Limited Liability Companies: Statement of Financial Position

For this post, I will be touching on the Statement of Financial Position (SoFP for short) for a Limited Liability Company. The format of the SoFP is similar to both Sole Proprietorship and Partnership Accounts, although a little bit different. Before I show you the format of the SoFP, it’s crucial to know few new items that are included into the SoFP.

Intangible Assets: Intangible assets are assets that do not have a “physical” existence. Despite lacking in physical existence, these assets are useful/valuable to the company; therefore, there are treated as an asset in the SoFP. Example of intangible assets are brand (like MacD and Coca-Cola) and proprietary rights.

Proposed Dividend: Dividend that has been proposed (put forward) to the shareholders but the company has yet to pay them. Therefore, proposed dividend is a current liability to the company.

Debenture Loan: I did mention previously that debenture loan is like a bank loan.. this is not totally correct because of the confusion that this might cause you. If you think the explanation later will confuse you more, just understand that debenture loan is like a bank loan. Companies can choose to issue debenture certificates to lenders (the lenders can be anyone like government, other companies, and banks) using the companies’ assets as collateral. The rationale behind this is to bypass the use of bank because of the high interest rate, companies that has strong balance sheet can then choose to raise money from the market by issuing debenture loan (with lower interest rate than bank of course). Debenture loan is a long-term liabilities.

Share Premium Account: This is presented after called-up capital. Share premium account is used when the stock price is higher than the par value. The par value of most stocks are $1 but it can be anything else so do read properly! So if the stock price is $15, then the share premium is $14 ($15-$1) multiply by the number of shares outstanding.

General Reserve: The directors of the company may decide to reinvest/retain some of its profits into the company instead of paying it out to the shareholders as dividends. Because it belongs to the shareholders, general reserve is treated as an equity.

Retained Earnings (at Year End) = Retained Earnings from Previous Year + Profit leftover after deducting Tax, Dividends and Transfer to General Reserve.  Please see Profit and Loss Appropriation account for more.

Here is the format of SoFP for a Company.

Company Balance Sheet - Vertical Format A

Company Balance Sheet - Vertical Format B

Summary: Get the format and reminders right!

Limited Liability Companies: Appropriation Account – Part 2

This blog post will aim to explain a little bit more on the reasons why you need to follow the format of Limited Liabilities Company’s Appropriation Account and the failure to do so will result in you losing marks. You will still need to get familiar with some of the introductory terms from earlier posts. If you have not, please revisit them here.

For ease of reference, I have also included similar content from previous topic on Profit and Loss Appropriation Account.


In general, let me classified everything in its simplest form into:

  1. Banker,
  2. Government (for Tax), and
  3. Shareholders.

1. If you owe bank money, you are absolutely required under contractual obligation to pay back bank on time! This is actually quite logical. The bank do not need to know how the business is performing. Their only concern will be on whether the business is paying the bank on time! In your Profit and Loss, as can be seen from sole proprietorship and partnership account, this will appear in the debit side of the profit and loss. The same thing applies to a corporate account. But remember that you will be expected to see a new term called debenture loan. The next time you see a debenture loan, treat it as an expense to the Profit and Loss Account!

2. The next person you are required to settle as soon as possible will be the government, because not paying them is a criminal offense! If you refer to the picture above, you will see that tax appears after profit before tax.

3. The last person to receive remaining profit will be the shareholders. Shareholders participate in dividend payment and capital appreciation (increase in stock price). Shareholders also have rights in decision making for the company. With that being said, shareholders are actually at an advantageous position due to their (usually) higher return. As a result of assuming the highest risk of the company, they were the last to receive any returns (whether big or small) from the company.

Shareholders are further classified into preference and ordinary shareholders. Preference shareholders were the first one to receive dividend before ordinary shareholders. You might be questioning why but if you look at how preference share behaves, it is actually quite similar to debenture loan (i.e. earning fixed return) with no voting rights. If you refer back to the picture above, you will be able to see that preference dividend appears first, followed by ordinary dividend.

In summary, the order of your P&L Appropriation Account will be:

  1. Interest on Loan,
  2. Debenture Loan,
  3. Tax (to government),
  4. Preference Dividend, and
  5. Ordinary Dividend.

Introduction to Limited Liability Companies

A quick recap so far, you have gone through sole proprietorship accounts, partnership accounts and not-for-profit organisation accounts. This will be the last set of accounts that you will need to be aware of, the limited liability companies’ accounts.

Let’s start with getting used to some of the new terms for companies’ accounts.

Authorised share capital is the maximum amount of capital that a company can issue. If a company has an authorised share capital of 1,000,000, then it can only issued up to 1,000,000 shares. Take note that I am referring to the number of shares, not the value of the shares. Depending on the price per share, a $1 per share will equate $1,000,000 capital and a $5 per share will equate $5,000,000 capital (and so on) for 1,000,000 shares.

Issued share capital is the actual number of shares held by the shareholders. Take note that it is not compulsory for the question to be set with the same authorised and issued share capital. Some people will just read “Authorised share capital” for xxx shares @ $xx and then straight away write this as the capital amount. This can be a trick to mislead you. Remember that issued share capital is the actual number of shares held by the shareholders – which should be translated to the capital amount.

Called-up capital is the amounts payable on each share that has been asked (or called) for payment. If a share is worth $1, but is call for $0.90, the called-up capital will be $0.90 per share.

Calls in arrears is the total amount for which payment has been asked (or called) for but payment has yet to be received from the shareholders.

Paid-up capital is the total amount of share capital which has been paid by shareholders. This can also be calculated as Called-up Capital – Calls in Arrears.

Shares can be divided into preference and ordinary shares. There are more types of shares but for now, let’s just keep this to preference and ordinary shares.

Preference shares get an agreed rate (in %) of dividend before the ordinary shareholders. Preference shares can be further sub-divided into non-cumulative preference shares and cumulative preference shares. As their names imply, non-cumulative preference shares cannot carry forward any shortage into future years while cumulative preference shares will be able to carry forward such shortages into future years.

Ordinary shares get the remainder share of the profits in dividends. However, not all profits will be distributed as dividend to shareholders. Profits are needed to be reinvested in to the company for growth. The leftover/reinvested amount is called “transfer to reserve.”

Limited Liability Company is a private company whereby the shareholders are only responsible for its debts to the extent of the amount of capital that they invested.

Reserve account forms a part of the company’s capital. As can be expected, reserve account gets it value from “transfer to reserve.” For second subsequent year, reserve account will be: opening balance (from last year) + this year transfer to reserve.

Dividend is the sum of money paid by the company to the shareholders. A semi-annual dividend payout is called interim dividend. Since interim dividend is for six months only, you must remember to apportion it for six months only, i.e. if 1,000,000 shares @ $1.00 has an interim dividend of 5%, then the interim dividend is 1,000,000 x $1 x 5% x 6/12. If you forget to apportion it to 6/12 months, then you will have wrongly calculated the interim dividend.

Debenture is a term similar to loan. Other similar terms for loan include loan stock and loan capital. Debenture interest is similar to interest on loan, this is an expense to the company.

Directors’ remuneration is a form of monetary reward paid to director. The treatment is similar to salaries for employees, i.e. an expense to the company.

Hopefully some of the tricks and confusing parts that I pointed out above can help clear your confusions in this new topic.