Corp Acc-2 - Chap1-5-Material Updated-Sep2013

MINISTRY OF MANPOWER
SALALAH COLLEGE OF TECHNOLOGY
BAAC 3205- CORPORATE ACCOUNTING-2
Academic Year
2013 - 2014
Semester I
Business Studies Department 1

Salalah College of Technology
TABLE OF CONTENTS
Chapter TITLE OF THE CHAPTER Page No.

No.
1 Meaning of Corporations & Terminology &differences 3

between partnership and corporations.
Advantages & disadvantages of corporations & formation of
the corporations and statutory requirements.
2 Accounting treatment and practices of corporation formation, 16

share subscription, non-cash subscription .
3 Accounting treatment of treasury stock. 38
4 Preparation of Comprehensive Income statement &Balance 41

Sheet (Partial)
5 Tax Implications, divisible profits and reserves 51

Chapter: 1
 Meaning of Corporations & Terminology
 Differences between partnership and corporations.
 Advantages & disadvantages of corporations
 Formation of the corporations and statutory requirements.

DEPARTMENT OF BUSINESS STUDIES
BAAC 3205 Corporate Accounting- 2

Chapter-1
1. What is a Company / Corporation ?
A company is defined as a voluntary association of persons, who contribute money or

money’s worth to a common stock and use it for a common purpose.
A company is a voluntary and autonomous association of certain persons with capital divided
into numerous transferable shares formed to carry out a particular purpose in common. It is
an artificial person created by law to achieve the object for which it is formed.
A company is a legal entity quite distinct and separate from the persons who are its members.
Death, insanity or insolvency of a member or any member will not affect the existence of the
company. The ownership is divorced from management because a joint stock company is
managed by a board of directors elected by the shareholders (that is owners).
A Company can hold, purchase or sell both movable and immovable property, incur and pay
debts, open a bank account in its name and sue and be sued in the same manner as an
individual.
2. Features of a Company / Corporation:
1. Incorporation: A company is an incorporated association. It comes into existence only

after registration under the Companies Act.
2. Artificial person: A company is regarded as an artificial person as it is created by law

and can be effaced only by law. It has no body, no soul, no conscience, still it is in a position
to exist. Like any other person it can own property, conduct a lawful business enter into
contracts with others, buy, .sell and hold property, all under its own name and its own seal.
3. Separate legal entity- the company is an artificial person. The legal entity that the
company is recognized to be has many of the rights of a natural person.
The following are the rights of a company.
a. can purchase property.
b. can sell property.
c. can hold property.
d. can open bank account in its name.
e. can make contract under its name.
f. it is independent from its members.
g. its existence is not affected by coming in & going out of its members/ owners
h. can sue others.
i. others can sue it.

4. Common seal-a company not being a natural person cannot sign documents for itself.
The common seal with the name of the company therefore used as a substitute for its
signature.
5. Perpetual Succession-
It means that the company has a continuous existence which is not affected by death,
insolvency or retirement (transfer of share) of any shareholder. Most of the companies are
Limited Liability Companies; therefore liability of its members is limited to the extent of
value of shares purchased. It has perpetual succession because of its status of separate legal
entity.
6. Limited liabilities: The liability of the members of a company is normally limited by

guarantee or by the shares. Member’s liability is limited to the amount of shares held.
Members are not personally liable for the debts of the company. So, personal properties of
the members are not liable to be attached for the payment of the company's debts. For
example, the face value of the share of a company is RO. 10 which the member has already
paid. At the time of winding up of the company, the member cannot be asked to pay any
money. But if the member had paid only RO.7, he can at the most be asked to pay the
balance ofR0. 3 (face value RO.10 minus money paid RO. 7), and no more.
7.Separation of ownership and management: The shareholders of a company are widely

scattered throughout the country. For the conduct of the business and its Management,
shareholders elect another set of persons known as directors. The right to manage the
company affairs is vested in the directors who are elected representatives of the shareholders.
Thus, ownership is separated from management.
8.Rigidity of objects: The scope of the business of a company is limited. The type of
business in which the company would participate is mentioned in the 'object clause' of its
Memorandum of Association. The company cannot take up any new business without
changing the object clause. To change the object clause, the company has to comply with the
provisions of the Companies Act.
9. Statutory regulations: A company is governed by the Companies Act and it has to follow
various provisions of the Act. It has to submit a number of returns to the Government.
Accounts of a company must be audited by a Chartered Accountant. Thus, the company form
of organization has to comply with numerous and varied statutory requirements.
3. Sources of Finance:
The company raises its finance through internal and external sources.
Internal sources includes:
a. Share capital.
b. Undistributed profits of the companies.
External sources includes:
a. Issue of Debentures.
b. Accepting deposits from the public.
c. Loans from commercial banks.
d. Loans from financial institutions

A limited company is a company the members of which have limited liability. It means their
liabilities limited to the capital they have invested in it. A limited company may be a joint
stock company or Limited Liability Company. It has a separate legal existence, owned by its
members’ and run by its elected directors.
A company is an improved form of business organization over Partnership on many counts.

A company can raise larger amount of finance from large number of its members. In a
company type of organization, capital is divided in to certain number of units. Each unit of
capital is called share.
It is necessary that the joint stock company must consist of, at least, three natural (Natural
person means an individual; a juristic person is one created by Law such as a company.) or
Juristic persons. A joint stock company is established and administered as per the provisions
of Articles 56 to 130 of the Commercial company Law (No.4/1974).
Distinction between Limited Liability Company& Partnership
Limited Liability Company Partnership
1. Act : A Company is governed by Is governed by Partnership Act.

Companies Act.
2.Entity: A Company is separate legal Partnership has no separate legal

entity not affected by changes in entity and any changes in partners
membership. (insolvency, unsound mind) breaks
the partnership.
3. Number: Minimum no. in public co. is 7 For Partnership maximum no. is 10
and private co. is 2 for Banking business and 20 for
(Omani law to be referred) other business.
No maximum no. for public co.
In private co. max. no. should not
exceed 50.
4. Liability: Liability of members is limited in Liability of partners is unlimited—

case of L.L.C their private property will also be
used for the purpose of partnership
debts.
5. Capital: The maximum capital is fixed at The capital of partnership depends
the time of formation in the on financial status of members.
related documents
a. collected from large
investors
b. denomination / share
price is fixed at
convenient to people to
subscribe
c. variety of shares are
issued
d. shares are easily bought
and sold at Stock markets
6. Profits: Profits of the company are Profits of partnership are distributed

distributed in the form of among members as per the
dividends or bonus shares. agreement/ equally if no agreement.
Dividends cannot be merged into Partnership profits can be merged

capital, but can be capitalized by into capital of partnership
issue of Bonus shares.
7.Management: Management of a co. is entrusted All the partners are entitled to take
to Board of directors who are part in the management of business
elected by members. and inspect books of accounts.
Members cannot inspect books of

accounts and they cannot
participate in management.
They are entitled for copies of
audited Final accounts.
8. Audit: Is done compulsorily by Audit of partnership accounts is not

Chartered Accountants. compulsory.
9.Winding up: Is done as per the legal Partnership can be wound up at any
formalities. time with out legal formalities.
10. Books of Are to be kept as per the legal No legal requirements for keeping
Accounts: requirements. books of accounts.
11.Registration: Is compulsory for Company. A Partnership may or may not be

registered.
12. Transfer of Transfer of shares is limited A partner cannot transfer his
Interest: among members only in private interest/ capital to other person until
companies. all other partners agree.
In pubic cos. shares are freely

transferable from one person to
another.
13. Tax: Company pays the tax. Firms pay tax if it is unregistered
while partners pay tax if it is
registered.

Advantages & disadvantages of a Corporation
1. Advantages & disadvantages of a Corporation
The world’s largest companies are formed as corporations. Microsoft, Google and Yahoo are
all corporations. These companies are worth billions of dollars and they are what you will
always see and hear on a business or stock trading news. Unlike a sole proprietorship or a
partnership, a corporation is a business that is recognized by law as a separate legal entity
with its own powers, responsibilities, and obligations. The defining feature of a corporation is
its legal independence from the people who create it. If a corporation becomes insolvent, its
owners and shareholders will not be liable beyond their equity investments in the corporation
– creditors cannot go after the stockholders’ personal assets to exhaust their debts. This
attribute is called limited liability. A corporation sounds very promising, but before sole
proprietors and partners decide to incorporate their businesses, we should first study the
following advantages and disadvantages of a corporation.
Advantages
1. Limited liability for the owners. Since a corporation is a separate and distinct legal
entity, owners of a corporation are only indebted to the extent of their interest in the
corporation. This means that the creditors of a corporation can only run after the assets of the
corporation and not the personal assets of the stockholders in the settlement of the
corporation’s debts and obligations. In other words stockholders enjoy a “shield” from most
creditors.
2. Ease on the sell and transfer. If the stock of a corporation is publicly traded, owners and
investors can sell their ownership interest in a corporation in a matter of minutes through a
stockbroker. If the stock is not publicly traded, the stock certificate can be transferred or
assigned to another owner by executing a deed of assignment of shares of stock.
3. Continuity. The corporation’s power of succession enables it to enjoy a continuous

existence. Unlike a sole proprietorship, the death of a stockholder will not terminate the
corporation. The corporation will continue as a separate and distinct legal entity and the
shares of its interest can be transferred from one owner to another owner.
4. Ease in raising money. Because of limited liability, ease of transfer of shares and
continuity, investors are more attracted to investing in corporations rather than in sole
proprietorships and partnerships. This attraction allows corporations to raise the capital
needed to manage and expand their operations.
5.Economies of scale: As companies operate on a large scale, they can take advantage of
large scale buying, selling, production, etc. As a result of these economies of large scale
operations, companies can provide goods to consumers at a cheaper price.

