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.