Limited Companies (Copy)
Cheat Sheet: 5.3 Limited Companies
O Level and IGCSE Accounting – Quick Revision
Definition: Limited Company
- A limited company is a business registered as a separate legal entity, distinct from its owners (shareholders).
- Run by directors on behalf of shareholders.
Limited Liability
- Shareholders are only liable for the company’s debts up to the amount unpaid on their shares.
- Personal assets are not at risk.
Advantages and Disadvantages
| Advantages | Disadvantages |
|---|---|
| Limited liability for owners | Complex to form and register |
| More capital can be raised via shares | Financial statements must be published |
| Perpetual existence (company survives owners) | More legal requirements and regulations |
| Professional image and credibility | Dividends not guaranteed |
Equity and Capital Structure
Equity = Total funds contributed and retained by shareholders
Includes:
- Ordinary Share Capital
- Preference Share Capital
- General Reserve
- Retained Earnings
Share Capital Terms
| Term | Meaning |
|---|---|
| Issued capital | Total nominal value of shares issued to shareholders |
| Called-up capital | Amount company has requested from shareholders to pay |
| Paid-up capital | Amount actually paid by shareholders |
Types of Shares
| Share Type | Key Features |
|---|---|
| Ordinary Shares | Variable dividend, voting rights |
| Preference Shares | Fixed dividend, no voting rights, paid before ordinary shareholders |
| Redeemable | Can be repurchased by company at a future date |
| Non-redeemable | Cannot be bought back |
Note: Cumulative, non-cumulative, rights issues, and share premium not examined
Loan Capital (Debentures)
| Debentures | Ordinary Shares |
|---|---|
| Fixed return (interest) | Variable return (dividends) |
| Repayable | Not repayable |
| Do not confer ownership | Shareholders are owners |
| Interest is an expense | Dividend is distribution of profit |
Income Statement for Limited Companies
| Particulars | Amount ($) |
|---|---|
| Revenue | xxxx |
| Cost of Sales | (xxxx) |
| Gross Profit | xxxx |
| Operating Expenses | (xxxx) |
| Operating Profit | xxxx |
| Interest on Debentures | (xxx) |
| Profit Before Tax | xxxx |
| Income Tax | (xxx) |
| Profit for the Year | xxxx |
| Appropriations: | |
| Dividends | (xxx) |
| Transfer to General Reserve | (xxx) |
| Retained Earnings | xxxx |
Statement of Changes in Equity (Format)
| Particulars | Ordinary Share Capital | Preference Share Capital | General Reserve | Retained Earnings |
|---|---|---|---|---|
| Opening Balance | xxxx | xxxx | xxxx | xxxx |
| Profit for the year | – | – | – | xxxx |
| Dividends | – | – | – | (xxx) |
| Transfer to reserves | – | – | xxx | (xxx) |
| Closing Balance | xxxx | xxxx | xxxx | xxxx |
Statement of Financial Position (Extract)
Equity and Liabilities
| Section | Amount ($) |
|---|---|
| Equity: | |
| Ordinary Share Capital | xxxx |
| Preference Share Capital | xxxx |
| General Reserve | xxxx |
| Retained Earnings | xxxx |
| Non-current Liabilities: | |
| Debentures | xxxx |
| Current Liabilities: | |
| Trade Payables, Accruals, etc. | xxxx |
Adjustments from 5.1 (Apply Same to Companies)
| Adjustment | Impact |
|---|---|
| Depreciation | Expense in income statement; reduces asset value |
| Accrued/Prepaid Expenses & Incomes | Adjust profit and position |
| Provision for doubtful debts | Reduces trade receivables |
| Inventory Valuation | Affects cost of sales and profit |