6. Scope for expansion: As there is no limit to the maximum number of shareholders in a
public limited company, expansion of business is easy by issuing new shares and dentures.
Companies normally keep part of their profits as reserve and use them expansion.
7. Public confidence: Companies are subject to Government controls and regulations 1 heir
accounts are audited by a chartered accountant and are to he-published This Creates
confidence in the public about the functioning of the company.
8. Transferability of shares: The shares of the public limited company can be sold at any
Time in the stock exchange. Shareholders can sell their shares whenever they want There is
no need to take the consent of other shareholders. Thus, shareholders can Convert their
shares into cash at any time without much difficulty.
9. Professional management: You know that the management of a company is in the Hands
of the directors who are elected by shareholders. Normally, experienced persons are elected
as directors. You also know that day-to-day activities are managed by salaried managers.
These managers are the experts in their respective fields’ As Companies have large scale
operations and profits; attracting good professional Managers are easy by paying attractive
salaries. Thus, company form of organization gets the services of professionals on the Board
of Directors and in various management Positions.
10 Risk diffused: As the membership is very large, the business risk is divided among the
several members of the company. This is an advantage for small investors.
Disadvantages
1. Complexity in organization and regulation. To incorporate a business, an application

with the Securities and Exchange Commission must be filed and approved. A higher capital
requirement is also sometimes required for other type of corporations. Once approved, the
corporation must comply with the numbers of regulations and reportorial requirements which
are specifically implemented for corporations.
2. Double taxation. A possibility of “double taxation may arise on the dividends it pays. The
corporation is taxed on its income. Then, if the corporation distributes some of the net
income to the stockholders as a dividend, the dividend will be taxed again on the
stockholders’ personal income tax returns.
3. Limited liability may weaken credit capacity. A corporation which doesn’t have a good
financial condition and performance may drive away creditors specially that owners are
enjoying limited liabilities. This may weaken the corporation’s capacity to borrow money to
expand its operations.
4. Centralized management. Its centralized management restricts a more active

participation by stockholders who are not major owners in the conduct of corporate affairs.
By analyzing these advantages and disadvantages of corporation, you can examine if your
business condition, performance, liquidity and solvency are already enough for your business
to face the corporate world.
5. Lack of secrecy: The management of companies is usually in the hands of many
persons. Everything is discussed in the meetings of Board of Directors. Therefore
compared to sole trader and partnership concerns, maintaining business secrets is relatively
difficult in a company form of organization.
6. Delay in decision making: In company form of organization all important decisions are
taken by either the Board of Directors or shareholders in their meetings Hence decision
making process is time consuming. If a quick decision is needed it will be difficult to
arrange meetings all of a sudden. So, some business opportunities may be lost because of
delay in decision making.
7. Neglect of minority interest: The representatives of the majority group of shareholders

become the members in the Board of Directors. The shareholders who are in minority never
get representation on the Board of Directors. As a consequence, the interests of the minority
members may be neglected and oppressed at the hands of the majority group.
8. Lack of personal interest: In sole proprietorship and partnership firms business is

managed by owners themselves. In company form of organization, day-to-day Management
is vested with the salaried executives who do not have any personal Interest in the company.
This may lead to reduced employee motivation and result in Inefficiency.
9. More government restrictions: The Company is subject to many restrictions from which
the proprietorships and partnerships are exempted. So, it has to spend Considerable time and
effort in complying with the various legal, requirements.
10. Fraudulent management: There is a possibility that some unscrupulous promoters may
float a bogus company, issue shares and collect money. Later on, they can get away with the
money by putting the company in liquidation. It is also possible that the Directors and
professional managers may misuse the company resources for their @
Personal benefit and bring losses to the company.
'
Formation of a Corporation
1. Different types of organizations & Formation of a Company in Sultanate

of Oman
There are several types of business organizations recognized by the Commercial
Companies Law:
1.General Partnership: is formed by two or more natural or legal persons who become
jointly and severally liable for the partnership’s debts. A partnership interest may be
transferred only with the approval of all the partners unless otherwise provided in the
Partnership agreement.
All the partners are considered as Managers, however the partnership may be
managed by one or more natural persons, such persons may not be partners if the
Partnership deed so provides.
2.A Limited Partnership: A limited partnership is one in which the liability of one or more
partners is limited to the extent of their contribution to the capital and other partners’ liability
is unlimited.
3.A Joint Stock Company: Certain businesses like insurance, commercial air transport or
banking should be in the form of joint stock company (SAO). Such a company can be
formed by 3 or more natural or legal persons- it requires approval of Directorate General of
Commerce.
SAO Company may be:
a. SAOG (‘General’) -- in which shares are issued to public for subscription A general
Omani Joint Stock Company is one which offers its shares for public subscription. Examples:
Oman Arab Bank S.A.O.G., Oman International Bank S.A.O.G etc.
or
b. SAOC (Closed) -- in which share are not issued to public for subscription. A limited
Omani joint stock company is one which restricts its membership to a very close circle of its
relatives and friends. Examples: National Life Insurance Company S.A.O.C., Global
Insurance Broker Co. S.A.O.C etc.
The name of a joint stock company must be followed by either “Limited Omani Joint Stock
Company” (SAOC [Abbreviation is of French origin Societe Anonyme Omani Closed] or
“General Omani Joint Stock Company [SAOG Societe Anonyme Oman General].
An application for formation of a joint stock company must be signed by at least three
founders and submitted along with the Articles of incorporation and other documents as
required by the Ministry of Commerce & Industry.
• Shareholders – there is a minimum requirement of three shareholders.
• Minimum capital requirements –
SAOC (Closed ) must have a minimum share capital of at least RO500,000.

SAOG (‘General’) must have a minimum share capital requirement of RO2 million 50% of
the share capital must be paid up on subscription, with the remainder being payable
within the subsequent three years.
• Management structure – management of a JSC is by a board of directors and must consist

of at least three members for a closed joint stock company and five members for a general
joint stock company. Any person who holds at least 10% of the JSC’s share capital
may appoint a director to the board.
Licensing and registration

• The key government authority for the incorporation and registration of a company is the
Ministry of Commerce and Industry (MOCI), which includes the grant of a trade
licence.
All companies must also be registered with the Omani Chamber of Commerce and Industry
(OCCI).
The OCCI registration is renewable annually, whilst the
MOCI registration is renewable every five years.
Other establishment issues

• A bank certificate showing the deposit of the company’s capital in an Omani bank account
is required as part of the incorporation process.
• It should be noted that Oman has established free zones in which wholly foreign owned
entities are permitted. The freezones are Al Mazunah, Knowledge Oasis Muscat
and Salalah Free Trade Zone.
4. Limited Liability Company (LLC):
A Limited Liability Co. (LLC) is usually chosen by foreign investors. Examples: Poly
Products L.L.C., Bahwan Engineering Co. L.L.C. etc.
• Shareholders – there is a minimum of two shareholders required for a LLC and a

maximum of 40 shareholders.
• Minimum capital requirements – the minimum capital requirement for a LLC is RO20,000,
although where a LLC has a foreign investor the minimum capital requirement is RO150,000
All shares must be fully paid up on subscription.
• No public offer – LLC cannot offer its shares to the public.
• Management structure – LLC is managed by one or more managers who do not need to be
shareholders in the LLC.
• Minority shareholder protections – the Omani shareholder in a LLC may waive the rights
attaching to its shares (including the right to dividends and to vote) in return for a
commission, structured either as a lump sum per annum, or a percentage of turnover or net
profit, or as otherwise determined between the parties.
• Timeframe to establish – approximately two weeks for a wholly Omani owned LLC but up
to two months for a LLC with foreign shareholder
5. Holding Company:

The Holding Company is a Joint-stock Company or a Limited Liability Company which
financially and administratively controls one or more other Companies which become
subsidiary to such Company by means of its holding at least 51% of such Company or
Companies whether they are Joint-stock Companies or a Limited Liability Companies. The
term “Holding” shall be added to the title of such Company in all its papers,
advertisements and other documents issued thereby.
The Capital of a Holding Company shall not be less than Two Million Omani Rials
2.Comparison between LLC and SAO companies:
In Oman we have a major distinction between companies with a capital of more than
RO 500,000 and those with a capital less than that value. Companies with a capital worth
more than RO 500,000 are called Joint Stock Companies, while companies with a
smaller capital are called Limited Liability Companies, even though both forms offer
limited liability to its shareholders.
The Omani Commercial Companies Law deals with each of these forms on its own.
The basic definition of a joint stock company is the same as that of an LLC, A distinction
between this one and LLC is that the latter cannot have more than 40 members. The
minimum number of members is 3 to a joint stock company and 2 to a limited liability
company. The liability of members of both forms is limited to the payment of the value of
the shares subscribed. The government can solely or jointly establish a company, and if does
so, it is exempt from provisions regarding number of shareholders.
The company(SAOG)will be required to have a minimum of two million Omani Rials to be

able to offer its shares to the public.
Promoters of a public company must own 30% to 60% of the shares and issue the rest to
the public. A single promoter cannot own more than 20% of the shares, except at certain
exceptions mentioned in the law, but the total amount owned by the promoters shall not
exceed 60%.
The management of a joint stock company is vested in the Board of directors, comprising of
three to twelve members. Joint stock companies are bound by all acts of their directors
acting within the scope of their registered powers within the legal restrictions. The directors
are liable to the company, the shareholders and third parties for any fraud, negligence or
illegality in their acts as well as for failure to act as prudent persons in the relevant
circumstances.
Dissolution may take place where the term of the company expires, the company
accomplishes its objects, all interests are transferred to one person, bankruptcy, loss of all
or most of the capital and the creation of a members contract to dissolve the company.

