Limited Companies (Copy)
Introduction to Limited Companies
- A limited company is a form of business organisation that is legally separate from its owners (shareholders).
- Shareholders have limited liability → they are only liable for debts up to the amount they invested in shares.
- Managed by a board of directors, who act as agents on behalf of shareholders.
- Must follow International Accounting Standards (IAS/IFRS) and national legal requirements for financial reporting.
- Produces statutory financial statements that give a true and fair view of the company’s financial performance and position.
Types of Limited Companies
- Private Limited Company (Ltd):
- Cannot sell shares to the public.
- Fewer shareholders, usually family-owned or small businesses.
- Less disclosure required compared to public companies.
- Public Limited Company (PLC):
- Can sell shares to the public via stock exchange.
- Subject to stricter regulation.
- Must publish annual audited financial statements.
Key Financial Statements of Limited Companies
1. Statement of Profit or Loss (Income Statement)
- Shows performance over a period (usually one year).
- Prepared in line with IAS 1 Presentation of Financial Statements.
Format (Extract Example):
| Particulars | Amount ($) |
|---|---|
| Revenue | 500,000 |
| Cost of Sales | (320,000) |
| Gross Profit | 180,000 |
| Other Income (e.g., rent received) | 20,000 |
| Administrative Expenses | (60,000) |
| Distribution Costs | (25,000) |
| Finance Costs (Interest) | (10,000) |
| Profit before Tax | 105,000 |
| Income Tax | (25,000) |
| Profit for the Year | 80,000 |
- Revenue: Sales income.
- Cost of Sales: Opening inventory + purchases + direct costs – closing inventory.
- Gross Profit: Revenue – Cost of Sales.
- Operating Profit: Gross Profit + Other Income – Expenses.
- Finance Costs: Interest on loans/debentures.
- Profit after Tax: Distributed to shareholders as dividends or retained in reserves.
2. Statement of Financial Position (Balance Sheet)
- Shows assets, liabilities, and equity at a given date.
- Must follow IAS 1 and IAS 16 for assets, IAS 37 for provisions, IAS 12 for tax.
Format (Extract Example):
| Assets | Amount ($) | Equity & Liabilities | Amount ($) |
|---|---|---|---|
| Non-Current Assets | Equity | ||
| Property, Plant & Equipment | 200,000 | Share Capital (Ordinary Shares) | 150,000 |
| Intangible Assets (Goodwill, Patents) | 50,000 | Share Premium | 20,000 |
| Retained Earnings | 90,000 | ||
| Total Non-Current Assets | 250,000 | Total Equity | 260,000 |
| Current Assets | Non-Current Liabilities | ||
| Inventory | 40,000 | Long-term Loan | 80,000 |
| Trade Receivables | 30,000 | Current Liabilities | |
| Cash and Bank | 20,000 | Trade Payables | 25,000 |
| Total Current Assets | 90,000 | Short-term Loan | 10,000 |
| Current Tax Payable | 5,000 | ||
| Total Assets | 340,000 | Total Liabilities & Equity | 340,000 |
Key Notes:
- Equity = Assets – Liabilities
- Divided into Share Capital, Reserves, Retained Earnings.
- Must distinguish between current (due within one year) and non-current (due beyond one year).
3. Statement of Cash Flows (IAS 7)
- Explains movements of cash and cash equivalents during the year.
- Divided into 3 sections:
- Operating Activities:
- Cash from normal trading (receipts from customers, payments to suppliers).
- Adjusts profit for non-cash items (depreciation, provisions).
- Investing Activities:
- Cash spent/received from purchase or sale of non-current assets and investments.
- Financing Activities:
- Cash movements with owners/creditors (issue of shares, dividends paid, repayment of loans).
Example Extract:
| Cash Flows from Operating Activities | Amount ($) |
|---|---|
| Profit before tax | 105,000 |
| Add: Depreciation | 15,000 |
| Less: Increase in Receivables | (5,000) |
| Less: Increase in Inventory | (10,000) |
| Add: Increase in Payables | 8,000 |
| Net Cash from Operations | 113,000 |
| Tax Paid | (25,000) |
| Net Cash from Operating Activities | 88,000 |
4. Statement of Changes in Equity (IAS 1)
- Shows movements in equity during the year.
- Records retained earnings, dividends, new shares issued, revaluation gains.
Example Extract:
| Particulars | Share Capital | Share Premium | Retained Earnings | Total Equity |
|---|---|---|---|---|
| Opening Balance | 150,000 | 20,000 | 60,000 | 230,000 |
| Profit for the Year | – | – | 80,000 | 80,000 |
| Dividend Paid | – | – | (50,000) | (50,000) |
| Share Issue | 20,000 | 10,000 | – | 30,000 |
| Closing Balance | 170,000 | 30,000 | 90,000 | 290,000 |
5. Schedule of Non-Current Assets (IAS 16)
- Shows details of depreciation and asset movements.
- Usually an annex to the financial statements.
Example:
| Asset Type | Opening Balance | Additions | Disposals | Depreciation | Closing Balance |
|---|---|---|---|---|---|
| Machinery | 100,000 | 50,000 | (10,000) | (15,000) | 125,000 |
| Vehicles | 40,000 | 20,000 | – | (8,000) | 52,000 |
| Total | 140,000 | 70,000 | (10,000) | (23,000) | 177,000 |
Accounting Adjustments in Limited Companies
- Depreciation (straight-line or reducing balance).
- Provision for Doubtful Debts (IAS 37).
- Accruals and Prepayments (matching principle).
- Tax provision at end of year.
- Dividends (interim and final) declared must be deducted from retained earnings.
Distinction from Partnerships and Sole Traders
| Feature | Limited Companies | Partnerships/Sole Traders |
|---|---|---|
| Legal Status | Separate legal entity | Owners and business same legal entity |
| Liability | Limited liability of shareholders | Unlimited liability of partners/sole trader |
| Profit Distribution | Dividends based on shares | Profit shared as per agreement |
| Reporting | Must comply with IAS/IFRS, publish accounts | Fewer statutory requirements |
| Capital Raising | Can issue shares/debentures | Limited to owners’/partners’ contributions |
Reasons for Preparing Limited Company Accounts
- Statutory Requirement (law + IFRS compliance).
- Provide Information to Shareholders about profitability and financial position.
- Assist Investors and Creditors in decision-making.
- Facilitate Taxation (corporation tax based on profits).
- Performance Evaluation by directors and management.
- Transparency and Accountability in financial reporting.
Evaluation of Information for Decision-Making
Candidates must use financial statements to:
- Analyse profitability (gross profit %, net profit %, ROCE).
- Assess liquidity (current ratio, quick ratio).
- Judge efficiency (inventory turnover, receivables collection period).
- Evaluate gearing (debt/equity ratio, interest cover).
- Consider future prospects (growth in revenue, retained earnings trend).