13. Accounting for Limited Companies

Question 1

What are the 4 key features of a limited company?

Answer 1

• 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)

Question 2

What are the four main differences of the financial statement for a Limited Company compared to a sole trader?

Answer 2

• 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.

Question 3

What is the Statement of Changes in Equity for?

Answer 3

To inform shareholders as to why equity balances have changed over the year.

Question 4

What are some changes on the summarised Statement of Profit or Loss?

Answer 4

• No breakdown for cost of sales, just the total figure.
• No breakdown of expenses, just totals

Question 5

What are the two main differences of the Statement of Financial Position for a Limited Company compared to a sole trader?

Answer 5

• 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

Question 6

What is share capital?

Answer 6

The amount of money put into the business by shareholders.

Question 7

What are dividends?

Answer 7

Money taken from the company by shareholders.

Question 8

How is Retained earnings calculated?

Answer 8

Profits - Dividends

Question 9

How is amount owing to shareholders calculated?

Answer 9

Share Capital + Retained Earnings

Question 10

Who proposes the dividend amount payable to shareholders?

Answer 10

The directors.

The shareholders then vote on it.

Question 11

When are dividends usually paid?

Answer 11

Early in the following financial year.

Question 12

When are dividends accounted for in the financial statements?

Answer 12

When they are paid, not when they are proposed.

Question 13

What is an interim dividend?

Answer 13

A small dividend paid before the final dividend is proposed.

Question 14

What is a reserve?

Answer 14

Anything owing to a shareholder in addition to the Share Capital.

Question 15

What are the two main types of reserve?

Answer 15

• Capital reserve
• Revenue reserve

Question 16

What is a Revenue Reserve?

Answer 16

A reserve that is distributable

Aka it can be paid to the shareholders as dividend.

Question 17

What type of reserve is retained earnings?

Answer 17

Revenue reserve

Question 18

What type of reserve is the Share Premium Account?

Answer 18

Capital reserve.

Question 19

What type of reserve is the Revaluation Reserve?

Answer 19

Capital reserve.

Question 20

What is the nominal value of a share?

Answer 20

The value of the share that was printed on the share.

Question 21

What is a share premium?

Answer 21

The excess amount above the nominal value of a share if it was issued at a higher price than the nominal value.

Question 22

What is share capital?

Answer 22

The nominal amount of shares issued.

Question 23

What is a Rights Issue of shares?

Answer 23

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.

Question 24

What is a bonus issue of shares?

Answer 24

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.

Question 25

What is the double entry when there is a bonus issue of shares?

Answer 25

• Debit Share Capital
• Credit Share Premium Account

Question 26

Where is profit resulting from Revaluation shown on the financial statement?

Answer 26

In the Revaluation Reserve.

This is separate from the Statement of Profit or Loss.

Question 27

What are ordinary shares?

Answer 27

All the shares that are not preference shares.

Question 28

What are preference shares?

Answer 28

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.

Question 29

What are the two types of preference shares?

Answer 29

• Redeemable
• Irredeemable

Question 30

What are redeemable preference shares?

Answer 30

Where they will be repaid on a fixed date.

Question 31

How are redeemable preference shares shown on the financial statements?

Answer 31

• The dividends are shown together with interest on the SoPL.
• The nominal value is shown on the SoFP under non-current liabilities.

Question 32

What are irredeemable preference shares?

Answer 32

Preference shares that will never be repaid.

Question 33

How are irredeemable preference shares shown on the financial statements?

Answer 33

• The dividends do not appear on the SoPL.
• The nominal value appears on the SoFP under capital.

Question 34

What is the Statement of Comprehensive Income?

Answer 34

It’s nearly identical to the SoPL, but with profit on revaluation shown at the bottom, under profit for the year.