AQA A-Level Accounting: Accounting for limited companies (7127) – Revision Notes

These notes cover section 3.16, Accounting for limited companies, of the AQA A-level Accounting (7127) specification (version 1.1, October 2026, for A-level exams from June 2019 onwards). The qualification is not tiered, and the specification places section 3.16 in the content assessed by Paper 1. For full explanations and a worked company example, use the study guide. Then work through the practice questions.

The income statement, statement of changes in equity and statement of financial position are in the section 3.7 revision notes. See also the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics. All figures are invented.

What section 3.16 adds to 3.7

Content	You must be able to
Statements based on IAS1	Prepare a statement of cash flow (IAS7, indirect method) and a schedule of non-current assets
Revaluation	Record it; show the revaluation reserve
Share issues	Tell apart an issue of shares, a rights issue and a bonus issue; record each
Published accounts	Reasons; benefits and limitations; main elements under IAS1 and the Companies Acts and their purpose; use by stakeholders
Standards framework	Explain its purpose and importance

Not examined: group financial statements; the statement of comprehensive income; specific standards other than IAS1 and IAS7.

Key terms

• Cash and cash equivalents – cash in hand and at bank, less any bank overdraft.
• Indirect method – starts from profit and adjusts for non-cash items and working-capital changes.
• Schedule of non-current assets – table of movements in cost (or valuation) and depreciation for each class of asset.
• Revaluation reserve – equity reserve holding the unrealised gain when an asset is revalued upwards. Not available for cash dividends.
• Rights issue – new shares offered to existing shareholders in proportion to their holdings, for cash, usually below market price.
• Bonus issue – free shares to existing shareholders, funded by turning reserves into share capital. No cash.
• Published accounts – annual accounts filed with the Registrar of Companies and available to the public.

Formulas and rules

What	How
Shares in an issue of “1 for n”	Existing shares / n
Rights issue: share capital	New shares x nominal value
Rights issue: share premium	New shares x (issue price - nominal value)
Bonus issue: transfer	New shares x nominal value, from a reserve to share capital
Revaluation surplus	Valuation - carrying amount
Depreciation after revaluation	Based on the valuation over the remaining life
Profit or loss on disposal	Proceeds - carrying amount
Tax paid	Opening tax payable + charge - closing tax payable
Interest paid	Opening accrual + charge - closing accrual
Closing cash and cash equivalents	Opening + net increase (or - net decrease)

Method in steps

Statement of cash flows (indirect method)

1. Start with profit from operations.
2. Add depreciation and any loss on disposal;
   deduct any profit on disposal.
3. Working capital: deduct increases in inventory and
   receivables; add increases in payables (reverse
   the signs for decreases).
4. = Cash generated from operations. Deduct interest
   paid and tax paid -> net cash from operating
   activities.
5. Investing: purchases of non-current assets (out);
   sale proceeds (in).
6. Financing: share and rights issues (in); debentures
   issued (in) or repaid (out); dividends paid (out).
7. Net change + opening cash = closing cash. Check
   against the statement of financial position.

IAS7 currently allows some choice over where interest and dividends paid are shown. The layout above is a common one. IFRS 18 removes the choice for most non-financial companies from periods beginning on or after 1 January 2027 (both then go under financing).

Schedule of non-current assets

Cost/valuation:  opening + additions - disposals
                 +/- revaluation = closing
Depreciation:    opening + charge - on disposals
                 - eliminated on revaluation = closing
Carrying amount: closing cost/valuation - closing
                 depreciation (= the SOFP figure)

Revaluation (upward)

Dr Asset (valuation - cost)
Dr Provision for depreciation (all of it)
Cr Revaluation reserve (valuation - carrying amount)

Show the surplus in a revaluation reserve column of the statement of changes in equity, not in the income statement. A fall in value is set first against any revaluation reserve for that asset; the rest is an expense.

Small worked reminders

Rights issue. 500,000 ordinary shares of £1. Rights issue 1 for 5 at £1.40.

New shares 100,000
Dr Bank 140,000; Cr Share capital 100,000; Cr Share premium 40,000

Bonus issue. 600,000 ordinary shares of £0.25. Bonus issue 1 for 2 from retained earnings.

New shares 300,000
Dr Retained earnings 75,000; Cr Share capital 75,000

Revaluation of land (not depreciated). Cost £150,000, revalued to £195,000: surplus £45,000 to the revaluation reserve.

Operating cash. Profit from operations £50,000; depreciation £12,000; profit on disposal £1,000; inventory up £3,000; receivables up £4,000; payables up £2,000.

50,000 + 12,000 - 1,000 - 3,000 - 4,000 + 2,000 = 56,000

Tax paid. Opening payable £9,000; charge £11,000; closing payable £11,000: paid 9,000 + 11,000 - 11,000 = £9,000.

