hey welcome to index world and this video series on igcse accounting today's video is on limited companies this is one topic that many students find difficult probably because a lot of new concepts are involved compared to other chapters so in this video we shall we see all the theory involved behind the limited companies understand the various terms which are important and then in the next video we shall go and understand the financial statements i could have directly done the financial statements given you the format but but really it doesn't make any sense to directly go to financial statements and start looking at the formats of the financial statements if you don't understand the important terms that are related to the limited companies so in today's lecture we're going to study the meaning of limited companies and the meaning of limited liability advantages and disadvantages of limited companies how do they compare with other forms of business organizations like sole trader and partnerships meaning and types of shares dividend and voting rights involved in limited companies difference between debentures and shares the types of limited companies that one can set up and also understand the structure of the share capital then in the next video we shall see the format of financial statements of limited companies and how to solve limited company questions in exam now what's a limited company a limited company is a form of business organization that has its own legal identity a separate identity apart from its owners from its members and the owners have limited liabilities so two very important features of a limited company that are not present in other forms of business organizations like sold trader and partnership the company has its own legal identity meaning it is an entity registered with the government apart from its owners but in case of sole trader and the partnership the businesses do not have their own legal entity the business is known by their owners by the partners who've invested capital in that business another important feature is that the investors or the shareholders or the members have limited liability in the company limited liability is a term that we use to describe the fact that the shareholders liability towards the business is limited to the amount of capital they have contributed to the firm in case of sole trader and partnership owners will obviously contribute capital in future if the business is not able to pay off its liabilities owners personal assets can be sold off by the lenders by the creditors to recover their amount from the from the firm but in case of companies these lenders and creditors cannot go and have a claim on the personal assets of the shareholders who've invested in the company so this is known as limited liability the liability of these shareholders is limited to the amount that they've already contributed as capital to the business they're not they're not liable to contribute anything more than that in case of any event so you could say that as far as shareholders or investors are concerned a company is a better form of organization for them because their risk is limited in case of sole traders and partnership the risk is unlimited let's look at quick advantages and disadvantages of companies they do ask some theory questions related to this in exam so should be aware of two or three points for each now talking about advantages obviously a company has better access to capital because it can sell its shares to so many investors and raise capital compared to a sole trader in partnership a company has a separate legal identity i've already told you that it is not known by its investors but it is it has its own legal presence in the eyes of government and finally the owners have limited liability so it's beneficial to them compared to the investors or owners of a sole trader or partnership firm talking about disadvantages of companies now setting up a company is not cheap it costs money compared to other forms of business organizations lot of documentation is involved a lot of time is involved time it is time consuming so the setting up of company is time consuming and costly at the same time now in a company lot of investors from the general public have invested in the company so it is mandatory for the directors to publish their final accounts and make it public they cannot hide their financial dealings they have to show their figures of revenues balance sheet items they have to show it mandatory now think from competitors point of view it is a disadvantage to the company the competitors are actually aware of how the business is doing and the shareholders have a very limited role in the functioning of the company they can only appoint directors in the annual general meeting where they because shareholders have voting rights which we'll see in the next few slides shareholders can vote for the directors who actually run the business so shareholders cannot come and interfere in the day-to-day operations of the business now let's understand share and share capital now the capital of a company is known as share capital this share capital of the company is divided into units of equal value these units are known as shares so shares is nothing but entire share capital divided what happens is when you want to raise capital you will sell shares and collect money in form of share capital now the value of these shares in the books is known as face value or power value so what are the different types of shares a company can sell and raise money first one is the preference shares now preference shares are shares which give the investors or the shareholders to preferential rights first one they have a preferential right to receive dividend before all other shareholders so dividend is something that the shareholders get in return for the investment made so when the companies earn profit the first set of shareholders to get the dividends will be the preference shareholders because they have this preferential right another preferential right the shareholders the preference shareholders carry is that at the time of winding up of the company when the company is closed obviously the process is to sell the assets pay off all the liabilities and at the end whatever remains is paid out to the owners so the preference shareholders have a preferential right in claiming on the assets or rebalance of the assets first before other shareholders so they carry these two preferential rights now preference shares can be of two types redeemable preference shares and non-redeemable preferences obviously there are other types of preferences also like cumulative preferences non-cumulative preferences convertible preference shares non-convertible preferences but not relevant for syllabus for our syllabus we will just understand the meaning of redeemable and non-redeemable preference shares redeemer preferences are