The profit and loss account of a company, is the same as that of a sole trader, but there are additional expenses that are unique to the company and therefore, they should be included in the in this account (e.g.)
- Director’s fees salaries and other expenses
- Audit fees
- Amortization e.g. goodwill
- Debenture interest
Director’s salaries Salaries, fees and other expenses in relation to the directors are expenses as far as company accounts are concerned. This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.
Audit fees All companies are required to prepare the accounts which should be audited and therefore any fees paid in relation to audit and accountancy is an expense.
Debenture interest Loans taken up by companies are called debentures. The interest paid on these loans is charged as an expenses and unpaid amount are shown as current liabilities in the business. The debenture is classified under non-current liability.
Corporation tax Companies pay corporation tax on the profits they earn. This is shown in the accounts because a company is a separate legal entity unlike for sole traders and partnerships whose tax is shown as drawings.
Dividends Shareholders are also entitled to a share of profits made by the company and this is because the shareholders do not make drawings from the company. A company may pay dividends in two stages during the cause of the financial period:
- Interim dividends Is paid part way — the financial period. (e.g.) after the 6 months Final proposed Is paid after the year-end or after the completion to final accounts. If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose interim paid and final proposed.
- Capital reserves Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three types of capital reserves are:
Share Premium A share premium arises when accompanies issues shares at a price that is more than the par value. The share premium may be applied in the following:
- Paying un issued shares.
- Writing off preliminary expenses.
- Write off discounts on shares
Revaluation reserve: Any gain made on revaluation of non current Assets especially for Land and buildings. When company sells its property to realize the gain, the amount is transferred to the profit and loss account.
Capital Redemption Reserve A reserve created after redemption or purchase of Preference shares without issuing new shares. The transfer is made from either the share premium or the profit and loss account.
Revenue reserves This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves. Transfers are made from the Profits to the General reserves to provide for expansion or purchase of non current assets. The General Reserves can also be used to issue bonus Shares.