3.General Procedures for setting up Joint-Stock Companies in Oman
a) General Legal Requirements:

 The capital of the public joint-stock company should not be less than RO 500,000
(five hundred thousand) Omani Rials and the capital in the case of limited joint-stock
company, whose shares will not be floated for public subscription, should not be less
than RO 150,000 (One hundred and fifty thousand) Omani Rials.
 The number of partners should not be less than 3 persons and rate of their shares in
the capital of the public joint stock company should not be less than 20% of the
capital.
 The shares offered for public subscription should not be less than 40% of the capital.
b) Documents to be submitted:
1. A letter to the Director General of Commerce for permission to set up a joint stock
company.
This letter should include brief details of the type of the company, its equity capital,
activities and names of the founders and signed by three founders.
2. Original and two copies of the Memorandum of Incorporation and the Articles of
Association of the company signed by all founders.
3. A form showing non-presence of same name and the approval of the committee on it.
4. Photocopies of the passport of the natural founders.
5. Resolution of the partners’ assembly in case of general partnership and limited

partnership companies and the Board Resolution in case of Joint Stock companies, while
mentioning the number of shares subscribed to the name of the authorized signatory
on the memorandum and articles of association, if one of the founders was a juristic
person.
6. Also copies of the computer printout and valid CR certificate of these companies.
Copies of the approvals of other ministries, if the nature of the company’s activity
necessitates approvals from other Ministries of Information, Education, Health, and
Board of Muscat Securities market, etc.
7.Memorandum of Incorporation and Articles of Association, copy of the CR, signing

authorization attested by Oman Chamber of Commerce and Industry, Oman’s embassy or
embassy of any Arab country which is an Arab league member, situated in the country of
the foreign founder’s head office, if he was a juristic person.
www.Chamberoman.com

Chapter: 2
 Accounting treatment and practices of corporation formation, share

subscription, non-cash subscription .

Chapter 2
Documents, Different types of shares & Capital & Journal entries:
1.Shares: The Share capital of a company is divided into units of small denominations. One
of the units into which the capital of the company is divided is called a ‘Share’.
‘Share’ has been defined as ‘share in the share capital of the company’.
Shares are numbered so that they can be identified.
They are considered as movable property and transferable according to the procedure
mentioned.
Difference between Shares and Bonds
The limited company raises its capital by issue of shares and/or bonds. A share is different
from a bond. A shareholder is the owner of the company where a bondholder is the creditor
of the company. If the company is in profits, the shareholder may get a dividend i.e. a share
in the profits of the company, if the management of the company decides so. Where as the
bondholder is entitled to a fixed rate of interest from the company, irrespective of its profits
or losses.
Bonds issued by the company constitute liability and hence they are shown as liability in the
Balance Sheet.
2.Classes of Shares: Companies usually issue three classes of shares.

They are :
i. Equity shares
ii. Preference shares
iii. Deferred shares
i. Equity Shares: An Equity share is one which is not a Preference share. They are risk
bearing shares. In lean years the equity share holders do not receive any dividends, but in
years of prosperity they receive substantial dividends. In the event of Liquidation of a
company, they are entitled for all the surplus assets after the payment to creditors and
Preference share holders.
Sweat Equity shares: They are not different from equity shares but these shares are issued
to employees or directors of the company at discount. These shares are not issued for
cash but for consideration, such as providing know-how or providing intellectual property.
ii. Deferred shares: They are called as ‘Founders shares’ or ‘Management shares’.
They are allotted to promoters and their friends at the time of formation of the company.
They carry disproportionate voting rights and right to substantial dividends from the profit
left after paying off Preference and Equity dividend.
iii. Preference shares: Preference share is that part of share capital of the company which
enjoys preferential right as to
a. payment of dividend at fixed rate during life time of the company
b. return of capital on winding up of the company
They cannot compel the company to pay the dividend but they can prevent the company from
paying dividend to others (equity share holders) without dividend being paid first
Preference shareholders have voting rights only with respect to Resolutions directly
concerning their rights.
3. Types of Preference shares:
A. From the point of view of dividends,

Preference shares may be:
i. cumulative preference shares: means, shares for which dividends accumulates when not
paid. When the company wants to pay any dividend to equity shareholders, it must first pay
arrears of such dividend to cumulative preference shareholders.
ii.non-cumulative preference shares: means, shares for which arrears of dividends does
not accumulate. If a dividend is not declared in any year, it lapses.
B. From the point of view of participation in profits,

i. participating preference shares: means preference shares which carry the right of
sharing profits left after paying equity and cumulative preference dividends at specified rate.
ii.non-participating preference shares: means preference shares which does not carry right
of sharing surplus after paying equity and cumulative preference dividends.
C. From the point of view of Convertibility,

i.convertible preference shares : means, those preference shares which can be converted
into equity
ii.non-convertible preference shares : means, those preference shares which can not be
converted into equity.
4. Presentation of Share Capital in the Balance Sheet:

Share Capital is divided into different types as below;
a. Authorised capital: is the maximum capital that the company is authorized to raise. It is
also called as ‘Registered Capital’ or ‘Nominal Capital’. It is stated in the Memorandum of
Association.
b. Issued capital: represents the capital which is offered to public for subscription. The
authorized capital which is not offered for public subscription is known as 'un-issued capital',
e.g.. If a company invites the public to subscribe for 50,000 shares then its issued capital is
Ro. 5,00,000.
c. Subscribed capital: refers to that part of the issued capital which has been subscribed by
the public. When the shares offered for public subscription are subscribed fully by the public,
the issued capital and subscribed capital would be the same. It may be noted that ultimately,
the subscribed capital and issued capital are the same because if the number of shares
subscribed is less than what is offered, the company allot only the Number of shares for
which subscription has been received. in case it is higher than what is offered, the allotment
will be equal to the offer. In other words, the fact of over ,subscription is not reflected in the
books.
d. Called up capital: is that part of the subscribed capital which has been called up by the
company. The company may decide to call the entire amount or part of the face value of the
shares. For example, if the company has called up only RO 7 per share, then called up capital
of the company will be RO 3,50,000 (50,000 x 7).
e. Paid up capital: is that part of the called up capital which has been actually paid by the
shareholders. When the shareholders have paid the entire call amount, the called-up capital is
the same as the paid-up capital, if any of the shareholders has not paid amount on calls, such
an amount may be called-up capital minus call- in-arrears.
f. Uncalled capital: is that part of the capital which is not called up by the company. ( i.e
difference between authorized capital and issued capital)
g. Reserve Capital: A company can reserve a part of its uncalled capital to be called up only
in the event of winding up. Such uncalled amount is called ‘Reserved Capital’ of the
company. It is available only for the creditors on winding up of the company.
Let us take the following example and show how the share capital will be shown in the
balance sheet.
ABC Ltd Co. has registered its capital as RO 20,00,000, divided into 2,00,000 shares of
RO10 each.
The company offered 1,00,000 shares of RO 10 each to the public for subscription as RO 2
on application, RO 3 on allotment, RO 3 on first call and the balance on final call. The
company received applications for 1,25,000 shares.
The company finalized the allotment on 1,00,000 shares and rejected applications for 25,000
shares.
The company did not make the final call. The company received all the amount except on
1,000 shares on which call money has not been received.
The above amounts will be shown in the balance sheet of a company as follows:
Balance Sheet
Share Capital RO
Authorized or Registered or Nominal Capital:

2,00,000 shares of RO 10 each 20,00,000
Issued Capital:
1,00,000 shares of RO 10 each 10,00,000
Subscribed Capital:
1,00,000 shares of RO 10 10,00,000
Called-up Capital:
1,00,000 shares of RO 10 each, RO 8 per share 8,00,000
Paid-up Capital:
1,00,000 shares of RO 10 each, RO 8 per share 8,00,000
Less: Calls-in-arrears (on 1,000 shares @ RO 3 per share) 3,000 7,97,000
Add share forfeiture
7,97,000
5. Raising of Capital:
A company can raise its capital in any of the following ways:
a. Private placement: Capital in this case is raised by persuading friends and relatives
of promoters to subscribe the shares.
b. Public Issue: The Company invites the public to subscribe to its share capital.
c. Rights Issue: In this case, shares are offered to existing shareholders in proportion to
their existing equity shareholdings.
6. Subscription of capital:
i. Minimum subscription: is the minimum amount of capital in the opinion of
directors, must be raised to meet the needs of business Operations of the company
ii. Under subscription: If all the shares offered by the company are not bought by
the public, it is called shares are undersubscribed.
iii. Over subscription: When shares applied for, is more than shares offered it is called
shares are over subscribed. In such case, Pro rata allotment is done.
For example, shares offered are 40,000 but shares applied are 60,000 then, for every 6
shares applied, 4 shares will be allotted .i.e 2 : 3
a. Meaning of over-subscription possible ways of allotment of shares when the issue is

over- subscribed:
When the number of applications received by the company is more than the number of shares
offered by the company, the issue is said to be over-subscribed. When the issue is over-
subscribed, the company cannot allot shares more than those offered for subscription. In case
of over-subscription, there are three possible ways/alternatives of allotment. These are:
1. Reject the excess applications received and full allotment is made to the remaining
applicants.
2. All the applicants are allotted shares but on pro-rata basis.
3. Some applications are accepted in fall, some are rejected and some are allotted
proportionately.
Difference between over subscription and under subscription
Basis Over-subscription Under-subscription
Applications received In case of over-subscription, In case of under-subscription,

applications received for shares are applications received for shares are
more than offered by the Company. less than offered by the Company.
Basis of allotment In this case, allotment can be made In this case, company makes full
in full to some, pro-rata to some andallotment to all the applicants, if
may reject the remaining applicants. condition of minimum subscription
is satisfied.
Refund of application Application money is refunded to the There is no need to refund money as
applicants, whose applications are no application is rejected.
rejected.

