What is a Limited Company?
A limited company is a legal entity that is separate from its owners (shareholders). The most important feature is Limited Liability, meaning shareholders only lose the money they invested if the company fails.
Key Components of Equity
- Share Capital: Money raised by selling shares to the public or private investors.
- Retained Earnings: Cumulative profits kept in the business after paying dividends.
- General Reserve: Profit set aside for future use or emergencies.
1. Statement of Changes in Equity (SOCE)
This statement explains the movement in the equity accounts during the year, including profit for the year and dividends paid.
| Details | Share Capital ($) | Retained Earnings ($) | Total ($) |
|---|---|---|---|
| Balance at 1 Jan | 100,000 | 45,000 | 145,000 |
| Profit for the year | -- | 20,000 | 20,000 |
| Dividends paid | -- | (5,000) | (5,000) |
| Balance at 31 Dec | 100,000 | 60,000 | 160,000 |
2. Dividends and Debentures
Dividends: The part of the profit distributed to shareholders. Note that proposed dividends are no longer recorded in the financial statements until they are actually paid.
Debentures: Long-term loans taken by the company. The interest on debentures is an expense in the Income Statement, not a distribution of profit.
Note on Dividend
Dividends reduce Retained Earnings
Wheres in Partnership, drawings reduce the Current Account.
Quick Check
1. Where is "Interest on Debentures" recorded?
View Correct Answer
Correct Answer: B. Debenture interest is a finance cost and must be deducted before calculating the profit for the year.