preference shares wherein the capital is taken from the investor for a fixed period of time after which the capital is redeemed or repaid back to the shareholder or investor the company repays back the capital to the investor after a fixed period which is pre-decided at the time of investment by the shareholder but in case of non-redeemable preference shares the capital is not repaid back to the preference shareholder unless the company is closed only at the time of winding up the capital is then repaid back in case of non-redeemable preference shares the other category of shares would be the ordinary shares which is the common type of shares that you see that you hear about now ordinary shares do not carry the two preferential rights we've discussed for preference shares they will receive the dividends only after preference shareholders receive the dividend so once the preference shareholders receive dividend if profits are left then only ordinary shareholders will receive dividends and second at the time of winding up ordinary shareholders will be paid back their share of capital only after the capital is paid back to preference shareholders and if sufficient funds are left after that if funds are not left ordinary shareholders do not get anything so you could say that at these two points ordinary shareholders are at a disadvantage because they receive dividend after preference shareholders and they receive their capital also after preference shareholders dividend is what an investor gets as return on his investment so when you're investing in the capital of a company what you get back is dividends for example when you invest in bank deposits you get back interest from the bank in the same way dividend is what investors get in form of returns on their investment in share capital now dividend is that part of profits which is paid back to the investors so one important point that you have to understand here is that dividend will be only paid if the company is earning profits because if there are no profits you cannot distribute dividends dividends is just the part of profits that has been distributed no profits no dividend preference shareholders are paid dividend at a fixed rate usually their dividend rate is fixed but in case of ordinary shares the dividend rate is not fixed in years when the company is doing very well ordinary shareholders could get very high rates of dividend but in years when the company is not doing well directors may decide not to pay any dividend to the shareholders so here you could say that ordinary shareholders are at an advantage over preference orders because in years when the company is doing really well the rate of dividend of ordinary shareholders could be very high so how do you calculate dividend there are two ways of calculating dividend depends on the information given now one way is that dividend per share is given so they would say that let's say dividend per share is 0.5 per share the question might mention that dividend per share is 0.5 and you are also given an information that the total number of shares the company has issued is let's say hundred thousand shares so the total dividend here would be fifty thousand dollars what i've done is dividend per share multiplied by number of shares another way to calculate dividend is when rate of dividend is given now this is not dividend per share this is rate of dividend is mentioned in terms of percentage so let's say eight percent is the rate of dividend whenever percentage is mentioned or rate of dividend is mentioned you need to multiply it by the value of capital in the above formula it was number of shares dividend per share was multiplied by number of shares but when rate of dividend is given you need to multiply by the value of share capital and not the number of shares so let's say 8 multiplied by let's say the value of share capital is hundred thousand so eight thousand dollars will be the dividend voting rights entitle the ordinary shareholders to vote on certain matters in the annual general meeting now agm or annual general meeting is a meeting of all the ordinary shareholders which is usually done once a year now in the meeting certain proposals are kept by the directors regarding the company management and performance ordinary shareholders have a right to vote on these matters so that to that extent they can make sure that company is being managed as per what they want if you talk about preference shareholders preference shareholders do not carry any voting rights so again here ordinary shareholders are at an advantage over preference shareholders what do you mean by debentures you must be knowing about bank loan now what happens in a bank loan is you take a a single sum of loan from one bank now doing that is possible if the loan amount is not very huge okay let's say if you need millions of dollars or billions of dollars as loan ma it is possible that the bank might be reluctant in giving you loan it is possible to raise such a big amount by way of loan if you can issue debentures now debentures is a document that you issue to members of general public and borrow money from them so that you can repay back the money to them after a fixed period of time and at the same time pay them interest periodically so the benches are instruments that help the company raise huge amounts of capital by way of loan from the public what are the important features of debentures that also distinguish it from these shares so debentures are lenders here okay they're creditors of the company eventually they have to be paid back whether or not the company is doing well or no but in case of shares the shareholders were owners of the company they were not lenders of the company now interest on debentures is paid at a fixed rate irrespective of level of profits or the losses but if you remember in case of ordinary shareholders the rate of dividend was not fixed in case of winding up before any amount of assets can be paid back to the preference shareholders or ordinary shareholders first they have to be paid to the debenture holders the amount of loan has to be returned back to the debenture holders and then only amount can be repaid back to the shareholders now debenture holders are also not entitled to any kind of voting rights like preference shareholders only ordinary shareholders are entitled to voting rights in the agm so a quick table here to understand the difference between ordinary shares preference shares and debentures i think you would understand this table easily now after going through all these points in detail in the previous slides so the status of an ordinary shareholder is that of an owner preference shareholder is also an owner of the company but the venture holders are lenders of the company in ordinary shares dividend is paid at a variable rate in years of high profit high dividend else low dividends and in some cases no dividends also