Accounts of Limited Companies

Limited companies owe their origin to the need to raise large amounts of capital to finance
business. At present companies are regulated by the Companies Act. Two of the main reasons for
forming a company are therefore to facilitate the raising of capital and to protect the members
with limited liability. A limited company is a separate legal entity; i.e. it is regarded in law as
having a separate existence from that of its members. The members of a limited company are not
liable beyond their contributions for the debts of the company. This means that they enjoy
limited liability. A limited company is formed by the registration of certain documents with the
Registrar of Companies. The Memorandum of Association and the Articles of Association are
two of the documents which have to be filed. The memorandum of Association defines the
relationship of the company with the outside world. The Articles of Association defines the
internal rules governing the rights of the members and the running of the company.

Public and private companies

Public Companies

The company registers as a public company and describes itself as such in the Memorandum of
Association. The name of the company must end with “Public limited company” or the
abbreviation “plc”. A public company may offer its shares to the public and its shares will be
traded on the Stock Market.

Private Companies

The company does not describe itself as a public company and its name will end with “Limited”
or “Ltd”. A private company may not offer its shares to the public and as such they will not be
traded on the Stock Exchange.

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 Example of Company’s Final Accounts
ABC Trading Company PLC
Trading and Profit and Loss Account
for the year ending December 31, 2012

Details/Accounts $’m $’m $’m

Sales 100.0
Less: cost of sales 54.0
Gross Profit 46.0

Selling and distribution Expenses

Sales person’s salaries 2.1
Warehouse expenses 1.9
Depreciation: warehouse machinery 0.5
Delivery vans 0.8 5.3
Administration Expenses
Administrative salaries 14.6
Property expenses 16.0
Depreciation: Fixtures and fittings 0.7
Office machinery 0.2 31.5
Financial Expenses
 Interest on debentures 0.4 (37.2)
Profit before tax 8.8
Taxation (2.5)
Profit after tax 6.3
Transfer to general reserves 2.0
Dividends paid and proposed
Preference: paid 0.4
Preference: proposed 0.4
Ordinary: paid 0.6
Ordinary: proposed 1.2 (4.6)
Retained profit for the year 1.7
Retained profit brought forward 1.5
Retained profit carried forward 3.2

Summary
(a) A debenture is a long term loan made to a company, or more strictly, the document which
is evidence of such loan. Debentures carry the right of fixed rate of interest.
(b) Profit before tax: This item marks the end of the Profit and Loss Account and the
beginning of the Profit and Loss Appropriation Account because all the items that follow
show how the profit is “appropriated” to particular purposes.

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(c) Taxation: Companies pay Corporation Tax on their profits. The tax charge is shown as a
charge in the Profit and Loss Appropriation Account. This in contrast to a sole trader or
partnership account where the business entity is not subject to Income Tax. Sole traders
and partners are liable to pay tax on the profits of their businesses, and if they pay the tax
out of business funds, the payments is treated as drawings.
(d) Transfer to General Reserve: Revenue reserves are created to strengthen the financing of
a company by ploughing profits back into the business. They are created or increased by
debiting the Profit and Loss Appropriation Account and crediting the amount to a
General Reserve Account.
(e) Dividends: Shareholders get returns in the form of dividends. The dividends are debited
in the Profit and Loss Appropriation Account and credited to a Dividends Account. When
the dividends are paid, the cash paid is debited to Dividends Account and credited to
cash.
(f) Preference dividend: The holders of preference dividend are entitled to a fixed rate of
interest on their share.
(g) Ordinary dividend: the ordinary share holders are not entitled to a fixed rate of dividend
on their shares. The directors may pay an interim dividend to shareholders during the
year and may propose at the end of the year to pay a final ordinary dividend.
(h) Retained profit: The balance on the Profit and Loss Appropriation after transfers to
reserves and dividends is the retained profit fore the year. It is added to the retained profit
brought forward from the previous year to provide the retained profit carried forward to
the next year.

