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

This guide covers 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. The specification places section 3.16 in the content assessed by Paper 1, a 3-hour written exam, and you must use a calculator in the exam.

The internal income statement, statement of changes in equity and statement of financial position (section 3.7) are taught in the limited company accounts study guide and are not repeated here. Use it with the revision notes and the practice questions. See also the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics. All businesses and figures are invented.

What section 3.16 covers

Specification content (3.16)	What you must be able to do
Drafting financial statements for limited companies (based on IAS1)	Prepare the 3.7 statements plus a statement of cash flow (IAS7, indirect method) and a schedule of non-current assets
Revaluation of non-current assets	Record a revaluation and show the revaluation reserve
Issue of shares, rights issue, bonus issue	Explain the differences and record each in the financial statements
Requirement to publish accounts	Give reasons, benefits and limitations; state the main elements required by IAS1 and the Companies Acts and the purpose of each; explain how stakeholders use them
International accounting standards framework	Explain its purpose and importance

The specification notes that group financial statements, the statement of comprehensive income and specific standards other than IAS1 and IAS7 will not be examined.

One company runs through this guide: Ellerby Packaging Ltd, year ended 31 March 2026.

Schedule of non-current assets

A schedule of non-current assets shows, for each class of asset, how cost (or valuation) and accumulated depreciation moved during the year.

Ellerby’s data (cost and accumulated depreciation at 1 April 2025):

• Buildings: cost £320,000; depreciation £40,000; 2.5% a year on cost. Revalued to £408,000 on 31 March 2026.
• Machinery: cost £180,000; depreciation £72,000. Bought £45,000. Sold machinery costing £30,000 (depreciation £18,000) for £9,500. 20% on cost held at the year end.
• Vehicles: cost £64,000; depreciation £28,000. Bought a van for £22,000. 25% reducing balance on vehicles held at the year end.

Working

Buildings   2.5% x 320,000                       = 8,000
Machinery   20% x (180,000 + 45,000 - 30,000)    = 39,000
Vehicles    25% x (64,000 + 22,000 - 28,000)     = 14,500
Disposal    carrying amount 30,000 - 18,000      = 12,000
            proceeds 9,500, so loss on disposal  = 2,500

Schedule of non-current assets for the year ended 31 March 2026

	Buildings £	Machinery £	Vehicles £	Total £
Cost or valuation
At 1 April 2025	320,000	180,000	64,000	564,000
Additions	–	45,000	22,000	67,000
Disposals	–	(30,000)	–	(30,000)
Revaluation	88,000	–	–	88,000
At 31 March 2026	408,000	195,000	86,000	689,000
Depreciation
At 1 April 2025	40,000	72,000	28,000	140,000
Charge for the year	8,000	39,000	14,500	61,500
On disposals	–	(18,000)	–	(18,000)
On revaluation	(48,000)	–	–	(48,000)
At 31 March 2026	0	93,000	42,500	135,500
Carrying amount
At 1 April 2025	280,000	108,000	36,000	424,000
At 31 March 2026	408,000	102,000	43,500	553,500

The closing carrying amounts go in the statement of financial position.

Revaluation of non-current assets

A company may restate an asset such as buildings at its current value. An increase is not profit: the asset has not been sold, so the gain is unrealised. It goes to a revaluation reserve in equity.

Ellerby’s buildings, after this year’s depreciation, have a carrying amount of 320,000 - 48,000 = £272,000. They are revalued to £408,000.

Revaluation surplus = 408,000 - 272,000 = 136,000

Dr Buildings (cost to valuation, 408,000 - 320,000)   88,000
Dr Provision for depreciation (eliminated)            48,000
Cr Revaluation reserve                               136,000

• Statement of financial position: buildings at valuation £408,000 with nil accumulated depreciation; revaluation reserve £136,000 in equity.
• Statement of changes in equity: add a revaluation reserve column; show the £136,000 surplus on its own line.
• Income statement: no entry for the surplus.
• Future depreciation is based on the valuation. With 34 years of useful life left, next year’s charge is 408,000 / 34 = £12,000, up from £8,000.

The revaluation reserve is not available for paying cash dividends, because the gain is unrealised. If an asset falls in value, the fall is set against any revaluation reserve for that asset first; any remaining fall is an expense in the income statement.

Issue of shares, rights issues and bonus issues

Section 3.7 covers a share issue at a premium (Dr bank; Cr share capital at nominal value; Cr share premium with the excess). Section 3.16 adds two more kinds of issue.

	Issue of shares	Rights issue	Bonus issue
Who receives shares	Anyone offered them	Existing shareholders, in proportion to holdings	Existing shareholders, free
Price	Often at a premium	Usually below market price	None
Cash raised	Yes	Yes	No
Total equity	Increases	Increases	No change: reserves become share capital

Ellerby’s equity at 1 April 2025: 600,000 ordinary shares of £0.50 (£300,000); share premium £60,000; retained earnings £245,000.

Rights issue: 1 for 4 at £0.80.

New shares     600,000 / 4 = 150,000
Dr Bank             150,000 x 0.80 = 120,000
Cr Share capital    150,000 x 0.50 =  75,000
Cr Share premium    150,000 x 0.30 =  45,000

Bonus issue (after the rights issue): 1 for 5, using share premium.

