Edexcel A-Level Accounting: Limited companies (YAC11)

This guide teaches topic 2.1, Limited companies, from Unit 2: Corporate and Management Accounting of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2 (September 2018). It covers outcomes 2.1.1 to 2.1.15. All of it is Unit 2 (A2) only. Calculators may be used in the examination.

Use the revision notes to recap fast and the practice questions to check your understanding. For Unit 1 double entry, read Principles and double entry bookkeeping. Also useful: the Edexcel A-Level Accounting hub, the printable checklist and the free diagnostics.

What this topic covers

Outcomes	Area	Content
2.1.1	Statements	The three IAS 1 statements listed
2.1.2	Reports	Auditor, Auditors’ Report, Directors’ Report, corporate governance
2.1.3	Disclosure	Continuing and discontinued activities; exceptional items
2.1.4–2.1.5	Reserves	Capital and revenue reserves; six named reserves
2.1.6–2.1.8	Share capital	Authorised, issued, called-up; rights and bonus issues; entries
2.1.9–2.1.11	Finance	Shares and debentures; gearing; provisions
2.1.12–2.1.15	Purchase or merger	The four accounts; purchase price; new statement of financial position; goodwill

2.1.1 and 2.1.3: The company statements

A company’s statement of profit or loss and other comprehensive income adds finance costs and tax, splits continuing from discontinued operations, and adds other comprehensive income (such as a revaluation gain) to reach total comprehensive income.

Worked example 1: Halvergate Mouldings plc, year ended 31 March 2026

Halvergate has 8% debentures of 150,000. Administrative expenses include a material restructuring cost of 24,000. A product line closed in the year lost 22,950 after tax. Tax is 25% of profit before tax. Property was revalued from 310,000 to 385,000.

Statement of profit or loss and other comprehensive income
Revenue	1,240,000
Cost of sales	(744,000)
Gross profit	496,000
Distribution costs	(158,300)
Administrative expenses	(171,900)
Profit from operations	165,800
Finance costs (8% × 150,000)	(12,000)
Profit before tax	153,800
Tax (25%)	(38,450)
Profit for the year from continuing operations	115,350
Loss for the year from discontinued operations	(22,950)
Profit for the year	92,400
Other comprehensive income: gain on property revaluation	75,000
Total comprehensive income	167,400

Why the split matters (2.1.3). Discontinued operations are shown as a single amount, with detail in the notes, so users can forecast from the continuing 115,350: the closed line will not recur. An exceptional item is income or expense so large or unusual that its nature and amount are disclosed separately (IAS 1 requires this for material items), as with the 24,000 restructuring cost. Otherwise a one-off cost could be misread as a lasting fall in efficiency.

The statement of changes in equity

This replaces the old appropriation account, with one column per component of equity. In the year, Halvergate:

• made a 1 for 10 rights issue of 0.50 ordinary shares at 0.80 on its 800,000 shares (80,000 new shares)
• paid last year’s final dividend of 0.04 per share before the rights issue, and an interim dividend of 0.03 per share after it
• transferred 20,000 to the general reserve.

	Share capital	Share premium	Revaluation	General	Retained earnings	Total
At 1 April 2025	400,000	60,000	–	35,000	148,000	643,000
Rights issue	40,000	24,000				64,000
Profit for the year					92,400	92,400
Revaluation			75,000			75,000
Dividends paid (32,000 + 26,400)					(58,400)	(58,400)
Transfer				20,000	(20,000)	–
At 31 March 2026	440,000	84,000	75,000	55,000	162,000	816,000

These closing balances become the equity figures in the statement of financial position. Dividends paid appear here, never as an expense.

2.1.2: The auditor and the two reports

The auditor is independent of the directors and reports to the shareholders, who need an independent check on the directors’ stewardship. That check is central to corporate governance: how companies are run, controlled and held to account.

The Auditors’ Report gives an opinion on whether the financial statements show a true and fair view, with the basis for that opinion. If there is material misstatement, or not enough evidence, the opinion is modified (for example, qualified), warning users not to rely fully on the figures.

