Company Accounts

A company is a business organization legally recognized as a separate entity from its owners. This means the company can own property, enter contracts, and be sued independently. In Nigeria, companies are formed under the Companies and Allied Matters Act (CAMA).

Formation requires several key steps. First, promoters prepare a memorandum of association and articles of association. These documents establish the company's objectives and internal rules. Next, they submit these documents to the Corporate Affairs Commission (CAC) for registration. Once approved and the certificate of incorporation is issued, the company officially exists as a legal entity.

A concrete example is how MTN Nigeria was established—promoters registered the company with CAC, obtained approval, and then began operations as a legally separate business entity.

The main advantage of this structure is limited liability, meaning shareholders only lose their investment if the company fails.

Companies in Nigeria are classified into two main types based on liability. A private company has limited members, usually between two and fifty people, and shares cannot be sold to the general public. Think of Dangote Group's private operations before going public. A public company, on the other hand, can have unlimited members and can offer shares to anyone through the stock exchange. The Nigerian Stock Exchange lists many public companies like MTN Nigeria and Zenith Bank where ordinary Nigerians can buy shares.

Shares represent ownership in a company. Ordinary shares give you voting rights and dividends based on company profits. Preference shares guarantee fixed dividends but limited voting rights. When you buy shares, you become a shareholder with partial ownership of that business.

Understanding these distinctions is crucial for company accounting.

When a company needs money to start or expand its business, it can issue shares to the public. Think of shares as small pieces of ownership in the company. If a company divides itself into 1,000 equal parts and sells 500 of these parts to investors, each part is one share. The people who buy these shares become part-owners called shareholders.

For example, when Nigerian banks like GTBank or First Bank wanted to raise capital for expansion, they issued shares that Nigerians could buy. If you bought shares worth ₦10,000, you'd own a tiny piece of that bank and could receive dividends (profits) annually.

Companies issue shares at a price determined by their value and market demand. This money becomes the company's capital for operations and growth. Share issues are recorded carefully in the company's accounting books because they represent long-term financing.

When a company needs money to grow but doesn't want to issue more shares, it borrows from banks or the public through loan capital, debentures, or mortgages. Loan capital is money borrowed from financial institutions at agreed interest rates and repayment periods. Debentures are certificates issued to the public where people lend money to the company and receive fixed interest payments—think of them as IOUs. Mortgages are long-term loans specifically secured against company property or land; if the company defaults, the lender can seize the asset.

For example, Nigerian breweries might take a mortgage against their factory buildings to finance expansion projects. These financing methods appear on the balance sheet as liabilities since the company owes the money back. Unlike share capital, loan capital creates a legal obligation to repay with interest.

A company prepares final accounts mainly for its internal management to understand how the business performed during a period. These accounts show profit or loss, financial position, and cash flow—helping directors and managers make better decisions. Unlike published accounts shared with the public, internal accounts contain detailed information that the company wants to keep confidential.

Think of it like Dangote Group preparing detailed financial statements for their board meetings to review departmental performance and decide where to invest more money next. The management needs complete, honest information without hiding anything because they're trying to improve operations.

Internal accounts follow the same accounting principles as published accounts but include more detailed breakdowns. Management uses them to evaluate performance, plan budgets, and identify problem areas needing attention.

Ratios help us understand how well a company is performing by comparing different figures from its financial statements. Think of ratios as a company's health check—they show profitability, efficiency, and financial strength. For example, if Dangote Cement Limited earned ₦500 million profit on ₦2 billion sales, the profit ratio of 25% tells us the company keeps 25 kobo from every naira of sales. Common ratios include gross profit ratio (profit before expenses), net profit ratio (final profit), and return on capital employed (how well the company uses investors' money). By comparing these ratios year-on-year or against competitors, you can spot trends—whether the business is improving or declining. Low ratios might signal problems needing investigation. Shareholders and creditors use these ratios to make investment decisions.

**

When a company buys an existing business, it doesn't just record the purchase price as a simple expense. Instead, accountants create a special account called "Purchase of Business" to track all assets and liabilities acquired. Think of it like this: if you bought your uncle's provision store in Lekki, you'd need to record the shop building, stock, equipment, and even the debts owed separately—not as one lump sum.

The purchase price gets divided among identifiable assets like inventory, equipment, and cash. Any amount paid above the fair value of these assets becomes "goodwill," representing the business's reputation and customer loyalty. For instance, if a Lagos company buys a competitor's business for ₦5 million when the assets are worth ₦3 million, that ₦2 million difference is goodwill.

This account eventually closes to the owner's capital account at year-end.

The Statement of Cash Flow shows how a company's cash position changed during a period. Think of it like tracking money flowing in and out of a business's bank account. Two methods exist: the direct method lists actual cash receipts and payments, while the indirect method starts with net profit and adjusts for non-cash items. For example, if a Nigerian manufacturing company like Dangote Group sells goods on credit, the indirect method adds back accounts receivable increases to net profit because actual cash wasn't received yet. Both methods arrive at the same final answer—the net change in cash. This statement matters because profitable companies can still fail without proper cash management. Understanding cash flow helps identify whether a business genuinely earns money or merely appears profitable on paper. Nigerian companies must prepare this according to Nigerian Financial Reporting Standards.