13. Accounting for Limited Companies Flashcards
What are the 4 key features of a limited company?
- It is a separate legal entity
- The owners (shareholders) are separate from the management (directors)
- Shareholders have limited liability for the debts of the company
- There are more formalities required (e.g. disclosure, audit)
What are the four main differences of the financial statement for a Limited Company compared to a sole trader?
- Capital is shown differently in the Statement of Financial Position
- Two SoPL are made. One for internal management use (which is the same as a sole trader SoPL), and a summarized version for the public.
- Financial statements will include a Statement of Changes in Equity
- The company itself pays tax.
What is the Statement of Changes in Equity for?
To inform shareholders as to why equity balances have changed over the year.
What are some changes on the summarised Statement of Profit or Loss?
- No breakdown for cost of sales, just the total figure.
- No breakdown of expenses, just totals
What are the two main differences of the Statement of Financial Position for a Limited Company compared to a sole trader?
- Only net book value is shown. Details like that of cost and depreciation are shown in a separate statement
- Amount owing to owners (called capital for sole traders) is very different
What is share capital?
The amount of money put into the business by shareholders.
What are dividends?
Money taken from the company by shareholders.
How is Retained earnings calculated?
Profits - Dividends
How is amount owing to shareholders calculated?
Share Capital + Retained Earnings
Who proposes the dividend amount payable to shareholders?
The directors.
The shareholders then vote on it.
When are dividends usually paid?
Early in the following financial year.
When are dividends accounted for in the financial statements?
When they are paid, not when they are proposed.
What is an interim dividend?
A small dividend paid before the final dividend is proposed.
What is a reserve?
Anything owing to a shareholder in addition to the Share Capital.
What are the two main types of reserve?
- Capital reserve
- Revenue reserve
What is a Revenue Reserve?
A reserve that is distributable
Aka it can be paid to the shareholders as dividend.
What type of reserve is retained earnings?
Revenue reserve
What type of reserve is the Share Premium Account?
Capital reserve.
What type of reserve is the Revaluation Reserve?
Capital reserve.
What is the nominal value of a share?
The value of the share that was printed on the share.
What is a share premium?
The excess amount above the nominal value of a share if it was issued at a higher price than the nominal value.
What is share capital?
The nominal amount of shares issued.
What is a Rights Issue of shares?
An offer of new shares to existing shareholders.
They must be offered to all shareholders in the same ratio, depending on how many shares they own.
What is a bonus issue of shares?
An issue of new shares to existing shareholders free of charge.
Must be given to existing shareholders in the same ratio depending on how many shares they own.
What is the double entry when there is a bonus issue of shares?
- Debit Share Capital
- Credit Share Premium Account
Where is profit resulting from Revaluation shown on the financial statement?
In the Revaluation Reserve.
This is separate from the Statement of Profit or Loss.
What are ordinary shares?
All the shares that are not preference shares.
What are preference shares?
Shares that receive a fixed dividend each year.
Ordinary shareholders are only entitled to dividends out of the remaining profit after paying the preference dividends.
What are the two types of preference shares?
- Redeemable
- Irredeemable
What are redeemable preference shares?
Where they will be repaid on a fixed date.
How are redeemable preference shares shown on the financial statements?
- The dividends are shown together with interest on the SoPL.
- The nominal value is shown on the SoFP under non-current liabilities.
What are irredeemable preference shares?
Preference shares that will never be repaid.
How are irredeemable preference shares shown on the financial statements?
- The dividends do not appear on the SoPL.
- The nominal value appears on the SoFP under capital.
What is the Statement of Comprehensive Income?
It’s nearly identical to the SoPL, but with profit on revaluation shown at the bottom, under profit for the year.
