Liquidation Of a Company Defination with Example

LIQUIDATION

Definition and Necessity

"Liquidation" is the act of terminating or winding up the business by a company. In this case not only the business activities are closed, but steps are also taken to close the books of accounts.

When a company is in financial. difficulties, which cannot be overcome through internal reconstruction i.e. recapitalization measures described in the earlier section, the only way is the external reconstruction, which involves:

·         Winding up the old company

·         Formation of a new company to replace the liquidated company or its taking over by a new company.

Accounting Entries for Liquidation

The entries necessary to close the books of the company that goes into liquidation will be similar to those, which are required in the case of dissolution of the partnership, which have already been described. It is necessary to open a realization account in this case. The procedure for debit and credit is as under:

•          i.            Debit realization account and credit each asset account at book value. This will result in closing asset accounts in the ledger.
•        ii.            Debit each liability account by a credit to realization account if the liabilities are taken over by the purchasing company. This will close the liability accounts in the ledger.
•      iii.            Debit the purchaser's account and credit the realization account with the agreed purchase price.
•      iv.            If the expenses of liquidation are to be borne by the purchasing company, debit the purchasing company's account and credit bank.
•        v.            Debit realization account with other expenses not borne by the purchasing company and credit cash or bank. The realization account will now show profit or loss, which will be transferred to the shareholders' accounts.
•      vi.            Transfer the share capital account, reserve, funds, balance c profit and loss account to shareholders' accounts.
•    vii.             When purchasing a company or other purchasers make payment by cash or issue of shares, debit cash, and shares and credit the purchasing company.
•  viii.            Debit shareholders' account and credit cash and shares when the same are distributed to the shareholders.

This will close all the accounts of the liquidating company. The above procedure will be clear from the following example.

Detailed Example-

Given below is the balance sheet of M & N Company limited.

Capital & Liabilities             Amount             Assets                          Amount

20000 shares of Rs.IO each         200000         Land and Building                    100000

Debentures                                    100000         Plant & machinery                    25000

Reserve Fund                                 25000           Work in Progress                     30000

Dividend equalization Fund         20000           Stock                                           60000

Profit & Loss Appropriation        5100            Furniture & Fitting                     2500

Sundry Creditors                          30000           Sundry Debtors                         25000

                                                                              Cash at bank                              12500

                                                                              Cash in hand                              100 

A bargain is struck with A & B company limited according to which directors of M & N company agree to wind up their company by taking necessary steps and A & B is to take over the business of the liquidating company on the following terms and conditions:

        I.            The taking over the company to discharge all debentures at a premium of 5%. 

MS EXCEL Advanced Keyboard Shortcuts

MS EXCEL ADVANCED KEYBOARD SHORTCUTS

 

CTRL+D: Uses the Fill Down command to copy the contents and format of the topmost cell of a selected range into the cells below

CTRL+G: Displays the Go To dialog box

 CTRL+K: Displays the Insert Hyperlink dialog box for new hyperlinks or the Edit Hyperlink dialog box for selected existing hyperlinks

CTRL+N: Creates a new, blank workbox

 CTRL+O: Displays the Open dialog box to open or find a file

 

 ADVANCED EXCEL 2

F4: Repeats the last command or action if possible

When a cell reference or range is selected in a formula. F4 cycles through the various combinations of absolute and relative references

CTRL+F4:  closes the selected workbook window

F5: Displays the Go To dialog box

CTRL+F5: restores the window size of the selected workbook window

SHIFT+F6: Switches between the worksheet, Zoom controls, task pane, and Ribbon.

CTRL+F6: switches to the next workbook window when more than one workbook window is open

ALT+F: creates a chart of the data in the current range

ALT+SHIFT+F: inserts a new worksheet

Shift+F2: adds or edits a cell comment

CTRL+F2: Displays the Print Preview window

SHIFT+F3: displays the Insert Function dialog box

F4: Repeats the last command or action if possible

When a cell reference or range is selected in a formula. F4 cycles through the various combinations of absolute and relative references

CTRL+f4: closes the selected workbook window

F5: Displays the Go To dialog box

CTRL+F5: restores the window size of the selected workbook window

CTRL+SHIFT+&: Applies the outline border to the selected cells

CTRL+SHIFT+~: Applies the General number format

CTRL+SHIFT+$: Applies the Currency format with two decimal places (negative numbers in parentheses)

CTRL+SHIFT+%: Applies the percentage format with no decimal places

Types of Company| Private Ltd, Limited, Public

Kinds of Companies

There are three kinds of companies which can be registered in our country under the provisions of the Companies Ordinance, 1984.

Un-Limited Companies

These are the companies in which the liability of the members is unlimited. It may or may not have share capital. If the company goes into liquidation the private property of the members will be liable for attachment for satisfying debts of the company. As the risk involved is great, unlimited companies are not found in this country. Companies Limited by Guarantee

These are the companies whose shareholders undertake to contribute a certain sum towards the assets of the company in the event of its being wound up to meet the claims of the creditors. Generally, such companies do not have any share capital.

 

From another angle. we can classify companies as private and public.

Private Company

According to section 2 (28) of the Companies Ordinance 1984, a private company means a company which by its articles: Restricts the right to transfer its shares:

Limits the number of its members to fifty not including persons who are in the employment of the company; and Prohibits any invitation to the public to subscribe for their shares, if any or debentures of the company.

Note: A private company is required to add word (Private) as a part of its name before the word limited.

Public Company

It means a company. which is not a Private Company Section 2 (30). A company whose articles do not contain all the restrictions specified in Section 2 (28) is a Public Company. Further, a public company may be listed or unlisted. A listed company is one whose securities are listed in Stock Exchange for purpose of trading in it. In a simple word, a public company is a company that invites the general public to subscribe to its share capital.

Formation of a Company

The founders of the company are called promoters of the company. Promoting persons take initiative in the formulation of the company. Promotion of a company means planning its establishment, negotiation of preliminary contracts, assessment of capital requirements, choice of first directors, drafting of the memorandum, and. articles of association and prospectus and arranging underwriting and other matters relating to raising the proposed capital of the company. The memorandum and articles of association are filed with the Registrar of the Joint Stock Companies. If the Registrar is satisfied that the company is being formed for lawful purposes, that none of its objects stated in the memorandum Is inappropriate or deceptive and that

 

all the requirements of the Company's Ordinance, 1984 have been complied with in respect of registration, he shall retain and register the memorandum and articles of association. When the documents are found in order, the i Registrar issues a certificate of incorporation

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Profit and Loss Account PLS | PLS Appropriation Account

PROFIT AND LOSS ACCOUNT

Companies Ordinance does not prescribe any particular form in which the profit and loss account (or income and expenditure account) of a company should be prepared. However, it has been laid down as to what it shall contain and disclose.

 According to Section 234 (1) every profit and loss account shall give a true and fair view of the profit or loss of the company for the financial year. In order to disclose the true profit or loss of a company for the financial year, it is necessary that the profit and loss account should be so drawn up, that the balance shown at some stage in the account can properly describe as the profit or loss for the financial year and the item set out later in the account can be seen to be:

·        Matters not relative to a fair ascertainment of the profit or loss for the year.

·        Adjustments.

·        Appropriations of the profits including the balance brought forward.

 Contents of the Profit and Loss Account

The profit and loss account of a non-listed company must be prepared in accordance with the requirements of Part-Ill of Schedule Fifth to the Companies' Ordinance. Detailed contents of the profit and loss account of a listed company is prescribed in the Part-II of Schedule Fourth to the Companies Ordinance. Both these schedules themselves are self. explanatory. The former deals with the listed companies and the later provide details for all the other companies. Most of the clauses in the former have been repeated in the later except certain special information additionally required to be disclosed by listed companies. According to Part-||| Schedule Fifth the requirements as to profit and loss account of companies are summarized as follows:

Income

a. Gross turnover and deduction therefrom:

1.     Commission paid to sole selling agents:

2.      Commission paid to other selling agents:

3.     Brokerage and discount on sales.

b- Income from investments, showing separately the income from each associated undertaking and other investments.

c-  Interest/profit accrued or received showing separately against loans and advances.

d- Profit on sale of the investment.

e- Profit on sale of fixed assets.

f-  Income arising from any unusual transaction.

G- Income arising against any prior year item: and

h- Other income stating each material item separately.

 Material Consumption & Stock Position:

The material consumption figures indicating the opening and closing balance of raw material, work-in-progress and finished goods and the purchase of material and stock during the year must be stated.

In case, however, by. the accounting method employed by the company, the "cost of material consumed" or "cost of purchased finished goods sold" can be worked out, then the disclosures of opening and closing stocks (as discussed above) can be dispensed with.

