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