prepare income statements, statements of changes in equity and statements of financial position
5.3 Limited Companies
In a limited company, the owners (shareholders) are only liable for the amount they invest. Think of it like a lemonade stand run by a group of friends: each friend puts in a certain amount of money, and the stand’s profits belong to the stand, not to any single friend. 📈
Income Statement (Profit & Loss Statement)
The income statement shows how much money the company made and how much it spent over a period. It follows the order: Revenue → Cost of Sales → Gross Profit → Operating Expenses → Operating Profit → Other Income/Expenses → Profit before Tax → Tax → Profit after Tax. The basic formula is:
$Profit = Revenue - Cost$
| Item | Amount (£) |
|---|---|
| Revenue (sales) | 10,000 |
| Cost of Sales | 4,000 |
| Gross Profit | 6,000 |
| Operating Expenses | 2,000 |
| Operating Profit | 4,000 |
| Other Income | 500 |
| Profit before Tax | 4,500 |
| Tax (20%) | 900 |
| Profit after Tax | 3,600 |
Statement of Changes in Equity
This statement tracks how the company’s equity changes during the year: share capital issued, retained earnings, and dividends paid. Think of equity as the total value of the lemonade stand’s assets minus its debts.
| Item | Amount (£) |
|---|---|
| Share Capital (beginning) | 5,000 |
| New Shares Issued | 2,000 |
| Retained Earnings (beginning) | 3,000 |
| Profit after Tax | 3,600 |
| Dividends Paid | 1,000 |
| Total Equity (ending) | 13,600 |
Statement of Financial Position (Balance Sheet)
The balance sheet shows what the company owns (assets) and what it owes (liabilities) at a specific date. It must balance: Assets = Liabilities + Equity.
| Assets | Liabilities & Equity |
|---|---|
| Cash | £2,000 |
| Inventory | £1,500 |
| Equipment | £3,000 |
| Total Assets | £6,500 |
| Accounts Payable | £1,200 |
| Short‑Term Loan | £1,000 |
| Share Capital | £5,000 |
| Retained Earnings | £1,300 |
| Total Liabilities & Equity | £6,500 |
Revision
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