Business Accounting

Benefits Of Budgeting:

Reinforce the management process of planning ahead. In fact, budget compel the managers to think and anticipate of future challenges, formulate strategies ,etc so as to achieve  the desired company’s goals;

A budget is in reality a set of plan. This plan is created by all the relevant managers to create a course of action for future action(s)

Create a basis for Performance Evaluation of Managers’ performance. Incentives are based on how much have been achieved against the budgeted figures. Hence, if budgets are set up realistically will assist to motive manager and employees positively.

Aid in resource planning and allocation, key or scarce resources or capital expenditure are carefully review during the establishment of the budgets;

Promote continuous improvement. In the budgeting stage, non-value adding activities shall be elimianted, new or enhanced processes are designed to increase productivity, etc.;

Budgeting is the best time for all level of manager to co-ordinate together so as to plan ahead, promotes teamwork, process improvement and goal congruency between the company and the employees.

Delegation of duties, authority limit and responsibility are more properly segregated as budgets are set up. With budgets, top management feel that they are in control of the various business activities of the company.

Limitation Of Budgeting:

De-motivation of employees as they feel that the budgeted figures are way too high to achieve;

Budgetary slack or padding the budgets as managers will intentionally blow up their budget figures for fear of top management’s reprimanding them;

A budget tends to emphasize on results and the real reasons are being ignored;

Unrealistic budgets can lead managers to make decisions that might be detrimental to the company. A good example of over-ambitious sales budget will lead to disastrous impact like giving steep discount to increase volume,etc.;

No matter how well prepared a budget might be, it will never be able to reflect truly the reality/complexities faced by the company;

There is a need to revise/update the budget which at the time was based on a certain set of circumstances/best information.

Budgets if not properly buy in by all relevant parties will not get the full cooperation hence it might lead to the motto:Planning to fail

Characteristics Of ABSORPTION:

• The company that absorbs the small company will become bigger.

• The existing shareholders of the absorbed company  form part of the shareholders of the new company.

• No new company is formed

1. refunds any surplus capital

2. cancel paid up capital not represented by assets

3. reduces/write off uncalled capital on any of the shares

Accounting For Company Reconstruction- REFUND OF SURPLUS CAPITAL

1. large amount of accumulated losses and or

2. some of the assets are overvalued/overstated

3. some of the assets are fictitious

The above illustrates that XYZ Ltd has unwisely eroded its paid up share capital from $600,000 to $50,000.

• continue to be in business and face further erosion of capital vide it continuing trading losses
• wind up its business
• re-organize

By embarking on an internal reconstruction, XYZ Ltd should have the following intention:

• ability to start afresh to regain profitability
• adjust any unrepresented assets
• writing off the accumulated losses by reducing its paid up capital
• subsequently to issue additional shares to raise funds for its new plans.

1. Determine the total amount to be written off
   • the debit balance of the accumulated profit & loss needs to be eliminated
   • overvalued assets need to be written down
   • fictitious assets like preliminary expenses, recorded goodwill, patent, trademarks and other intangible assets need to be written off

2. The rights of the various stakeholders need to be considered

• debenture holders, trade and other creditors-all the liabilities should be settled. The debenture holders and creditors at times are willing to convert their claims into shares.
• preference shareholders -ensre that the reduction or written off vaue in preference shares must not be higher than ordinary shares. Preference shareholders may be willing to convert their claims ( preference dividends in arreas) into shares or waive the rights to the arrears.

3. Ensure that the ordinary shareholder should bear the major brunt of the losses as they are risk takers in the business

4. At the end, ensure that the scheme is equitable to all affected parties.

1. No new company is formed. The existing company continues as a going concern;
2. The ailing company will not gove ito liquidation under the capital reduction scheme and
3. Involves complying the requirements under the Companies Act.

1. A new company is formed by the existing shareholder of the old company to take over the assets and liabilities;
2. The ailing company goes into liquidation and
3. There is no need to comply with particular clause in the Companies Act.

• A term used to describe the drastic formal changes in a company’s capital structure as a result of certain circumstances.

• Divided into two(2) types namely

• Internal reconstruction

• External reconstruction

• Undertaken by companies that have surplus capital or companies whose capital has been eroded by trading losses

• In this type of internal reconstruction, companies who wish to reduce their capital need to comply with certain requirements of their local Companies Act. This normally involves the following:

• The capital reduction scheme must be confirmed by the court

• The articles of association of the company must provide for such reduction of capital and

• A special resolution must be passed by the company

1. To reduce or write off uncalled capital on any of its shares;
   
2. To cancel paid up capital not represented by assets; or
   
3. To refund any surplus capital ie. Capital in excess of the needs of the company ( a company which has par value of $1 applies to reduce to 50 cent per share so as to refund 50 cent per share to the shareholders )