Limited Companies’ Books And Accounts
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
The profit and loss appropriation account
The appropriation of net profit has to be shown in company accounts, so we need to draw up a profit and loss appropriation account. This shows how much of the profit is being set aside for taxation, how much is being distributed in dividends on shares, and how much is being retained in the company for future growth.
A limited company’s statutory ‘books’
The law requires a company to keep the following books, as well as its books of account:
- a register of members (shareholders)
- a register of charges (liabilities such as mortgages and debentures)
- a register of directors and managers
- a minutes book.
It also requires it to appoint an external auditor. This person is an accountant, not employed by the company, who checks that the entries in the accounts are all correct, and that the accounts give a ‘true and fair view’ of the company.
Special points on company accounts
Limited company accounts differ from those of other business units in several other ways. For sole proprietors and partners, the profit and loss account is closed each year by transferring any balance to capital account. In the case of limited companies, any undistributed profits stay on the profit and loss account as reserves along with undistributed profits for all previous periods. However, to avoid showing a high profit and loss account balance, a company will often transfer some of it to a general reserve account, when compiling the profit and loss account. These reserves, along with paid up shares, are called shareholders’ funds because they are owned by the shareholders.
In the balance sheet of a limited company creditors have to be analysed into those falling due for payment within a year, and those falling due in more than a year (e.g. long term loans).