WHAT IS AUTHORISED SHARE CAPITAL?

Authorised share capital is also called Nominal share capital

This the total amount of share capital stated in the Memorandum of Association of a limited company. It also states how the share capital is divided into individual shares of a set amount, such as $1 a share.

The authorized share capital represents the maximum amount of capital the company is allowed to raise from the public, through the issue of shares.

There are no upper or lower limits on authorised share capital for private limited companies, but a public limited company must have a certain minimum authorised share capital. ( varies in different countries )

A company can increase its authorised share capital by passing an ordinary resolution at a general meeting. Equally, a company can decrease its authorised share capital by passing an ordinary resolution to cancel some shares – this is called “diminution of capital” or share capital reduction.

WHAT IS ISSUED CAPITAL, SUBSCRIBED, CALLED-UP, UNCALLED-UP & PAID-UP CAPITAL?

Called-up capital comprises that part of issued capital where the company has called up for the subscribers to pay up the money and

Uncalled-up capital comprise that part of issued capital which has not yet been called up.

Paid-up Capital is the amount of called-up capital that has been paid up by the shareholders. When a shareholder fails to pay the sum due when a call is made, the amount outstanding is called “Calls in Arrear”

SO WHAT IS THE DIFFERENCE BETWEEN AUTHORISED AND ISSUED SHARE CAPITAL?

ILLUSTRATION

1,500,000 shares at 90 cents per share $1,350,000

Uncalled-up capital:

1,500,000 shares at 10 cents per share $150,000

WHAT ARE RESERVES?

Reserves are appropriations of profit namely when profits have been ascertained after deducting all expenses which includes provision and others. Reserves are residual earnings after all expenses and taxation which belongs to the owners namely the shareholders.

There are essentially two(2) types of Reserves:

• Capital Reserves

• Revenue Reserves

WHAT ARE CAPITAL RESERVES?

Capital Reserves:

• Are appropriation from profits ( refer above) which cannot be distributed by way of cash dividends.

• These capital reserves arises mainly from (i) equity transactions between the enterprise and its shareholders; (ii) from adjustments arising in accounting for business combinations; (iii) from differences arising on translation of foreign currency operations; (iv) from surpluses arising from asset revaluation; (iv) any unrealized gain which has not been included in income.

• Examples of capital reserves includes: share premium, capital redemption reserves, capital reserves arising on merger and acquisition, statutory reserves, asset revaluation reserve and exchange fluctuation reserves.

WHAT ARE REVENUE RESERVES?

Revenue Reserves are:

• Are appropriation from profit ( refer above) which can be distributed by way of cash dividends although some may be set aside for other purposes.

• Examples like retained profits and general reserves.

SUMMARY: TO RECAP FOR OWNERS’ EQUITY SIDE OF THE BALANCE SHEET

Balance Sheet And Its Owners’ Equity Side consists of :

Paid In Capital + Capital Reserves + Revenue Reserves

WHAT IS A BALANCE SHEET?

A Balance Sheet is a snapshot of the financial position of an entity.

This snapshot is at a point of time.

Say, as at 7 May 2006, you look at Company A’s balance sheet, it reflects the financial position as at that day. After that day, the financial position company A can change to a better or worse situation.

Also, remember that in the Balance Sheet, we have the three (3) key components:

Assets= Liabilities + OWNERS’ EQUITY

( Refer to my illustration for the Dual Aspect Concept)

DEFINE OWNERS’ EQUITY:

Looking at the equation:

Assets= Liabilities + Owners’ Equity

However, if we change it to :

Owners’ Equity= Assets-Liabilities

(Assets=what the entity owns & Liabilities=what the entity owes)

In this case, we can see that the owners’ equity is the residual after total assets minus the liabilities relating to the acquiring the assets. Owners’ equity is the paid-up capital plus free reserves and retained earnings or undistributed profits

Here, we can understand that Owners’ equity can also be called the NET WORTH of the business namely whatever belonging to the owners of the business.

WHAT ARE THE MAJOR COMPONENTS OF THE OWNERS’ EQUITY?

Comprises:

1. Paid Up Capital

2. Capital Reserves or Non-Distributable Reserves

3. General Reserves or Distributable Reserves

WHAT ARE LONG TERM LIABILITES?

Long Term Liabilities:

• Is opposite of current liabilities which are more than 12 months from the date of the balance sheet.

Examples are:

• Long term debts /fixed term loan

Remember that we need to classify the total debts into two(2) parts:

• Current portion of long-term debts( amount owing within 12 months of balance sheet date and

• Non-current portion namely More than 12 months of balance sheet date

• Also, the current portion of the long term debts is to be classify as Current Liabilities whilst the non-current portion is in the Long Term Liabilities

SUMMARY: TO RECAP FOR LIABILITIES SIDE OF THE BALANCE SHEET

Balance Sheet And Its Liabilities Side (Total Liabilities) consists of :

Current Liabilities +Long Term Liabilities

WHAT ARE CURRENT LIABILITIES?

