13 - Company Financial Statements & Associated Matters

Question 1

What is a company?

Answer 1

• separate legal entity
• distinct from its owners (members or shareholders)

Question 2

What is the difference between a company and a sole trader?

Answer 2

• the way the profit is dealt with in the P&L account
• the composition of ‘Capital’ in the balance sheet
• the statutory requirements

Question 3

What are the two ways to present the profit section in a financial statement?

Answer 3

• two statement approach, P&L shown as an income statement and a second statement: statement of other comprehensive income
• single statement approach

Question 4

Compare the presentation of the profit and loss account of a sole trader and the income statement of a limited company.

Answer 4

Question 5

What is the layout of the statement of other comprehensive income?

Answer 5

Question 6

How does paying tax compare for sole traders and companies?

Answer 6

ST pays tax on adjusted profits, but as all profits belong to trader they are taxed as income and will not appear on the accounts of the business.

Company will pay tax on profits, as separate legal entity. Tax is shown in a reduction of profits. Calculation of corporation tax is a provision based on profits of the year. Doesn’t represent tax paid as corporation tax is not payable immediately but nine months after year end or by instalments (large companies)

Question 7

What is the double entry for paying corporation tax?

Answer 7

Question 8

What is deferred tax?

Answer 8

An accounting adjustment to reflect the timing difference between items affecting the profit and loss account (income statement) in the accounts and the tax computation for the business

Question 9

How are dividends paid?

Answer 9

Payments to owners of the company (shareholders) paid after all expenses have been deducted

Question 10

What is the double entry for a sole trader withdrawing money from the business?

Answer 10

Question 11

How are dividends paid to shareholders of a business? What is the double entry for interim dividends?

Answer 11

• not practical for each shareholder to have a drawings account
• don’t appear on the face of the P&L account, deducted from accumulated profit or loss amount shown in company’s BS
• some companies pay an amount on account of the total dividend before the end of the year - the interim dividend.
• if final dividend decided after AP, won’t be in accounts for year it relates to. If dividend declared before, deducted from P&L reserve in BS for year it relates to as a liability.
• therefore 2 amounts for dividend entered in the P&L account reserve