Introduction to final Accounts of Limited Liability company

1
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 20 owners
  (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

2
Limited Liability

• The capital of a limited company is divided into
  shares. Shares can be priced at 1, 5, 10 or
  any other amount. To become a member of a limited
  company (shareholder), a person must buy one (1)
  or more shares.
• 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
  shareholders can lose is their shares ( the
  value)
• They cannot be force to pay any of their private
  money in respect of the companys losses.

3
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 public company

4
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.

5
Legal Status of a Ltd Company

• A limited company is said to posses a separate
  legal entity from that of its shareholders. Put
  simply, a company is treated like a person
  separate from its owners (responsible for
  itself) A company can sue one or more of its
  shareholder or, its shareholder can sue the
  company. This would not be the case if the
  company and its shareholder were the same.

6
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

7
Types of 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

8
There are two (2) types of preference shares

• Cumulative preference shares These receive a
  dividend up to an agreed percentage each year. If
  the amount paid is less than the maximum amount
  agreed upon, the shortfall will be paid in a
  future year before the ordinary shareholders get
  paid.
• Non-Cumulative preference shares These will not
  receive the shortfall in future years in case a
  shortfall occurs.

9
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

10
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.

11
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
• Directors 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)

12
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
• Net profit for the year
• Balance of profits from last year
• Taxes if any (to be deducted from profits)
• Transfers to reserves
• Preliminary expenses
• Goodwill written off
• Proposed dividends

13
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 each
• 
  2004 2005 2006Net profit 5, 967 7, 864
  8, 822
• Transfers to Reserves
• general
  nil 1, 000 nil
• fixed asset replacement nil
  nil 1, 500
• goodwill
  500
• preliminary expenses
  250
• Dividends were proposed for each year on
  preference shares at 5 and on ordinary shares
  at 2004, 10 2005, 12½ 2006, 15

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Solution

• IDO Ltd
• Profit and loss appropriation accounts
• 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
  0less transfers to
  reservesgeneralfixed asset replacementprelimin
  ary expensesgoodwill written offProposed
  dividendspreference 5 ( 20, 000)
  1, 000ordinary 10 (40, 000)
  4, 000 (5,
  000) Retained profits c/d
  967

15
Solution Year 2

• IDO 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, 864
  Add Retained profits
  967
  
  8, 831
• less transfers to reservesgeneral
  1,
  000fixed asset replacementpreliminary
  expensesgoodwill written offProposed
  dividendspreference 5 ( 20, 000)
  1, 000ordinary 12 ½ (40, 000)
  5,000 (7,
  000) Retained profits c/d
  1,
  831

16
Solution Year 3

• IDO Ltd
• IDO Ltd
• Profit and loss appropriation accounts
• 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, 653
• less transfers to reservesgeneral
  
  
  
  
• fixed asset replacement
  1, 500
• preliminary expenses
  250goodwill written off
  500
  
• Proposed dividendspreference 5 ( 20, 000)
  1, 000ordinary 15
  (40, 000) 6, 000
  (9, 250) Retained
  profits c/d
  1, 403