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 Example of Company’s Balance Sheet
ABC Trading Company PLC
Balance Sheet as at December 31, 2012

Details/Accounts $ $ $
Fixed Assets
Intangible fixed assets 10.0
Tangible fixed assets 87.0
Investments 5.0
102.0
Current Assets
Stock 4.0
Debtors 16.8
Bank 17.4
38.2
Creditors: amounts falling due within one
year
Creditors 26.4
Taxation 2.5
Dividends-proposed 1.6 (30.5) 7.7
109.7
Creditors: Amounts falling due after more
than one year
10% Debentures 2003/2005 (4.0)
105.7
Share Capital and Reserves
Authorized share capital
60,000 ordinary shares of $1,000 each 60.0
20,000 8% Preference shares of $1,000 each 20.0
80.0
Issued and fully paid
Ordinary shares of $1,000 each 45.0
8% Preference shares of $1,000 each 10.0
Share premium Account 22.5
Revaluation Reserve 20.0
General Reserve 5.0
Profit and Loss Account 3.2
105.7

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Summary
(a) Intangible fixed assets: These are fixed assets that cannot be seen or touched. Examples
are goodwill, patents, license, royalties, copyrights and trademarks.
(b) Tangible fixed Assets: these are fixed assets which have a physical existence and can be
touched and felt e.g. property, plant and machinery, office furniture, etc.
(c) Fixed Asset Investments: these are usually shares in other companies which are held for
the long term. A company may buy shares in another company in order to have some say
in the way that another company is run or to gain some other benefit.
(d) Creditors: Amounts falling due within one year: this is the term used in the Companies
Act for current liabilities.
(e) Taxation: Corporation tax is paid at the rate prescribed by law.
(f) Dividends: Dividends proposed by the directors will not have been paid at the date of the
Balance Sheet and must therefore be shown in the Balance Sheet as a current liability.
The liability in the above case is composed of: Proposed preference dividend $0.4m +
proposed ordinary dividend $1.2m=$1.6m.
(g) Creditors: Amounts falling due after more than one year: This is the term used in the
Companies Act to describe long term liability.
(h) Authorized share capital: the authorized share capital is the maximum amount of share
capital which a company may issue as stated in the Memorandum of Association. This
amount must not be exceeded, but the company may comply with certain formalities
required by law to increase the amount of authorized capital.
(i) Debentures: these are long term liabilities.
(j) Issued share capital: This is the amount of share capital which has actually been issued to
shareholders or members

Example on Company’s Trading and Profit and Loss Account

ABC Ltd has an authorized share capital of $1.5m $1 ordinary shares, of which 1 million have
been issued as fully paid. The following information was extracted from the accounts for the year
ended September 30, 2006:

Details/Accounts $ $
Freehold premises at cost 250,000
Carriage inwards 13,500
Sales 750,000
Stock, October 1, 2005 80,000
Wages and salaries:
Administration 20,000
Distribution 40,000 60,000
Motor vehicle running costs 11,000
Purchases 430,000
Returns inward 18,000
Returns outward 25,000
Director’s remuneration 20,000
Auditor’s fees 2,500
General admin. expenses 9,000
Discounts allowed 2,500

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 Retained earnings (Cr. Bal. Oct.1,2005) 260.000

Notes:
(a) The closing stock was valued at $90,000 cost.
(b) The ordinary share dividends for the year were: Interim 3% Already paid; Final 8%
Proposed.
(c) The directors decided to transfer $100,000 to General Reserve.
(d) Expenses in arrears at September 30, 2006 were: Motor vehicle running costs $1,100;
Salaries and wages (Distribution staff) $3,000.
(e) Expenses paid in advance at September 30, 2006 were: General expenses $1,500.
(f) The liability for Corporation tax for the year ended September 30, 2006 was calculated to
be $95,000.
(g) The company depreciated freehold premises at 4% per annum on cost.
(h) On October 1, 2005 the company’s assets included: $

Motor vehicles at cost 40,000

Depreciation to date 16,000
Depreciation is made at 20% per annum on the reducing balance basis. The above figures
include a motor vehicle which cost $8,000 and which had been in company ownership for
exactly two years. It was sold for $2,500 on October 1, 2005.
(i) The company’s motor vehicles were used by staff as follows: Distribution staff- 30,000
miles per annum; Administrative staff- 10,000 miles per annum.

