Cambridge IGCSE Accounting · 0452
Chapter 5: Preparation of Financial Statements — Part 3
Section 5.3 · Limited Companies
A limited company is a legal entity separate from its owners (shareholders). The key feature is limited liability, meaning shareholders only lose the money they invested if the company fails.
Capital Structure and Equity
Equity is the total value belonging to shareholders. It appears in the SFP and is analysed in the Statement of Changes in Equity (SCE). Components include:
| Component | Description |
|---|---|
| Ordinary share capital | Variable dividends; voting rights at AGM |
| Preference share capital | Fixed percentage dividend; priority over ordinary shares |
| General reserve | Profit transferred for future expansion |
| Retained earnings | Cumulative undistributed profits from previous years |
Share Capital vs Loan Capital (Debentures)
| Share Capital | Debentures (Loan Capital) | |
|---|---|---|
| Status | Owners (shareholders) | Creditors (lenders) |
| Return | Dividends (appropriation of profit) | Debenture interest (expense in Income Statement) |
| Payment | Only if company is profitable | Must be paid regardless of profit |
| SFP classification | Equity | Non-current liability |
Share Capital Terminology
- Authorised (Nominal) Capital
- The maximum value of shares the company is permitted to issue under its constitution.
- Issued Capital
- The total value of shares actually sold to shareholders.
- Called-up Capital
- The total amount the company has requested shareholders to pay for their shares (may exceed paid-up if calls are outstanding).
- Paid-up Capital
- The actual amount of money received by the company from shareholders.
Example: A company issues 100,000 ordinary shares of $1 each. Shareholders have paid $0.80 per share on call.
Issued capital = $100,000 · Called-up capital = $100,000 · Paid-up capital = $80,000 · Amount owed = $20,000 (other receivable from shareholders).
Company Financial Statements
- Income Statement
- Similar to a sole trader but includes Directors’ Remuneration and Debenture Interest as operating expenses. Dividends are never expenses.
- Statement of Changes in Equity (SCE)
- Shows how each equity component changed from the start to the end of the year, including profit for the year, transfers to reserves, and dividends paid.
- Statement of Financial Position
- Debentures appear under non-current liabilities; equity section shows share capital, reserves, and retained earnings.
Worked Example 1: Statement of Changes in Equity
Delta plc — year ended 31 December 2025:
| Details | Ordinary shares $ | General reserve $ | Retained earnings $ | Total $ |
|---|---|---|---|---|
| Balance at 1 January 2025 | 200,000 | 15,000 | 42,000 | 257,000 |
| Profit for the year | — | — | 28,000 | 28,000 |
| Transfer to general reserve | — | 5,000 | (5,000) | — |
| Dividends paid | — | — | (12,000) | (12,000) |
| Balance at 31 December 2025 | 200,000 | 20,000 | 53,000 | 273,000 |
Worked Example 2: Income Statement and SFP Extract
Using Delta plc: Revenue $420,000; Cost of sales $280,000; Administrative expenses $85,000; Directors’ remuneration $18,000; Debenture interest $9,000; Profit for the year $28,000 (as above).
| Income Statement (extract) | $ |
|---|---|
| Gross profit (420,000 − 280,000) | 140,000 |
| Less: Administrative expenses and directors’ remuneration | (103,000) |
| Less: Debenture interest | (9,000) |
| Profit for the year | 28,000 |
SFP (extract) — Equity and Liabilities:
| Details | $ |
|---|---|
| Equity (per SCE) | 273,000 |
| Non-current liabilities — 8% Debentures | 150,000 |
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