Limited Companies | O Level Accounting 7707 & IGCSE Accounting 0452 | Detailed Free Notes To Score An A Star (A*)
- Advantages of operating as a limited company
- Limited liability: The liability of the shareholder is limited to the amount they have invested in the company. Personal assets are safe
- Separate Legal Identity: A company is incorporated which means it can separately make transactions with its own identity. It does not need to use the name of the owners.
- Can raise extensive capital easily by selling shares
- Can sell shares.
- It also has more prestige than sole traders and partnerships, so organizations and financial institutions are willing to lend.
- Problems of operating as a limited company
- The ownership can change easily – as shares can be bought by others.
- Has little secrecy as it has to share its accounts openly
- Can be audited at anytime.
- Legal requirements to set up are huge
- Reporting requirements are extensive
- Dividends payments
- Equity
- Investing in money into a company to buy shares or part ownership of the company is called equity.
- Capital Structure of Limited Company
- Preference Share Capital
- Preference shares are the shares that do not have a vote in the annual general meeting.
- They have a fixed percentage of dividends
- They have to be paid before ordinary share holders in case the company goes bankrupt and is liquidated.
- Cumulative preference shares are special preference shares where if dividend is not paid in one year, then it will become a liability and has to be paid later.
- Non-cumulative preference shares do not have dividend cumulation over the years.
- Ordinary Share Capital
- Ordinary shares have part ownership of the company
- Paid last of all in case the company gets liquidated.
- They have a vote in the annual general meeting based on their number of shares
- Can be selected on the board of directors
- They are the real “owners” of the company
- General Reserve
- A specific percentage of the profits of the company that is set aside by the company as a reserve for future needs and requirements. Such needs may include contingency situations, meeting financial issues of the company, dividend payments, working capital requirements and offsetting future losses as well.
- Retained Earnings
- These are the profits that the company has saved over time.
- These are other than any reserves.
- Dividends can be paid from retained earnings
- Issued, called up and paid up capital
- Investors have already paid the complete amount for the paid up capital.
- Called up capital is not paid completely currently. However, request ahs been made for their payment.
- Total share of the shares that a company has paid to the shareholders.
- Preference Share Capital
- Equity Financing / Share Capital
- Share Capital raising means a company sells stocks/ shares of its company in return for part ownership to the investor
- Debt Financing
- There are two types of debt financing.
- First, a company can raise debt by taking loans from financial institutions
- Second, the company can issue debentures
- These are long-term debt certificates that are offered by the company itself.
- The person getting the certificate will pay a one time price to the company.
- The company will pay an interest on the face value for the said number of years
- At the end of the period, the company will purchase back the debt certificate at the face value as well.
- If at any point in between, the company can purchase the certificate back at the face value but it will be other than the interest paid.
- Income Statement for Limited Companies
- Other things are the same in the income statement, one key change is that in the operative expenses, director’s salary will be added.
- Any interest on debentures for the period will also be added in the operative expenses.
- After the profit for the year is calculated, we do the following
- LESS: Transfer to general reserve
- LESS Proposed preference share dividend
- LESS Paid ordinary share dividend
- LESS Proposed ordinary share dividend
- This calculation give us retained profit for the year
- In this we add the retained profit from the last year, it becomes the retained profit carried down.
- Below, you can see this last part of the income statement in detail
| Operating Profit (Profit for the year | – | |
| Less: Equity Transactions | ||
| Transfer to General Reserve | – | |
| Preference Share Proposed Dividend | – | |
| Ordinary Share Paid Dividend | – | |
| Ordinary Share Proposed Dividend | – | |
| Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Total Deductions | (-) | |
| Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Retained Profit for the Year | – | |
| Retained Profit Brought Down | – | |
| Retained Profit Carried Down | – |
- Next, we have to make a statement of changes in equity
- It is made in a horizontal format
| Share Capital | Share Premium | Revaluation Reserve | General Reserve | Retained Earnings | Total | |
| Balance B/D | – | – | – | – | – | – |
| Any Surplus Gained on Revaluation | – | – | ||||
| Net Profit for the Period | – | – | ||||
| Dividends Paid | (-) | (-) | ||||
| Transfer to General Reserve | – | (-) | ||||
| Issued Share Capital | – | – | ||||
| Any Premium on Share Capital Issue | – | – | ||||
| Balance C/D | – | – | – | – | – | – |
- Now, these Balance CD will help us in the statement of financial position
- In the statement of financial position, the following changes will be noted
- In the non-current liabilities, debentures might be present
- In the current liabilites
- Debenture interest may be present
- Proposed dividends are present (these are dividends that have been announced but have not been paid, such dividends are paid during the next year.
- The Equity Section will be called the Capital and Reserves Section
- The following items are included
- C/D Balances of Capital, Share Premium, Revaluation Reserve, General Reserve and Retained Earnings.
- All of them are added, and it gives us the total of the section for capital and reserves.
