CHAPTER 21
LIMITED COMPANIES
21.0 LEARNING OBJECTIVES
The objective of this chapter is to help students understand what items to be included in the financial statements. It also aims to remind the students on how to prepare financial statements in accordance to International Accounting Standards and assist them to differentiate between profit and cash flow, and understand the need for management to control cash flow.
21.1 NEED FOR LIMITED COMPANIES
Limited liability companies, more commonly referred to as limited companies, came into existence originally because of the growth in the size of businesses, and the need to have a lot of people investing in the business who would not be able to take part in its management.
21.1 PRIMARY FINANCIAL STATEMENTS
The preparation of final accounts start with the trial balance. When the debit and credit sides of the trial balance agrees, then the information is used to prepare Statement of Profit or loss and Other Comprehensive Income and Statement of Financial Position.
- Statement of Profit or Loss and Other Comprehensive Income
This starts with Income (Revenue) for the whole period and then charges to the Income, cost of making that income in the Trading account. This then calculates gross profit which we subtract all expenses of running the business.
Statement of Comprehensive Income for XYZ for the year ending 31st December
| 2013 | ||||
| MK | ||||
| Revenue | XX | |||
| Less Return Inwards | (XX) | |||
| Less Cost of Sales (COSA) |
XX | |||
| Opening Inventory | XX | |||
| Add Purchases | XX | |||
| XX | ||||
| Less: Closing Inventory | (XX) | (XX) | ||
| Gross Profit
Less : Expenses |
XX | |||
| Rent | XX | |||
| Salaries and wages | XX | |||
| Water and electricity | XX | |||
| Other operating expenses | XX | (XX) | ||
| Profit for the period | XX | |||
| Other comprehensive Income | ||||
| Revaluation Reserves | XX | |||
| Total comprehensive Income | XX | |||
- A Statement of Financial Position
This is a statement which shows all the list of assets and liabilities. The statement of financial position is a snapshot of what the business is wealth. This statement of financial position is not for the whole year but represents the values as at a particular date. The statement of financial position has the Asset on one side and Capital with liability on the other side. The arrangements of items in the statement of financial position starts with items which are not very liquid enough and ends with very liquid items.
Pro-forma
Statement of Financial Position of XYZ as at 31st December 2013
| Non-Current Assets Cost
(NBV) |
Dpn | C/ | Amount | ||
| MK | MK | MK | |||
| Property, Plant and Equipment XX | XX | XX | |||
| Intangible Assets XX | XX | XX | |||
|
Current Assets |
XX | ||||
| Inventory | XX | ||||
| Receivables | XX | ||||
| Prepayments | XX | ||||
| Bank | XX | ||||
| Cash | XX | XX | |||
|
Financed by Capital and Liabilities |
XX | ||||
| Capital | XX | ||||
| Share Premium | XX | ||||
| Add: Profit | XX | ||||
| Other reserves | XX | ||||
| Non-Current Liabilities |
XX | ||||
| Long term loan | XX | ||||
| Provisions | XX | ||||
|
Current Liabilities |
XX | ||||
| Current portion of long term loan | XX | ||||
| Payables | XX | ||||
| Accruals | XX | XX | |||
| XX |
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| The capital side of a sole trader is represented as follows: | ||
| Capital | XX | |
| Add: Profit | XX
XX |
|
| Less: Withdrawals | (XX) | |
| Capital
While as capital side for a partnership is reflected as follows: |
XX | |
| Capital : A | XX | |
| B XX | ||
XX
Current Accounts :A XX
B XX XX
XX
The above formats mostly refer to sole traders and partnerships. However, with limited companies some items need emphasizing:
Share capital: shareholders of a limited company obtain their reward in form of a share of the profits, known as dividend. Main types of shares are preference shares and ordinary shares. Share capital has different meanings as can be authorized share capital and/or issued share capital. It can also be called-up capital, uncalled capital, calls in arrears, and paid-up capital.
Debentures: this term is used when a limited company receives money on loan, and certificates called debenture certificates are issued to the lender. Interest will be paid to the holder, the rate of interest being shown on the certificate.
Directors’ remuneration: as directors exist only in companies, this type of expense is only found in company accounts. Directors are legally employees of the company, appointed by the shareholders. Their remuneration is charged to statement of profit or loss.
END OF CHAPTER SUMMARY
This chapter was included as a revision on the preparation of financial statements with emphasis for the sole trader and partnerships.
Formatting is an important element in the preparation of financial statements and it is important that students should have a full understanding as to where assets, liability, Capital, income and expenditure are presented in the financial statement.