7. Important Documents: Each company is governed by two documents known as
‘Memorandum of Association’ and the ‘Articles of Association’, generally referred to as the
Memorandum and the Articles.
i. Memorandum of Association: The memorandum contains five clauses for private

companies and six clauses for public companies, as given below:
a. the name of the company

b. the place and city where the registered office of the company is located
c. the objects of the company
d. a statement that the liability of its members is limited ( for limited liability company)
e. details of the share capital which the company is authorized to issue
f. for public limited company, a statement that the company is a public limited company
The Memorandum is a document that discloses conditions which governs company’s

relationship with the outside world.
ii. Articles of Association: Besides Memorandum of Association, every company must

also have Articles of Association. The articles of association governs relationship
between members and the company, between one member and the other members
and other necessary regulations for working of the company.
The Companies Act has a model set of articles called as Table ‘A’. A company may if
so wishes, have articles same as Table ‘A’ i.e. adopt Article ‘A’ or adopt part of it and
have some sections altered.
Companies having limited liability whether private or public have to send a copy of their
Final Accounts, drawn up in the prescribed form to the Registrar of companies.
iii. Prospectus: When shares are issued to public for cash, it should satisfy the
requirements of the Companies Act. Every public issue must be accompanied by an
issue of ‘Prospectus’ of the company and every private issue must be accompanied by
issue of ‘a statement in lieu of prospectus’.
The prospectus gives the detailed information about the company, objectives of the
company, history of the company, the details of issue, issue highlights, risk factors,
terms of present issue, financial performance in case of existing company, details of
the projects for which the finance is raised, market price of the share and justification
for premium, previous issues, minimum subscription and such other details as required
by the Companies Act and/ any other law in force.

Journal Entries relating to Share Subsciption:
Procedure for applying for shares:

On reading the prospectus, the public apply for the shares in the prescribed form. Along with
share application, ‘Application Money’ is to be submitted, which is normally 5 % of the face
value of share.
Application for minimum number of shares is to be applied. When the application is

accepted, Allotment of shares takes place. If shares are not allotted, the application money
will be refunded by the company.
When shares are allotted, ‘Allotment money’ is to be paid by the shareholder. After which
Calls are made. Balance of money may be called through ‘First call’ and ‘Second call’.
It depends on the company to divide the share value through the stages of allotment and
calls. If a company so wish, it may collect the full value of the share along with the
application itself.
Journal Entries relating to Share Subsciption:

1. When ‘Application Money’ is received
Bank A/c Dr.
Share Application A/c
2. Transfer of Share Application Money

Share Application A/c Dr.
Share Capital A/c
3.Refund of money in respect of rejected applications

Share Application a/c Dr.
Bank A/c
4.When allotment is made and money become due

Share Allotment A/c Dr.
Share Capital A/c
5. On receipt of Allotment money

Bank A/c Dr.
Share Allotment A/c
6. When Call is made

Share Call A/c Dr.
Share Capital A/c
7. When Call money is received

Bank A/c Dr.
Share Call A/c

Calls in arrears:
Sometimes amounts due on allotment are not received from the shareholders with in the
specified time. The allotment account in such circumstances will show debit balance
representing the unpaid amount. The total of unpaid amounts is called 'calls-in-arrears'.
In other words the excess of Called up capital over Paid up capital is called calls in
arrears. This amount should be debited to calls-in- arrears account and credited to the
allotment account on the closing date. Calls in arrears should appear in the Balance
Sheet by way of deduction from paid up capital.
Calls in advance:Sometimes the applicants pay in full on the shares they have applied. If
these applicants are allotted shares and allotment money is not called up, the excess money
thus received is ‘calls in advance'. In other words, the excess of paid up capital over called
up capital is called calls in advance. This is to be added to the paid up capital in the
liability section of the Balance Sheet
Such amount will be called as calls in advance and will be credited to a separate account
known as calls in advance account by passing the following entry:
Bank A/c
To Calls in Advance A/c
Calls in Advance account is shown on the liabilities side of the Balance sheet separately from
the paid up capital. Generally interest is paid on such calls according to the provisions of the
Articles of Association. Calls in advance are not entitled for any dividend declared by the
company.
Issue of Shares for consideration other than cash:
A. Issue of shares to vendors for consideration other than cash.

Sometimes companies issues fully paid shares to the vendors from whom it buys assets.
When such shares are issued then it must be clearly stated in the balance sheet and must
be distinguished from the issue made for cash.
Entry:
Asset A/c Dr.

To Share capital A/c
B. Issue of shares to promoters for consideration other than cash and tangible assets.
(eg.technical information, engineering services, plant layout, etc.)
Entry:
Goodwill A/c Dr.

To Share Capital A/c

Price of Issue of Shares:
Shares of a company may be issued at:

a. Issue of Shares at Par-
When the shares of a company are issued at the face value, they are said to be issued “At
Par”.eg. RO 10 face value of share issued at par RO 10 only means , it is at par value.
b. Issue of Shares at Premium-

When there is great demand for a company’s share then that company issues its share at a
price higher than the face value of share. The excess amount collected over and above the
face value is called premium and such an issue is known as “Issue of share at Premium”.
Premium can be received along with share allotment money.
For eg. Share face value of RO 100 issued at RO 110 at premium. RO 10 is more than the
face value and hence RO 10 is called premium. The amount received is to be credited to a
separate account called “Share Premium Account”.
Entry: (If the premium is received along with the allotment money).
a. Share Allotment A/c Dr.
To Share Premium A/c
b. Bank A/c Dr.

To Share Allotment A/c
c. Issue of Shares at Discount –
Generally a company is not allowed to issue shares at discount. ie, at a price less than the
face value. Such an issue can be made only under special circumstances. For.eg RO 10 face
value share is issued at RO 9 per share.RO1 the difference between face value and the issue
price is called discount and debited to “Discount on Shares account”. Normally such
discount is recorded at the time of allotment.
Entry:
a. Share Allotment A/c Dr.

Discount on issue of shares A/c Dr.
b. Bank A/c Dr.
To Share Allotment A/c
Discount on the issue of shares will be shown under miscellaneous head on the assets side of
the balance sheet till it is completely written off from the profit and loss account. Generally
such discount is spread over some period say five years and the amount written off each year
is debited to profit and loss account and the amount not yet written off is shown on the assets
side of the Balance sheet.

Forfeiture and Reissue of shares:
a.Forfeiture:
Forfeiture means the company to take back the shares for non- payment of any call
money. If a share holder fails to pay any call money on shares made by the company these
shares may be taken back or cancelled as a penalty after a reasonable notice of not less than
14 days. The company has no powers to forfeit the shares unless it is provided by the Articles
of Association. The shareholder ceases to be a member of the company. The share capital
is reduced on forfeiture and the money so received on it is credited to “Forfeited Shares
Account”
Entry:
Share Capital A/c Dr. (No. of shares forfeited X Amount called up)
To Particular Call A/c (No. of shares forfeited X Amount unpaid)
To Forfeited Shares A/c (No. of shares forfeited X Amount already paid)
b.Re- issue of Forfeited Shares:
Forfeited shares can be re-issued at a price less than the face value . But it should not be less
than the called up value. The loss on the re-issued of forfeited shares is debited to
“Forfeited Shares Account” and if there is any balance in “Forfeited Shares Account” the
same will be a “Capital Profit”. It should be transferred to “Capital Reserve Account”.
The entry for re-issue of forfeited shares.
Bank A/c Dr. (No. of shares x Re-issue price)

Forfeited Shares A/c Dr. (No. of shares x Difference between face value
and re-issue price)
To Shares Capital A/c (No. of shares x Face value)
If there is any balance in Forfeited Shares Account it should be transferred to Capital
Reserve Account and the entry.
Entry:
Forfeited Shares A/c Dr.
To Capital Reserve A/c
(Being profit on reissue of forfeited shares transferred to Capital Reserve A/c)
Capital Reserve will be shown on the liabilities side of the Balance sheet and can be
used for writing off capital losses.
c. Surrender of Shares
After the allotment of shares, sometimes a shareholder is not able to pay the further calls and
returns his shares to the company for cancellation. Such voluntary return of shares to the
company by the shareholder himself is called surrender of shares. The same entries as are
passed in case of forfeiture of shares will be passed in case of surrender of shares.

Exercise 1: On 1st January 2007 the Directors of ABC Co. L.L.C. decided to issue 100,000
shares of RO 10 each, RO 2.5 payable on Application and RO 2.5 payable on allotment, RO
2.5 on First Call and RO 2.5 on Second Call.
Applications are received for 120,000 shares. On 10 th January, the directors decided to reject
applications in respect of 20,000 shares, the application money being refunded in full. All
Allotment money received in full.
On 31st March 2007, a Call of RO 2.5 per share was made and all sums due are received Pass
necessary Journal Entries for the transactions.
Assume that when the Call of RO 2.5 was made all sums due are received except on 1,000
shares allotted to Mr. ‘A’. Pass necessary Journal Entries for the transactions.
Solution:
Journal Entries in the Books of ABC Co. L.L.C.
Debit RO Credit RO
5. on receipt of Allotment money

7.(a) When Call money is received
7.(b) When Call money is received
Exercise 2: On 1st January 2007 the Directors of XYZ Co. L.L.C. decided to issue 50,000
shares of RO 10 each, RO 2.5 payable on Application and RO 2.5 payable on allotment, RO
3 on first Call and RO 2 on Second Call.
Applications are received for 60,000 shares. On 05th January, the directors decided to reject
On 28th February 2007, a Call of RO 3per share was made and all sums due are received.
Pass necessary Journal Entries for the transactions.
Assume that when the Call of RO 3was made all sums due are received except on 500
shares allotted to Mr. ‘B’. Pass necessary Journal Entries for the transactions.
Solution:
Journal Entries in the Books of XYZ Co. L.L.C.
Debit RO Credit RO

7.(a) When Call money is received
7.(b) When Call money is received
Over Subscription: (Pro rata allocation)

In case of over-subscription all the applications received for shares are not allotted
therefore, certain share applications need to be rejected. A set basis is determined to
calculate ratio of allotment. This basis is called as ‘Pro rata allotment’.
Incase of prorata allotment, instead of returning the excess application money, the same will
be adjusted towards money due on allotment and the balance of allotment money will be
payable by the applicant.
If the application money is more than what is due on application and allotment, such money
may be refunded or adjusted towards calls as (calls in advance)
For eg. If 40,000 shares are offered, applications received are 60,000 then the pro rata
allotment will be 40:60 or 2:3 i.e for every 3 shares applied, 2 shares will be allotted.

