LIMITED COMPANIES LIMITED LIABILITY Owners (Shareholders) liability is limited to the amount of money they invest in the company Public Limited Company

LIMITED COMPANIES

LIMITED LIABILITY Owners (Shareholders) liability is

limited to the amount of money they invest in the company

Public Limited Company (plc): 2 or more owners Minimal share capital of £50,000. Sells shares on the stock market to

the general public Private Limited Company (ltd): Company name must be followed by

letters Ltd Can sell shares to family and friends Authorised Share Capital cannot

exceed £50,000

DOCUMENTS

Memorandum of Association

Contents: Company Name Company Address Address of the

Company Authorised Share

Capital Statement of

Limited liability

Articles of Association

Contents: Rights and duties

of the director The procedure for

election of directors

Procedure for calling a General Meeting

Declaration and payments of dividends

Keeping of Accounts and Audits

Appointment of Secretary

LIMITED COMPANIES

Ownership

• Owned by the SHAREHOLDERS

Dividend

• A reward given to each shareholder for investing in the company.

• An interim dividend is one that is paid during the financial year

Control

• Run by a BOARD of DIRECTORS who have been elected by SHAREHOLDERS at the AGM

• Directors are get paid for their work, which is deducted in the Profit and Loss Account

Annual General Meeting (AGM)

• Must be held by law

• Informs shareholders how the business is doing

• Allows shareholders to express their views

FINANCEIssuing Shares

Authorised Share Capital

• The amount of shares a company is allowed to sell.

Issued Share Capital

• The amount of shares a company actually sold

TYPES OF SHARES

Preference shares

• Entitled to a certain percentage of the Net Profits

• Rank for payment before ordinary shares

• Don’t carry voting rights

Ordinary Shares

• Most risky type of investment

• Dividend will depend on Net profit of the year

• Get paid after preference shares

• Carry voting rights

FINANCE

DEBENTURES

• A debenture is a bond or loan These are normally issued in attempt to raise capital by plcs

Characteristics:

• Certificates representing a long term loan to the firm

• Fixed rate of interest charged over the term of the loan

• Debenture interest must be paid regardless of profit or loss

• Secured debentures guaranteed repayment upon liquidation

• Debenture owners are creditors and not shareholders to a limited company

FINANCE

Reserves

• A build up of profits in the following categories:

• Unappropriated Profit

• General Reserve

• Can be reduced by losses, issue of bonus shares, pay off or write off goodwill

General Reserve

• Contains profit that are transferred from the P&L appropriation account

• The General Reserve is not identified for a particular purpose

• Annual Transfer is identified by Directors

• General Reserve is the property of the shareholder

Trading P& L Acc of xxxx for y/e xxxxxx£ £ £

Sales x

LESS COST OF GOODS SOLD

Opening Stock x

ADD Purchases x

LESS Purchases Returns x x

ADD Carriage In x

ADD Warehouse Expenses x

x

LESS Closing Stock x

Cost of Goods sold -x

GROSS PROFIT x

Add any GAINS

(rent comm, disc, Investment received) x

Add any DECREASED Prov for BD +xx

LESS EXPENSES

Debenture Interest x

Wages x

Rates x

Insurance x

Advertising x

Depreciation x

Inc in Prov for BD x x

Net Profit Before Corporation Tax x

Trading P& L Acc of xxxx for y/e xxxxxx

£ £ £

Net Profit Before Corporation Tax x

Less Corporation Tax x

Net Profit After Corporation Tax x

Add unappropriated profit (trial balance)+x

x

Less Appropriations:

