f u r t h e r f e at u r e s o f c o m p a n y a c c o u n t s
which is greater than the original loan amount. Thus the bond is effec-
tively paying interest; you just don’t get it until the end of the term.
How do you account for a zero coupon bond, then? Is the liability the initial amount
or the final amount?
The liability starts as the amount of cash received for the bond, but the
liability increases each year. As I said, interest is effectively paid on this
type of loan, and we can work out what the effective interest rate is. We
then increase the liability by this interest rate each year so that, at the
end of the term, the liability has grown to the final lump sum payment.
The other book-keeping entry is to reduce retained profit each year by the
effective interest for the year.
As we saw in the last session, Wingate has only one type (or class as it
is known) of share capital – ordinary shares. These are by far the most
common shares you will encounter. Just as with debt, though, there are
The shares you are likely to encounter most often after ordinary shares
are preference shares. They are different from ordinary shares in that:
They usually have a fixed annual dividend, which must be paid
before any dividend is paid on the ordinary shares. Unlike interest,
though, these dividends cannot be paid unless the company has
positive retained profit.
If the company is wound up, the preference shareholders usually
get their money back before any money is returned to the ordi-
nary shareholders. The amount they get back will, however, be
the amount they put in or some other predetermined amount. The
ordinary shareholders get what is left over, which may be a lot
more than they put in or a lot less.