Exercise 3: ‘A’ Company has issued 1,000 8 % Preference Shares for RO 100 each,
payable 10% on Application, 20% on Allotment, 40% on First Call & 30% on Second Call.
Applications received for 1,500 shares.
a. Assume that application money received on 500 un allocated shares is refunded. All
money called is received
b. Assume that application money received on 500 un allocated shares is not refunded, but
adjusted towards Allotment money. All money called is received
Show journal entries till the First Call.
Solution: a)
Journal Entries in the Books of ‘A’ Co. L.L.C.
Debit RO Credit RO

Solution: b)
Journal Entries in the Books of ‘A’ Co. L.L.C.
Debit RO Credit RO

No need

Exercise 4 On 1st March 2007, Al Mashoor L.L.C decided to issue 40,000 shares, with face
value of RO10 each. RO 2 payable on Application, RO 3 on allotment, RO 3 on First Call
and RO 2 on Second Call. Applications were received were for 60,000 shares.
a. The directors decided to return the money received on excess applications

b. Another proposal is to adjust the extra money received for the allotment money due
All money due was received, show journal entries till the First call money.
Solution: a)
Journal Entries in the Books of Al Mashoor Co. L.L.C.
Debit RO Credit RO

Solution: b)
Journal Entries in the Books of Al Mashoor Co. L.L.C.
Debit RO Credit RO

No need


DEPARTMENT OF BUSINESS STUDIES
BAAC 3205 CORPORATE ACCOUNTING-2
Practice Questions
1. On 1st January 2007, the Directors of ‘XYZ’ Co. L.L.C decided to issue 6,000 shares of
RO 200 each. The amount payable is, 10 % on Application, 20 % on Allotment, 40 % on
First Call and 30 % on Second Call.
Applications are received for 7,000 shares. On 10 th January, the directors decided to reject
On 30th June 2007, the First Call was made and all sums due are received except on 500
shares allotted to Mr. Ahmed. Show necessary Journal Entries for the transactions.
Solution:
Debit RO Credit RO

2. On 1st April, 2007 the Directors of ‘A’ Co. L.L.C decided to issue 10,000 shares of RO
100 each. The amount payable is, RO 40 on Application, RO 30 on Allotment, RO 20 on
First Call and RO 10 on Second Call.
Applications are received for 15,000 shares. On 10th April, the directors decided to reject
On 30th June 2007, a Call of RO 20 per share was made and all sums due are received Pass
Assume that when the Call of RO 20 was made all sums due are received except on 300
shares allotted to Mr. ‘X’. Pass necessary Journal Entries for the transactions.
Solution:
Debit RO Credit RO

3. On 1st April, 2007 the Directors of ‘A’ Co. L.L.C decided to issue 20,000 shares of RO
100 each. The amount payable is, RO 20 on Application, RO 25 on Allotment, RO 30 on
First Call and RO 25 on Second Call.
Applications are received for 25,000 shares. On 10th April, the directors decided to reject
On 30th June 2007, a Call of RO 30 per share was made and all sums due are received. Pass
Assume that when the Call of RO 30 was made all sums due are received except on 500
shares allotted to Mr. ‘M’. Pass necessary Journal Entries for the transactions.
Solution:
Debit RO Credit RO

4. On 1st January 2007, the Directors of ‘XYZ’ Co. L.L.C decided to issue 12,000 shares of
RO 100 each. The amount payable is, 10 % on Application, 20 % on Allotment, 40 % on
First Call and 30 % on Second Call.
Applications are received for 15,000 shares. On 10th January, the directors decided to reject
On 30th June 2007, the First Call was made and all sums due are received except on 1500
shares allotted to Mr. Sameer. Show necessary Journal Entries for the transactions.
Solution:
Debit RO Credit RO

BAAC 3205-Corporate Accounting-2
Issue of Shares, Forfeiture and Reissue of shares
Practice Questions
1. ABC ltd. issues 10000 shares of the value of RO 10 each payable RO 4 on Application,
RO 3 on Allotment, and RO 3 on First and final call. All the shares are subscribed, duly
allotted and the call is made. All cash is received except the call money on 300 shares. These
shares are forfeited by the directors and are reissued as fully paid for RO 2500.
Show necessary Journal Entries for all the above transactions.
Prepare the ledger accounts and show how these items would appear in the Balance
Sheet.
2. XYZ ltd. issues 5000 shares of the value of RO 10 each payable RO 3 on Application, RO
3 on Allotment ,and RO 4 on First and final call. All the shares are subscribed, duly allotted
and the call is made. All cash is received except the call money on 100 shares. These shares
are forfeited by the directors and are reissued as fully paid for RO 750.
Pass the necessary journal entries for the above transactions.
Prepare the ledger accounts and show how these items would appear in the Balance
Sheet.
3. XYZ ltd. issues 5000 shares of the value of RO 10 each payable RO 3 on Application, RO
3 on Allotment ,and RO 4 on First and final call. All the shares are subscribed, duly allotted
and the call is made. All cash is received except the call money on 100 shares. These shares
are forfeited by the directors .Of the forfeited shares, 50 shares are reissued as fully paid for
RO 350.
Pass the necessary journal entries for forfeiture of shares and reissue.
Show how the Share Capital A/c and Capital reserve will appear in the Balance sheet.

Chapter: 3
 Accounting treatment of treasury stock.

Chapter: 3
Accounting treatment of treasury stock.
Treasury Stock, it is the stock reacquired or repurchased by the issuing entity, reducing the
quantity of outstanding stock on the open market. To explain differently, when an entity
reacquires its own common or preferred stock in an open-market transaction, such stock is
termed Treasury stock. Bear in mind, it is the stock which is authorized and issued but not
outstanding. Also be acquainted that:-
1. It is reported as a reduction (debit) in stockholder's equity;
2. No gain or loss is recognized on a treasury stock transaction and
3. Retained earnings may be decreased abut never increased by the treasury stock
transaction.
There are two ways to account for treasury stock transactions:

 Cost method
 Par-value method
Either of the methods adopted will not affect the stockholder's equity. What sets them apart is
their stance and use of different equity accounts.
Cost Method
It is a less complicated method than the par-value method where an entity considers purchase
of treasury stock as a temporary reduction in stockholders equity and not as retirement of
shares. Distinguishing features include:
1. Debit the treasury stock account for the cost to acquire the shares.
2. At the time of reissuance/sale of treasury stock, credit the treasury stock account for
the cost of shares.
3. The gain/loss on acquistion is recognized at the time reissuance/sale.
o Gains are credited to paid-in-capital from treasury stock transactions.
o Losses are first charged to paid-in-capital from treasury stock transactions and
the remainder, if any is charged to retained earnings.
4. Retirement of treasury stock will require additional journal entries.
Par Value Method

This method holds the view point that a treasury stock transaction is "retirement" of shares
and its reissuance/sale is a "new" issue. It is slightly more complex than cost method but
when it comes to retirement of treasury stock the journal entries are fairly simple.
Note: Under par value method we start with the assumption of retiring such shares, therefore,
when the treasury shares are actually retired, the treatment is fairly simple. This does not
hold true for cost method.
Key features of par value method:-

1. On repurchase of own shares, debit the treasury stock account for the par value and
not the cost of reacquisition.
2. Treasury shares acquired for a price more than they were originally issued - Debit
additional paid-in-capital (APIC - common stock) for the premium received when
the shares were first issued to public. The excess, if any, goes to retained-earnings.
3. Treasury stock acquired at a cost equal to or less than the original issue cost - Debit
APIC - common stock for premium at the time of issuance and paid-in-capital from
treasury stock is credited for the difference between the original issue price and the
cost to acquire treasury stock.
4. When treasury shares are resold, credit the treasury stock account at par value and
credit or debit APIC - Treasury Stock for the remainder.

