Ch3: Company accounts Flashcards
(37 cards)
What’s a ‘reserve’ on a company’s account?
The capital of the company in excess of the called up value of the issued share capital.
Examples of capital reserves:
Share premium account, revaluation reserve, capital redemption reserve.
These cannot be distributed by way of dividend or other payment to shareholders
What are revenue reserves?
Retained earnings
They can be distributed to shareholders in the form of dividends.
What is a share premium account?
A capital reserve - cannot be distributed to shareholders, except in exceptional circumstances like a bond issue or on a buyback of shares.
Even if the market price goes up, the share premium account will remain unaltered.
What is a capital redemption reserve?
Can only be created as a consequence of a transaction between the company and its shareholders, such as, a buyback of shares out of a company’s capital.
What do you have to do with revaluation reserve?
The increase in the value of the asset in the Balance Sheet causes the figure for Net Assets to rise corresponding
It is therefore necessary to make a corresponding change to the bottom half of the Balance Sheet.
This is achieved by creating or increasing an existing revaluation reserve by the same value.
What does the retained earnings represent?
Profits after tax earned by the company over its history and not distributed by way of dividend or appropriated to another reserve.
It generally increases from year to year as most companies do not distribute all of their profits.
What happens to dividends in a Statement of Changes in Equity?
Dividends do not belong on a Profit and Loss account.
When a company declares a dividend, this will show up in the SoCiE.
What is a proposed dividend?
When the directors have recommended a final dividend, but the shareholders have not yet approved it.
It does not appear in the accounts of that accounting period.
What is the procedure for final dividend?
The size of the final dividend is declared by the company’s directors in the Directors’ Report, and approved by the company’s shareholders by ordinary resolution, typically passed at the Annual General Meeting.
What is a declared dividend?
Final dividend that has been approved by the shareholders.
It is a debt of the company enforceable by the relevant shareholders.
How and where do you account for declared dividend?
It will be taken into account in the SoCiE as a deduction in calculating the Retained Earnings (profit and loss carried forward) which will appear in the bottom half of the Balance Sheet
Name the various features of an interim dividend.
- Can be paid without the need for an ordinary resolution
- An unpaid interim dividend is not a debt that the shareholders are legally entitled to sue upon.
- Interim dividends will only be reflected in a company’s accounts if they have actually been paid.
What do you do with an interim dividend on the SoCiE
When an interim dividend has been paid in any year the amount of the dividend will have been deducted from the assets, i.e. cash and cash equivalents, and will be shown as an item on the trial balance.
A dividend is an allocation of profit and not an expense of the company so it will not be shown in the Profit and Loss Account.
What’s the legal treatment for final dividend (proposed)?
Not a legal debt, cannot be enforced by shareholders.
What’s the legal treatment for Final Dividend – Declared but not paid?
Legal debt enforceable by shareholders.
What’s the legal treatment for Final Dividend – Declared and paid?
Legal debt enforceable by shareholders.
What’s the legal treatment for Interim Dividend – declared and paid
The interim dividend becomes a legal debt once it has been paid to the shareholders.
What’s the accounting treatment for interim dividend?
The assets of the company will have been reduced by the amount of the dividend and the dividend will feature as an item in the trial balance. The dividend will be taken into account in the SoCiE at the end of the accounting period in which it is paid and will impact on the Retained Earnings (profit and loss carried forward) in the Balance Sheet.
What’s the accounting treatment for final dividend - declared and paid?
The assets of the company will have been reduced by the amount of the dividend and the dividend will feature as an item in the trial balance. The dividend will be taken into account in the SoCiE at the end of the accounting period in which it is declared and will impact on the Retained Earnings (profit and loss carried forward) in the Balance Sheet.
What’s the accounting treatment for final dividend - declared but not paid?
Dividend will be taken into account in the SoCiE at the end of the accounting period in which it is declared. In the unlikely event that the dividend has been declared but not paid as at the date of the Balance Sheet, it will also appear in the Balance Sheet as part of ‘Current liabilities’.
What’s the accounting treatment for final dividend - proposed?
Dividend does not appear in the company accounts.
What happens if part of the dividend has already been paid to preference shareholders as an interim dividend in any year?
That part will not appear on the top half of the company’s Balance Sheet for the relevant year. However, it will appear as a deduction in the SoCiE to calculate the Retained Earnings in the bottom half of the Balance Sheet.
What happens to the remainder of the preference dividend if part of it has already been paid to preference shareholders as an interim dividend?
The remainder of the preference dividend is declared by the shareholders, and though paid after the year end, will appear in the SoCiE to calculate retained earnings and be shown as a Current liability in the top half of the Balance Sheet.
