Topic 8: Company Accounts

1. Limited Companies

A limited company is a legal entity separate from its owners (shareholders), whose liability is limited to the unpaid amount on their shares.

Types

• Private limited company (Ltd): shares not sold to the public; 1 or more shareholders.
• Public limited company (PLC): may offer shares to the public and list on the stock exchange.

Documents of a Company

• Memorandum of Association: external affairs (name, objects, share capital).
• Articles of Association: internal rules.
• Certificate of incorporation.
• Prospectus (public companies).

2. Share Capital

Types of Shares

• Ordinary shares: owners with voting rights; dividend varies with profit.
• Preference shares: fixed dividend; paid before ordinary shareholders; usually no voting rights.

Debentures

Long-term loans to the company; fixed interest is paid regardless of profit. Holders are creditors, not owners.

3. Differences: Shares vs Debentures

4. Company Profit and Appropriation

The company's profit before tax is reduced by corporation tax. The remaining net profit after tax is appropriated:

1. Transfer to reserves (general or other reserves).
2. Dividends: preference first, then ordinary.
3. Retained profit carried forward.

Worked Example

Net profit after tax: KSh 560,000. Preference share capital KSh 500,000 at 8%. Ordinary dividend KSh 200,000. Transfer to general reserve KSh 100,000.

5. Balance Sheet of a Company (Outline)

Non-current assets (land, buildings, equipment) Current assets (stock, debtors, bank, cash) Less: Current liabilities = Net assets

Financed by:

• Share capital (ordinary and preference)
• Reserves and retained profit
• Long-term liabilities (debentures, loans)

6. Advantages and Disadvantages of Limited Companies