New shares     750,000 / 5 = 150,000
Dr Share premium    150,000 x 0.50 =  75,000
Cr Share capital                      75,000

	Before £	After both issues £
Ordinary shares of £0.50	300,000	450,000
Share premium	60,000	30,000
Retained earnings	245,000	245,000
Total	605,000	725,000

Total equity rises by £120,000: exactly the cash from the rights issue. The bonus issue only moves £75,000 between parts of equity. Reserves such as share premium, revaluation reserve or retained earnings can fund a bonus issue.

Statement of cash flows (IAS7, indirect method)

A statement of cash flows explains the change in cash and cash equivalents over the year. IAS7 groups cash flows under three headings: operating activities, investing activities and financing activities. The indirect method starts from profit and removes the items that do not involve cash.

More Ellerby data: profit from operations £96,400; inventory up from £31,200 to £38,900; trade receivables down from £44,600 to £41,300; trade payables up from £27,800 to £30,100; 8% debentures of £75,000, interest paid in full; tax charge £18,200, tax payable £15,600 at the start and £18,200 at the end; dividends paid £48,000; opening overdraft £23,400.

Tax paid = opening payable + charge - closing payable = 15,600 + 18,200 - 18,200 = £15,600. Interest paid works the same way when interest is accrued.

Ellerby Packaging Ltd: Statement of cash flows
for the year ended 31 March 2026
                                                 £          £
Cash flows from operating activities
Profit from operations                                 96,400
Adjustments for:
  Depreciation                                         61,500
  Loss on disposal of machinery                         2,500
  Increase in inventories                              (7,700)
  Decrease in trade receivables                         3,300
  Increase in trade payables                            2,300
Cash generated from operations                        158,300
  Interest paid                                        (6,000)
  Tax paid                                            (15,600)
Net cash from operating activities                    136,700

Cash flows from investing activities
  Purchase of non-current assets          (67,000)
  Proceeds from sale of machinery           9,500
Net cash used in investing activities                 (57,500)

Cash flows from financing activities
  Proceeds from rights issue              120,000
  Dividends paid                          (48,000)
Net cash from financing activities                     72,000

Net increase in cash and cash equivalents             151,200
Cash and cash equivalents at 1 April 2025             (23,400)
Cash and cash equivalents at 31 March 2026            127,800

• Depreciation and loss on disposal reduced profit without any cash leaving: add them back. Deduct a profit on disposal.
• An increase in inventory or receivables ties up cash: deduct it. An increase in payables: add it.
• The sale proceeds (£9,500) go under investing activities.
• The bonus issue and the revaluation involve no cash, so neither appears.

IAS7 currently allows a choice of heading for interest and dividends paid; this layout is common, so label yours clearly. From periods beginning 1 January 2027, IFRS 18 puts both under financing for most non-financial companies.

Published accounts

Reasons for publishing

Under the Companies Acts, limited companies must prepare annual accounts and file them with the Registrar of Companies, where the public can see them. Shareholders, who usually do not run the company, need a report on how directors have used their money (stewardship). Because liability is limited, lenders and suppliers need information before giving credit.

Main elements and their purpose

Element	Required by	Purpose
Statement of financial position	IAS1	Assets, liabilities and equity at the year end
Statement of profit or loss	IAS1	Performance for the year (the specification excludes the statement of comprehensive income)
Statement of changes in equity	IAS1	Movement in each part of equity, including share issues and dividends
Statement of cash flows	IAS1 and IAS7	Where cash came from and how it was used
Notes, including accounting policies and schedules such as non-current assets	IAS1	Explain and break down the figures
Comparative figures for the previous year	IAS1	Allow comparison over time
Directors’ report	Companies Acts	Directors’ account of the year
Strategic report (companies that are not small)	Companies Acts	Review of the business, its performance and main risks
Auditor’s report (unless the company is exempt from audit)	Companies Acts	Independent opinion on whether the accounts give a true and fair view

How stakeholders use them

Stakeholder	What they look for
Shareholders, potential investors	Profit, dividends, return; whether to buy, hold or sell
Lenders	Ability to pay interest and repay; security in non-current assets
Suppliers	Liquidity: will they be paid on time?
Employees	Job security; ability to afford pay rises
Government	Tax; economic data
Customers, local community	Whether the company will keep trading

Benefits and limitations

Benefits: content set by law and standards is consistent and comparable; an audit adds credibility; anyone can see it.

Limitations: the figures are historical and may be months old when published; they are summarised; non-financial factors (staff skills, customer loyalty) are missing; estimates such as depreciation and valuations involve judgement; directors may present figures favourably (window dressing); competitors can read them too.

The international accounting standards framework

International standards are issued by the International Accounting Standards Board (IASB). Newer ones are called International Financial Reporting Standards (IFRS); older ones keep the name IAS, such as IAS1 and IAS7.

Purpose: to set out how items are measured, presented and disclosed, so that companies following the standards prepare accounts in the same way.

Importance:

• Comparability between companies and countries, which helps international investors.
• Reliability: fewer choices of method leave less room for creative accounting.
• Consistency over time, so trends are meaningful.
• A benchmark for auditors judging whether accounts give a true and fair view.

Standards do not remove judgement: estimates are still needed.

Common errors

• Adding back the sale proceeds of an asset in operating activities instead of the loss (or deducting the profit) on disposal.
• Using the tax charge as tax paid without adjusting for opening and closing tax payable.
• Getting working-capital signs the wrong way round (an increase in receivables is deducted).
• Showing a bonus issue, or a revaluation, as a cash flow.
• Crediting a revaluation surplus to the income statement or to retained earnings.
• Calculating bonus shares on the share total before an earlier rights issue.

Next, use the revision notes, then the practice questions. For ratios, see analysis and evaluation of financial information.

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.