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accounting for companies

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Introduction

Accounting for limited companies A company is legally created when the person(s) fill in a few simple forms and the registrar of companies enters the company name into the registry of companies. Perpetual life: This means that the life of the company is separate to those who own the company i.e. if the shareholder dies it does not mean the company is in jeopardy, the shares of the deceased person will be passed on. However the life of the company can also be brought to an end by courts or by shareholders who believe that there is no real future in the company (voluntary liquidation). This contrasts partnerships, whereby death leads to dissolution of the company. Limited liability: Allows shareholders to limit their losses. They can walk away from large debts as long as their obligations as a shareholder have been satisfied. The liability of the shareholders is limited to the nominal value of their shares. This may be beneficial to the private sector, as the opportunity cost of setting up is reduced allowing the economic problem of scarcity to be resolved. ...read more.

Middle

The status given to these companies is PLC. Private limited company: Shares are largely restricted from general public and are generally distributed amongst very few shareholders e.g. a family business. These are provided the status of LTD. The importance of providing statuses to these companies is to insure that those dealing with LTD's and PLC's are that the liability is limited (amongst the shareholders). Previous profit and loss statements (i.e. those for sole traders) are not taxed on profits, in this scenario the tax is levied on the business and not on the owners. The senior management level of a company is the board of directors, which could consist of all the shareholders in the case of a small company or elected individuals that act on behalf of shareholder's best interests. The divorce of the day-to-day operations of the company and the shareholders has led to exploitation by the directors, as there is a conflict of interests. This principal-agent problem will undermine the corporate governance (the way in which companies are directed and controlled). ...read more.

Conclusion

Share premium is best described using an example: Net assets: 1.5m Current shares: 1m ordinary shares at $1 each Wishes to raise 0.6m - therefore it issues new shares at $1.50, Previously it issued 600,000 shares at $1 each but now it issues 400,000 at $1.50 each. The excess 0.5*400,000 = 200,000 is the share premium. Here are some definitions: Authorised share capital - when a company is setting up there is a limit imposed on the nominal value of shares that can be issued. Called up share capital - When the company does not require the funds all at once, spme can be paid and the rest called upon at another point in time. The withdrawable part: revenue reserves The non-withdrawable part: share capital and capital reserves (upward revaluation of assets or share premium) The reason for this distinction is due to limited liability, if the owner of the business withdraws all the capital from the business the creditors can legally enforce the obligations upon the owner(s). This is not the case with companies where there is a divorce between business and owners - creditors cannot legally enforce the obligation onto each and every separate shareholder. The larger the non-withdrawable part the easier to attract creditors and suppliers on credit. ...read more.

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