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

This guide covers 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. The specification places section 3.7 in the content assessed by Paper 1, a 3-hour written exam, and you must use a calculator in the exam.

Use it with the revision notes and the practice questions. It builds directly on financial statements of sole traders, which teaches every year-end adjustment used below, and on types of business organisation, which explains limited liability, ordinary shares and debentures. See also the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics. All businesses and figures are invented.

What section 3.7 covers

Specification content (3.7)	What you must be able to do
Internal financial statements of limited liability companies	Prepare an income statement, a statement of changes in equity and a statement of financial position, for internal use, not for publication
Income statement	Show profit from operations, profit for the year before tax and profit for the year after tax
Statement of changes in equity	Show opening balances, share issues (including at a premium), dividends paid, profit or loss for the year and closing balances
Statement of financial position	Use the sub-headings non-current assets, current assets, current liabilities, non-current liabilities and equity

The specification notes that preference shares and general reserves will not be examined. Statements of cash flow, revaluation, rights and bonus issues and published accounts belong to section 3.16, Accounting for limited companies, not here.

What changes when the business is a company

The adjustments are the same as for a sole trader: accruals, prepayments, depreciation, irrecoverable debts, the provision for doubtful debts and closing inventory. What changes is who owns the business and how the owners are rewarded.

Item	Sole trader	Limited company
Owners’ stake	Capital account	Equity: share capital and reserves
Money taken by owners	Drawings, deducted from capital	Dividends paid, deducted from retained earnings
Pay for the people who run it	Not an expense (the owner’s reward is profit)	Directors’ remuneration is an expense
Tax on profit	Not in the business accounts	Tax is charged in the income statement
Long-term borrowing	Bank loan, mortgage	Also debentures, with debenture interest

Equity for a 3.7 question has three parts:

• Ordinary share capital – the nominal (face) value of the shares issued.
• Share premium – the amount received above nominal value when shares are issued.
• Retained earnings – profits after tax kept in the company, less dividends paid, built up over the years.

Share issues at a premium

When a company issues shares for more than their nominal value, only the nominal value goes to share capital. The excess goes to the share premium account.

Dr Bank             (number of shares x issue price)
Cr Share capital    (number of shares x nominal value)
Cr Share premium    (number of shares x premium per share)

Worked example. Halden Tech Ltd issues 200,000 ordinary shares of £0.50 each at £1.20 per share. All money is received.

• Bank: 200,000 x £1.20 = £240,000
• Share capital: 200,000 x £0.50 = £100,000
• Share premium: 200,000 x (£1.20 - £0.50) = £140,000

Check: 100,000 + 140,000 = 240,000. Share premium is part of equity. It is not income, so it never appears in the income statement.

The income statement: three levels of profit

The trading section is the same as a sole trader’s. Below gross profit, the specification requires three profit lines:

Revenue
Less cost of sales
Gross profit
Less operating expenses (wages, directors' remuneration,
  rent, depreciation, irrecoverable debts ...)
Profit from operations
Less finance costs (debenture interest, loan interest)
Profit for the year before tax
Less tax
Profit for the year after tax

• Profit from operations shows how well the trading activity performed before any financing cost.
• Finance costs are the interest on borrowing. Charge the full year’s debenture interest, whether or not it has all been paid (accruals). Any unpaid interest is a current liability.
• Tax is the company’s tax on its profit for the year. Any unpaid amount is a current liability.
• Dividends are not an expense. They are a distribution of profit to shareholders, so they go in the statement of changes in equity.

The statement of changes in equity

This statement explains the movement in each part of equity between the start and the end of the year. Use one column per component and a total column.

                          Share      Share   Retained
                        capital    premium   earnings    Total
                              £          £          £        £
Balance at start              x          x          x        x
Share issue                   x          x                   x
Profit for the year                                 x        x
Dividends paid                                     (x)      (x)
Balance at end                x          x          x        x

The profit line uses profit for the year after tax. If the company makes a loss, it is shown in brackets and reduces retained earnings. Each closing balance becomes a line in the equity section of the statement of financial position.

The statement of financial position

A common layout lists assets first, then equity and liabilities, with these sub-headings:

• Non-current assets at carrying amount (cost less accumulated depreciation).
• Current assets: inventory, trade receivables (less any provision), other receivables (prepayments, income due), cash and cash equivalents.
• Equity: share capital, share premium, retained earnings.
• Non-current liabilities: debentures and loans not due for repayment within 12 months.
• Current liabilities: trade payables, other payables (accruals, accrued debenture interest), tax payable, bank overdraft.

