Describe the concepts and principles applied in preparing records and financial statements relating to companies (meaning, types, reserves, retained earnings, dividends and procedures for raising share capital)

Companies are categorised based on two main criteria: their method of incorporation and the extent of members' liability.

Based on Incorporation

Statutory companies are created by special legislation and operate like private companies. Examples in Tanzania include Tanzania Telecommunications Company Limited (TTCL) and Air Tanzania Company Limited (ATCL). Registered companies are those registered under the Companies Act, 2002 (CAP 212).

Based on Liability

A limited liability company is one where the liability of members is limited to the unpaid amount on shares held. A company limited by guarantee is where members commit to contribute a specific amount upon winding up. An unlimited liability company has no limit on members' liability, meaning creditors can claim from members' personal property if company assets are insufficient.

Based on Number of Members

A private company (Ltd) has a minimum of two and maximum of fifty shareholders, cannot offer shares to the public, and cannot trade on the stock exchange. A public company (PLC) requires a minimum of seven shareholders, can offer shares to the public, and may be listed on the stock exchange.

Reserves are profits or gains that have been set aside to achieve specific objectives. They strengthen a company's financial position, provide for contingencies, or fund future expansion.

Revenue Reserves

Revenue reserves are created from operating profits and can be:

• General reserves: Set aside for unspecified business needs such as meeting contingencies, offsetting future losses, or enhancing working capital.
• Specific reserves: Created for a particular purpose and cannot be used for other purposes. Examples include investment fluctuation reserves (to adjust differences between book value and market value of investments) and debenture redemption reserves (for paying long-term loans).

Capital Reserves

Capital reserves arise from capital-oriented transactions, such as:

• Gains or profits from the sale of non-current assets
• Revaluation surpluses of non-current assets
• Share premium (when shares are issued at a price higher than par value)

Capital reserves are not used for dividend distribution but to conserve capital and improve financial stability.

Retained earnings (also called undistributed profit) are profits earned by the company that are not distributed to shareholders as dividends. Instead, they are retained in the business for reinvestment, meeting future expenses, or paying dividends when profits are insufficient. Retained earnings appear in the equity section of the statement of financial position and accumulate over time.

Dividends are sums of money paid by a company to its shareholders out of its profit or reserves. They represent a return on investment and are declared by the Board of Directors. Key points:

• Dividends are an appropriation of profit, not an expense
• They reduce retained earnings when declared
• Types include interim dividends (paid during the year) and final dividends (declared at year-end)
• For preference shareholders, dividends are usually fixed; for equity shareholders, dividends vary with profitability

When a public company issues shares to the public, it follows these procedures:

1. Issue of Prospectus: An invitation is issued to the public containing details such as face value, issue price, number of shares offered, terms of issue, and application procedures.

2. Receipt of Application: Interested investors submit applications with the required application money to the designated bank.

3. Allotment of Shares: The company allocates shares to applicants. If oversubscribed, shares may be allotted on a pro-rata basis or excess money refunded.

4. Allotment Money: Allotted shareholders pay the allotment money on the due date.

5. Calls: Any remaining unpaid amount is demanded through calls (first call, second call, final call) as the company requires funds.

Terms of Share Issue

Shares may be issued:

• At Par: Issue price equals nominal value
• At Premium: Issue price exceeds nominal value (the excess is credited to Share Premium Account)
• At Discount: Issue price is below nominal value (subject to court approval and maximum 10% discount)

On 1 January 2024, Mwanga PLC had retained earnings of TZS 50,000,000. During the year, the company made a net profit of TZS 30,000,000. The Board of Directors decided to:

• Transfer TZS 5,000,000 to a general reserve
• Declare dividends of TZS 10,000,000 to equity shareholders

The journal entries would be:

After these entries, the retained earnings balance would be: TZS 50,000,000 + TZS 30,000,000 − TZS 5,000,000 − TZS 10,000,000 = TZS 65,000,000.

In Tanzania, understanding company financial statements is essential when evaluating businesses such as supermarkets, telecom companies (like Vodacom or Airtel), or banks (like NMB or CRDB) before investing in their shares. For instance, if you save money and wish to buy shares in a local company listed on the Dar es Salaam Stock Exchange (DSE), you would examine whether the company maintains adequate reserves, has strong retained earnings, and pays consistent dividends—knowledge gained from studying these concepts and principles.