Resources | Subject Notes | Accounting
A limited company is a type of business where the liability of the shareholders is limited to the amount they have invested in the company. This means that the personal assets of the shareholders are protected from business debts.
Key features of a limited company include:
The income statement (also known as the profit and loss account) reports a company's financial performance over a specific period (e.g., a year). It shows whether the company made a profit or a loss.
The format of an income statement is as follows:
Item | Amount (£) |
---|---|
Revenue | |
Cost of Goods Sold (COGS) | |
Gross Profit (Revenue - COGS) | |
Operating Expenses | |
Depreciation | |
Operating Profit (Gross Profit - Operating Expenses - Depreciation) | |
Other Income | |
Other Expenses | |
Profit Before Tax (Operating Profit + Other Income - Other Expenses) | |
Tax Expense | |
Profit After Tax (Profit Before Tax - Tax Expense) |
The statement of changes in equity shows how the equity of a company has changed over a specific period. Equity represents the owners' stake in the company.
Key elements of equity include:
The format of a statement of changes in equity is:
Item | Opening Balance (£) | Change (£) | Closing Balance (£) |
---|---|---|---|
Share Capital | |||
Retained Earnings | |||
Other Reserves | |||
Total Equity |
The statement of financial position shows a company's assets, liabilities, and equity at a specific point in time.
The fundamental accounting equation is: Assets = Liabilities + Equity
Assets are resources owned by the company (e.g., cash, inventory, equipment). They are listed in order of liquidity (how easily they can be converted to cash).
Liabilities are amounts owed by the company to others (e.g., accounts payable, loans). They are also listed in order of when they are due.
Equity represents the owners' stake in the company.
The format of a statement of financial position is:
Assets | Amount (£) |
---|---|
Current Assets | |
Stock/Inventory | |
Cash and Bank Balances | |
Debtors (Accounts Receivable) | |
Other Current Assets | |
Fixed Assets (Non-Current Assets) | |
Property, Plant, and Equipment (PPE) | |
Land | |
Other Non-Current Assets | |
Liabilities | Amount (£) |
Current Liabilities | |
Accounts Payable (Creditors) | |
Loans Payable | |
Other Current Liabilities | |
Non-Current Liabilities | |
Long-term Loans | |
Other Non-Current Liabilities | |
Equity | Amount (£) |
Share Capital | |
Retained Earnings | |
Other Reserves |
The income statement and the statement of changes in equity are linked. The profit (or loss) from the income statement flows into the retained earnings account in the statement of changes in equity.
The balance sheet reflects the assets, liabilities, and equity at a specific point in time. The changes in equity over a period are reflected in the balance sheet through the retained earnings component.