Total assets must equal total equity plus total liabilities.

Full worked example: from trial balance to three statements

Brackwood Joinery Ltd. Trial balance at 31 December 2025:

	Dr £	Cr £
Revenue		612,000
Purchases	351,000
Inventory 1 January 2025	42,500
Wages and salaries	98,400
Directors’ remuneration	46,000
Rent and rates	24,600
General expenses	13,900
Debenture interest	1,800
Premises at cost / provision for depreciation	240,000	28,800
Machinery at cost / provision for depreciation	96,000	38,400
Trade receivables / trade payables	51,300	36,800
Bank	18,700
Dividends paid	15,000
Ordinary shares of £1 each		150,000
Share premium		40,000
Retained earnings 1 January 2025		33,200
6% debentures (repayable 2032)		60,000
Totals	999,200	999,200

Notes at 31 December 2025:

1. Closing inventory is £46,200.
2. Rent of £2,100 is prepaid; wages of £1,600 are accrued.
3. Only half a year’s debenture interest has been paid.
4. Depreciate premises at 2% on cost and machinery at 25% reducing balance.
5. Tax on the profit for the year is estimated at £21,000.
6. During the year the company issued 50,000 ordinary shares at £1.60 each. This is already recorded in the trial balance.

Working

Cost of sales          42,500 + 351,000 - 46,200 = 347,300
Wages                  98,400 + 1,600 = 100,000
Rent and rates         24,600 - 2,100 = 22,500
Depreciation premises  2% x 240,000 = 4,800
Depreciation machinery 25% x (96,000 - 38,400) = 14,400
Debenture interest     6% x 60,000 = 3,600; accrued 3,600 - 1,800 = 1,800
Share issue            capital 50,000 x £1 = 50,000;
                       premium 50,000 x £0.60 = 30,000

Income statement for the year ended 31 December 2025

                                          £          £
Revenue                                        612,000
Less cost of sales                             347,300
Gross profit                                   264,700
Less operating expenses
  Wages and salaries                 100,000
  Directors' remuneration             46,000
  Rent and rates                      22,500
  General expenses                    13,900
  Depreciation: premises               4,800
  Depreciation: machinery             14,400
                                               201,600
Profit from operations                          63,100
Less finance costs: debenture interest           3,600
Profit for the year before tax                  59,500
Less tax                                        21,000
Profit for the year after tax                   38,500

Statement of changes in equity for the year ended 31 December 2025

                       Share      Share   Retained
                     capital    premium   earnings      Total
                           £          £          £          £
At 1 January 2025    100,000     10,000     33,200    143,200
Share issue           50,000     30,000                80,000
Profit for the year                         38,500     38,500
Dividends paid                             (15,000)   (15,000)
At 31 December 2025  150,000     40,000     56,700    246,700

The opening share capital and premium are the trial balance figures less the issue made during the year.

Statement of financial position at 31 December 2025

                              Cost   Acc. dep.  Carrying
Non-current assets               £          £          £
  Premises                 240,000     33,600    206,400
  Machinery                 96,000     52,800     43,200
                                                 249,600
Current assets
  Inventory                                       46,200
  Trade receivables                               51,300
  Other receivables (rent prepaid)                 2,100
  Cash and cash equivalents                       18,700
                                                 118,300
Total assets                                     367,900

Equity
  Ordinary share capital                         150,000
  Share premium                                   40,000
  Retained earnings                               56,700
                                                 246,700
Non-current liabilities
  6% debentures (repayable 2032)                  60,000
Current liabilities
  Trade payables                                  36,800
  Other payables (1,600 + 1,800)                   3,400
  Tax payable                                     21,000
                                                  61,200
Total equity and liabilities                     367,900

Both totals are £367,900. If yours differ, check that every adjustment appears twice and that dividends have not also been deducted as an expense.

Common errors

• Showing dividends paid as an expense in the income statement.
• Charging only the debenture interest paid, instead of the full year’s interest.
• Putting the whole share issue proceeds in share capital, with nothing in share premium.
• Using profit before tax, not after tax, in the statement of changes in equity.
• Treating directors’ remuneration like drawings, so it never reaches the income statement.
• Forgetting tax payable as a current liability.
• Listing debentures repayable in several years’ time as a current liability.
• Copying the trial balance share capital into the opening balance when shares were issued during the year.

Next, test yourself with the revision notes and then the practice questions. The exam preparation guide explains the paper structure.

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.