Back to: Financial Accounting
Good day, class.
This week, we begin our study of company accounts, which is different from partnership accounts. A company is a legal entity separate from its owners (shareholders), and its financial records are more formal and regulated.
Company Accounts
1. Types of Companies
Private Limited Company (Ltd): Cannot invite the public to buy shares; ownership is usually limited to a small group.
Public Limited Company (Plc): Can sell shares to the public and is usually larger.
2. Key Features of a Company
Separate legal personality
Owned by shareholders
Managed by a board of directors
Has perpetual succession
Can sue and be sued in its own name
3. Capital Structure
Companies raise funds mainly through shares. There are different types of share capital:
Authorised capital: The maximum capital a company is allowed to issue.
Issued capital: The portion of authorised capital actually offered to shareholders.
Called-up capital: The amount shareholders are asked to pay.
Paid-up capital: The amount actually paid by shareholders.
4. Types of Shares
Ordinary Shares: Holders are owners of the company, take the highest risk, and share residual profits after all expenses and preference dividends are paid.
Preference Shares: Holders receive fixed dividends and are repaid before ordinary shareholders if the company is wound up. They may be cumulative or non-cumulative.
5. Reserves and Retained Earnings
Companies often set aside part of their profits as reserves. These include:
General Reserve: For future needs.
Revenue Reserve: Created from profits and used to strengthen the company.
Retained Earnings: Profits not shared as dividends, kept in the business for growth.
6. Dividends
Dividends are profits shared with shareholders.
They are declared by the board of directors and paid after profits are confirmed.
Interim dividends may be paid during the year, while final dividends are declared at the end.
7. Company Financial Statements
These include:
Statement of Financial Position (Balance Sheet)
Statement of Profit or Loss and Other
Comprehensive Income
Statement of Changes in Equity
Notes to the Accounts