Chapter:4
 Preparation of Comprehensive Income statement &its styles
Chapter-4
Financial Statements

Horizontal form of Trading, Profit & loss A/c
Name of the company ---year ended for which the A/c is prepared
Figures for Figures for
Current year Current year
Opening stock Income:
Purchases Sales
(-) returns Closing stock
Wages
Carriage inwards
Gross Profit c/d
xxxxxx xxxxxx
Expenses; Gross profit b/d
Salaries discounts
(+) outstanding
Depreciation
Provision for tax
Net Profit c/d
xxxxxx xxxxxx
Previous yr. dividend Balance b/f
General Reserve Net Profit b/d
Proposed dividends
Surplus carried to Balance
Sheet
xxxxxxx xxxxxxx
Horizontal form of Balance Sheet
Name of the company ---Date at which the B/S is prepared

Liabilities Figures for Assets Figures for
Current year Current year
Share Capital Fixed Assets
Reserves and surplus Investments
Secured Loans Current Assets
Unsecured Loans Loans & Advances
Other Loans and advances Miscellaneous
Expdr.
Current Liabilities Profit & Loss A/c bal. c/f
Provisions
XXXXXX XXXXXX
Exercise 1
From the following particulars furnished by Premier Co. L.L.C, prepare Balance Sheet as at
31st March 2007.
Debit RO Credit RO
Equity Capital (face value RO 100) -- 10,00,000
Calls in arrears 1,000 --
Land 200,000 --
Building 350,000 --
Plant & Machinery 525,000 --
Furniture 50,000 --
General Reserve -- 210,000
Loan from NBO -- 150,000
Stock 250,000 --
Provision for taxation -- 68,000
Sundry debtors 200,000 --
Advances 42,700 --
Proposed dividend -- 60,000
Profit & Loss Account -- 100,000
Cash Balance 30,000 --
Cash at Bank 247,000 --
Preliminary expenses 13,300 --
Loans -- 121,000
Sundry Creditors -- 200,000
TOTAL: 19,09,000 19,09,000
Additional information:
The cost of assets is: RO
Building 400,000
Plant & Machinery 700,000
Furniture 62,500
Solution: Ex. 1
Premier Co. L.L.C,
Balance Sheet as at 31st March 2007
Liabilities RO Assets RO
Reserves and surplus Investments
Other Loans and advances Miscellaneous Expdr.
Provisions
Exercise 2: From the following particulars furnished by Fast Auto Co. L.L.C, prepare
Trading, Profit & Loss Account & Balance Sheet as at 31st Dec. 2007.
Debit RO Credit RO
Equity Share Capital (face value RO 40) --4,00,000
Stock 1st Jan. 2007 186,420 --
Purchase & Sales 718,21011,69,900
Returns 12,680 9,850
Manufacturing Wages 109,740 --
Sundry manufacturing expenses 19,240 --
Carriage inwards 4,910 --
Interest on Bank Loan (18 %) 4,500 --
Office Salaries & expenses 17,870 --
Auditor’s fees 8,600 --
Directors’ Remuneration 26,250 --
Bank loan –secured -- 50,000
Advance payment of tax 84,290 --
P & L A/c 1st Jan. 2007 -- 38,640
Cash in hand 19,530 --
Debtors & Creditors 105,400 62,220
Loose Tools 12,500 --
Furniture 5,000 --
Premises 164,210 --
TOTAL: 17,30,61017,30,610
Additional information: RO
i. outstanding manufacturing wages 1,890
ii. outstanding office salaries 1,200
iii. stock valued at 124,840
iv. Loose tools ,, ,, 10,000
v. provide interest on bank loan for 6 months
vi. write off 1/3 of Preliminary expenses vii. make a provision of Income tax 50% viii.
first transfer 5 % of net profits to General Reserve, ix. then declare dividend 15 % x.
Depreciate plant & machinery 15%, Office furniture 10%
*****
Solution: Ex.2
Fast Auto Co. L.L.C
Trading & Profit and Loss Account for year ending 31st December, 2007
RO RO
Opening stock Income:
Sales
Purchases Closing stock

(-) Returns
Wages
(+) Outstg.
Sundry Manufacturing exp.
Carriage inwards
Gross Profit c/d
Expenses; Gross profit b/d

Interest on Bank Loan discounts
(+)outstg.
Office salaries & exp.
(+) outstg.
Auditor’s fees
Directors’ remuneration
Depreciation
Plant & Machinery
Office furniture
Loose tools
Preliminary exp.
Provision for tax
Net Profit c/d
P & L Appropriation Account

Previous yr. dividend P & L A/c Bal. b/f

General Reserve Net Profit b/d
(current year)
Proposed dividends
Surplus carried to Balance

Sheet
Fast Auto Co. L.L.C

Balance Sheet as at 31st December, 2007
( shares of Plant & machinery
RO each)
(-) depreciation
Premises
Furniture depreciation
Loose Tools
(-) depreciation
Reserves and surplus Investments --

General Reserve
Profit & Loss A/c bal. (C. Yr.)
Stock
Debtors
Cash in hand
Cash at Bank
Advance Tax

Other Loans and advances Miscellaneous
Expdr.
Preliminary expenses

Sundry Creditors
Proposed dividends
Outstanding expenses
Provisions
Provision for Taxation
****
Corporate Accounting-2
Practice Questions:
1. From the following particulars furnished by Al Mashoor Co. L.L.C. prepare Trading, Profit
& Loss Account and Balance Sheet for the year ended 31.12.07
Debit RO Credit RO
Equity Share Capital (face value RO 40) -- 4,00,000
Stock 1st Jan. 2007 186,420 --
Purchase & Sales 718,210 11,45,750
Returns 12,680 9,850
Manufacturing Wages 109,740 --
Interest on Bank Loan 4,500 --
Office Salaries & expenses 17,870 --
Auditor’s fees 8,600 --
Directors’ Remuneration 26,750 --
Bank loan –secured (15 %) -- 50,000
Advance payment of tax 84,290 --
P & L A/c 1st Jan. 2007 -- 38,680
Cash in hand 29,530 --
Debtors & Creditors 105,400 62,220
Furniture 5,000 --
Premises 164,210 --
TOTAL: 17,06,500 17,06,500
Additional information: RO
a. Outstanding manufacturing wages 1,800
b. Stock valued at 125,000
c. Depreciate plant & machinery 15%, Office furniture 10%
d. Make a provision of Income tax 50%
e. First transfer 5 % of net profits to General Reserve, f. then declare dividend 15 %
Al Mashoor Co. L.L.C

Trading & Profit and Loss Account for year ending 31st December, 2007
RO RO
P & L Appropriation Account
Al Mashoor Co. L.L.C

Balance Sheet as at 31st December, 2007

***

Chapter: 5
 Tax implications, divisible profits and reserves.
Chapter-5
Tax implications, divisible profits and reserves
Foreign investment of corporations and dealing with foreign currency translation

The Oman Law Digest- 2009- Foreign Capital Investment
In order to do business in Oman, it is necessary for a foreign natural or juridical person to

comply with laws governing foreign business activity, which includes Foreign Capital
Investment Law [RD 102/94] (“FCIL”), Commercial Register Law [RD 3/74 as amended],
Commercial Agencies Law [RD 26/77 as amended], Commercial Companies Law [RD 4/74
as amended] and Law of Commerce [RD 55/90].
According to FCIL, foreign companies seeking to do business in Oman are required to form a
locally registered company with local equity participation of at least 55%. A foreign capital
investment licence is granted by MCI to foreign entities upon satisfying capital and other
requirements. The licence permits a foreign company to have shareholding in a local
registered company.
Although FCIL restricts foreign ownership in Omani companies to 45%, pursuant to Oman’s
accession to WTO in 2002, foreign shareholding up to 70% in all sectors is permitted
without need for approval from the cabinet or the Council of Ministers. Foreign
ownership of 100% is permitted for certain types of businesses in Oman such as
brokerage services and for projects which are deemed by the Council of Ministers to
contribute to the development of the national economy. The minimum capital
requirement for such companies is RO 500,000.
Minimum capital requirements for different types of companies with foreign equity
participation are: (i) limited liability companies, RO 150,000 although Oman had
committed to abolish this requirement as of January 2001; (ii) closed joint stock company,
RO 500,000; and (iii) public joint stock company, RO 2,000,000.
There is no restriction on repatriation of foreign funds. There are no foreign exchange

controls. The Omani Rial is pegged to the US Dollar at a fixed rate of US $2.59/RO 1.
BRANCH OFFICE
A foreign company may establish a branch office for the purpose of performing a
government or quasi-government (including partly owned government companies) contract.
Tenure of a branch office is restricted to the terms of the contract and may be extended for
additional terms if the contract is extended for further periods or there is another government
or quasi-government contract for longer duration. The branch cannot do business other than
the performance of the contract for which it is established. Branches are subject to a high rate
of taxation starting from 30% on taxable income of over RO 30,000.
REPRESENTATIVE OFFICE

A foreign company may form a representative office for the limited purpose of marketing
and promotion of products. It is prohibited from directly engaging in sale or doing any other
activity deemed to be commercial activity. It is authorised to recruit employees.
Pursuant to the Free Trade Agreement between Oman and the US effective 1 January
2009 (“FTA”), American investors will be accorded preferential treatment in business.
US companies seeking to conduct business in Oman will get an unprecedented level of
openness and access to the Omani services market. The FTA guarantees national and most
favoured nation treatment for services including production, distribution, marketing and sale
of services and includes benefits for service providers across a range of fields, including
banking, insurance, securities, and asset management. The FTA also offers a comprehensive
dispute resolution mechanism. The MCI has issued MD 102/08 on registration of branches of
American establishments and companies. Similarly, Omani companies seeking to do business
with the US will now have open access to the world’s largest economy. Details of how it will
work in practice are still emerging. It remains to be seen how current Omani procedures will
adapt to the provisions of the FTA, but it is clear that the FTA will encourage strong
economic relations between the US and Oman.
Additional provisions provide for state-of-the-art protection of intellectual property, as well

as protections for the environment and domestic labour laws. The US has a FTA with only
one other GCC country (Bahrain), although more are expected in upcoming years.
The Oman Law Digest- 2009- Taxation
Personal income is not subject to tax in Oman. Tax is payable by companies and
establishments if they have permanent establishment in Oman. Tax is charged on income,
from all sources, which is realised or has arisen in Oman. All allowable deductions, such as
business costs or depreciation, are defined in Law of Income Tax on Commercial Companies
[RD 47/81 as amended] (“Tax Law”). Permitted depreciation rates are set out in the Tax
Law. In practice, tax is charged on what is substantially a profit calculation. The tax regime
is administered by the Secretariat General of Taxation under the Ministry of Finance.
Tax rates depend upon the legal status of the entity. All companies registered in Oman,
wholly Omani owned or with up to 70% foreign participation, and branches of wholly GCC
owned companies are subject to a uniform rate of 12% on taxable income over RO 30,000.
Other entities, including branches of foreign companies, are taxed as follows:
Taxable Income Tax Rate