All interim Dividends (in trial balance) x

Preference Dividends (in notes) x

Ordinary Dividends (in notes) x

General Reserve (notes) x

Goodwill written off x x

Unappropriated Profit x

Balance Sheet of xxxx as at xxxxxx£ £ £

FIXED ASSETS Cost Dep NBV

Properties x x x

Fittings x x x

Investments x

Goodwill (intangible asset) x

x

CURRENT ASSETS

Stock x

Debtors x

(LESS prov for bad debt) x x

Prepayments x

Bank x

Cash x

Investment Dividends Received x

x

CURRENT LIABILITIES

Creditors x

Bank overdraft x

Accrued Expenses x

Debenture Interest Due x

Corporation Tax x

Proposed Dividends x

VAT x -x

Working Capital x

NET ASSETS x

Balance Sheet of xxxx plc as at xxxxxx£ £ £

FINANCED BY

Authorised Share Capital

xxxxxxxx Ordinary shares x

xxxxxxxx ? Preference shares x

x


xxxxxxx Ordinary Shares x

xxxxxxxx ?% Preference Shares x

x

Reserves and Provisions

Profit and Loss Account x

General Reserve x

Share Premium Reserve x

Revaluation Reserve x x

ADD Long Term Liabilities

Debentures +x

NET WORTH x

Exercise 1 – Taylor plc

Notes

Prepayment

Marketing Expenses

Original figure 5,800

Less Prepayment 340

5,460

P& L Acc of Taylor plc for y/e 31/12/10£ £ £

GROSS PROFIT 63,500

LESS EXPENSES

Electricity 8,090

Marketing Expenses 5,460

Telephone 3,650

Rates 2,700

Advertising 2,200

Depreciation F&F 1,200 23,300

Net profit 40,200

+unappropriated profit at 31/12/09 0

40,200

Transfer to General Reserve 15,000

Ordinary Share Dividend 8,000

Preference Share Dividend14,00037,000

Unappropriated Profit 31/12/10 3,200

Ex 2 JINKY PLCJinky plc Appropriation Acc for Y/e 30/4/11

£ £ £

Net profit 46,000

+unappropriated profit at 30/04/10 4,000

50,000

Transfer to General Reserve 3,000

Ordinary Share Dividend 4,000

Preference Share Dividend1,000 8,000

Unappropriated Profit 31/12/11 42,000

Balance Sheet of Jinky plc as at 30/4/11£ £ £

FINANCED BY


100,000 £1 Ordinary Shares 100,000

20,000 5% £1 Pref Shares 20,000

120,000


Profit and Loss Account 42,000

General Reserve 35,000 77,000


Debentures 50,000

NET WORTH 247,000

£ £ £

(000) (000) (000)

Net Profit 35

Add Unappropriated Profit +26

61

Transfer to General Reserve 5

Interim Dividends

Ordinary 4

Preference 3 7

Proposed Dividend

Ordinary (full % plusInterim) 8

Preference 4 12 -24

(3000 already paid deducted)

Unappropriated Profit 31/1/11 37

Ex 3 – App Acc of Kippininn plc for y/e 31/1/11

Balance Sheet of Kipininn plc as at 31/1/11£ £ £


Premises 160

Office Equipment 65 18 47

207

CURRENT ASSETS

Stock 62

Debtors 13

VAT 6

Bank 21

102

CURRENT LIABILITIES

Creditors 18

Proposed Ordinary Dividend 8

Proposed Preference Div 4

Wages Accrued 7 37

Working Capital 65

NET ASSETS 272

Balance Sheet of Kipininn as at 31/1/11£ £ £


80,000 £1 Ordinary Shares 80

100,000 7% £1 Preference Shares 100

180


Profit and Loss Account 37

General Reserve 55 92


Debentures 0

NET WORTH 272

HIGHER THEORYPROPERTY REVALUATION RESERVE

• Property usually appreciates in value (goes up) over the assets lifetime

• Revaluation occurs when there is a difference in value between the revaluation figure and the net book value.

• It should be recorded as follows: Dr Asset in Balance Sheet, Cr Revaluation Reserve

• The reserve cannot be distributed to shareholders

• The reserve cannot be used to write off goodwill

• The reserve can be used to finance a bonus share issue

• If the asset depreciates then it should be written off against the profits

HIGHER THEORY

SHARE PREMIUM

• Shares and debentures may be issued at PAR ie. At a price equal to their nominal value e.g. £1 share issued at £1.

• Shares may be issued at a PREMIUM (at a price ABOVE their nominal or face value i.e. £1 share issued at £1.25.

• A premium on the issue of shares must be treated as CAPITAL RESERVE that can only be used for the following purposes:

• Issuing fully paid bonus shares

• Writing off preliminary expenses

• Writing off commission paid or discounts allowed on shares or debentures

HIGHER THEORY

EXAMPLE

• 100,000 ordinary shares were £1 each and are now being sold as a premium price of£1.50

• The financed by section should be updated as follows:


Ordinary Shares (100,000 at £1) £100,000

Reserves

General Reserve 10,000

Revaluation Reserve 15,000

Share Premium Reserve

(100,000@50p) 50,000 75,000

175,000

HIGHER THEORY

BONUS ISSUE

• If reserves increase beyond the level thought to be needed then shares can be issued to existing shareholders free of charge.

• Unlike a Rights Issue, no additional money is received. Share Certificates however are issued.

