Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Accounting for Limited Liability Companies: Basic Terms

  • As pointed out elsewhere there are subtle differences between accounting for sole trader businesses, partnerships and non-profit entities when compared to accounting for limited liability companies
  • This is due to differences in the way limited liability companies conduct their business when compared to the rest
  • There are concepts that are unique to companies
  • You need to familiarise yourself with the nature of companies in general as well as private limited and public limited companies in particular
  • You need to be familiar with the following terms:
    1. Shares-a share is a unit of capital, the capital of companies is divided into shares click here to learn more about shares. Shares are also known as stock
    2. Authorised share capital-the maximum value of shares that a company can legally issue. This number is specified in the memorandum of association although it can be changed later on with the shareholder’s approval. It is also known as nominal (share) capital. Authorised Share capital can be divided into:
      • Issued capital– par value of the shares actually issued
      • Paid up capital- money received from the shareholders in exchange for shares. This can be less than or equal to issue capital
      • Uncalled capital- money remaining unpaid by the shareholders for the shares they have bought. This is the difference between issued capital and paid up capital. If shareholders have fully paid up their capital then uncalled capital would be zero
    3. Shareholders’ funds-this is that portion of assets that is attributable to the owners of the company. It is equal to Assets less liabilities. It shows the theoretical amount that shareholders would receive if the business was to be liquidated on a given day. Shareholder’s funds are sometimes known as shareholder’s equity or simply Equity
    4. Dividends-a dividend is a share of the after-tax profit of a company, distributed to its shareholders in accordance to the number and class of shares(e.g. preference or ordinary shares) held by them
    5. Debentures-is a long-term security entitled to a fixed rate of interest, issued by a company and  can be secured against assets. Click here to learn more about debentures
    6. Reserve-are portions of a business’s profits which have been set aside to strengthen the business’s financial position. When a business makes a profit the directors might hold back a portion of the profit to achieve a certain purpose, for accounting reasons or as a mere rainy day fund instead of distributing all profits as reserves. The later is known as a General reserve while the former are special reserves
    7. Retained  profits-also known as retained earnings are profits generated by a company that are not distributed to stockholders (shareholders) as dividends but are either reinvested in the business. While retained earnings are technically a general reserve often they are shown as being separate from it in the statement of financial position. In this instance the figure shown under the heading retained earnings is the sum of all profits retained since the company’s inception.
    8. Statement of changes in equity- is a financial statement showing the beginning balance, additions to and deductions from, and the ending balance of the shareholders’ equity account, for a specified period. This is prepared as part of the financial statement of a company
  • As an accounting student you should familiarise yourself with the above terms

To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.