0 – 5,000 Nil
5,001 – 18,000 5%
18,001 – 35,000 10%
35,001 – 55,000 15%
55,001 – 75,000 20%
75,001 – 100,000 25%
100,001 – and above 30%
For branches of foreign companies, allowable deductions include corporate headquarters
expenses that are attributable to a branch.
TAX EXEMPTIONS:
Companies may apply for tax exemption under the Tax Law or FCIL. Generally,
exemptions are obtainable for an initial period of five years, extendable for a further
five years.
Exemptions are granted if: (i) income is realised from carrying out exportation of locally
manufactured or processed products; and (ii) the main activity is an activity specified for
exemption in the Tax Law or FCIL such as manufacturing, agriculture, fishery, tourism,
public utility or infrastructure project.
It is not permissible for a company to benefit from more than one exemption where
there might be several applicable exemptions.
Loss incurred during the exempted period may be carried forward until it is set off
against taxable income.
Foreign Currency Translation- gain /loss
Paper (unrealized) gain or loss (as on a balance sheet date) resulting from an appreciation or
devaluation of the non-local currency in which the assets and/or liabilities of a firm are
denominated in its account books.
Divisible Profit
Introduction of Divisible Profit
Those profits are termed as the divisible profit, which is legally distributed to the
shareholders of a company as dividend.
Company divides its profit into two parts one part will be transferred to reserves and the
other part would be distributed to shareholders as dividend. That part of profit which is made
available for payment of dividend is called Divisible Profit. While determining divisible
profit the following considerations are to be made;
1. Depreciation
2. Past losses
3. Capital losses
4. Capital Profit
5. Transfer to Reserve
6. Profits prior to Incorporation
Depreciation
According to Section 205 of Companies Act, company should provide for depreciation on all
assets. That means dividend should not be paid without providing for depreciation. In case
where dividend is paid without providing for depreciation, such dividend is said to be paid
out of capital. It is well known that dividend should be return on capital, and it should never
been return of capital. Therefore to keep capital intact, provision for depreciation is essential.
But there are some historical cases where payment of dividend was allowed without
providing for depreciation. Those historical cases are listed below;
 Lee Vs New Chatel Asphalte Co. Ltd.,

 Wilmar Vs Mc. Namara Co. Ltd.,
 Balton Vs Natal land Colonization Co. Ltd.,
Now also company can pay dividend without providing for depreciation with permission
from the Central Government
Past Losses
The term past losses is to be understood as past revenue loss i.e. Debit balance in profit &
loss account. As per the provision of Companies Act, after meeting past loss only divisible
profit is to be determined i.e. the dividend that can be paid.
There is a historical case where court allowed payment of dividend without meeting the past
loss. That Historical case was; Ammonia Soda Co Ltd., Vs Arthur Chamberlyn and others.
Capital Losses
While determining divisible profit, capital losses need not be taken into the consideration.
That means capital losses need not be met out of revenue profits.
Capital profits are there to meet capital losses in Verner Vs General and Commercial
Investment Trust Company Ltd., The investment Company comes across Capital loss due to
fall in market value of investment. It is capital loss. But the company without caring for such
capital loss declares dividend. Here Court decides that dividend from revenue profit can be
paid without meeting Capital loss.

Capital Profits
The profits which arise occasionally or rarely on account of some extra ordinary transaction
are called Capital Profits. On the other hand business profit is revenue profit. Dividend can
be paid out of Revenue Profit. But capital profit is not freely available for payment of
dividend.
The following are some examples to Capital Profits:
1. Premium on Issue of shares.

2. Premium on Issue of Debentures.
3. Profits prior to Incorporation
4. Profit on forfeiture and Re-issue of shares.
5. Profit on acquisition of Business
6. Profit on Sale of Asset
7. Profit on over insurance
8. Profit on Revaluation, etc.
Payment of dividend out of Capital Profits: In connection with payment of dividend out of
capital profit there are two views. Namely; General View and Legal View.
General View: It is otherwise known as commercial view. As per this view dividend should
not be paid out of capital profit. All capital profits should be transferred to capital reserve
which will be utilized for meeting capital losses like discount on Issue of shares and
debentures, loss on Sale of Asset, etc.
Legal View: It is the view expressed by companies act. It is otherwise known as statutory
view. According to this view, share premium and profit prior to incorporation should not be
used for payment of dividend. As per this view dividend may be paid out of other capital
profits by fulfilling the following conditions;
 There should be no restriction in Memorandum, Articles, etc. with regard to payment

of dividend out of capital profits.
 The capital profit from which payment of dividend is decided should have been
obtained in the form of cash.
 There should be on capital loss in co-existence.
 All assets should have been dealt with.
Transfer to Reserve
Here particularly transfer to general reserve is to be analyzed. Transfer to general reserve

impacts the quantity of divisible profits. As per the provision of companies act transfer to
general reserve should not exceed 10% of current year net profit.
Profits Prior to Incorporation
According to companies act dividend should not be paid out of profits prior to incorporation.
Factors of Divisible Profit
The following are the main factors, which influence the divisible profit.
1. Capital Profit
The divisible profit can be paid, if there is some capital profit or gain.
2. Capital Loss
If some part of the capital is lost or there is capital loss the dividend can be paid out of the
current profits without making any provisions for any capital loss.
3. Depreciation
The depreciation is charged before the distribution of the divisible profit
4. Transfers of Reserves
Under company ordinance

Before declaring dividends the directors have powers to make such reserves as they may
think proper.
Principles of Divisible Profit

1. Articles of Association
The articles prescribe the rules for divisible profit. The directors are entitled to distribute the
profits under the rules. They cannot exceed the prescribed limits.
2. Companies Ordinance
The companies ordinance states . The dividend can be paid out of revenue profit. The
directors must follow the rules of companies for distributing profits. They cannot violate the
law.
3. Accountancy Principle
The accountancy principles must be followed for calculating the divisible profits. The going
concern, consistency, conservation matching concepts is applied. These principles must be
applied other wise the reliable result cannot be expected from the accounting books and
records.

4. Legal Decision
The legal decision must be kept in mind which calculating the divisible profits. The court
cases relating to auditing must be followed if applicable to the conditions of business. The
auditor must know the decision announced by the courts from time to time.
5. Capital Maintenance
The principles of capital maintenance must be applied. The capital cannot be used to pay
dividend. The revenue profits can be utilized for payments of dividend. The capital account
must remain intact. It is illegal it the directors pay dividend out of capital during any year.
6. Shareholders’ Approval
The divisible profits can be used to pay as dividend after approval of shareholders. The
annual general meeting is called and the shareholders approve rate recommended by
directors. The rate of dividend proposed cannot be increased at all.
7. Capital Profit
The capital profit can be used to pay dividend under certain conditions. The capital profit
should be realized. All the assets should be revalued and even then there is surplus. The
articles of association allow the distribution of capital profit as dividend. The depreciation on
the revalued assets has been recorded in the books of accounts.
8. Directors Proposal
The directors have the right to propose the rate of dividend under certain conditions. The
capital profit should be realized. All the assets should be revalued and even then there is
surplus. The articles of association allow the distribution of capital profit as dividend. The
depreciation on the revalued assets has been recorded in the books of accounts.
9. Capital Loss
The dividend can be paid out of revenue profits even there is capital loss. There is no need to
adjust old capital loss before payment of dividends. The current year revenue profit can used
to pay dividend. The capital profit must be used to eliminate capital loss finest and then
surplus can be used to pay dividend.
10. Depreciation
The dividend can be paid out revenue profits. The depreciation on fixed assets must be
charge to profit and loss before declaring revenue profits. In case of manufacturing company
it is compulsory to charge depreciation before declaration of profit or dividend.
11. Past Losses
The company may sustain a loss in one year. It can earn profit in the next year. The company
may adjust loss of previous year. The remaining profit of current year can be pay dividends.
In 1918, Ammonia Soda Co. V Chamberlain case the court decided that under the articles of
association the directors can pay dividend out of current year profit with out adjustment past
losses.
12. Transfer to Reserve
The dividend can be paid of revenue profit remaining after transfer to reserves. The articles
of association empower the directors to create at a certain rate. In case of banks and financial
institutions it is obligatory to set up statutory reserves.
13. Secret Reserves
Management creates the secret reserves by various techniques. The financial institutions need
such reserves to develop the confidence of customers and owners. The reserves can be
created and used to pay dividend if allowed under the articles. The misuse of such reserves
must not be allowed.
14. Undistributed Profit
The directors for declaring dividend can use undistributed profit or profit and loss
appropriation balance. It is revenue of the previous years. It is a right of the directors to used
such profit for payment of dividend at the end of the year.
15. Profit Prior to Incorporation
The profit prior to incorporation is a capital profit. It cannot be used for payment of dividend.
It is a profit earned before the registration of the company. It can be used to write off capital
loss or issue of bonus share by the company management.
16. Asset Revaluation
The management can revalue the assets. The surplus on revaluation of assets can be started
on liability side of balance sheet. It can be used after realization. The assets may be sold and
profit may be realized.
17. Solvency of Company
The solvency of the business is very important than payment of dividend. The management
must determine cash needs of the company. If cash is surplus than business requirements
then dividend then can be paid is cash. In cash of storage of funds dividend should not be
paid in cash.
18. Creditors Protection
It is a principle of divisible profits that dividend must be paid out of revenue profits. The
correct calculation is essential for all who depend upon business. The overstatement can
disturb one section of investors while understatement can upset another group.

