Limited companies

1. Trading Business: Buys finished goods and sells them without alteration (e.g., a supermarket).
2. Service Business: Provides intangible services to customers (e.g., a hair salon or consultancy).
3. Manufacturing Business: Converts raw materials into finished goods (e.g., a bakery making bread from flour).
4. Combination: Many companies perform multiple roles, such as manufacturing products and then selling them directly to consumers.

Key Distinction: Unlike sole traders, limited companies have separate legal identity. This means the company can own assets, incur debts, and sue or be sued in its own name.

When advising on whether to form a limited company, consider the following:

The equity section of the Statement of Financial Position (SFP) comprises several components. Understanding their hierarchy is critical.

1. Preference Share Capital:

   • These shares usually carry a fixed dividend rate (e.g., 5% preference shares).
   • They have priority over ordinary shares for dividend payments and repayment of capital upon liquidation.
   • They typically do not carry voting rights.
   • In the SFP, they are listed above Ordinary Share Capital within Equity.

2. Ordinary Share Capital:

   • These are the standard shares issued to shareholders.
   • Dividends are not fixed and depend on company performance.
   • Holders have voting rights and residual claim on assets (paid last in liquidation).

3. General Reserve:

   • A portion of profit set aside for future use or specific purposes as decided by directors.
   • It is part of Equity but not tied to share capital.

4. Retained Earnings:

   • Profits accumulated over time that have not been distributed as dividends.
   • Calculated as: \text{Opening Retained Earnings} + \text{Profit for Year} - \text{Dividends Paid}.

Note: Debenture interest is an expense in the Statement of Profit or Loss (SPL). Dividends are a distribution of profit, not an expense.

Before preparing final accounts, adjustments from the trial balance are necessary. These ensure the accruals concept and matching principle are applied.

1. Inventory Valuation:

   • Inventory must be valued at the lower of cost and net realizable value (NRV).
   • If NRV < Cost, write down inventory to NRV. The loss is an expense in SPL.

2. Accruals and Prepayments:

   • Accruals: Expenses incurred but not yet paid. Add to the expense in SPL; show as Current Liabilities in SFP.
   • Prepayments: Expenses paid in advance for the next period. Deduct from the expense in SPL; show as Current Assets in SFP.

3. Capital vs. Revenue Expenditure:

   • Capital Expenditure: Benefit extends beyond the current year (e.g., buying a vehicle). Record as Non-current Asset in SFP.
   • Revenue Expenditure: Benefit is consumed within the current year (e.g., repairs). Record as Expense in SPL.

4. Provision for Irrecoverable Debts:

   • An estimate of debts unlikely to be paid.
   • New Provision = \text{Trade Receivables} \times \text{Rate}.
   • Adjustment: If New > Old, increase expense (Dr SPL, Cr Provision). If New < Old, decrease expense (Cr SPL, Dr Provision).
   • In SFP, show as a deduction from Trade Receivables.