Saturday, 19 January 2008

Accounting & finance features for limited companies

List and describe three accounting and finance features for limited companies? How is accounting and financial reporting regulated in your country?

There are a number of accounting and finance features that are specific to limited companies. The first of these is the way in which the company is owned. This is facilitated by the creation of shares when a company is formed, which allows the ownership to be spread between an infinite number of parties. The existence of shares grants a company perpetual existence, encourages investors because of their high liquidity, and enables ownership in the company to be expanded, or change hands, very quickly.

A limited company is legally required to produce financial statements and make this available to the public. These financial statements - the balance sheet and the income statement - follow the same format to those produced by non - incorporated companies but do have some subtle differences. The income statement will show more extensive profit details - operating profit (profit before financial expenses), profit before tax, profit after tax, and retained profit that has not been used to pay a dividend to shareholders or transferred to a reserve. The income statement will also show an audit fee, a dividend, and the amount transferred to the reserve. The balance sheet will differ in that it shows corporation tax (only paid in the UK by limited companies) and a figure for equity in the company.

As soon as a limited company grows beyond a certain size it is a requirement for the shareholders to appoint a qualified team of auditors to report on the accuracy of the financial statements of the company. The auditors will investigate the details of the financial statements and the evidence on which they are based. In my personal experience the field of auditing has become much more profile in recent years, and large auditing companies such as PriceWaterhouseCooper are better known than the companies that they are hired to audit.

In the UK, accounting is legislated by the Accounting Standards Board. This organisation issues accounting standards and protocols autonomously (but in consultation with the companies that its decisions will affect). The ASB expresses the need to harmonise international accounting standards, "in most cases, compliance with an FRS (Financial Reporting Standard) automatically ensures compliance with the relevant IAS" (Financial Reporting Council, 2008). This has to be the approach taken; every year sees increased European harmonisation in terms of legislation. "The European Commission adopted a regulation requiring Stock Exchange listed companies of EU member states to prepare their financial statements according to International Accounting Standards Board standards" (Atrill & McLaney, 2006). Much of the big business in the UK is now just part of an international conglomerate and this approach to international accounting will help that greatly.


Financial Reporting Council (2008) Foreword to Accounting Standards [Online] London: Financial Reporting Council
Available from (Accessed 19th Jan 2008)

Atrill, P. & McLaney, E. (2006) Accounting and Finance for Non - Specialists (5th Ed.) Pearson Education Ltd., Essex, England

No comments: