ACC2120 NOTES
ACC2120 NOTES
WEEK 1 – FINANCING COMPANY OPERATIONS
When a company is initially formed, it will generally need money to fund its set up such as the purchase of property, land and equipment as well as financing other operations. There are also legal costs of share issues, for any underwriting expenditure and for working capital. Hence it is important that enough money is raised to fund these needs. Companies can do this in several different ways.
FIrstlly share issues. Share issues can be in the form of a ordinary share or a preference share. A company issue shares at a price that they deem will attract investors. Shares can be publicly issued (only applicable to publicly listed companies), this means they offer the ‘public’ to invest in its company. This will generally require a disclosure document called a prospectus. (hence prospectus = public share) However, they can also be privately placed, that is sold to a specific person or entity. Also, shares can be issued to existing shareholders (rights issues), or brought back from existing shareholdings.
Share issues can be fully payable on application or in instalments.
When a company issues a prospectus, there is no accounting treatment. Accounting treatment occurs when applications are received. When applications are received, two accounts are introduced. Cash Trust and Application. The cash trust account is where the application money goes into when applications are received. It is put in a cash trust account rather than a cash account because the company does not legally own the money until shares are allotted or returned money if it was oversubscribed. Therefore the money must be kept in a separate bank account. Applications can be oversuscriped or undersubscribed. When there is an oversubscription, companies can either refund the excess money or they can hold the money and use it to offset accounts payable.
DR Cash Trust CR Application
The application account is a liability representing the money
WEEK 1 – FINANCING COMPANY OPERATIONS
When a company is initially formed, it will generally need money to fund its set up such as the purchase of property, land and equipment as well as financing other operations. There are also legal costs of share issues, for any underwriting expenditure and for working capital. Hence it is important that enough money is raised to fund these needs. Companies can do this in several different ways.
FIrstlly share issues. Share issues can be in the form of a ordinary share or a preference share. A company issue shares at a price that they deem will attract investors. Shares can be publicly issued (only applicable to publicly listed companies), this means they offer the ‘public’ to invest in its company. This will generally require a disclosure document called a prospectus. (hence prospectus = public share) However, they can also be privately placed, that is sold to a specific person or entity. Also, shares can be issued to existing shareholders (rights issues), or brought back from existing shareholdings.
Share issues can be fully payable on application or in instalments.
When a company issues a prospectus, there is no accounting treatment. Accounting treatment occurs when applications are received. When applications are received, two accounts are introduced. Cash Trust and Application. The cash trust account is where the application money goes into when applications are received. It is put in a cash trust account rather than a cash account because the company does not legally own the money until shares are allotted or returned money if it was oversubscribed. Therefore the money must be kept in a separate bank account. Applications can be oversuscriped or undersubscribed. When there is an oversubscription, companies can either refund the excess money or they can hold the money and use it to offset accounts payable.
DR Cash Trust CR Application
The application account is a liability representing the money