Ledger Accounts and Limited Companies

Limited companies keep ledger accounts and the only difference from sole trader, is the nature of some of the transactions, assets and liabilities.

Taxation

• Tax charged against profits will be accounted by:

Profit and loss account – Debit

Taxation account – Credit

• The outstanding balance on the taxation account will be a liability in the balance sheet, until eventually paid, when the accounting entry would be:

Taxation account – Debit

Cash – Credit

Dividends

A separate account will be kept for the dividends for each different class of shares.

• Dividends declared out of profits will be accounted for by:

Profit and loss appropriation account – Debit

Dividends payable account – Credit

• When dividends are paid:

Dividends payable account – Debit

Cash – Credit

Debenture Loans

Debenture loans being a long term liability will be shown as a credit balance in a debenture loan account.

• Interest payable on such loans is not credited to the loan account, but is credited to a separate creditors account for interest until it is eventually paid:

Interest account (Expense) – Debit

Interest payable (Current liability) – Credit

• When paid, the entries are:

Interest payable – Debit

Cash – Credit

Share capital and reserves

There will be a separate account for:

• Each different class of share capital

• Each different type of reserve

Taxation for Companies

Companies pay corporation tax on the profit they earn. Note that because a company has a separate legal personality, its tax is included in its accounts. An unincorporated business would not show income tax in its accounts, as it would not be a business expense but the personal affair of the proprietors.

Presentation in accounts

• The charge for corporation tax on profits for the year is shown as a deduction from net profit, before appropriation.

• In the balance sheet, tax payable to the government is generally shown as a current liability as it is usually due within nine months of the year end.

• For various reasons, the tax on i use a limited company profits in the profit and loss account and the tax payable in the balance sheet are not usually the same amount.

Important points about Company Accounts

• Limited companies have limited liability, which means that their members’ liability in the event of insolvency is limited to the amount of capital they put in.

• There are two types companies,

1. Private companies

2. Public companies

• Limited companies must keep accounting records.

• Limited companies have a share capital, it divided

1. Authorized share capital

2. Issued share capital

3. Called up share capital

4. Paid up share capital

• Dividends are appropriations of profit.

• Ordinary shares are different from preference shares, mainly because they carry no right to a fixed dividend.

 

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