Notes

OfLimited

LiabilityCompan

ies• By Talha Mahmood Bhatti.

Introduction to final Accounts of

Limited Liability company

Limited Companies are needed because of the disadvantages from which partnerships suffer.• A partnership can have no more than 20owners (except for limited partners)• The amount of capital needed to operate a very large oganisation is more than 20 people can provide•If a partnership business fails, a

partner can lose part or all of his or her private assets as well as the business assets

Limited Liability• The capital of a limited company is divided into shares.

Shares can be priced at $1, $5, $10 or any otheramount. To become a member of a limited company(shareholder), a person must buy one (1) or moreshares.

• If shareholders have paid in full for their shares, their liability is limited to those shares.

• If a company loses all of its assets, all the

shareholderscan lose is their shares ( the value)

• They cannot be force to pay any of their private money

in respect of the company’s losses.

Private & Public Companies

• The two classes of limited company are private company and public company. There are a lot more private companies than public companies.

• A Private Company: has a minimum membership of 2 Maximum of 50 members Must ask people to buy company shares privately: it cannot do so

in public e.g., by advertising shares in the newspaper.

Any company that does not follow the above is a publiccompany

Company Directors• A shareholder normally has the

right to attend general meetings of a company, and can vote at such meetings. Shareholders use their votes to appoint directors, who manage the business on behalf of the shareholders.

• At each annual general meeting, the final accounts for the year are given to the shareholders. The directors at

the meeting have to give a report on the progress of the company.

Legal Status of a LtdCompany

• A limited company is said to posses a ‘separate

legal entity’ from that of it’s shareholders. Put simply, a company is treated like a person separate from it’s owners (responsible for itself) A company can sue one or more of it’s shareholder or, it’s shareholder can

sue the company. This would not be the case if the company and it’s shareholder were the same.

Share Capital• A shareholder will receive a share of the profit

called a dividend.• Not all the net profit will be paid

out. The directors calculate the net profit and determine the amount that should be paid out and the amount that should be kept back.

• The amount kept back is called reserves

• Reserves can be general or specific• Dividend is usually shown as a percentage

Typesof Shares• There are two (2) main types of share:Preference Shares: these get an

agreed percentage rate of dividend before the ordinary shareholders receive anything

Ordinary Shares: these receive the remainder of the total profits available for dividends- there is no

upper limit of dividends they can receive

There are two (2)typesof preferenceshares

• Cumulative preference shares: These receive a

dividend up to an agreed percentage each year.If the amount paid is less than the maximumamount agreed upon, the shortfall will be paid in

a future year before the ordinary shareholders getpaid.

• Non-Cumulative preference shares: These will not receive the shortfall in future years in case a shortfall occurs.

Share Capital: different meanings• Authorised share capital: sometimes

known as registered capital or nominal capital. This is the total of the share capital which the company is allowed to issue to shareholders.

• Issued share capital: this is the total of the share capital actually issued to the shareholders. If all the authorised share capital is issued, then the authorised and issued share capital will be the same

• Called-up capital: where only part of the amount on each share has been asked for, the total amount asked for on all shares is known as the called-up capital

Share Capital: different meanings• Uncalled capital: this is the total

amount to be receive in the future, but which has not yet been asked for.

• Calls in arrears: the total amount for which payment is asked for (i.e. called for), but has not yet been paid by shareholders.

• Paid-up Capital: this is the total of

the amount of share capital that has been paid for by shareholders.

Trading Profit &loss a/c

• The trading and profit and loss account of a private company is

the same as that of a public company.• The trading account of a company is the same

as that of a sole trader• The profit and loss account of the company is a

little different from that of a sole trader. There are two main expenses that should be included. These are:

Director’s remuneration: this is the amount paid to the directors

in the form of salary.

Debenture Interest: debenture represent a loan to the company,

on which an interest is paid yearly. (a fix percentage)

The appropriation account

• Under the profit and loss account would be the appropriation account. This shows how the net profit is to be appropriated (i.e. share/used). The following may be found in the appropriation account:

o Net profit for the yearo Balance of profits from last yearo Taxes if any (to be deducted from profits)o Transfers to reserves o

Preliminary

expenses oGoodwill

written offo Proposed dividends

Example

• I will now show the profit and loss appropriation accounts of a new business

for the first three years of trading.IDO ltd has a share capital of 40, 000 ordinary shares of $1

each and 20, 000 5% preference shares of $1 each2004 2005 2006

Net profit 5, 9677, 864 8, 822Transfers to Reserves:general nil 1, 000 nil fixed asset replacement nil nil

1, 500 goodwill500

preliminary expenses

250Dividends were proposed for each year on preference

shares at 5% and on ordinary shares at: 2004, 10%; 2005, 12½%; 2006, 15%

SolutionIDO Ltd

Profit and loss appropriation accounts

1) For the year ended 31 December 2004$ $

Net profit before taxation 5, 967Tax (usually a fix percentage) (0)Net profit after taxation 5, 967Add Retained profits 0

less: transfers to reserves:generalfixed asset replacementpreliminary expensesgoodwill written offProposed dividends:preference 5% ( 20, 000) 1, 000ordinary 10 % (40, 000) 4, 000 (5, 000)Retained profits c/d 967

Solution: Year 2IDO Ltd

Profit and loss appropriation accounts

2) For the year ended 31 December 2005$ $

Net profit before taxation 7, 864Tax (usually a fix percentage) (0)Net profit after taxation 7, 864Add Retained profits 967

8, 831less: transfers to reserves:

general 1, 000fixed asset replacementpreliminary expensesgoodwill written offProposed dividends:preference 5% ( 20, 000) 1, 000ordinary 12 ½ % (40, 000) 5,000 (7, 000)Retained profits c/d 1, 831

Solution: Year 3IDO LtdIDO Ltd

Profit and loss appropriation accounts

1) For the year ended 31 December 2006$ $

Net profit before taxation 8, 822Tax (usually a fix percentage) (0)Net profit after taxation 8. 822Add Retained profits 1, 831

10, 6532) less: transfers to reserves:

general3) fixed asset replacement 1, 5004) preliminary expenses

250 goodwill written off

5005) Proposed dividends:

preference 5% ( 20, 000) 1, 000ordinary 15 % (40, 000) 6, 000 (9, 250)

Retained profits c/d 1, 403