Comparison of Companies to Sole Traders

Question 1

What are ordinary shares?

Answer 1

A company’s initial capital divided into units of equal size.

Question 2

What are owners of a share entitled to?

Answer 2

A dividend and voting rights.

Question 3

What is nominal value?

Answer 3

The base value of a share.

Question 4

What is a private limited company?

Answer 4

Known as a LTD. This type of company can only sell shares to friends and family not the public.

Question 5

What is a public limited company?

Answer 5

Known as a PLC. This type of company can sell shares to anyone and can be floated on the stock exchange.

Question 6

What benefits do preference shareholders get?

Answer 6

A fixed rate of dividend and receiving dividend in priority to ordinary shareholders.

Question 7

What is a irredeemable preference share?

Answer 7

The company is not entitled to buy them back in the future. Their dividends are treated as an appropriation on profit and they are treated as share capital.

Question 8

What is a redeemable preference share?

Answer 8

The company is entitled to buy them back at any point in the future. The dividend is classed as a finance cost and they are treated as non-current liabilities.

Question 9

What is the accounting treatment for a normal share issue?

Answer 9

Dr Cash

Cr Share Capital

Question 10

What is the accounting treatment for a premium share issue?

Answer 10

Dr Cash
Cr Share Capital (nominal value)
Cr Share Premium (excess over nominal value)

Question 11

What are reserves?

Answer 11

Any amounts that are attributable to ordinary shareholders other than ordinary share capital.

Question 12

What are 3 types of reserve?

Answer 12

Share premium account.
Retained earnings.
General or other reserves.

Question 13

What is the share premium account and what can’t be paid for using this account?

Answer 13

The excess of the issue price above the nominal value and dividends can not be debited from this account.

Question 14

What is a rights issue?

Answer 14

New shares are offered to existing shareholders usually at a discount to the current market price in proportion to their current share holding.

Question 15

What is a bonus issue?

Answer 15

An issue of fully paid shares to existing shareholders free of charge, in proportion to their current share holdings. They are paid for out of reserves.

Question 16

What is the accounting treatment for a bonus issue?

Answer 16

Dr Reserve

Cr Share Capital

Question 17

What are retained earnings?

Answer 17

An equity reserve used to accumulate the companies retained earnings.

Question 18

What is the accounting treatment for paying a dividend?

Answer 18

Dr Retained Earnings

Cr Cash

Question 19

What is the accounting treatment for a dividend that is declared but not yet paid?

Answer 19

Dr Retained Earnings

Cr Dividend Payable

Question 20

What is traded debt?

Answer 20

When a business borrows money in the form of loan stock (debentures or bonds).

Question 21

Where is loan stock recorded on the financial statments?

Answer 21

If the loan stock isnt due to mature within 12 months it is recorded as a non-current liability.

Question 22

How is interest on loan stock treated?

Answer 22

Interest paid is a finance cost and unpaid interest is classed as a other payable.

Question 23

What is a provision?

Answer 23

A liability of uncertain timing or amount.

Question 24

What are the reasons for a provision being created?

Answer 24

The business has a present obligation to incur the expenditure (a legal claim).
It is probable (the chance is over 50%) that the expenditure could be incurred.

Question 25

What is the accounting treatment for a provision?

Answer 25

Dr Expense (P+L)
   Cr Provision (current liability)

Question 26

What is the accounting treatment for when a tax arises?

Answer 26

Dr Tax Expense

Cr Tax Payable

Question 27

What is the accounting treatment for when a tax is paid?

Answer 27

Dr Tax Payable

Cr Cash