Financial Accounting · Lesson 10

Shares, debentures, reserves, company final accounts and the financial system

JAMBWAECNECO

What the syllabus asks

JAMB: Topic 16 Company accounts (formation, types of shares and debentures, issue of shares, capital and revenue reserves, final accounts for internal use)

WAEC: Company accounts (internal use), purchase of business; Financial system (Nigeria): money and capital markets, institutions

NECO: Company accounts (internal use), purchase of business; Financial system (Nigeria): money and capital markets, institutions

What you will learn

Describe types of companies and features of limited liability.
Distinguish ordinary shares, preference shares and debentures.
Record issues of shares at par and premium, including instalments and oversubscription.
Prepare company income statement, retained earnings and statement of financial position for internal use.
Distinguish capital and revenue reserves; explain rights and bonus issues.
Record purchase of a business; describe the Nigerian financial system.

Key points

A company is a separate legal person with limited liability, registered with CAC under CAMA 2020.
Minimum issued share capital: ₦100 000 private, ₦2 million public.
Ordinary shares: votes, variable dividend; preference: fixed dividend first; debentures: loans with interest.
Shares above nominal value create share premium (capital reserve).
Rights issue raises cash from existing holders; bonus issue capitalises reserves.
Revenue reserves are distributable; capital reserves generally are not.
Directors’ fees, audit fees and debenture interest are expenses; dividends are distributions.
Goodwill on purchase = consideration − fair value of net assets.
Money market: short term (T-bills, CP); capital market: long term (shares, bonds, NGX).
Regulators: CBN, SEC, NAICOM, PenCom, NDIC.

Start here: Nature and types of companies

Sole traders and partners risk their personal property for business debts and struggle to raise large sums. A limited company solves both problems. It is a legal person separate from its owners: it can own property, sue and be sued, and continues to exist when shareholders die or sell their shares (perpetual succession). Shareholders’ liability is limited to any amount unpaid on their shares.

In Nigeria, companies are registered with the Corporate Affairs Commission (CAC) under the Companies and Allied Matters Act (CAMA) 2020. CAMA 2020 introduced the single-member private company, allowing one person to form a company.

Types under CAMA 2020

Private company limited by shares (Ltd): cannot invite the public to buy its shares; restricted transfer of shares. Minimum issued share capital ₦100 000.
Public company limited by shares (Plc): may offer shares to the public and be listed on an exchange such as the Nigerian Exchange (NGX). Minimum issued share capital ₦2 000 000.
Company limited by guarantee: no share capital; members guarantee a sum on winding up. Used by charities, professional bodies and clubs.
Unlimited company: members have unlimited liability (rare).

Formation documents

The memorandum of association (name, registered office, objects or capacity, liability, share capital) and the articles of association (internal rules: meetings, directors’ powers, transfer of shares, dividends) are filed with CAC, which then issues a certificate of incorporation.

Advantages and disadvantages

Advantages: limited liability, continuity, easier to raise large capital, transferable shares (especially for Plcs), professional management. Disadvantages: costly formation and regulation, publication of accounts (Plcs), separation of ownership and control, corporate taxation, and slower decision-making.

Private versus public company

	Private (Ltd)	Public (Plc)
Offer of shares	Not to the public	May offer to the public
Transfer of shares	Restricted by articles	Freely transferable; may be listed
Minimum issued capital	₦100 000	₦2 000 000
Publication of accounts	Filed with CAC; less public scrutiny	Published; listed companies also follow exchange rules
Examples	Family businesses, small manufacturers	Large banks, cement and telecom companies listed on NGX

A private company can re-register as a public company when it needs to raise money from the public, as many growing Nigerian businesses have done before listing.

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Practice questions

1. A company is a separate legal entity, which means it

can own property, sue and be sued in its own name
is owned by the government
has unlimited liability
must have one owner

Show answer

A: can own property, sue and be sued in its own name
The company is distinct from its members.

2. Ordinary shareholders are entitled to

a fixed rate of dividend first
interest before tax
repayment before creditors
the residual profit after preference dividends

Show answer

D: the residual profit after preference dividends
They bear the most risk and take the residue.

3. Preference shareholders usually receive

interest charged as an expense
voting control
a fixed rate of dividend before ordinary shareholders
no dividend

Show answer

C: a fixed rate of dividend before ordinary shareholders
Their dividend is fixed and paid first.

4. Debenture holders are

auditors
creditors (lenders) of the company
owners of the company
directors

Show answer

B: creditors (lenders) of the company
They receive interest whether or not profit is made.

5. 500 000 shares of ₦1 each are issued at ₦1.50. The share premium is:

₦250 000
₦750 000
₦500 000
₦75 000

Show answer

A: ₦250 000
(1.50 − 1.00) × 500 000 = ₦250 000.

Key words

Limited liability: Shareholders can lose only the amount they invested or agreed to pay for their shares.
Private company (Ltd): A company whose shares are not offered to the public.
Public company (Plc): A company that may offer shares to the public and may be listed.
Ordinary shares: Equity shares carrying votes and the residual profits.
Preference shares: Shares with a fixed rate of dividend paid before ordinary dividends.
Cumulative preference shares: Preference shares whose unpaid dividends are carried forward.
Debenture: A written acknowledgement of a long-term loan to a company, usually at fixed interest.
Nominal (par) value: The face value of a share.
Share premium: The excess of issue price over nominal value.
Rights issue: An offer of new shares to existing shareholders in proportion to their holdings.
Bonus issue: Free shares issued to shareholders by capitalising reserves.
Retained earnings: Accumulated profits kept in the company.

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