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
| Term | Meaning |
|---|---|
| Authorised (nominal) capital | Maximum capital the company may issue |
| Issued capital | Part of authorised capital actually issued to shareholders |
| Called-up capital | Part of issued capital demanded from shareholders |
| Paid-up capital | Amount actually paid by shareholders |
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
| Shares | Debentures |
|---|---|
| Ownership | Loan (creditor) |
| Dividend from profit | Fixed interest, charged as an expense |
| Voting rights (ordinary) | No voting rights |
| Not repaid during company life | Repaid on maturity |
4. Company Profit and Appropriation
The company's profit before tax is reduced by corporation tax. The remaining net profit after tax is appropriated:
- Transfer to reserves (general or other reserves).
- Dividends: preference first, then ordinary.
- 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.
| Item | KSh |
|---|---|
| Net profit after tax | 560,000 |
| Less: Preference dividend (8% x 500,000) | (40,000) |
| Less: Ordinary dividend | (200,000) |
| Less: Transfer to general reserve | (100,000) |
| Retained profit carried forward | 220,000 |
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
| Advantages | Disadvantages |
|---|---|
| Limited liability | Costly and complex to set up |
| Large capital from many shareholders | Strict legal requirements |
| Continuity (perpetual succession) | Profits are shared and taxed |
| Easy transfer of shares (public) | Separation of ownership and control |
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Quick Quiz
- Ordinary shareholders
- Preference shareholders
- Debenture holders
- Directors
Answer: Option 2- Issued capital
- Called-up capital
- Authorised (nominal) capital
- Paid-up capital
Answer: Option 3- Ordinary share
- Preference share
- Debenture
- Retained earnings
Answer: Option 3