ACCOUNTING FOR LIMITED COMPANIES

Question 1

Introduction

Answer 1

• Limited companies can be of 2 types:
• - Public companies
• - Private companies
• A limited company raises long term finance by issuing
shares or debentures.
• All companies issue shares known as ordinary shares.
• Other varieties may also be issued, one of which is
known as preference shares.

Question 2

Shares and debentures:

Ordinary shares

Answer 2

-Ordinary shares also called common shares represents the equity ownership in a company proportionate to the number of ordinary shares with each investor.
- It does not have a pre-determined dividend i.e. the
shareholders of ordinary shares do not receive a mandatory dividend.
- Each ordinary share represents a vote in the Company which can be used during the Annual General Meeting and other general meetings of the Company.
- Ordinary share capital is the sum of money raised by a corporate from private and public sources through the issue of its common shares. It is the capital that is received by the owners of the company in exchange for shares.

Question 3

Preference shares

Answer 3

-Preference share capital means the shares with
preference over the other equity capital of the
shareholders’ capital. Such share capital is having
preference over the dividend and repayment at the time of liquidation.
- The rate of a dividend of preference shares is fixed.
- Preference shares do not have any voting right.

Question 4

Debentures

Answer 4

-A debenture is most often defined as an unsecured (no collateral) debt instrument which has maturity ranging from medium to long term.
- It is commonly used by corporate and government
entities to borrow money at fixed or floating interest rates which then contributes to the capital structure of the entity. It is however different from share capital.

Question 5

Reserves

Answer 5

• Reserves are one of the most notable appropriations of profits.
• Companies create reserves so they can be ready to face any contingencies in near future.
• Reserves in a company can be divided into two broad
categories:
- capital reserve and
- revenue reserve.
• Revenue reserve is created from the net profit companies make out of their own operations. Companies create revenue reserve to quickly expand the business. And revenue reserve also helps the companies to source their capital from their own internal profits. Example: retained earnings.
• A capital reserve, on the other hand, is created out of
capital profits. The purpose of capital reserve is to
prepare the company for any unforeseen events like
inflation, instability, need to expand the business, or to
get into a new and urgent project. Example, profit on the sale of fixed assets, profit on sale of shares etc.

Question 6

Revenue Reserve

Answer 6

Inherent meaning: Is created from trading activities of business.
Application: Acts as a reinvesting source for the business.
Distribution: Can be distributed as dividend to shareholders depending on the discretion of the company.
Term: Is useful for short and mid-term purposes.
Monetary value: Can always be received in monetary value.
Other purpose: A portion is always reinvested to the company or distributed as a dividend.
Examples: Retained earnings.

Question 7

Capital Reserve

Answer 7

Inherent meaning: Is created from non-trading activities of business.
Application: Acts as a provision for future contingencies like inflation, instability etc.
Distribution: Is never distributed.
Term: Is useful for long term purposes.
Monetary value: Can’t always be received in monetary value.
Other purpose: Can also be used for legal purposes.
Examples: Reserve created out of profit on sales of fixed assets.

Question 8

Components of Financial Statements

Answer 8

• Each component of the Financial Statements serves a special and useful purpose and helps various stakeholders understand the financial health of the business in a more simplified manner.

• Balance sheet/ statement of financial position shows the position of the business on a particular date.
• Income Statement shows the performance of the business during the year and provide a more granular view thereby complementing Balance Sheet.
• Statement of changes in Equity shows how equity capital changed during the accounting period and helps stakeholders understand the Owners perspective.
• Cash flow Statement provides information about the company’s cash receipts and cash payments during an accounting period which provides meaningful information to analyze the liquidity, solvency and financial flexibility of the business.

Question 9

Format of Income Statement

Answer 9

IN SLIDE