IGCSE Accounting — Limited Companies: Notes, Practice Questions & Worked Solutions

IGCSE Accounting 0452 · Section 5.3: Limited Companies

Limited Companies

A limited company is owned by shareholders, not a single owner or partners — which brings a different set of terms for capital, and legal protection for the owners if things go wrong.

1. Limited Liability and Shares

Limited liability means shareholders can only lose what they invested — their personal assets are protected if the company cannot pay its debts.

Share type	Feature
Ordinary shares	Variable dividend (depends on profit), paid after preference shares, carry voting rights
Preference shares	Fixed dividend rate, paid before ordinary shares

Worked example — preference dividend A company has 10,000 6% preference shares of $1 each. Calculate the annual preference dividend.
10,000 × $1 × 6% = $600

2. Equity: Reserves and Retained Earnings

General reserve is profit set aside for a general purpose (still part of equity, not distributed as dividend). Retained earnings is the accumulated profit not yet distributed to shareholders. Debentures are long-term loans to the company, paying fixed interest — unlike shares, they are not part of equity.

Worked example — retained earnings Retained earnings brought forward $5,000, profit for the year $12,000, dividends paid $4,000. Calculate retained earnings carried forward.
5,000 + 12,000 − 4,000 = $13,000

3. Share Capital Terms

Term	Meaning
Authorised share capital	The maximum a company is permitted to issue
Issued share capital	The amount actually issued to shareholders
Called-up share capital	The amount shareholders have been asked to pay so far
Paid-up share capital	The amount shareholders have actually paid

Common mistakes to watch for

Treating a debenture as part of equity — it’s a liability (a loan), and its interest is an expense, not a dividend.
Forgetting preference shareholders are paid their dividend BEFORE ordinary shareholders.
Confusing “issued” share capital with “authorised” share capital — issued is what’s actually been given out, authorised is the maximum permitted.

Key Vocabulary Recap

Limited liability — shareholders’ losses are limited to their investment

Debenture — a long-term loan to a company, paying fixed interest

Syllabus Reference

This note covers IGCSE Accounting 0452 Section 5.3, Limited Companies: limited liability, equity, ordinary and preference shares, general reserves, retained earnings, debentures, share capital terms, the statement of profit or loss, the statement of changes in equity, and the statement of financial position.

Practice questions

IGCSE Accounting 0452 · Section 5.3: Limited Companies — Practice Question Bank (no answers)

Limited Companies — Practice

Covers: limited liability, shares, reserves, and share capital terms. 10 questions.

Explain the meaning of limited liability.

Explain the difference between ordinary shares and preference shares.

A company has 10,000 6% preference shares of $1 each. Calculate the annual preference dividend.

A company has 20,000 8% preference shares of $0.50 each. Calculate the annual preference dividend.

Explain the difference between a general reserve and retained earnings.

Retained earnings brought forward $5,000, profit for the year $12,000, dividends paid $4,000. Calculate retained earnings carried forward.

Explain the difference between a debenture and a share.

Explain the difference between issued share capital and authorised share capital.

Explain the difference between called-up and paid-up share capital.

Q10

State one item shown in a statement of changes in equity.

Worked solutions

Show worked solutions

IGCSE Accounting 0452 · Section 5.3: Limited Companies — Solutions

Limited Companies — Practice: Solutions

Explain limited liability.

✓Limited liability means the shareholders’ losses are limited to the amount they invested in the company — their personal assets are protected even if the company cannot pay its debts.

Ordinary vs preference shares.

✓Ordinary shares receive a variable dividend depending on profit, paid only after preference shares, and typically carry voting rights. Preference shares receive a fixed dividend rate, paid before ordinary shareholders.

10,000 6% $1 preference shares.

Dividend = number of shares × value × rate

10,000×1×0.06

✓$600

20,000 8% $0.50 preference shares.

Dividend = number of shares × value × rate

20,000×0.50×0.08

✓$800

General reserve vs retained earnings.

✓A general reserve is profit that has been formally set aside for a general purpose, still part of equity. Retained earnings is the accumulated profit that has not (yet) been distributed as dividends or transferred to a reserve.

Retained earnings: b/f$5,000, profit$12,000, dividends$4,000.

c/f = b/f + profit − dividends

5,000+12,000−4,000

✓$13,000

Debenture vs share.

✓A debenture is a long-term loan to the company, paying fixed interest (an expense), and is a liability, not part of equity. A share represents part-ownership of the company, and shareholders receive a dividend (not interest) out of profit, if the company chooses to pay one.

Issued vs authorised share capital.

✓Authorised share capital is the maximum amount of shares a company is permitted to issue. Issued share capital is the amount that has actually been issued to shareholders so far, which can be equal to or less than the authorised amount.

Called-up vs paid-up share capital.

✓Called-up share capital is the amount shareholders have been asked to pay so far on their shares. Paid-up share capital is the amount they have actually paid.

Q10

Item in a statement of changes in equity.

✓Any valid item, e.g. profit for the year, dividends paid, or a transfer to/from a general reserve.

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