Limited Liability Companies

Objectives Explain the various ways of raising capital; Explain the accounting entries for recording capital and appropriating profits; Prepare the Balance Sheet of a limited liability company.

Capital Structure The capital structure of a business entity is the source or the composition of its capital. One form of raising capital available to limited liability companies is the issuing or selling of shares.

Forms of Raising Capital Ordinary Shares Preference Shares Debentures, Bonds and Treasury Bills

Classification of Capital Authorised Capital Issued Capital

Financial Statements Trading Account The format of the trading Account of a limited liability company is no different from that of a sole trader or partnership. Profit and Loss Account There are two expenses that do not apply to sole traders and p’ships: Debenture Interest Directors’ Remunerations

The Appropriation Account Transfers to reserves Goodwill written off Preliminary expenses written off Corporate tax Dividends Retained earnings

Definitions Transfers to reserves Portion of profits set aside for special or specific reasons (egs. Investment reserve, fixed asset reserve and general reserve). Goodwill written off Shown as an appropriation of profits and not as an expense in the P&L. Preliminary Expenses These are ‘one time’ costs, incurred only in the first year of business of a limited liability company.

Corporate tax Recorded as an appropriation of profits and not as an expense in the P&L. Dividends Both ordinary share and preference share dividends are recorded as appropriations of profits. Retained earnings Make up the remainder of profits after all appropriations have been made for the year. (a.k.a. undistributed profits)