Current liabilities are obligations/liabilities:

• that is expected to be settled in the normal course of the enterprise’s operating cycle ; or

• Is due to be settled within twelve months of the balance sheet date

Current Liabilities

Description

Accounts payable

Claims of suppliers arising from their providing goods or services to the entity for which they have not been paid

Accrued expenses

Amounts earned by outside parties but have not been paid by the entity

Deferred revenues

Liabilities that arise because the entity receives advanced payments for services it has agreed to render in the future

Taxes Payable

Amount owed to government agencies

Other Creditors

Amounting owing by the entity to non-Accounts payables like staff and others

Short term loan

Debts that are payable within 12 months of the balance sheet date

WHAT IS A BALANCE SHEET? (reiterated from earlier article)

A Balance Sheet is a snapshot of the financial position of an entity.

This snapshot is at a point of time.

Say, as at 7 May 2006, you look at Company A’s balance sheet, it reflects the financial position as at that day. After that day, the financial position company can change to a better or worse situation.

Also, remember that in the Balance Sheet, we have the three (3) key components:

Assets= LIABILITIES + Owners Equity

( Refer to my illustration for the Dual Aspect Concept)

DEFINE WHAT ARE THE CHARACTERISTIC OF LIABILITIES?

Future transfer or use of assets

the entity has no discretion to avoid it

Transaction already happened

WHAT ARE THE MAJOR COMPONENTS OF THE TOTAL LIABILITIES?

Comprises:

1.Current Liabilities and

2.Long Term Liabilities

WHAT ARE FIXED ASSETS?

Fixed Assets are unlike current assets:

• Which are NOT expected to be realised or held for trading or sale

• The costs of the fixed assets are allocated over the period of the useful lives to generate the income associate with it. This follows closely to the matching concept.

• Examples of Fixed Assets are:

• Property

• Plant & machinery

• Motor Vehicles

• Furniture & Fixtures

• Air-conditioners

• Office Rennovations

WHAT ARE LONG TERM INVESTMENTS?

Long Term investments are:

• investments a company intends to hold for more than one year. Consist of stocks and bonds of other companies, real estate, and cash that has been set aside for a specific purpose or project.

• also consist of the stock in a company’s affiliates and subsidiaries.

The difference between Short Term and Long Term investments lie in the company’s motive for owning them.

Short term investments consist of stocks, bonds, etc. a company has bought and will sell shortly. The investments made under long term investments may never be sold

WHAT ARE INTANGIBLE ASSETS?

Intangible assets:

have no physical existence and a long life. They include patents, copyrights, trademarks, etc.

SUMMARY: TO RECAP FOR ASSET SIDE OF THE BALANCE SHEET

Balance Sheet And Its Assets Side (Total Assets) consists of :

Current Assets+ Fixed Assets +Long Term Investments + Intangible Assets

WHAT ARE CURRENT ASSETS?

Current assets are assets:

• that are expected to be realised in, or is held for sale or consumption in, the normal course of the enterprise’s operating cycle ; or

• is held primarily for trading purposes or for the short term and expected to be realised with twelve months of the balance sheet date ; or

• Is cash or a cash equivalent asset which is not restricted in its use

Current Assets

Description

Cash

Funds that are readily available for distribution.

Marketable Securities

Investments that are both readily marketable and expected to be converted into cash within one year

Inventories

Consists of raw materials, work-in-progress and finished goods. Aggregate of items either held for sale in the ordinary course of the business, in process of production for such sale, or soon to be consumed in production

Accounts Receivable

Amounts owed to the entity by its customers

Prepaid expenses

Assets paid in advance whose usefulness will expire in the near future

Deposits

Deposits are assets which are monies paid to landlord, government authorities and others. These monies are paid in advance but are recoverable in the near future.

Other Debtors

Amount owing by the entity’s non customers like staff advances, etc

WHAT IS A BALANCE SHEET?

A Balance Sheet is a snapshot of the financial position of an entity.

This snapshot is at a point of time.

Say, as at 7 May 2006, you look at Company’s balance sheet, it reflects the financial position as at that day. After that day, the financial position company A can change to a better or worse situation.

Also, remember that in the Balance Sheet, we have the three (3) key components:

ASSETS= Liabilities + Owners’ Equity

( Refer to my illustration for the Dual Aspect Concept)

DEFINE WHAT ARE THE CHARACTERISTIC OF ASSETS?

resource controlled by the entity as a result of past events

and

from which future economic benefits are expected to flow to the entity

WHAT ARE THE MAJOR COMPONENTS OF THE TOTAL ASSETS?

Comprises:

1. Current Assets

2. Property, plant and equipment

3. Investments

4. Intangible Assets