Where each item goes in the statement of cash flows

Item	Treatment
Depreciation	Added back, operating
Loss / profit on disposal	Added back / deducted, operating
Increase in inventory or receivables	Deducted, operating
Increase in payables	Added, operating
Interest paid, tax paid	Deducted, operating (common layout)
Purchase of non-current assets	Outflow, investing
Proceeds from sale of non-current assets	Inflow, investing
Share issue or rights issue proceeds	Inflow, financing
Debentures issued / repaid	Inflow / outflow, financing
Dividends paid	Outflow, financing (common layout)
Bonus issue, revaluation	Not shown: no cash

Published accounts

Main elements and purpose

• IAS1: statement of financial position (position at year end); statement of profit or loss (performance); statement of changes in equity (movements in equity); statement of cash flows (sources and uses of cash, under IAS7); notes, including accounting policies and the schedule of non-current assets (explain the figures); comparative figures (comparison with last year).
• Companies Acts: directors’ report (directors’ account of the year); strategic report for companies that are not small (review of performance and main risks); auditor’s report unless exempt (independent opinion on whether the accounts give a true and fair view).

Reasons for publishing: legal requirement; stewardship (owners are often not the directors); limited liability means lenders and suppliers need information.

Benefits: consistent and comparable; audited; free to read.

Limitations: historical and published months after the year end; summarised; money measurement only, so non-financial factors are missing; estimates and judgement; window dressing; visible to competitors.

Stakeholders: shareholders and investors (return, dividends); lenders (repayment, security); suppliers (liquidity); employees (job security, pay); government (tax); customers and community (continuity).

International accounting standards framework

• Standards are issued by the IASB: newer ones are IFRS, older ones keep the name IAS.
• Purpose: common rules for measuring, presenting and disclosing items.
• Importance: comparability across companies and countries; reliability and investor confidence; less scope for creative accounting; consistency over time; a benchmark for auditors.

Must-know distinctions

• Rights issue vs bonus issue. Rights: cash raised, equity increases. Bonus: no cash, equity total unchanged.
• Revaluation reserve vs retained earnings. Revaluation reserve is unrealised and not available for cash dividends; retained earnings are realised profits.
• Profit vs cash. Depreciation and working-capital changes explain most of the gap in operating activities.
• Proceeds vs profit on disposal. Proceeds are the investing cash flow; the profit or loss is a non-cash adjustment.
• Tax charge vs tax paid. The charge is this year’s; the amount paid is often last year’s liability.

Quick self-test

1. A company has 900,000 ordinary shares of £0.50. It makes a 1 for 3 rights issue at £0.70. Calculate the new shares, cash raised, share capital and share premium.
2. A company has 2,000,000 ordinary shares of £0.10 and makes a 1 for 10 bonus issue. Calculate the transfer to share capital and the cash raised.
3. A building costs £200,000, has accumulated depreciation of £30,000 and is revalued to £260,000. Calculate the revaluation surplus.
4. Tax charge £14,000; tax payable £12,500 at the start and £14,000 at the end. Calculate tax paid.
5. Profit from operations £40,000; depreciation £9,000; loss on disposal £1,500; inventory up £2,000. Calculate cash generated from operations.
6. Under which heading do proceeds from the sale of machinery appear?
7. Under which heading are dividends paid shown in the common layout?
8. Does a revaluation appear in the statement of cash flows?
9. Name the statements IAS1 requires in a complete set.
10. Why can a revaluation reserve not be used to pay cash dividends?
11. Accumulated depreciation £20,000 at the start; charge £10,000; depreciation on an asset sold £9,000. Calculate closing accumulated depreciation.
12. Interest charge £4,800; accrued interest £1,200 at the start and £600 at the end. Calculate interest paid.

Answers

1. 900,000 / 3 = 300,000 shares; cash 300,000 x £0.70 = £210,000; share capital £150,000; share premium 300,000 x £0.20 = £60,000.
2. 200,000 x £0.10 = £20,000 transferred; cash raised nil.
3. 260,000 - (200,000 - 30,000) = £90,000.
4. 12,500 + 14,000 - 14,000 = £12,500.
5. 40,000 + 9,000 + 1,500 - 2,000 = £48,500.
6. Investing activities.
7. Financing activities.
8. No: no cash changes hands.
9. Statement of financial position, statement of profit or loss (and other comprehensive income), statement of changes in equity, statement of cash flows, and notes.
10. The gain is unrealised: the asset has not been sold.
11. 20,000 + 10,000 - 9,000 = £21,000.
12. 1,200 + 4,800 - 600 = £5,400.

Where marks are usually lost

• Sale proceeds added back in operating activities instead of the loss on disposal.
• Increase in receivables added instead of deducted.
• Tax charge used as tax paid.
• Bonus issue or revaluation shown as a cash flow.
• Revaluation surplus credited to the income statement or retained earnings.
• Old accumulated depreciation left on a revalued asset.
• Bonus shares calculated on the share total before an earlier rights issue.
• Closing cash in the statement of cash flows not agreeing with the statement of financial position, with an overdraft treated as positive.
• Limitations of published accounts listed with no link to the stakeholder in the question.

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards, published by AQA – section 3.16, Accounting for limited companies.