Required:
(a) The Trading and Profit and Loss Accounts for the year ended September 30, 2006.
(b) The Appropriation Account for the year ended September 30, 2006.
(c) List the items which the company would be required to include in its published accounts
under the Companies” Act.

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 ABC PLC
Trading and Profit and Loss Account for the year ended September 30, 2006

Details/Accounts $ $ $
Turnover/Sales (750,000-18,000) 732,000
Less: cost of sales
Opening stock 1/10/05 80,000
Purchases (430,000-25,000) 405,000
Carriage inwards 13,500 418,500
498,500
Closing stock 30/9/06 (90,000) (408,500)
Gross profit 323,500
Distribution costs:
Wages and salaries (40,000+3,000) 43,000
Motor vehicle running costs (1000+1100 x 0.75 9,075
Loss on disposal of vehicle (2620 x 0.75) 1,965
Depreciation motor vehicle (18,880 x 20%) x 0.75 2,832 56,872
Administrative costs:
Wages and salaries 20,000
Directors’ remuneration 20,000
Motor vehicle running costs ( 11000+1100) x 0.25 3,025
Auditors’ fee 2,500
General expenses 7,500
Discounts allowed 2,500
Loss on disposal of vehicle (2620 x 0.25) 655
Depreciation of motor vehicles (18880 x 20%) x 0.25 944
Depreciation of freehold premises (250000) x 4% 10,000 67,124 (123,996)
Profit on ordinary operations 199,504

(b) Profit on ordinary activities before tax 199,504

Tax on profit on ordinary activities (95,000)
Profit on ordinary activities after tax 104,504
Retained profit as at October v1, 2005 260,000
364,504

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Transfer to General Reserves 100,000
Ordinary dividend-Interim (1,000,000 x 3%) 30,000
-Proposed (1,000,000 x 8%) 80,000 (210,000)
Retained profit carried forward 154,504

(c) ABC PLC must include the following items in its published accounts:

$
Turnover/Sales 732,000
Cost of sales (408,500)
Gross profit 323,500
Distribution costs (56,872)
Administrative costs (67,124)
Financial costs (0)
Profit on ordinary activities before tax 199,504

Summary
(a) Motor vehicle costs to be distributed between Distribution and Admin in the ratio
30,000:10,000= 3:1
(b) Calculate profit or loss on disposal of motor vehicle:

Dr Motor Vehicle Account Cr

1/10/05 bal. b/f 40,000 1/10/05 disposal 8,000

1/10/05 bal. c/d 32,000
40,000 40,000

Dr Disposal Account Cr

1/10/05 Motor Vehicle 8,000 30/9/05 Prov. for dep. (8,000 x 20%) 1,600
30/9/06 Prov. for dep. ( 6,400 x 20%) 1,280
1/10/05 cash 2,500
30/09/06 P & L 2,620
8,000 8,000

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Dr Provision for Depreciation of Motor Vehicle Cr

1/10/05 disposal (yr 1) 1,600 1/10/05 bal. b/f 16,000

1/10/05 disposal (yr 2) 1,280
1/10/05 bal. c/d 13,120
16,000 16,000
2/10/05 bal. b/f 13,120
30/09/06 bal. c/d 16,896 30/09/06 P & L 3,776
16,896 16,896

Depreciation calculation for 2005 $

Cost of motor vehicle remaining in books 32,000
Less Accumulated depreciation (13,120)
Net book value as at 30/09/06 18,880
Depreciation for the year = $18,880 x 20% = $3,776