THE NATURE OF LIMITED

COMPANIES AND THEIR

CAPITAL
 LEARNING OBJECTIVES
• Main characteristics of limited companies with particular reference to how these differ from
partnerships

• Describe the different classes of companies limited by shares

• Outline the legal powers and duties of limited companies with reference to their memorandum
of association and articles of association

• Outline the nature and types of share and loan capital issued by limited companies

• Journal entry for issue of shares

• Outline the procedure relating to the issue of shares and debentures

• Explain the nature of share premium, debenture discount, preliminary expenses, interim and
final dividends
 INTRODUCTION TO FINAL
ACCOUNTS OF LIMITED LIABILITY
COMPANY
Limited companies are needed because of the
disadvantages from which partnerships suffer.
• A partnership can have no more than 20 owners
(except for limited partners)
• The amount of capital needed to operate a very large
oganisation is more than 20 people can provide
•If a partnership business fails, a partner can lose part or
all of his or her private assets as well as the business
assets
 LIMITED LIABILITY

• The capital of a limited company is divided into

shares. Shares can be priced at $1, $5, $10 or any other
amount. To become a member of a limited company
(shareholder), a person must buy one (1) or more
shares.
• If shareholders have paid in full for their shares, their
liability is limited to those shares.
• If a company loses all of its assets, all the shareholders
can lose is their shares ( the value)
• They cannot be force to pay any of their private money
in respect of the company’s losses.
 PRIVATE & PUBLIC COMPANIES

• The two classes of limited company are private company and

public company. There are a lot more private companies than
public companies.
• A private company:
 has a minimum membership of 2
Maximum of 50 members
Must ask people to buy company shares privately: it cannot do
so in public e.G., By advertising shares in the newspaper.
Any company that does not follow the above is a public company
 COMPANY DIRECTORS

• A shareholder normally has the right to attend general meetings of a

company, and can vote at such meetings. Shareholders use their votes to
appoint directors, who manage the business on behalf of the
shareholders.
• At each annual general meeting, the final accounts for the year are
given to the shareholders. The directors at the meeting have to give a
report on the progress of the company.
 LEGAL STATUS OF A LTD
COMPANY

• A limited company is said to posses a ‘separate legal entity’ from that of

it’s shareholders. Put simply, a company is treated like a person
separate from it’s owners (responsible for itself) A company can sue
one or more of it’s shareholder or, it’s shareholder can sue the company.
This would not be the case if the company and it’s shareholder were the
same.
 MEMORANDUM OF ASSOCIATION

• This is one of the documents required for the registration of a limited company.
• This document defines the constitution and objectives of the company and
includes:
• The name of the company and the country where registered
• The objectives of the company
• The amount of authorised share capital
• A statement that the liability of the members is limited
 ARTICLES OF ASSOCIATION

• The articles of association govern the relationships which exist between

the members and the company.
• The regulations may include the details of the powers given to the
directors
 DUTIES OF LIMITED
COMPANIES
• Fiduciary duties: directors owe fiduciary duties to the company, including duty of
loyalty, duty to act in good faith, duty to avoid conflicts of interest, duty of care, and
duty to act within their powers.
• Compliance: companies must comply with relevant laws and regulations, including
company law, tax law, and other regulatory requirements applicable to their industry.
• Financial reporting: limited companies are required to keep proper accounting
records and prepare annual financial statements in accordance with applicable
accounting standards. They must file these financial statements with the relevant
authorities.
• Disclosure: companies must disclose certain information to shareholders, such as
financial statements, director's report, and auditor's report. They must also disclose
information to the public, including information required by stock exchanges if the
company is publicly traded.
 CAPITAL

• Capital is raised by selling shares to the public.

