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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-36
DISADVANTAGES OF A PARTNERSHIP FIRM
The Local Law restricts the number of partners in a partnership firm to twenty. If the firm needs more
capital for its business, the partners may not be in a position to invest more money in the business.
Secondly, if the business of the partnership firm is very large and twenty persons can not manage it, they
cannot admit new partners in the business. However, there is one exception. The partnership firm of
professionals can have more than twenty partners.
At this point, need for forming a COMPANY arises.
ADVANTAGES OF A LIMITED COMPANY
A Limited company enjoys the following benefits:
 It can have more than twenty partners, so problem of extra capital is reduced to minimum.
 The liabilities of the members of a company is limited to the extent of capital invested by them in
the company
 There are certain tax benefits to the company, which a partnership firm can not enjoy.
 In Pakistan, affairs of limited companies are controlled by COMPANIES ORDINANCE issued in
1984.
 The formation of a company and other matters related to companies are governed by SECURITIES
AND EXCHANGE COMMISSION OF PAKISTAN (SECP).
TYPES OF COMPANIES
There are two major types of the companies:
 Private limited companies
 Public limited companies
PRIVATE LIMITED COMPANIES
Following are the main characteristics of private limited companies:
 Number of members in a private limited company ranges from two to fifty.
 Words and parentheses "(Private) Limited" are added at the end of the name of a private limited
company. Example: ABC (Private) Limited.
 Private limited company can not offer its shares to general public at large.
 In case a shareholder decides to sell his shares, his shares are first offered to existing shareholders. If
all existing shareholders decide not to purchase these shares, only then, an outsider can buy them.
 The shareholders of the private limited company elect two members of the company as Directors.
 These directors form a board of directors to run the affairs of the company.
 The head of board of directors is called "chief executive".
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Financial Accounting (Mgt-101)
VU
PUBLIC LIMITED COMPANY
Following are the main characteristics of public limited companies:
 Minimum number of members in a public limited company is seven
 There is no restriction on the maximum number of members in a public limited company.
 Word "Limited" is added at the end of the name of a public limited company. Example: ABC
Limited.
 Public limited company can offer its shares to general public at large.
 The shareholders of the public limited company elect seven members of the company as Directors.
 These directors form a board of directors to run the affairs of the company.
 The head of board of directors is called "chief executive".
There are two types of public limited company:
 Listed Company
 Non Listed Company
LISTED COMPANY
Listed company is that company whose shares are quoted on stock exchange. i.e. whose shares are traded in
stock exchange. It is also called quoted company.
NON LISTED COMPANY
Non listed company is that company whose shares are not quoted on stock exchange. i.e. whose shares are
not traded in stock exchange.
FORMATION OF A COMPANY
In case of private limited company, any two members and in case of public limited company, any seven
members can subscribe their names in Memorandum and Articles of association along with other
requirements of the Companies Ordinance 1984; can apply to Security and Exchange Commission for
registration of the company.
Memorandum of association contains the following:
 Name of the company with the word "Limited" as the last word of the name, in case of public
limited and the parenthesis and the word "(Private Limited)" as the last word of the name, in case of
private limited company.
 Place of registered office of the company.
 Objective of the company.
 Amount of share capital with which company proposes to be registered and division in to number
of shares.
 No subscriber of the company shall take less than one share.
 Each subscriber of the memorandum shall write opposite to his name, the number of shares held by
him.
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Financial Accounting (Mgt-101)
VU
ARTICLES OF ASSOCIATION
Article of association is a document that contains all the policies and other matters which are
necessary to run the business of the company.
This is also signed by all the members of the company.
When Security and Exchange Commission is satisfied that all the requirements of the Companies Ordinance
have been complied with, it issued certificate of incorporation to the company. This certificate is evidence
that a separate legal entity has come in to existence.
AUTHORIZED SHARE CAPITAL
The maximum amount with which a company gets registration/incorporation is called authorized
share capital of that company.
This capital can be increased with the prior approval of security and exchange commission. This
capital is further divided in to smaller denominations called shares.
Each share usually has a face value equal to Rs. 10. According to Companies Ordinance, this face
value can be increased but can not be decreased.
The value of share written on its face is called face value or par value or nominal value
ISSUED SHARE CAPITAL
When a company issues its shares to general public at large, the amount raised by the company with
such an issue is called issued share capital.
This is also called Paid up Share Capital.( total amount received by the company)
Accounting entry is recorded for issued share capital; no such entry is recorded for authorized share
capital.
PRELIMINARY EXPENSES
All expenses incurred up to the stage of incorporation of the company are called Preliminary Expenses. All
these expenses are incurred by subscribers of the company.
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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES