Company capital and manufacturing accounts

A company is a separate accounting entity

Company accounts report the transactions and position of the company rather than treating every shareholder's personal activity as company business. Ownership is represented by shares, while directors and managers exercise roles under the governance arrangement. Limited liability commonly limits shareholders'ordinary exposure according to their share obligations, but does not mean that the company has no debts. A company can continue despite changes in individual shareholders. Exact formation, disclosure and legal requirements vary by type and jurisdiction, so a conceptual lesson should not substitute for current legislation.

Share capital records the relevant nominal amount of issued shares under the elementary accounting format. If shares are issued above nominal value, the excess is share premium under the stated treatment. Issuing 10,000 shares of₦1 nominal value at ₦1.40 produces₦14,000 cash, ₦10,000 share capital and₦4,000 premium before any issue-cost adjustments specified. The whole receipt is not trading revenue, because it comes from owners providing capital. Likewise, the market price at which existing shareholders trade shares does not automatically change the company's share-capital account.

Shares, debentures and distributions

Ordinary shares represent an ownership interest with rights determined by the issue and law. Preference shares can carry specified preferential rights, but their accounting classification depends on their terms and framework rather than the word preference alone. Debentures ordinarily represent borrowing, making holders lenders rather than ordinary owners. Interest on borrowing is treated differently from dividends distributed to shareholders. A question should state the terms, dates and accounting basis. Do not assume every payment to a financier is a dividend or that every security is equity.

A dividend is a distribution according to the applicable approval and recognition rules, not an ordinary operating expense used to calculate trading profit. Retained earnings accumulate relevant profits after distributions and adjustments. Reserves can arise from different sources. Revenue reserves generally arise from earned profits, while capital reserves arise from specified capital transactions under the syllabus classification. The label reserve does not mean a separate bank account containing that amount. Restrictions on use and distribution require the relevant law and framework, so avoid inventing universal legal permissions.

Manufacturing cost starts before a sale

A manufacturing business converts materials into finished products. Its manufacturing account determines cost of production, which then supports the trading and profit calculation. Direct materials, direct labour and direct expenses can be traced to the product under the question's costing system. Prime cost is their total. Factory overhead includes indirect production costs such as factory supervision, production-equipment depreciation and relevant factory utilities. Selling and administration costs ordinarily belong outside factory production cost in the elementary format. Classification follows function, not merely the supplier's name.

Direct materials consumed commonly equal opening raw-material inventory plus purchases and relevant inward costs less closing raw-material inventory, adjusted for any additional items specified. Buying materials is not the same as consuming them in production. Suppose opening materials are₦20,000, purchases₦90,000 and closing materials₦25,000, with no other adjustments. Materials consumed are₦85,000. If direct labour is ₦60,000 and direct expenses₦5,000, prime cost is ₦150,000. Label each stage so that inventory and labour are not double counted.

Work in progress and finished goods

Work in progress is production not yet completed. Cost of completed production is generally opening work in progress plus current manufacturing cost less closing work in progress under the stated format. If prime cost is ₦150,000 and factory overhead₦40,000, current manufacturing cost is ₦190,000. With opening work in progress₦12,000 and closing₦17,000, completed production cost is ₦185,000. Closing work in progress is deducted because that portion has not yet become completed goods.

Finished-goods inventory is a separate stage. Cost of goods sold commonly equals opening finished goods plus completed production cost less closing finished goods, with any specified adjustments. If opening finished goods are₦30,000 and closing₦35,000 in the example, cost of goods sold is ₦180,000. Do not deduct both raw-material and finished-goods closing inventories from one undifferentiated purchases total. Each inventory belongs to a different stage and has its own calculation. A flow diagram in notes can help: materials, work in progress, finished goods, then cost of sales.

Apportionment and interpretation

Some expenses serve several functions or departments and need apportionment on a reasonable stated basis. Rent might be apportioned by floor area, power by metered use or machine hours, and staff-related costs by a relevant staff measure. The best basis reflects the cause of the cost where possible. Dividing equally merely because there are two departments is not automatically appropriate. If a question supplies a basis, use it and show the ratio. Check that all allocated portions sum to the original total without creating or losing expense.

Manufacturing profit can be affected by inventory valuation, capacity use and cost classification. A lower cost per unit may reflect improved efficiency, but it can also reflect different methods or a change in product mix. Company financial statements require context and comparable figures. A single gross-profit figure does not show liquidity, debt capacity or governance quality. Distinguish the purpose of computing cost from the wider task of interpreting performance, and state what further information would be useful.

Self-check and examination method

Self-check: why is share issue cash not sales income? It is capital financing from owners, not consideration for ordinary output. Self-check: why add opening work in progress and deduct closing work in progress? The first is completed using this period's work, while the second remains unfinished at the reporting date. Start with clear headings, calculate materials consumed, prime cost, factory cost, completed production and cost of sales in order. For company capital, separate nominal capital, premium, borrowing and distributions. These distinctions make the accounts understandable instead of merely balanced.

Further application

Where a factory transfers output internally at a price including profit, distinguish that management measure from external profit. Unsold internal output can require an unrealised-profit adjustment under the question's method. Likewise, abnormal waste and idle-capacity costs need the treatment specified by the accounting framework rather than automatic inclusion in every inventory unit. Costing aims to explain resources consumed, not manufacture a preferred result. A useful final check traces total units and values through raw materials, production and finished goods before interpreting the reported margin.