HIGHER THEORY

EXAMPLE

• It is proposed to give Ordinary shareholders a bonus issue of 1 share for every 6 held.

• This issue is to be financed from the share premium account.

• The value of issued ordinary shares is £36,000 (36,000 at £1 each) and the amount in the share premium account is £10,000.

• If 36,000 ordinary shares were sold and 1 in every six is to be issued as a bonus then that would be 36,000/6 = 6,000 shares

• 6000 shares at £1 each = £6,000.

HIGHER THEORY


Ordinary Shares (36,000+6,000) 42,000

Reserves

Share Premium Reserve (10-6) 4,000

HIGHER THEORY

Preliminary/ Issue Expenses

• These include legal and other expenses incurred when a company is formed

• When they are large they are often Capitalised with a proportion being written off each year

• Since the Companies Act 1981 they MAY NOT be shown as assets

• They can be written off against any balance on the Share Premium Account

OR

• They should e written off in the Profit and Loss account

• They can also include expenses incurred in the issue of Debentures

HIGHER THEORY

Factoring

• Where a company transfers responsibility for collecting its book debts to a factor

• The factor will:

• Settle the debts due to the firm

• Receive a fee in return (based on the amount of debts paid – plus a service charge)

• Manage the sales ledger and arrange for the collection of overdue debts

• Advantages of factoring

• Reduces debt collection period

• Better credit control

• Decrease in risk of bad debts

HIGHER THEORY

Operating profit

• This is the Net Profit of a company BEFORE Corporation Tax is Deducted

Exercise 10 – Kelburn Plc

Notes

Prepayment £’000

Selling Expenses

Original figure 26

Less Prepayment 5 BS/A

21 P&L

Accrual

Office Expenses

Original figure 20

ADD Accrual 8 BS/L

28 P&L

Debenture interest

Original figure (1/2 year) 4

ADD Amount owing 4 BS/L

8 P&L


Notes

Depreciation £’000

Fittings (Reduced Bal)