• When a company is formed it must inform the board of trade of its
authorised capital.
• This is the maximum it may raise by selling shares to the public.
 PRICE OF SHARES

• Shares will have a nominal value eg RM1 – this is the price that the shares
will normally be sold for.
• If the company is performing well and they wish to raise additional finance,
they could sell additional shares at a premium i.E above the nominal value eg
RM1.20
• If the company wishes to raise additional finance, to encourage investors to
buy shares, they may issue these additional shares at a discount eg RM0.90
 SHARE CAPITAL

• Preference shareholders have first claim on any profit made.

• They carry a fixed rate of dividend eg 5% preference shares
• Therefore they will receive the same amount of dividend each year,
even when profits are high
• Preference shares can be cumulative or non-cumulative
• With cumulative preference shares, if there is insufficient profit to pay
the dividend one year, the shareholders will receive the outstanding
dividend the next year as well as the dividend due for that year
 SHARE CAPITAL

• Ordinary shareholders will receive any outstanding profit after the

preference shareholders have received their dividend
• Therefore they may receive high dividends when profits are healthy and
perhaps NO dividend when profits are low
 SHARE CAPITAL

• A shareholder will receive a share of the profit called a dividend.

• Not all the net profit will be paid out. The directors calculate the net
profit and determine the amount that should be paid out and the amount
that should be kept back.
• The amount kept back is called reserves
• Reserves can be general or specific
• Dividend is usually shown as a percentage
 TYPES OF SHARES

• There are two (2) main types of share:

 Preference shares: these get an agreed percentage rate of dividend
before the ordinary shareholders receive anything
 Ordinary shares: these receive the remainder of the total profits
available for dividends- there is no upper limit of dividends they can
receive
 THERE ARE TWO (2) TYPES
OF PREFERENCE SHARES

• Cumulative preference shares: these receive a dividend up to an

agreed percentage each year. If the amount paid is less than the
maximum amount agreed upon, the shortfall will be paid in a future
year before the ordinary shareholders get paid.
• Non-cumulative preference shares: these will not receive the shortfall
in future years in case a shortfall occurs.
 SHARE CAPITAL: DIFFERENT
MEANINGS
• Issued share capital: this is the total of the share capital actually issued to
the shareholders. If all the authorised share capital is issued, then the
authorised and issued share capital will be the same
• It cannot exceed the authorised share capital.
• Issued share capital can comprise of preference shares and/or ordinary
shares
 JOURNAL ENTRY OF ISSUED
SHARES
• Recording the receipt of consideration:
• Debit: bank account or cash account (to record the amount received from the issuance of
shares)
• Credit: share capital account (to record the value of shares issued)
• If shares are issued at a premium:
• Debit: bank account or cash account (to record the amount received from the issuance of
shares)
• Credit: share capital account (to record the par value of shares issued)
• Credit: share premium account (to record the premium received over the par value)
• If shares are issued at a discount:
• Debit: bank account or cash account (to record the amount received from the issuance of
shares)
• Debit: share discount account (to record the discount given on shares issued)
• Credit: share capital account (to record the reduced value of shares issued)
 SHARE CAPITAL: DIFFERENT
MEANINGS

• Authorised share capital: sometimes known as registered capital or nominal

capital. This is the total of the share capital which the company is allowed
to issue to shareholders.
• Called-up capital: where only part of the amount on each share has been
asked for, the total amount asked for on all shares is known as the called-up
capital
• Uncalled capital: this is the total amount to be receive in the future, but
which has not yet been asked for.
• Calls in arrears: the total amount for which payment is asked for (i.E.
Called for), but has not yet been paid by shareholders.
• Paid-up capital: this is the total of the amount of share capital that has been
paid for by shareholders.
 DEBENTURES

