AQA A-Level Accounting: Limited company accounts (7127) – Revision Notes

These notes cover section 3.7, Limited company accounts, 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 3.7 in the content assessed by Paper 1. For full explanations and a complete trial-balance example, use the study guide. Then work through the practice questions.

Related pages: financial statements of sole traders for every year-end adjustment, and business organisation for limited liability and sources of finance. See also the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics. All figures are invented.

The three statements in 3.7

All three are internal statements: prepared for use inside the company, not for publication.

Statement	Purpose	Must show
Income statement	Profit or loss for the period	Profit from operations; profit for the year before tax; profit for the year after tax
Statement of changes in equity	Movement in each part of equity	Opening balances; share issues (including at a premium); dividends paid; profit (or loss) for the year; closing balances
Statement of financial position	Assets, equity and liabilities at the year end	Sub-headings: non-current assets, current assets, equity, current liabilities, non-current liabilities

Not examined in 3.7: preference shares and general reserves. Section 3.16 instead: statements of cash flow, schedules of non-current assets, revaluation, rights and bonus issues, published accounts.

Key terms

• Ordinary share capital – number of shares issued x nominal value.
• Nominal value – the face value of a share (for example £1 or £0.50).
• Share premium – the amount received above nominal value on a share issue. Part of equity, never income.
• Retained earnings – accumulated profits after tax, less dividends paid.
• Dividend – a distribution of profit to shareholders. Not an expense.
• Debenture – long-term borrowing with a fixed rate of interest.
• Directors’ remuneration – pay for directors. An operating expense.
• Cash and cash equivalents – the company term for cash in hand and cash at bank.

Formulas and links between statements

What	How
Share capital on an issue	Number of shares x nominal value
Share premium on an issue	Number of shares x (issue price - nominal value)
Profit from operations	Gross profit + other operating income - operating expenses
Profit for the year before tax	Profit from operations - finance costs
Profit for the year after tax	Profit for the year before tax - tax
Debenture interest charge	Rate x debentures for the full year (or the months outstanding)
Closing retained earnings	Opening + profit after tax (or - loss) - dividends paid
Total equity	Share capital + share premium + retained earnings
Balance check	Total assets = total equity + total liabilities

Method in steps: trial balance to company statements

1. Work every adjustment twice (income statement effect
   and statement of financial position effect).
2. Income statement: trading section -> gross profit ->
   operating expenses -> PROFIT FROM OPERATIONS ->
   finance costs -> PROFIT BEFORE TAX -> tax ->
   PROFIT AFTER TAX.
3. Statement of changes in equity: opening balances,
   share issue split into capital and premium,
   profit after tax, dividends paid, closing balances.
4. Statement of financial position: closing equity from
   step 3; add tax payable and accrued interest to
   current liabilities.
5. Check total assets = total equity and liabilities.

Small worked reminders

Share issue. 80,000 ordinary shares of £0.25 each are issued at £0.90.

Dr Bank            72,000   (80,000 x 0.90)
Cr Share capital   20,000   (80,000 x 0.25)
Cr Share premium   52,000   (80,000 x 0.65)

Profit levels. Gross profit £180,000; operating expenses £112,500; 8% debentures of £75,000 outstanding all year; tax £14,700.

Gross profit                        180,000
Less operating expenses             112,500
Profit from operations               67,500
Less debenture interest (8% x 75,000) 6,000
Profit for the year before tax       61,500
Less tax                             14,700
Profit for the year after tax        46,800

Retained earnings. Opening £84,300, profit after tax £46,800, dividends paid £20,000: closing = 84,300 + 46,800 - 20,000 = £111,100.