Cost 60 BS/FA

Dep to date 2040

Dep for current year 25% 10 P&L

NBV 30 BSC/FA

+BS/FA

Vehicles

Cost 70 BS/FA

Dep for Current year 20% 14 P&L

56

Existing Dep 9

NBV 47 BS/FA

+BS/FA


Notes

Provision for Bad Debts £’000

Debtors 40 BS/CA

Provision 5% 2

New Debtors figure 38 BS/CA

Existing Figure 3

Decrease in provision 1 P&L

Property Revaluation

Present Value 180 BS/FA

Cost 147

Increase in Valuation 33 Cap Res


Notes

Share premium Reserve £’000

Original amount 25

Less Preliminary Exp 20 BS/CL

5 BS/ FB

General Reserve

Original Value 27

This year’s transfer 13 APP

40 BS/FB

Dividends

50,000 10% £1 preference 50 BS/FB

Proposed dividend 5 BS/CL/ APP

60,000 £1 ordinary shares 60 BS/FB

Interim Dividend paid 6 APP

Final proposed dividend 5% 3 BS/CL/ APP

TPL & App of Kelburn plc for y/e 31/3/11£000 £000 £000

Sales 300


Opening Stock 15

ADD Purchases 180

ADD Warehouse Expenses 10 190

205

LESS Closing Stock 20

Cost of Goods sold -185

GROSS PROFIT 115

Add any GAINS

DECREASED Prov for BD 1

Discount Received 2118

LESS EXPENSES

Selling Expenses 21

Office Expenses 28

Bad Debts 5

Debenture Interest 8

Depreciation fittings 10

Depreciation Vehicles 14 86

Net Profit Before Corporation Tax 32

TPL & App of Kelburn plc for y/e 31/3/11

£000 £000 £000


Less Corporation Tax 25% 8

Net Profit After Corporation Tax 24

Add unappropriated profit from prev yr 5

29


Interim Ordinary dividend 6

Proposed Dividends

Final Ord dividend 5% 3

50,000 10% £1 preference 5

Reserves

General Reserve 13 27

Unnappropriated Profit 2

Bal sheet of Kelburn plc as at 31/12/11£000 £000 £000


Properties 180 180

Fittings 60 30 30

Vehicles 70 23 47

257

CURRENT ASSETS

Stock 20

Debtors (less provision (40-2) 38

Selling Expenses Prepaid] 5

Bank 4

67

CURRENT LIABILITIES

Creditors 20

Office Expenses Accrued 8

Debenture Interest due 4

Proposed Ordinary dividend 3

Proposed Pref dividend 5

Corporation Tax due 8

VAT 6 -54

Working Capital 13

NET ASSETS 270

Bal sheet of Kelburn plc as at 31/3/11£ £ £

FINANCED BY


60,000 £1 Ordinary shares 60

50,000 10% Preference shares 50

110


Unappropriated profit P&L 2

General Reserve 40

Share Premium Reserve (25-5) 5

Capital Reserve 33 80


10% Debentures +80

NET WORTH 270

Exercise 11 – Gibshill Enterprise plc

Notes

Accrual £’000

Selling Expenses

Original figure 16

Add Accrual 4 BS/L

20 P&L

Prepayment

Office Expenses

Original figure 18

LESS Prepayment 5 BS/A

13 P&L

Depreciation

Fittings - Cost 55 BS

Depreciation 20% 11 P&L

44

Existing Dep 12

NBV 32 BS

Total Dep (12 + 11) 23 BS

Exercise 11 – Gibshill plc

Notes

Depreciation £’000

Vehicles (Reduced Bal)

Cost 85 BS

Existing Depreciation 1570

Dep for current year 10% 7 P&L

NBV 63 BS

Depreciation to date (15+7) 22 BS

Provision for Doubtful Debts

Debtors 60 BS/CA

5% Provision for DD 3 BS/CA

Existing Provision for DD 1

Adjustment for this year 2 P&L

Exercise 11 – Gibshill plc

Notes

Bank overdraft £’000

Interest due Bank overdraft 1 BS/CL & P&L

Debenture Interest

½ Year (Paid) 2

½ Year (due) 2 BS/ CL

Full year interest 4 P&L

Bonus Share

£1 Ordinary Shares issued 40,000

£1 Bonus shares (1 in 4) 10,000

50,000 FB

Share Premium reserve 15,000

Less Bonus shares 10,000

5,000 FB

Exercise 11 – Gibshill Plc

Notes

General Reserve £’000

Existing amount 20

Less Amount to transfer 9 P&L

11 BS/ FB

Goodwill

Value 22 P&L (App)

Dividends

10,000 10% £1 preference 20 BS/FB

Dividend 2

Less Interim dividend) 1 P&L/app

Proposed dividend due 1 P&L/app

BS/CL

50,000 £1 ordinary shares 50 BS/FB

Final proposed dividend 8% 4 BS/CL/ APP

TPL & App of Gibshill plc for y/e 30/4/11£000 £000 £000

Sales 250


Opening Stock 15

ADD Purchases 170

185

LESS Closing Stock 18

Cost of Goods sold 167

GROSS PROFIT 83

LESS EXPENSES

Selling Expenses (16+4) 20

Office Expenses (18-5) 13

Provision for doubtful debts 2

Bad Debts 4

Discounts 1

Debenture interest 4

Depreciation Fittings 11

Depreciation Vehicles 7

Overdraft interest due 1 63


TPL & App of Gibshill plc for y/e 30/4/11

£000 £000 £000


Less Corporation Tax 25% 5

Net Profit After Corporation Tax 15

Add unappropriated profit from prev yr 6

21


Interim preference share div 1

Proposed Dividends

Final Preference share div 1

Ordinary Share dividend 4 6

Goodwill written off 22 28

-7

Reserves

Transfer FROM General Reserve 9

Unnappropriated Profit 2

Bal sheet of Gibshill plc as at 30/4/11£000 £000 £000


Fittings 55 23 32

Vehicles 85 22 63

95

CURRENT ASSETS

Stock 18

Debtors (less provision (60-3) 57

Office Expenses Prepaid 5

80

CURRENT LIABILITIES

Creditors 10

Selling Expenses Accrued 4

Debenture Interest due 2

Overdraft interest due 1

Proposed Preference div 1

Proposed Ordinary div 4

Corporation Tax 5

VAT 4

Bank Overdraft 6 37

Working capital 43

NET ASSETS 138

Bal sheet of Gibshill plc as at 30/4/11£ £ £

FINANCED BY


50,000 £1 Ordinary shares (40+10) 50

20,000 10% Preference shares 20

70


Unappropriated profit P&L 2

General Reserve (20-9) 11

Share Premium Reserve (15-10)5 18


8% Debentures +50

NET WORTH 138

Documents

LIMITED COMPANIES LIMITED LIABILITY Owners (Shareholders) liability is limited to the amount of money they invest in the company Public Limited Company