when there are no profits or profits are really bad but preference shareholders get dividends at fixed rate dementia holders get interest at fixed rate voting rights in agm is only available for ordinary shareholders no voting rights for preferential holders and debenture holders ordinary shareholders need not be redeemed during the life of the company it has the ordinary shareholders will get back the amount of capital only the once the company is wound up or is closed but preference shareholders depends if their redeemer preferences the capital will be paid back during the life of the company else only after the company is closed but in case of debentures you have to repay the amount of loan back during after a fixed period of time which is pre-decided now at the time of winding up first debentures will be paid the sum of loan and then amount is paid back to the preference shareholders and finally whatever is left is paid back to the ordinary shareholders so the last point speaks about that now companies limited companies can be of two types private companies private limited companies or public companies also known as public limited companies let us understand the difference between the two private limited is a company that can raise capital by selling shares not to the members of general public it cannot advertise to the general public that it is interested in raising capital and selling shares but it can only issue shares to people in its private network or the founder may be having a private network of family and friends shares can be only issued to such people you cannot have a general or a common advertisement wherein you are informing the public that you are interested in selling shares now one more feature of a private limited company is that once you invest in the shares selling off the shares or transferring the shares to another person may not be very easy it might be there might be some kind of documentation involved you might have to take permission of the other shareholders also in case of a private limited company a public limited company is a company wherein these shares can be sold to members of the general public you just need to put up a public advertisement by way of issuing prospectus wherein you inform them that you are selling shares and people according to their investment appetite they will come and invest in the company so in a public company public limited company might be having access to huge amount of capital compared to private limited company because there is no limit to the number of investors who can invest in your company now once you purchase these shares of a public limited company the shares are easily transferable or you can easily sell them because these shares are also traded on the stock exchange so you just need to you don't have to go and actually look for a buyer or take any kind of permission you can just sell your shares on the stock exchange but in case of a private limited company shares are not sold on stock exchange so investor might find it difficult to actually find buyers for the shares when the investor wants to sell the shares now let's understand some more important terms relating to the structure of the share capital the first term is authorized capital authorized capital is the maximum capital a company can raise by way of selling shares now this amount is mentioned in the memorandum of association a very important document of the company wherein the company states that this will be our maximum capital that we are interested in raising during a lifetime this is the authorized capital so company has an authorized capital here consisting of 50 000 ordinary shares of dollars to each so what would be our authorized capital obviously 50 000 shares into dollars to total 100 000 will be the authorized capital of this company during its lifetime it cannot issue shares worth more than hundred thousand dollars next is issued capital issued capital is that part of authorized capital which the company has issued to the members of public and the people have subscribed to it basically issued capital is the shares that have been already sold to shareholders or investors now example out of the total authorized capital the company has issued 40 thousand shares out of fifty thousand forty thousand have been issued so in this case issued capital would be forty thousand issued shares multiplied by dollars two per share eighty thousand dollars is the issued capital so issue capital will always be either equal to authorized capital or less than authorized capital next is the called up capital now understand one thing when the face value of a share is dollars to companies need not ask the shareholders to pay the entire dollars to on their shares at one go it could divide the in face value into different branches and pay as the shareholders to pay in installments so whatever installment the company has asked the shareholders to pay on their inve on their investment or on their shares that part of the issued capital is known as called up capital companies called that amount now here the 40 000 issued shares company has only called up dollars 1.5 per share out of the total dollars to only 1.5 per share has been called up so the total called up capital will be 40 000 shares into 1.5 60 000 and finally we have the paid up capital see when you call capital when the company calls up capital as the shareholders to pay the money on the shares not necessary that all shareholders would instantly pay the amount possible that some shareholders may not be able to pay the amount at that point of time so out of the called up capital whatever is actually paid by the shareholders is the paid up capital now in our example here out of the total called up capital of 60 000 5000 shares are such that on them dollar 0.5 per share is not yet paid by the shareholder so can i say the unpaid amount of shares is 5000 into 0.5 which is 2 500 so the paid up capital will be called up capital sixty thousand minus the unpaid part which is two thousand five hundred so fifty seven thousand five hundred will be the paid up capital now these terms are important from theory point of view they could ask you the meaning of these terms so i just took a small example to make you understand the meaning of these terms in this video i have told you all the important terms important concepts related to limited companies these terms and concepts will definitely help you understand the financial statements of companies better in the next video so if you still have doubts go back to the parts of video you've not understood try to see them again try to read some material gain a strong understanding of the concepts in the next video we shall see the format of financial statements of limited companies we shall also see one example on how to prepare financial statements of companies so that in exam it becomes very easy to solve questions thank you