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Accounting:Limited Companies By Nick - Coggle Diagram
Accounting:Limited Companies By Nick
Pros and cons of Limited companies
Cons:-Greater regulation leads to increased administration costs.
-Accounting requirements for companies are more complex and time consuming.
Pros: -Shareholders have limited liability for the debts of the company
-Access to different forms of finance including issuing shares and funding by means of debenture loans.
Definitions to consider
Equity: The heading used for the capital and reserves section of a limited company's statement of financial position.
Limited Liability: The liability of any shareholder for the debts of the company is limited to the amount of their fully paid shares.
Capital structure of a limited company
Preference shares capital: The amount of the shares that are entitled to receive a fixed rate of dividend and that are ranked before ordianry shares for the payment of dividend.
Retained earnings: Profits that have not been used to finance the payment of dividends nor have been transferred to a general reserve.
Ordinary shares capital: The amount of the shares that receive a variable rate of dividend that is dependant on the on the profits available for distribution.(These shares have voting right.)
General reserve: Part of the undistributed profits that have not been distributed as dividends and are set aside for some future use.
Issued, Called-up and Paid-up capital
Paid-up Capital: The part of the called up share capital of a company for which payment is received.
Called-up capital: The part of the issued capital of a company which payment is requested.
Issued capital: The amount of capital that has actually has actually been issued by a limited company.
Share capital
Ordinary Shares: Shares that receive a variable rate of dividend that is dependant on the profits avilable for distribution.
Debemtures: Long term loans that carry a fixed rate of interest which must be paid each year and which is charged to the company's income statement
Preference Shares: Shares that are entitled to receive a fixed rate of dividend and that are ranked before ordinary shares for the payment of a dividend.
Preparing Income Statements, Statements in equity and staments of financial position
Statement in equity
(+)Profit of the year [Increases Retained Earnings]
(+)Ordinary shares dividend [Decreases Retained Earnings]
(-)Transfer to Reserve [Decreases Retained Earnings]
SOFP
NCL + Debentures
Equity -> Shareholder’s Equity
Issued Ordinary Share
Issued Preference share
Retained Earning
General Reserve
Income Statement
(+)expense -> Director Salaries
Finance cost/charge -> Debenture interest
(expense) -> Preference share dividend
Sales - Cost of Sales = Gross Profit
Gross Profit - Expenses = Profit from Operation (Operating profit)
Profit from Operation - Finance cost (Deb interest and P/s dividend) = Profit for the year