IGCSE Accounting: Limited Companies

Overview

• Focus on theory behind limited companies before moving to financial statements.
• Understanding important terms related to limited companies is essential.

Limited Companies

• Definition: A business organization with a separate legal identity from its owners.
• Features:
  • Legal Identity: Registered with the government and separate from its owners.
  • Limited Liability: Shareholders' liability is limited to the capital they contributed.

Comparison with Other Business Forms

• Sole Trader and Partnerships:
  • No separate legal identity.
  • Owners have unlimited liability; personal assets may be at risk.
• Limited Companies:
  • Separate legal identity.
  • Limited liability for shareholders.

Advantages and Disadvantages

Advantages

• Better access to capital through selling shares.
• Separate legal identity.
• Limited liability for shareholders.

Disadvantages

• Costly and time-consuming setup.
• Mandatory publication of financial accounts, exposing financial details to competitors.
• Shareholders have limited direct control over company operations.

Shares and Share Capital

• Share Capital: Capital divided into equal value units called shares.
• Types of Shares:
  • Preference Shares:
    • Preferential rights to dividends and asset claims during winding up.
    • Types: Redeemable and Non-redeemable.
  • Ordinary Shares:
    • Dividends received after preference shareholders.
    • More risk but potential for higher dividends when the company does well.

Dividends

• Definition: Return on investment for shareholders.
• Only paid if the company is profitable.
• Preference shares have fixed dividend rates.
• Ordinary shares have variable dividend rates.

Voting Rights

• Ordinary shareholders can vote in the annual general meeting (AGM).
• Preference shareholders do not have voting rights.

Debentures

• Similar to loans but raised from the public.
• Fixed interest rate regardless of company performance.
• Paid back before shareholders in winding up.
• No voting rights.

Types of Limited Companies

• Private Limited Companies:
  • Shares not sold to the general public.
  • Share transfer requires documentation and possibly approval from other shareholders.
• Public Limited Companies:
  • Shares sold to the general public and traded on stock exchanges.
  • Easier access to large amounts of capital.

Share Capital Structure Terms

• Authorized Capital: Maximum capital a company can raise by issuing shares.
• Issued Capital: Part of authorized capital issued to shareholders.
• Called-Up Capital: Portion of issued capital that shareholders are asked to pay.
• Paid-Up Capital: Actual amount paid by shareholders.

Study Recommendations

• Ensure understanding of key concepts and terms to prepare for financial statement analysis.
• The next video will focus on the format of financial statements for limited companies.