Limited companies

Revise Limited companies for Accounting 7707 (O Level) — revision notes, 84 practice questions and instant AI marking.

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Cambridge O Level Accounting 7707

Limited Companies

The big idea: A limited company is a separate legal person owned by shareholders, whose risk is limited to what they paid for their shares. Its accounts look like a sole trader’s, but the capital section becomes equity: share capital plus reserves, with dividends shown in the statement of changes in equity.

Summary — What This Chapter Covers

Limited liability: shareholders can lose only the amount they invested in their shares.
Equity = ordinary share capital + non-redeemable preference share capital + reserves (general reserve and retained earnings).
Preference shares receive a fixed dividend before ordinary shareholders; ordinary shares carry the votes and the remaining profit.
Non-redeemable preference shares are part of equity; redeemable preference shares will be repaid, so they are a non-current liability.
Debentures are long-term loans: interest is an expense; debenture holders are lenders, not owners.
Distinguish issued, called-up and paid-up share capital.
Prepare the income statement, the statement of changes in equity and the statement of financial position.

1. Operating as a Limited Company

Syllabus 5.3 · Paper 1 & 2

Separate legal entity, limited liability

A limited company is a separate legal entity from its owners. The owners are shareholders; the business is run by directors. Limited liability means that if the company fails, shareholders can lose only the money they have paid (or agreed to pay) for their shares; their personal possessions are safe.

Advantages	Disadvantages
Limited liability for shareholders	More legal formalities and costs to set up and run
Large amounts of capital can be raised by issuing shares	Financial statements must be published, so less privacy
The company continues if a shareholder dies or sells shares (continuity)	Profits are shared among many shareholders as dividends
Easier to borrow because of its size and status	Owners (shareholders) and managers (directors) may be different people with different aims

2. Equity and the Capital Structure

Syllabus 5.3 · Paper 1 & 2

Share capital + reserves

Equity is the shareholders’ interest in the company: ordinary share capital, non-redeemable preference share capital and reserves. It equals total assets − total liabilities. Redeemable preference shares are not part of equity (see the next section).

Item	Meaning
Ordinary share capital	Shares owned by the ordinary shareholders, who vote at meetings and receive a dividend that varies with profit, paid after preference dividends. They take most risk and gain most if the company does well.
Non-redeemable preference share capital	Shares with a fixed rate of dividend (e.g. 6%) paid before any ordinary dividend; normally no votes. They are never repaid while the company continues, so they are part of equity.
General reserve	Profits transferred from retained earnings and kept in the company, for example to finance expansion. It is a revenue reserve, not cash.
Retained earnings	Accumulated profits not yet paid out as dividends or transferred to the general reserve.

Practice Question 1

A company has 6% non-redeemable preference shares of $1 each, $80,000, and 300,000 ordinary shares of $0.50 each. It pays the full preference dividend and an ordinary dividend of $0.04 per share. Calculate the total dividends paid.

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Also in the full note

Will the company have to pay them back?
How much has actually been paid?
Income statement, changes in equity, financial position

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Limited companies