 Expenditure

Expenditure incurred under the following heads must be stated separately:

a)    Store and spares consumed Fuel and power

b)   Salaries, wages, including bonus, provident fund contribution and other staff welfare expenses

c)    Rent, rates, and taxes

d)    Insurance premium

e)    Repair and maintenance

f)      Patent, copyrights, trademarks, royalties and technical assistance tee and expenses

g)    Donations

h)   Depreciation or other provisions in diminution in value of assets and investment

i)      Interest showing separately on debentures, long term loans, and short-term loans, on borrowing from associated undertaking, directors and managing agents

j)      Loss on sale of investment and on sale of fixed assets

k)   Bad debts are written off and provision for doubtful debts distinguished between trade debts and other debts, and

l)      Provision for taxation indicating the provision for deferred tax.

Cost of Goods Manufactured/Exported

The PLS Account shall be so drawn up as to disclose separately the manufacturing trading and operating results.

In the case of a manufacturing concern, the cost of goods manufactured must be shown in the accounts.

The value of items during the financial year shall also be shown provided such value exceeds 20% of the total turnover of the company.

Other Disclosures

In the case of listed companies, the following information be disclosed;

The aggregate amount of expenses in respect of salary, fees, allowances, commission, and benefit allowed to:

a)    Directors

b)   Chief Executives

c)    Managing Agents

d)   Executives

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Balance Sheet Format | Assets and Liabilities of Balance Sheet with Complete Detail

BALANCE SHEET

Every company is required to prepare a balance sheet at the end of each trading period. Section 234 provides that the balance sheet shall give a true and fair view of the state of affairs of the company at the end of its financial year and should comply with requirements of Part-ll of Schedule Fifth in the case of unlisted companies and Part-II of Schedule Fourth in the case of listed companies.

 Format of Balance Sheet

 No form has been prescribed for the balance sheet in the companies' ordinance. It permits the presentation of the balance sheets both in horizontal as well as in vertical forms. A format of Balance Sheet has been developed in horizontal form from the fifth schedule meant for non-listed companies. Additional information required for listed companies under the fourth schedule is also given separately.

Format of balance sheet in statement Form Capital and liabilities

1.    Share capital and Reserves:

                        i.            Authorized share capital-ordinary share of Rs. Total:

                     ii.            Issued subscribed and paid-up capital.

                   iii.            Reserves:

                                  i.            Capital reserves

                               ii.            Capital redemption reserve

                             iii.             Share premium account Surplus on revaluation of the fixed asset

                             iv.            Pre-incorporation profits

                                v.            Any other capital reserve (specify)

 

2.    Revenue reserves

                                  i.            General reserve

                               ii.            Dividend equalization reserve

                             iii.            Deferred depreciation reserve

                             iv.            Un-appropriated profits

                                v.            Any other revenue reserve (specify)

 

3.    Long term loans

                                  i.            Secured loans

                               ii.            Unsecured loan

4.    Debentures and participation term certificate

a.      Secured:

                                i.            Debentures

                             ii.            Participation term certificates

b.     Un-secured:

1.                  Debenture

2.                2. Participation term certificates

 

5.    Deferred Liabilities:

                                  i.            For taxation.

                               ii.            For pension, gratuity and other staff benefits schemes.

                             iii.            Other deferred liabilities.

6.     Long Term Deposits:

7.     Current Liabilities:

1.     Short term loans:

a.      Secured:

1.     From banks & financial institutions.

2.     From subsidiaries, managed Modarabas and associated undertakings.

3.     From directors, chief executive & managing agents.

4.     From others.

b.      Un-secured:

1.     From bank & financial institutions.

2.     From subsidiaries, managed modarabas and associated undertakings.

3.     From directors, chief executive & managing agents.

4.     From others.

8.             Current portion of long terms liabilities.

9.              Deposits.

10.               Creditors.

11.               Accrued liabilities

12.               Bills payable.

13.                Advance Payments.

14.               Interest accrued on secured loans,

15.               Profit accrued on Participation Term Certificates. Other liabilities e.g. unclaimed dividends, unpaid dividends.

16.               Provision for taxation:

a.      Excise duties

b.     Customs duties

c.      Sales Tax

d.     Income Tax

e.      Other Taxes.

17.    Proposed dividend.

       18.    Other provisions and accruals for contingencies.

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