• A company can raise finance over and above issuing shares by selling
debentures.
• A debenture is a loan to the company.
• If the company goes bust, the debenture holders have a right to the
assets of the company
• Debentures carry a fixed rate of interest, which must be paid before any
dividend is given to the shareholders
 PROCEDURE RELATING TO THE
ISSUE OF SHARES AND
DEBENTURES
The procedure for issuing shares and debentures typically involves the following steps:
•Authorization:
• The board of directors must first authorize the issuance of shares or debentures.
This authorization is typically done in accordance with the company's
memorandum and articles of association and any applicable laws or
regulations.
•Approval:
• Shareholders' approval may be required for certain types of share or debenture
issuances, especially if they involve significant changes to the company's
capital structure.
•Valuation:
• If shares are issued at a premium or debentures are issued at a discount, the
company may need to obtain a valuation to determine the appropriate premium
or discount amount.
 PROCEDURE RELATING TO THE
ISSUE OF SHARES AND
DEBENTURES
The procedure for issuing shares and debentures typically involves the following steps:
•Offer:
• The company makes an offer to potential investors to subscribe to the shares or
debentures. This offer can be made through a prospectus (for public offerings)
or through a private placement memorandum (for private placements).
•Subscription:
• Investors who wish to subscribe to the shares or debentures submit their
applications along with the necessary funds.
•Allotment:
• After the subscription period closes, the board of directors meets to decide how
many shares or debentures to allot to each subscriber. Allotment is typically
done based on the subscription amounts and any applicable allocation criteria.
 PROCEDURE RELATING TO THE
ISSUE OF SHARES AND
DEBENTURES
• Payment:
• Subscribers must pay for the allotted shares or
debentures according to the terms specified in the
offer document. Payment is usually made in one or
more installments.
• Issuance:
• Once payment is received, the company issues the
shares or debentures to the subscribers. Share
certificates are issued for shares, while debenture
certificates may also be issued for debentures.
 PROCEDURE RELATING TO THE
ISSUE OF SHARES AND
DEBENTURES
• Registration:
• For shares issued to the public, the company must file documents with the
relevant regulatory authorities to register the issuance. This ensures compliance
with securities laws and regulations.
• Listing (if applicable):
• If the company's shares or debentures are listed on a stock exchange, the company
must apply for listing and comply with the exchange's listing requirements.
• Disclosure:
• The company must disclose details of the share or debenture issuance in its
financial statements and other regulatory filings as required by law.
 NATURE OF SHARE PREMIUM

Share premium:
•Share premium represents the excess amount received over the face
value (or nominal value) of shares issued by a company.
•It arises when shares are issued at a price higher than their face value.
•Share premium is recorded as part of shareholders' equity in the
company's balance sheet and can be used for various purposes such as
issuing bonus shares, writing off preliminary expenses, or paying
dividends.
 NATURE OF DEBENTURE
DISCOUNT
Debenture discount
•Debenture discount refers to the difference between the face value of
debentures and the price at which they are issued.
•It arises when debentures are issued at a price lower than their face
value.
•Debenture discount is treated as an expense and is amortized over the
term of the debentures.
•The amount of discount amortized each year reduces the company's
interest expense.
 NATURE OF PRELIMINARY
EXPENSES
Preliminary expenses:
•Preliminary expenses are the costs incurred by a company in the process
of incorporation or in preparing for the issue of shares or debentures.
•These expenses include legal fees, registration fees, printing costs, and
other expenses related to the organization and promotion of the company.
•Preliminary expenses are treated as an asset and are amortized over a
period of time, usually not exceeding five years.
 NATURE OF INTERIM AND FINAL
DIVIDENDS
Interim dividends:
•Interim dividends are dividends declared and paid by a company during
its financial year, before the final determination of profits for the year.
•Interim dividends are typically paid out of the company's accumulated
profits or current year's profits if they are sufficient.
•The board of directors has the authority to declare interim dividends based
on the company's financial performance and cash flow requirements.
 NATURE OF FINAL DIVIDENDS

Final dividends:
•Final dividends, also known as ordinary dividends, are dividends declared
and paid by a company at the end of its financial year, after the
determination of profits for the year.
•Final dividends are usually recommended by the board of directors and
approved by shareholders at the company's annual general meeting (agm).
•They are paid out of the company's distributable profits, which include
retained earnings from previous years and current year's profits.
THANK YOU 