Where each item goes

Item	Statement and position
Directors’ remuneration	Income statement, operating expenses
Debenture interest (full year)	Income statement, finance costs
Accrued debenture interest	SOFP, current liabilities (other payables)
Tax for the year	Income statement, below profit before tax
Tax unpaid at year end	SOFP, current liabilities
Dividends paid	Statement of changes in equity, retained earnings column
Share premium	SOCE (on issue) and SOFP, equity
Debentures repayable after more than 12 months	SOFP, non-current liabilities
Bank overdraft	SOFP, current liabilities

Skeleton layouts to memorise

STATEMENT OF FINANCIAL POSITION
Non-current assets (carrying amounts)          x
Current assets                                 x
Total assets                                   X
Equity: share capital, share premium,
        retained earnings                      x
Non-current liabilities: debentures, loans     x
Current liabilities: trade payables, other
  payables, tax payable, bank overdraft        x
Total equity and liabilities                   X

STATEMENT OF CHANGES IN EQUITY
Columns: share capital | share premium | retained earnings | total
Rows: start balance, share issue, profit (loss) for the year,
      dividends paid, end balance

Loss year. If the company makes a loss after tax of £9,000, show (9,000) on the profit line of the statement of changes in equity. Any dividends paid are deducted as well, so retained earnings fall by both amounts.

Must-know distinctions

• Sole trader capital vs company equity. A sole trader has one capital account; a company splits equity into share capital, share premium and retained earnings.
• Drawings vs dividends. Drawings reduce a sole trader’s capital; dividends paid reduce retained earnings. Neither is an expense.
• Owner’s reward vs directors’ remuneration. A sole trader’s own “wage” is drawings; directors’ pay is an expense of the company.
• Profit from operations vs profit before tax. The gap is finance costs.
• Profit before tax vs profit after tax. The gap is tax. Only profit after tax goes to retained earnings.
• Share capital vs share premium. Nominal value only vs the excess over nominal value.

Quick self-test

1. 120,000 ordinary shares of £0.50 are issued at £0.75. Calculate the bank receipt and the share premium.
2. Which profit figure goes into the statement of changes in equity?
3. A company has 5% debentures of £90,000 all year and has paid £2,250 interest. How much interest is accrued?
4. Profit from operations £48,000; finance costs £6,000; tax £9,500. Calculate profit before tax and profit after tax.
5. Retained earnings at the start £25,000; loss for the year £8,000; dividends paid £4,000. Calculate closing retained earnings.
6. Under which sub-heading does tax payable appear?
7. Where does directors’ remuneration appear?
8. Retained earnings rose from £60,000 to £71,000. Profit after tax was £23,000. Calculate dividends paid.
9. Name the two items the specification says will not be examined in 3.7.
10. Share capital £200,000; share premium £35,000; retained earnings £64,000. Calculate total equity.
11. Gross profit £150,000; profit from operations £54,000; no other operating income. Calculate operating expenses.
12. Why are these statements described as “internal”?

Answers

1. Bank 120,000 x £0.75 = £90,000; premium 120,000 x £0.25 = £30,000.
2. Profit for the year after tax (or the loss).
3. Full year 5% x 90,000 = £4,500; accrued 4,500 - 2,250 = £2,250.
4. Before tax 48,000 - 6,000 = £42,000; after tax 42,000 - 9,500 = £32,500.
5. 25,000 - 8,000 - 4,000 = £13,000.
6. Current liabilities.
7. Income statement, as an operating expense (before profit from operations).
8. 60,000 + 23,000 - 71,000 = £12,000.
9. Preference shares and general reserves.
10. 200,000 + 35,000 + 64,000 = £299,000.
11. 150,000 - 54,000 = £96,000.
12. They are prepared for use within the company (directors and managers), not for publication.

Where marks are usually lost

• Dividends paid deducted in the income statement as well as, or instead of, in the statement of changes in equity.
• Only the debenture interest paid charged, not the full year’s interest.
• Debenture interest placed among operating expenses, so profit from operations is wrong.
• Tax deducted before profit from operations, or tax payable missing from current liabilities.
• Whole proceeds of a share issue credited to share capital, with no share premium.
• Profit before tax carried into retained earnings.
• The trial balance share capital used as the opening balance when shares were issued during the year.
• Profit lines without the exact labels: profit from operations, profit for the year before tax, profit for the year after tax.
• Equity totals in the statement of financial position not agreeing with the closing totals in the statement of changes in equity.

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards, published by AQA – section 3.7, Limited company accounts.