Introduction to Company Accounts

A company is simply a business organization formed by law with its own separate identity from its owners. The main types you'll encounter are private and public companies. Private companies have restricted ownership, meaning their shares cannot be sold to the general public. They typically have fewer shareholders and are often family-owned businesses. Think of a small manufacturing firm in Lagos owned by a few families. Public companies, on the other hand, can sell their shares freely to anybody through the stock exchange. Companies like Dangote Group and Nigerian Breweries are public companies because ordinary citizens can buy their shares on the Nigerian Stock Exchange.

The key difference lies in how freely shares are traded and how many owners there can be. Private companies offer more privacy and control, while public companies raise capital more easily but face stricter regulations and public scrutiny.

When a company issues shares, it's basically selling ownership pieces to investors. Think of it like a bakery owner dividing their business into 1,000 equal parts and selling some to raise money. The accounting procedure involves recording the share capital at par value (the stated price) in the company's books. If investors pay more than par value, that extra amount goes to the share premium account, not the capital account. For instance, if Dangote Cement issues 500,000 shares at ₦10 par value but sells them at ₦15 each, the books record ₦5,000,000 in share capital and ₦2,500,000 in share premium. This separation is crucial because share capital has legal restrictions on use, while share premium offers more flexibility. Understanding this distinction helps you answer questions about company formation and capital structure.

When a company needs money to expand or operate, it can raise funds in two main ways. Shares represent ownership in the company. When you buy shares in a company like Dangote Group, you become a part-owner and can earn profits through dividends. Debentures, however, are loans the company borrows from investors. Unlike shareholders, debenture holders are not owners—they are creditors who receive fixed interest payments regardless of whether the company makes profits.

Think of it this way: shareholders are like business partners sharing gains and losses, while debenture holders are like banks lending money with guaranteed returns. The key difference is that debentures must be repaid at maturity, but shares never need repayment.

In company accounts, shares appear under equity while debentures appear under long-term liabilities. Understanding this distinction helps you correctly classify items on the balance sheet.

Company final accounts show the financial position of a business at the end of a financial year. They comprise the Statement of Profit or Loss (Income Statement) and the Statement of Financial Position (Balance Sheet). The profit and loss account calculates whether the company made profit or loss by matching all revenues against expenses. For example, if Nigerian Breweries Limited sells beer worth ₦500 million but spends ₦300 million on production, distribution, and administration, their profit would be ₦200 million. The balance sheet then shows what the company owns (assets), owes (liabilities), and the owner's stake (equity) at a specific date. Both statements are interconnected—the profit calculated flows into equity on the balance sheet. Understanding how to extract and compute these elements properly is crucial for success.

Accounting ratios are mathematical comparisons between different figures in a company's financial statements that help us understand how well the business is performing. Think of them as vital signs for a company—just like a doctor checks your blood pressure and heart rate, accountants use ratios to diagnose a company's financial health.

The main types include profitability ratios, which show how much profit a company makes from its sales; liquidity ratios, which measure whether a company can pay its short-term debts; and efficiency ratios, which reveal how effectively a company uses its assets. For example, if a Nigerian company like Dangote Cement has a profit margin of 35%, this means for every naira of sales, the company keeps 35 kobo as profit.

These ratios help investors decide whether to buy shares, banks decide whether to lend money, and managers decide on business strategy.

These three ratios measure a company's ability to pay its debts. The current ratio divides current assets by current liabilities—if a company has ₦100,000 in assets and ₦50,000 in debts due soon, its ratio is 2:1, which is healthy. The acid test ratio is stricter; it removes inventory because stocks take time to sell. Using the same example but removing ₦30,000 inventory leaves only ₦70,000 in liquid assets, giving a weaker 1.4:1 ratio. Stock turnover measures how quickly a company sells its goods. If Dangote Cement sells ₦500 million worth of cement yearly with average inventory of ₦100 million, its turnover is 5 times per year. Fast turnover suggests good sales; slow turnover suggests dead stock. All three ratios help investors decide if a company is financially healthy.