Accounting for IGCSE - Video 35 - Limited companies (Part 1) - Theory

Summary

This video on limited companies for IGCSE accounting explains key concepts such as the definition of limited companies, the advantages and disadvantages they offer, and the crucial distinction of limited liability. It covers types of shares, including preference and ordinary shares, as well as debentures and their role in financing. The structure of share capital is detailed, defining terms like authorized, issued, called up, and paid up capital. The video aims to provide a solid foundation for understanding financial statements related to limited companies, setting the stage for the next lesson on financial statement formats.

Takeaways

• 📜 A limited company has a separate legal identity from its owners, providing a layer of protection for personal assets.
• 🔒 Shareholders enjoy limited liability, meaning they are only responsible for the company's debts up to their investment amount.
• 💼 Limited companies have better access to capital by selling shares, which is advantageous compared to sole traders and partnerships.
• 💰 Setting up a limited company is more expensive and time-consuming due to extensive documentation and legal requirements.
• 📈 Preference shares offer shareholders preferential rights to dividends and asset claims during winding up, unlike ordinary shares.
• 📊 Ordinary shares are subject to variable dividends, which depend on company profits, while preference shares often have fixed dividends.
• 🗳️ Voting rights in annual general meetings are granted only to ordinary shareholders, giving them a say in company management.
• 🏦 Debentures allow companies to borrow funds from the public, establishing the debenture holders as creditors rather than owners.
• 🔍 Private limited companies cannot publicly advertise their shares, limiting their capital-raising abilities compared to public companies.
• 📉 Authorized capital is the maximum amount a company can raise, while issued capital represents the shares already sold to investors.

Q & A

What is a limited company?

A limited company is a business organization that has its own legal identity separate from its owners, offering limited liability to its shareholders.

What does limited liability mean for shareholders?

Limited liability means that shareholders are only responsible for the company's debts up to the amount they invested, protecting their personal assets.

What are the advantages of forming a limited company?

Advantages include better access to capital through share sales, a separate legal identity, and limited liability for shareholders.

What are some disadvantages of limited companies?

Disadvantages include higher setup costs, extensive documentation requirements, and the obligation to publicly disclose financial information.

What are preference shares, and how do they differ from ordinary shares?

Preference shares give shareholders preferential rights to dividends and asset claims in liquidation before ordinary shareholders, who receive dividends only after preference shareholders.

How are dividends paid to shareholders?

Dividends are paid from the company's profits; preference shareholders typically receive a fixed rate, while ordinary shareholders may receive variable rates depending on profitability.

What is a debenture, and how does it function in a limited company?

A debenture is a form of debt financing where the company borrows money from the public, promising to repay it with interest. Debenture holders are creditors and have priority in repayment during liquidation.

What distinguishes private limited companies from public limited companies?

Private limited companies cannot sell shares to the general public and have restrictions on share transfer, while public limited companies can sell shares widely and are listed on stock exchanges.

What is authorized capital in a limited company?

Authorized capital is the maximum amount of capital that a company is allowed to raise through the sale of shares, as specified in its memorandum of association.

What is the difference between called up capital and paid up capital?

Called up capital is the amount shareholders are asked to pay on their shares, while paid up capital is the portion of called up capital that has actually been paid by the shareholders.