What is limited liability?

Shareholders can lose no more than they paid, or agreed to pay, for their shares. Their personal possessions are safe.

Which holders are the owners of a limited company?

ordinary shareholders. They have the votes, and they bear the greatest risk.

Which statement about debentures is correct?

They are long-term loans carrying a fixed rate of interest. The interest is an expense that must be paid every year.

Which shares receive a fixed rate of dividend?

preference shares. And they are paid before the ordinary shareholders.

What is paid-up share capital?

the amount of called-up capital that shareholders have actually paid. It can be less than the called-up capital if some shareholders have not yet paid.

What are retained earnings?

profits kept in the company and not paid out. They are a reserve, and part of equity.

Limited companies and their capital · Cambridge IGCSE Accounting

In plain words

A limited company is a business that exists in law as a "person" of its own, separate from the people who own it. The owners are shareholders, and the most they can lose is what they paid for their shares.

8 things to know

A limited company is a separate legal entity. It can own assets, owe money and be taken to court in its own name.
Limited liability means that a shareholder's liability for the company's debts is limited to the amount paid, or agreed to be paid, for the shares.
Advantages: limited liability, the ability to raise large amounts of capital by issuing shares, and continuity: the company carries on when shareholders change.
Disadvantages: more legal requirements and costs, less privacy because accounts are made public, and the original owners may lose control.
Ordinary shares carry votes. Their dividend varies with profit and is paid after the preference dividend. Ordinary shareholders are the owners and take the greatest risk. Preference shares receive a fixed rate of dividend first, and usually carry no vote.
Debentures are long-term loans to the company. They carry a fixed rate of interest, which must be paid whether or not there is a profit. Debenture holders are lenders, not owners, and have no vote.
Issued share capital is the shares that have been sold to shareholders. Called-up capital is the part of their price the company has asked for so far. Paid-up capital is the part of the called-up capital that has actually been received.
Equity is the share capital plus the reserves: the general reserve and retained earnings. Retained earnings are profits kept in the company and not paid out as dividends.

Worked example

A company issues 50 000 ordinary shares of $1 each and asks shareholders to pay 60 cents a share for now. All but $800 has been received. State the issued, called-up and paid-up share capital.

Issued: 50 000 × $1 = $50 000.
Called-up: 50 000 × $0.60 = $30 000.
Paid-up: 30 000 − 800 = $29 200.

Tips and tricks

Dividends on shares are a share of profit and can be missed in a bad year. Interest on debentures is an expense and has to be paid every year.
"Limited" describes the shareholders' liability, not the company's. The company itself must pay all its debts if it can.

6 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Limited companies and their capital: 6 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

What is limited liability?
- The company can only owe a limited amount.
- Shareholders can lose no more than they paid, or agreed to pay, for their shares. (the answer)
- The company can only have a limited number of shareholders.
- The directors are not responsible for anything.
Their personal possessions are safe.
Which holders are the owners of a limited company?
- debenture holders
- bank lenders
- ordinary shareholders (the answer)
- trade payables
They have the votes, and they bear the greatest risk.
Which statement about debentures is correct?
- They are part of the share capital.
- Their holders vote at company meetings.
- They are long-term loans carrying a fixed rate of interest. (the answer)
- Their interest is paid only if there is a profit.
The interest is an expense that must be paid every year.
Which shares receive a fixed rate of dividend?
- ordinary shares
- preference shares (the answer)
- both
- neither
And they are paid before the ordinary shareholders.
What is paid-up share capital?
- the shares the company could issue
- the amount the company has asked shareholders to pay
- the amount of called-up capital that shareholders have actually paid (the answer)
- the market value of the shares
It can be less than the called-up capital if some shareholders have not yet paid.
What are retained earnings?
- dividends paid to shareholders
- profits kept in the company and not paid out (the answer)
- money borrowed from the bank
- the cost of the shares
They are a reserve, and part of equity.

6 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 7 marks. Write your answers on paper, then check them.

Limited companies and their capital

Cambridge IGCSE Accounting 0452 · 7 marks · papermunch.org

Name ______________________________ Date ______________

Explain what is meant by limited liability.[2]
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The liability of the shareholders for the debts of the company is limited to the amount they paid, or agreed to pay, for their shares.
I got this one
State three differences between ordinary shares and debentures.[3]
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Ordinary shareholders are owners, but debenture holders are lenders. Ordinary shares carry votes, but debentures do not. Ordinary shares receive a dividend that varies with profit, but debentures receive a fixed rate of interest, which must be paid even if there is no profit.
I got this one
A company has ordinary share capital of $80 000, a general reserve of $12 000 and retained earnings of $23 000. Calculate the total equity.[2]
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$115 000. 80 000 + 12 000 + 23 000.
I got this one

Answers: Limited companies and their capital

1. The liability of the shareholders for the debts of the company is limited to the amount they paid, or agreed to pay, for their shares.
2. Ordinary shareholders are owners, but debenture holders are lenders. Ordinary shares carry votes, but debentures do not. Ordinary shares receive a dividend that varies with profit, but debentures receive a fixed rate of interest, which must be paid even if there is no profit.
3. $115 000. 80 000 + 12 000 + 23 000.