Grade 10

Accounts of Limited Companies

1. What are the two types of limited companies?
Public and private limited companies

2. Define a limited company.

A limited company is a legal entity which has a separate identity from its
shareholders, whose company’s debts is limited.

3. What is the minimum number of members needed to form a company?

Two members

4. What are shares?

Units of ownership in a company.

5. What are dividends?

Distribution of profit in a company.

6. What are interim dividends?

Dividends paid halfway through the year or dividends paid between two
annual general meetings.

7. Who runs the company?

Board of directors

8. What is authorized share capital?

The maximum amount of share capital that a company is allowed to issue
according to its memorandum and article of association.

9. What is issued share capital?

The amount of share capital actually issued to shareholders is called
issued share capital.

10. What is called up capital?

The total amount the company has requested from the shareholders.

11. What is paid up capital?

That part of the called up capital for which a company has received cash
from its shareholders.

Accounting Theory Questions and Answers (MSI) 1

12. Describe preference shares.
 They get preference over the ordinary shares.
 They receive a fixed rate of dividend.
 Preference dividend is payable before any ordinary dividend is
payable to the ordinary shareholders.
 If the company is wound up (closed down) any money left after
paying outside liabilities is used to pay the preference shareholders
before anything is returned to ordinary shareholders.
 Preference shareholders are not usually entitled to vote at annual
general meetings.

13. What are the types of preference shares?

Cumulative preference shares and Non-cumulative preference shares.

14. What are Cumulative preference shares?

The type of preference share for which if dividend for one year is not paid,
it will be carried forward to the next year.

15. What are Non-Cumulative preference shares?

The type of preference share for which if dividend is not paid for one year,
it will not be carried forward to the next year.

16. Describe Ordinary shares.

 They are also called equity shares
 The dividend on ordinary share is only payable after the payment of
preference shares.
 The dividend is not a fixed amount and varies according to the
profits of the company
 If a company is wound up, after paying the outside liabilities,
whatever is left first will be used to repay preference shareholders
before ordinary shareholders
 Ordinary shareholders usually have voting rights at annual general
meeting.

17. What are the similarities between preference shares and

debentures?
 The rate of interest for debentures and the rate of dividends for
preference shares are both fixed
 Both do not have the right to vote at the meetings
 Both repaid before ordinary shareholders upon liquidation
 Both form part of the capital employed in the company
 Both paid before ordinary shareholders

Accounting Theory Questions and Answers (MSI) 2

18. Describe debentures
 Long-term loans to the company
 Debentures carry a fixed rate of interest which is payable whether
the company makes a profit or not
 The interest appears in the profit and loss account as an expense
 If the company is wound up, debenture holders will be repaid
before any capital is repaid to shareholders.
 Debenture holders are not owners of the company
 They do not have voting rights at annual general meeting.

19. What are the differences between preference shareholders and

debentures?
 Preference shareholders are owners, debenture holders are not.
 Preference shares receive dividend, debenture holders receive
interest.
 Debenture will be repaid in the future, preference shares are
usually fixed capital.
 Debenture interest must be paid before preference dividend.

20. What are the differences between preference shareholders and

debentures?

Ordinary shares Preference shares

Variable rate of dividend
Ordinary dividend paid after
preference dividend paid
If dividend is not paid in the current
year, it is not carried forward to the
future years
Ordinary shareholders are risk
bearers
Have rights to vote
Paid last, if at all, in liquidation
Fixed rate of dividend
Preference dividend paid before
ordinary share dividend
If dividend is not paid in the current
year, it may accumulate be paid in
the future
Less risky
Generally have no rights to vote
Have preferential rights in
liquidation

21. What is retained profit?

Profit which is not distributed to shareholders

22. What are reserves?

Funds set aside for various purposes

23. What are main types of reserves?

Capital and revenue reserves

Accounting Theory Questions and Answers (MSI) 3

24. State uses of general reserve.
 For the general growth of the company
 To pay dividends in the future
 To conserve cash and working capital

25. What is the difference between a partnership and limited company?

Partnership Limited company

Partners have unlimited liability
Partnership limited in the ability to
raise capital
Partnership managed by owners
Partners can make drawings
throughout the period
Limited company has limited liability
to the extent of share capital
invested
Limited company generally has
wider source of funds
Limited company employs a board
of directors to manage the business
Shareholders cannot make drawings

Accounting Theory Questions and Answers (MSI) 4