Secret Reserves
A secret reserve is a reserve that is created but not stated in the balance sheet. There are
various ways secret reserves. The banks, insurance companies and other financial institutions
want to win public confidence for their successful working. These business concerns can
create secret reserves. It is a technique to show poor financial position to rivals and in case of
need such reserves are available to meet crisis. There are merits and demerits of such
reserves. The auditor can examine the existence of such a situation. The amount may not be
high. The director's intention may be good. The auditor may not disclose such reserves in the
audit report. When the amount is high and directors misuse such reserves the auditor must
inform the shareholders through his report.
How Secret Reserves is Created
1. Under Valuation of Fixed Assets
The management can create secret reserves by under valuation of fixed assets. In fact the
value of fixed assets is much higher but it started at less value. The reserves of the same
amount are created. There reserves do not appear in balance sheet.
2. Eliminating Fixed Assets
The management may decide to eliminate any fixed asset. In preparing balance sheet such
assets are not stated. The value fixed assets can be used to create secret reserve of the same
amount. As the reserves are secret there is no need to show it.
3. Under Valuation of Current Assets
The current assets may be recorded in balance sheet at less value. In this way under valuation
of current assets helps the management to conceal profits and reserves from liabilities. The
management can be such reserves in times of financial needs.
4. Excess Provision For Bad Debts
The excess provision for bad debts means decrease in the value of debtors below the real
value. Stating excess provision for bad and doubtful debts creates the secret reserves. It is
only possible when management is selling goods on credit.
5. Charging Capital Expenditure to Revenue
The management can play trick for creating secret reserves. The capital expenditure can be
treated as revenue. The profits will be understated. The secret reserves are created to meet the
demand of the business management.
6. Overstating Liabilities
The management can over state the value of any liability. This action leads to creation of
secret reserves. The profit and reserves are reduced by equal amount.
7. Grouping Dissimilar Items
The different items appearing on liability side may be grouped. The creditors, reserves and
provisions may be stated under the heading Sunday creditors and other credit balance.
8. Contingent Liabilities
The management can show contingent liability as actual liability in order to create secret
reserves. In fact contingent liability is stated as footnote. But its inclusion in balance sheet
met the objective of the management.
9. Including Fictitious Liabilities
The management can show fictitious liabilities as actual liabilities. In this way the reserves
and profits can be eliminated for the same amount. The secret reserves are creating in order
to obtain certain objectives.
10. Showing Good Will At Nominal Value
The goods will have high value. It may state at nominal value. The secret reserve is created
equal to the difference between actual value and nominal value. The directors can create
secret in order to meet business objectives.
Advantages of Secret Reserves
1. Increase Working Capital
The purpose of creating secret reserves may be increasing working capital. The shortage of
working capital may be lead to failure of business. But use of secret reserves help to improve
the financial strength in order to make the business successful.
2. Dividend Equalization
It is a benefit of secret reserve that dividend can be paid at equal rate. When there is
sufficient profit there is no need to use secret reserve. In case of low profit or loss the secret
reserves can be used to pay dividend. Thus fluctuating profit cannot affect dividend rate.
3. Face Competition
The benefit of secret reserves is available to the management. It can face competition in the
market. In order to eliminate or shrink the size other business concern it can become loss
leader. The use of secret reserves is helpful to remain in market for long period.
4. Keep Rivals Away

The benefit of secret reserves is that management can keep rival away. The financial position
does not look attractive. The new entrants are discouraged. They decide not to enter the field.
5. Meet Financial Exists
The benefit of secret reserves is that management can meet financial crisis in case of
emergency. The loan facility may not be available but such reserves are useful for meeting
crisis.
6. Win Public Confidence
The management is in a position to win the public confidence. The equal rate of dividend
provides confidence to the shareholders. The general public is happy over the reserves.
7. Low Profit Years

The management can use secret reserves in low profit years. Due to poor business activities
there may be no profit. Such reserves help the management to follow the same policies of
dividend.
Distinction between provisions and reserves
Reserves:
1. It is created by debiting the profit and loss appropriation account.
2. It is created to meet an unknown liability, or to strengthen the financial position of the

company or for equalization of dividends etc.
3. A reserve is created only when there is profit in the business.
4. It can be distributed among shareholders as dividend.
5. The reserve is created without taking into consideration the actual amount required except
in the case of redemption of debentures when a definite sum is set aside.
6. Creation of reserve depends upon the financial policy of the business and discretion of its
management.
7. It is usually shown on the liability side of the balance sheet as it is not a specific reserve.
Provisions:
1. It is created by debiting the profit and loss account.
2. It is created to meet a known liability or a specific contingency, e.g.. provision for bad and
doubtful debts, or provision for depreciation etc.

3. A provision is created irrespective of whether there is profit or loss in the business.
4. It is not available for distribution as dividend among shareholders.
5. A provision is made for a definite amount and, therefore, a definite sum is set aside every
year to meet the known contingency.
6. Making of a provision is a must to meet known liability or contingency.
7. The provision is generally shown on the assets side of the balance sheet.
Distinction between general reserve and specific reserve
Specific Reserve
1. It is created for a specific purpose.
2. It is utilized for that specific purpose, for which it was created.
3. Whether profit or no profits, it must be created.
4. It is necessary to create in order to ascertain profit.
5. It is shown on the debit side of profit and loss account.
6. Net profits are reduced because of it.
General Reserve
1. It is created not for any specific purpose but for meeting future contingencies.
2. It can be utilized for meeting any future loss.
3. It is created only when there is sufficient profit.
4. They are created only when there are profits i.e. they depend upon profits.
5. It is shown on the debit side of profit and loss appropriation account.
6. Only distributable profits are reduced because of it.
Reserve Fund
Profit set aside and used in the business is a reserve. But profit set aside and invested outside
the business is a reserve fund. Thus, the use of the term 'fund' indicates
investment of reserve outside the business.

Sinking Fund
A sinking fund is a fund built up by annual contributions. The contributions are invested
outside the business in readily realizable securities. Interest received on investments is
reinvested in the same securities.
A sinking fund may be (i) for replacement of fixed assets or (ii) for the redemption of
debentures or repayment of loan. A sinking fund for the replacement of a fixed asset is a
provision. But a sinking fund for redemption of debentures or repayment of loan is an
appropriation of profits. A sinking fund represents amount invested outside the business.
Distinction between reserve fund and sinking fund
Reserve fund
1. Investments are not for definite period.
2. It is created always out of divisible profits.
3. Interest received on investments representing reserve fund may not be re-invested.
Sinking fund
1. Investments are for a definite period.

2. It is not always out of divisible profit e.g. sinking fund for replacement of asset is
provision for depreciation, it must be created even if there are no profits.
3. In case of sinking fund, interest is always re-invested.
******


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MINISTRY OF MANPOWER

SALALAH COLLEGE OF TECHNOLOGY

BAAC 3205- CORPORATE ACCOUNTING-2

Business Studies Department 1

Chapter TITLE OF THE CHAPTER Page No.

1 Meaning of Corporations & Terminology &differences 3

2 Accounting treatment and practices of corporation formation, 16

3 Accounting treatment of treasury stock. 38

4 Preparation of Comprehensive Income statement &Balance 41

5 Tax Implications, divisible profits and reserves 51

Business Studies Department 2

 Meaning of Corporations & Terminology

 Differences between partnership and corporations.

 Advantages & disadvantages of corporations

 Formation of the corporations and statutory requirements.

Business Studies Department 3

BAAC 3205 Corporate Accounting- 2

A company is defined as a voluntary association of persons, who contribute money or

1. Incorporation: A company is an incorporated association. It comes into existence only

2. Artificial person: A company is regarded as an artificial person as it is created by law

Business Studies Department 4

6. Limited liabilities: The liability of the members of a company is normally limited by

7.Separation of ownership and management: The shareholders of a company are widely

Business Studies Department 5

A company is an improved form of business organization over Partnership on many counts.

Distinction between Limited Liability Company& Partnership

Limited Liability Company Partnership

1. Act : A Company is governed by Is governed by Partnership Act.

2.Entity: A Company is separate legal Partnership has no separate legal

4. Liability: Liability of members is limited in Liability of partners is unlimited—

6. Profits: Profits of the company are Profits of partnership are distributed

Dividends cannot be merged into Partnership profits can be merged

Members cannot inspect books of

8. Audit: Is done compulsorily by Audit of partnership accounts is not

11.Registration: Is compulsory for Company. A Partnership may or may not be

In pubic cos. shares are freely

Business Studies Department 7

1. Advantages & disadvantages of a Corporation

3. Continuity. The corporation’s power of succession enables it to enjoy a continuous

Business Studies Department 8

1. Complexity in organization and regulation. To incorporate a business, an application

4. Centralized management. Its centralized management restricts a more active

7. Neglect of minority interest: The representatives of the majority group of shareholders

8. Lack of personal interest: In sole proprietorship and partnership firms business is

1. Different types of organizations & Formation of a Company in Sultanate

SAO Company may be:

• Shareholders – there is a minimum requirement of three shareholders.

• Minimum capital requirements –

SAOC (Closed ) must have a minimum share capital of at least RO500,000.

• Management structure – management of a JSC is by a board of directors and must consist

Licensing and registration

Other establishment issues

4. Limited Liability Company (LLC):

• Shareholders – there is a minimum of two shareholders required for a LLC and a

Business Studies Department 12

2.Comparison between LLC and SAO companies:

The company(SAOG)will be required to have a minimum of two million Omani Rials to be

Business Studies Department 13

a) General Legal Requirements: