DR M.

IRUNGU
FACULTY OF BUSINESS & MGT SCIENCES
UNIVERSITY OF NAIROBI
 Chapter 3:
Accounting for Company
•A company is a business owned by a
group people called shareholders
•Shareholders earn a return called
Dividends
•Share capital is thus the capital
raised from shareholders
There are two types of shares:
Preference shares and
 ordinary shares.
Equity section of SFP

Has the following

Preference share capital
Ordinary share capital and
Reserves
Reserves
•These are funds that the business
sets aside for purposes of future
financial obligations.
There are two types of reserves;
•Revenue reserves
•Capital reserves
Revenue Reserves
These reserves can be distributed to
the shareholders.

They include;
•Retained profits/loss (the balance
after appropriation) and
•General reserves
 Capital Reserves
• These reserves are not distributable to the
shareholders.
They include :
•Share premium (amount paid on the issued shares
above their par value);
•Revaluation reserve (amount by which assets
appreciate after valuation is done) and
• Capital redemption reserve fund (amount
transferred from the retained earnings to finance
the redemption of preference shares or
debentures).
 income statement
•The income statement for a company is unique in
the following ways;
•It includes unique expenses such as director’s
remuneration and audit fee.
• Companies are also required to pay tax on the
profits.
• It includes an extra section which shows how
the profits made by the company are distributed
or appropriated.
Statement of financial position

•The Statement of financial

position of a company is unique
only at the equity section
Format Statement of income is as follows:
XYZ LTD
Statement of Income for the period ended 31 December 202X

Revenues:
Sales xx
Less: Return inwards (xx)
Net sales xx
Less: Cost of Sales
Opening inventory xx
Add:Purchases xx
Add: Carriage inwards xx
Less: Return outwards (xx)
Less: closing inventory (xx)
xx
Gross profit xx
Add :Other incomes xx
Discount received xx
Profit on disposal of assets xx
Income from investments xx
Interest received from bank xx
Less: Expenses
Administrative expenses xx
Operating expenses xx
Selling and distribution expenses xx
Debenture interest xx
Audit fees xx
Directors remuneration xx
Total expenses xx
Net profit for the period before tax xx
Net profit for the period before tax
Less: Corporation tax (xx)
Net profit for the period after tax
Add :Retained profit b/d xx
Less: Transfers to General reserves
Less: Interim paid :
Preference dividend (xx)
Ordinary dividend (xx)
Less: Final proposed
Preference dividend (xx)
Ordinary dividend (xx)
Retained profit c/d xx
 XYZ LTD
Statement of Financial Position as at 31 December 202X
Non-current assets COST ACC. DEP NBV
Land and buildings xx (xx) xx
Plant and equipment xx (xx) xx
Furniture and fittings xx (xx) xx
Motor vehicles xx (xx) xx
xx
Current Assets
Inventory xx
Accounts receivable xx
Less: Provision for doubtful debts (xx) xx
Prepayments xx
Short term investments xx
Cash at bank xx
Cash in hand xx
xx
Total Assets Y T E X T xx
Financed by:
Equity:
Authorized share capital
1,000,000 ordinary shares of Sh 1 each xx
1,000,000 preference shares of Sh 1 each xx
Issued and fully paid
800,000 ordinary shares of Sh 1 each xx
500,000 10% preference shares of Sh 1each xx
Capital reserves
Share premium xx
Revaluation reserve xx
Capital redemption reserve xx
xx
Revenue reserves
General reserve xx
Retained profit/loss xx
Total equity xx
Total equity xx
Non-current liabilities:
10% debentures xx
Current Liabilities:
Bank overdraft xx
Creditors xx
Accruals xx
Tax payable xx
Dividends payable xx
xx
Total equity and current liabilities xx
Example 1 Suggested solution
Note 1
Operating cost

b/d 1,878 Prepayments 42

Wages 387 c/d 2,223

2,265 2,265
Ledgers
Prepayments

Operating cost 42
NOTE 1,6 and 7
Accruals

Operating Cost 387

Deb. Interest 270

Audit fees 450

Directors fees 3,000

4,107
Depreciation expense for F &F

15
=  ( 44 ,000  12 ,000 )  4,800
100

15
  (32 ,000 )  4,800
100
Depreciation expense for Machinery

10
=  78 ,000  7,800
100
 Ledgers

Depreciation expense

Provision for Dep: F&F 4,800

Provision for Dep: Machinery 7,800

12,600
Ledgers
Provision for Dep:F&F

b/d 12,000

Depreciation expenses 4,800

16,800
Ledgers
Provision for Dep:Machiney

b/d 8,000

Depreciation expenses 7,800

15,800
 Dividends

6
Ordinary dividends : Final =  50 ,000  3,000
100

10
Preference dividends : Final   10 ,000  500  500
100
Ledgers
Dividend expenses

b/d 2,500

Dividend payable 3,500

6,000
Ledgers

Dividend payable

Dividend expenses 3,500

Note 8
Accounts receivable
b/d 54,680 Sales 180

_____ c/d 54,500

54,680 54,680
Ledgers
Sales
Acc. receivable 180 b/d 259,843

c/d 259,663 ______

259,843 259,843
Ledgers
Purchases
b/d 137,112 Acc. payable 95

_______ c/d 137,017

137,112 137,112
Ledgers
Accounts payable
Purchases 95 b/d 42,530

c/d 42,435 _____

42,530 43,530
Provision for Doubtful debts

5
=  54 ,500  2,725
100
 Ledgers
Bad debts expenses

b/d 370

Provision for doubtful

debts 1,085

1,455
Ledgers

Provision for doubtful debts

b/d 1,640

Bad debts exp. 1,085

2,725
Debenture interest

9 1
=  12 ,000   270
100 4
 Ledgers
Debenture interest expenxes

b/d 810

Accruals 270

1,080
 Ledgers
Audit fees

Accruals 450
 Ledgers
Directors fees

Accruals 3,000
 Toshiba Enterprises
Income Statement
For the period ended 31 December 2023
 Sh.’000
Revenues
Sales 259,663
Less:Return in (112)
Net sales 259,551
Cost of sales
Opening inventory 11,530
Add: Purchases 137,017
Add:Carriage in 106
Less:Return out (144)
Less:Closing inventory (11,890)
136,619
Gross profit 122,932
Gross profit 122,932
continued
Add: Discount
received 950
Less:Expenses
Administration 42,820
Operating 2,223
Discount allowed 550
Carriage out 168
Debenture interest 1,080
Director fees 3,000
Audit fees 450
Depreciation
expenses 12,600
Bad debts 1,455
64,346
Profit before Tax 59,536
 Sh.000

Profit before Tax 59,536

Tax expenses
30 % 17,861

Profit after Tax 41,675

Less:Dividends 6,000

Retained profit for the year 35,675

Add: Retained profit-b/d 4,330

Less: Transfer to General reserves 1,000

Retained profit-c/d 39,005

 Toshiba Enterprises
Statement of changes in equity
For the period ended 31 December 2023
 Statement of changes in equity
Ord. Pref. General Retained Total

capital Shares Reserves Profit

Sh.’000 Sh.’000 Sh.’000 Sh.’000 Sh.’000

B/d 50,000 10,000 6,900 4,330 71,230

PAT 41,675 41,675

Dividends (6,000) (6,000)

Transfers 1,000 (1,000) -

C/d 50,000 10,000 7,900 39,005 106,905

 Toshiba Enterprises
Statement of Financial Position
As at 31 December 2023
ASSETS Sh.’000 Sh.’000 Sh.’000
Non-current assets Cost Acc. Dep NBV
Premises 34,000 - 34,000
Furniture 44,000 16800 27,200
Machinery 78,000 15,800 62,200
123,400
Current assets

Accounts receivable 54,500

Less :Provision for doubtful debts (2,725) 51775
Inventory 11,890
Prepayment 42
63,707
Total assets 187,107
Financed by:
Financed by:
Equity:
Authorized share capital of 10,000,000 ordinary shares of Sh 10 each
Authorized share capital of 1,000,000 preference shares of Sh 100 each
issued and fully paid 6,500,000 ordinary shares@ Sh 10 50,000
issued and fully paid 150,000 10% preference shares of @ Sh 100 10,000

Retained earnings 39,005

General reserves 7,900
106,905
Non-current liabilities:
9% Debenture 12,000
Current liabilities:
Bank 299
Accounts payable 42,435
Dividends 3,500
Tax 17,861
Accruals 4,107
68,202
187,107
Example 2 Suggested Solution
Note (a)
• 10m authorised ordinary shares@10
• 0.5m authorised prefered shares@100
• 6.5m issued & paid ordinary shares@10=65,000
• 0.15m issued & paid prefered shares@100=15,000
Note (b)
Prepayment=240÷6x4=160
Accrued wage-675
Operating Expense=22914-160+576=23,229
Note (c)
Closing inventory=10,970
Note (d)
Depreciation exp –F&F=15%x(38,000-15,000)=3,450
Depreciation exp.–Mac=12%x34,000=4,080
Total depreciation=3,450+4,080=7,530
Note (d)
• Provision for dep.- F&F=15,000+3,450=18,450
• Provision for dep.- Mac=12,000+4,080=16,080
Note (e)
Provision for doubtful debt=10%x55,790=5,579
Additional bad debts=5,579-2,100=3,479
Bad debts Expense=760+3,479=4,239
Note (f)
Accrued deb interest=10%x18,000=1,800÷4=450
Deb interest expenses=1,350+450=1,800
Note (g)
Final Ordinary dividend=0.5x6.5m shares=3,250
Final preferred dividend=10%x15,000 shares=1,500-450=1,050
Final dividend payable=3,250+1,050=4,300
Dividend expense=3,250+4,300=6,750
Note (h)
Revaluation reserves=95m-88.5m=6.5M
 Mwembe Enterprises Ltd
Statement of income for the period ended 31 December 2024

Revenues:

Sales 238,120

Cost of sales

Opening Inventory 11,520

Add: Purchases 140,200

Less: Closing Inventory (10,970)

140,750

Gross profit 97,370

Gross profit 97,370
Add: Discount received 876
Less: Expenses:
Administration expenses 29,128
Operating expenses 23,229
Bad debts expense 4,239
Debenture interest 1,800
Audit fee 500
Directors remuneration 1,000
Depreciation expenses 7,530
67,426
Profit before taxes 30,820
Profit before taxes 30,820

Less:Taxes 30% (9,246)

Profit after taxes 21,574

Less:Dividends (6,750)

Retained profit for the year 14,824

Retained profit b/d 4,269

Retained profit c/d 19,093

 Mwembe Enterprises Ltd
Statement of changes in equity
For the period ended 31 December 2024

General Reserves
Preference Share

Capital Reserves

Reval. Reserves
Ordinary Share

Retained
Reserves
capital

capital

Total

b/d 65,000 15,000 5,400 9,800 164,800 4,269 264,269

PAT 21,574 21,574
REV 6,500 6,500
Div. (6,750) (6,750)
c/d 65,000 15,000 5,400 9,800 171,300 19,093 282,593
 Mwembe Enterprises Ltd
Statement of financial position as at 31
December 2024
Non-current Asset: Cost Acc.Dep REV NBV
Land 160,000 160,000
Building 88,500 6500 95,000
Machinery 34,000 (16,080) 17,920
Furniture 38,000 (18,450) 19,550
292,470
Current assets:
Inventory 10970
Accounts receivable 55,790
Less:provisions (5,579) 50,211
Bank 4,693
Prepayments 160
66,034
Total assets 358,504
Financed by:
Equity:

Authorized share capital of 10,000,000 ordinary shares of Sh 10 each

Authorized share capital of 500,000 preference shares of Sh 100 each

issued and fully paid 6,500,000 ordinary shares@ Sh 10 65,000

issued and fully paid 150,000 10% preference shares of @ Sh 100 15,000

General reserves 5,400

Capital Reserves 9,800
Revaluation Reserves 171,300
Retained profits 19,093
Total equity 285,593
Non-current Liabilities:

10% Debentures 18,000

Current Liabilities:

Accounts payables 38,740

Accruals 2,625
Dividend payable 4,300
Tax payable 9,246
54,911
Total equity and Liabilities 358,504
THANK YOU CLASS