond their capital investment.

2. Formal separation of business and personal assets aids in business governance.

3. Ownership can be conveniently shared, enhancing capital mobilization compared to partnerships.

4. Shares can be transferred easily.

5. Potential tax benefits compared to other business forms.

Disadvantages

1. Higher initial formation costs, requiring complex documentation.

2. Elevated annual operating costs, necessitating regular filings and audits.

3. Greater legislative responsibilities for directors than in other business structures.

4. Difficulty and expense in returning surplus capital to shareholders.

5. Possible tax disadvantages compared to other structures.

Differences Between Company and Partnership

Company

1. Minimum members: 1; Maximum: Tied to authorized capital.

2. Exists independently of member changes; can sue and be sued.

3. Limited liability confined to shares owned or guaranteed amount.

4. Management rights are vested in a board of directors, who may not be members.

5. Freely transferable shares in public companies.

6. Mandatory audit requirements.

7. Governed by the Companies Code, 1963 (Act 179).

Partnership

1. Minimum partners: 2; Maximum: 20-50.

2. Legal entity affected by partner changes.

3. Unlimited liability of partners.

4. All partners participate in management.

5. New partners require consent of all current partners.

6. No mandatory audits.

7. Governed by the Incorporated Private Partnership Act, 1962 (Act 152).

Differences Between Company and Sole Trader

1. Capital Introduced by Proprietors: Company: Issued share capital; Sole Trader: Capital account.

2. Loans from Third Parties: Company: Debentures; Sole Trader: Loan account.

3. Profits Withdrawn by Proprietors: Company: Dividends; Sole Trader: Drawings.

4. Profits Retained in the Business: Company: Surplus or Reserve; Sole Trader: Capital account.

Issues and Redemption of Shares

Shares represent members' interests in the capital and profits of the company. For example, holding 1,000 shares out of 10,000 issued indicates a one-tenth ownership interest (i.e., $( rac{1,000}{10,000} = rac{1}{10})$).

Types of Shares

1. Preference Shares: Entitled to fixed dividends and repayment first upon liquidation; do not carry voting rights.

2. Ordinary Shares: Also referred to as equity shares, these shareholders receive dividends based on the profits made, which are not fixed and can vary annually. In liquidation, ordinary shareholders are paid after preference shareholders.

Differences between Preference Shares and Ordinary Shares

Par Value of Share

The par value is the fixed amount registered for a share. An example includes 10,000 ordinary shares of GH¢1 each issued at par, indicating the shares were issued at GH¢1 each. If issued above par, it incurs a share premium (e.g., GH¢1.20 each means GH¢0.20 as share premium). A share issued below par incurs a discount (e.g., GH¢0.70 each means GH¢0.30 as a discount).

Shares of No Par Value

A no par value share has no fixed face value at inception, and a value is determined only at the time of issue. In Ghana, shares are issued as "no par value."

Share Capital

1. Authorized Capital: The maximum capital a company can raise, also known as registered or nominal capital.

2. Issued Capital: The portion of authorized capital the public is invited to subscribe.

3. Unissued Capital: The portion of authorized capital not yet offered to the public.

4. Unsubscribed Capital: The part of issued capital that was not taken up.

5. Paid Up Capital: The total amount that the company has received from shareholders, differing from expected capital.

6. Unpaid Capital / Call In Arrears: The amount due from shareholders which has yet to be paid, defined as the difference from expected amounts.

7. Called Up Capital: The portion of issued capital that shareholders have been asked to pay.

8. Subscribed Capital: The actual amount of issued capital taken by the public.

Share Deal Account

When redeeming or purchasing shares, a company must not withdraw from stated capital. Instead, a share deal account must be established, transferring funds from the income surplus account for the purpose of redemption or buy-back. Expenditures on share redemption or purchase are recorded in the share deal account, which should be distinctly shown on the balance sheet.

Stated Capital

Stated capital encompasses:

• Proceeds from share issues for cash,

• Proceeds from shares issued for non-cash considerations,

• Amounts transferred from the income surplus account.
  Stated capital must be listed as a separate line item in the financial statements.

Dividend

Dividends represent the portion of a company's profits distributed to shareholders. Distribution is contingent upon profitability and is recommended by the board of directors. Types include:

• Interim Dividends: Paid prior to year-end, subject to approval at the annual general meeting.

• Final or Proposed Dividend: Recommended by directors to be paid at year-end.

Issue of Shares

A public company typically issues a prospectus, a detailed document to invite the public to acquire shares, assisting potential investors in making informed decisions.

Application and Allotment of Shares

Initially, applicants seeking shares are considered creditors until shares are allotted, at which point they become shareholders. The accounting entries for share applications are as follows:

• Debit Special Bank Account

• Debit Application Account

• Credit Application Account for the amount received on application

• Credit Stated Capital Account for the amount transferred to stated capital.