Transcript Introduction to final Accounts of Limited Liability company

Introduction to final Accounts of
Limited Liability company
Limited Companies are needed because of the
disadvantages from which partnerships suffer.
• A partnership can have no more than 20
owners (except for limited partners)
• The amount of capital needed to operate a very
large oganisation is more than 20 people can
provide
•If a partnership business fails, a partner can lose
part or all of his or her private assets as well as the
business assets
Limited Liability
• The capital of a limited company is divided into
shares. Shares can be priced at $1, $5, $10 or any other
amount. To become a member of a limited company
(shareholder), a person must buy one (1) or more
shares.
• If shareholders have paid in full for their shares, their
liability is limited to those shares.
• If a company loses all of its assets, all the shareholders
can lose is their shares ( the value)
• They cannot be force to pay any of their private money
in respect of the company’s losses.
Private & Public Companies
• The two classes of limited company are private company and public
company. There are a lot more private companies than public
companies.
• A Private Company:
 has a minimum membership of 2
 Maximum of 50 members
 Must ask people to buy company shares privately: it cannot do so
in public e.g., by advertising shares in the newspaper.
Any company that does not follow the above is a public
company
Company Directors
• A shareholder normally has the right to attend
general meetings of a company, and can vote at
such meetings. Shareholders use their votes to
appoint directors, who manage the business on
behalf of the shareholders.
• At each annual general meeting, the final
accounts for the year are given to the
shareholders. The directors at the meeting have
to give a report on the progress of the company.
Legal Status of a Ltd Company
• A limited company is said to posses a ‘separate
legal entity’ from that of it’s shareholders. Put
simply, a company is treated like a person
separate from it’s owners (responsible for itself)
A company can sue one or more of it’s
shareholder or, it’s shareholder can sue the
company. This would not be the case if the
company and it’s shareholder were the same.
Share Capital
• A shareholder will receive a share of the profit
called a dividend.
• Not all the net profit will be paid out. The
directors calculate the net profit and determine
the amount that should be paid out and the
amount that should be kept back.
• The amount kept back is called reserves
• Reserves can be general or specific
• Dividend is usually shown as a percentage
Types of Shares
• There are two (2) main types of share:
 Preference Shares: these get an agreed
percentage rate of dividend before the ordinary
shareholders receive anything
 Ordinary Shares: these receive the remainder
of the total profits available for dividends- there
is no upper limit of dividends they can receive
There are two (2) types of preference
shares
• Cumulative preference shares: These receive a
dividend up to an agreed percentage each year.
If the amount paid is less than the maximum
amount agreed upon, the shortfall will be paid in
a future year before the ordinary shareholders get
paid.
• Non-Cumulative preference shares: These
will not receive the shortfall in future years in
case a shortfall occurs.
Share Capital: different meanings
• Authorised share capital: sometimes known as registered
capital or nominal capital. This is the total of the share
capital which the company is allowed to issue to
shareholders.
• Issued share capital: this is the total of the share capital
actually issued to the shareholders. If all the authorised
share capital is issued, then the authorised and issued
share capital will be the same
• Called-up capital: where only part of the amount on each
share has been asked for, the total amount asked for on
all shares is known as the called-up capital
Share Capital: different meanings
• Uncalled capital: this is the total amount to be
receive in the future, but which has not yet been
asked for.
• Calls in arrears: the total amount for which
payment is asked for (i.e. called for), but has not
yet been paid by shareholders.
• Paid-up Capital: this is the total of the amount of
share capital that has been paid for by
shareholders.
Trading Profit & loss a/c
• The trading and profit and loss account of a private company is
the same as that of a public company.
• The trading account of a company is the same as that of a sole
trader
• The profit and loss account of the company is a little different
from that of a sole trader. There are two main expenses that
should be included. These are:
 Director’s remuneration: this is the amount paid to the directors
in the form of salary.
 Debenture Interest: debenture represent a loan to the company,
on which an interest is paid yearly. (a fix percentage)
The appropriation account
• Under the profit and loss account would be the
appropriation account. This shows how the net profit is
to be appropriated (i.e. share/used). The following may
be found in the appropriation account:
o Net profit for the year
o Balance of profits from last year
o Taxes if any (to be deducted from profits)
o Transfers to reserves
o Preliminary expenses
o Goodwill written off
o Proposed dividends
Example
• I will now show the profit and loss appropriation accounts of a new business
for the first three years of trading.
IDO ltd has a share capital of 40, 000 ordinary shares of $1 each and 20, 000 5%
preference shares of $1 each
Net profit
Transfers to Reserves:
general
fixed asset replacement
goodwill
preliminary expenses
2004 2005
5, 967 7, 864
nil
nil
1, 000
nil
2006
8, 822
nil
1, 500
500
250
Dividends were proposed for each year on preference shares at 5% and on
ordinary shares at: 2004, 10%; 2005, 12½%; 2006, 15%
Solution
1)
IDO Ltd
Profit and loss appropriation accounts
For the year ended 31 December 2004
$
$
Net profit before taxation
5, 967
Tax (usually a fix percentage)
(0)
Net profit after taxation
5, 967
Add Retained profits
0
less: transfers to reserves:
general
fixed asset replacement
preliminary expenses
goodwill written off
Proposed dividends:
preference 5% ( 20, 000)
ordinary 10 % (40, 000)
Retained profits c/d
1, 000
4, 000
(5, 000)
967
Solution: Year 2
IDO Ltd
Profit and loss appropriation accounts
2) For the year ended 31 December 2005
$
$
Net profit before taxation
7, 864
Tax (usually a fix percentage)
(0)
Net profit after taxation
7, 864
Add Retained profits
967
8, 831
less: transfers to reserves:
general
1, 000
fixed asset replacement
preliminary expenses
goodwill written off
Proposed dividends:
preference 5% ( 20, 000)
1, 000
ordinary 12 ½ % (40, 000)
5,000
(7, 000)
Retained profits c/d
1, 831
Solution: Year 3
1)
2)
3)
4)
5)
IDO Ltd
IDO Ltd
Profit and loss appropriation accounts
For the year ended 31 December 2006
$
Net profit before taxation
Tax (usually a fix percentage)
Net profit after taxation
Add Retained profits
less: transfers to reserves:
general
fixed asset replacement
preliminary expenses
goodwill written off
Proposed dividends:
preference 5% ( 20, 000)
ordinary 15 % (40, 000)
Retained profits c/d
$
8, 822
(0)
8. 822
1, 831
10, 653
1, 500
250
500
1, 000
6, 000
(9, 250)
1, 403