The Directors’ Report is written by the directors. Under UK company law it includes the directors’ names, the recommended dividend, political donations and employee matters, giving users context the statements lack.

2.1.4 and 2.1.5: Reserves

Revenue reserves come from profits and can be paid as dividends. Capital reserves cannot; they protect the capital base creditors rely on.

Reserve	Type	Created by	Utilised for
Retained earnings	Revenue	Profit for the year	Dividends, transfers to other reserves, bonus issues
General	Revenue	Transfer out of retained earnings	Future needs; can be transferred back
Share premium	Capital	Issuing shares above nominal value	Fully paid bonus shares; writing off share issue costs
Revaluation	Capital	Upward revaluation of a non-current asset	Not distributable; may be moved straight to retained earnings when the asset is sold or used up
Foreign exchange	Capital	Exchange differences on translating a foreign operation (via other comprehensive income)	Moved to profit or loss when that operation is disposed of
Capital redemption	Capital	Transfer from retained earnings equal to the nominal value of shares bought back out of profits	Keeps capital intact; can pay up bonus shares

A reserve is not cash.

2.1.6 to 2.1.8: Share capital, rights issues and bonus issues

• Authorised: the maximum the company may issue (a note).
• Issued: shares actually allotted.
• Called-up: the part of the issue price asked for so far.

Ostlerby Instruments plc issues 100,000 shares of 1.00 at 1.50: 1.10 on application (including the 0.50 premium), 0.40 later. On application: Dr Bank 110,000; Cr Share capital 60,000; Cr Share premium 50,000. Issued capital is 100,000 but called-up is 60,000. On the call: Dr Bank 40,000; Cr Share capital 40,000. Forfeiture is not examined.

A rights issue offers existing shareholders new shares in proportion to their holdings, usually below market price, and raises cash. A bonus issue converts reserves into free shares: no cash moves and total equity is unchanged.

Worked example 2: Rookhope Signals Ltd

Equity: 240,000 ordinary shares of 1.00 (240,000), share premium 36,000, retained earnings 190,000. The company makes a 3 for 8 bonus issue, using share premium first. It then makes a 1 for 6 rights issue at 1.60.

Bonus issue: 240,000 × 3/8 = 90,000 shares, nominal 90,000.

Journal	Dr	Cr
Share premium	36,000
Retained earnings	54,000
Ordinary share capital		90,000

Rights issue: shares now 330,000; 330,000 ÷ 6 = 55,000 new shares; cash 55,000 × 1.60 = 88,000.

Journal	Dr	Cr
Bank	88,000
Ordinary share capital		55,000
Share premium (55,000 × 0.60)		33,000

Ordinary share capital account

Dr		Cr
Balance c/d	385,000	Balance b/d	240,000
		Share premium / retained earnings (bonus)	90,000
		Bank (rights)	55,000
	385,000		385,000

Check: equity = 385,000 + 33,000 + 136,000 = 554,000 = 466,000 + 88,000 cash. Using share premium first keeps retained earnings available for dividends.

2.1.9 to 2.1.11: Shares, debentures, gearing and provisions

	Ordinary shares	Preference shares	Debentures
Holder is	an owner	an owner	a lender
Return	variable dividend, only if declared	fixed-rate dividend, paid before ordinary	fixed-rate interest, payable whether or not there is a profit
Voting	usually yes	usually no	no
In the statements	equity	usually equity	non-current liability; interest is a finance cost

Capital gearing is the share of long-term finance with a fixed cost:

Gearing ratio = Fixed cost capital (debt) / Total capital employed (debt + equity) × 100

Appendix 7 of the specification says this formula will not be supplied in the examinations. Halvergate: 150,000 ÷ (816,000 + 150,000) × 100 = 15.5%, low gearing. A highly geared company must pay interest even in a poor year, which raises the risk to ordinary shareholders but magnifies their returns when profit rises; lenders may refuse further loans.

A provision (IAS 37) is a liability of uncertain timing or amount. Create one only for a present obligation from a past event, where an outflow is probable and can be reliably estimated. A merely possible outflow is a contingent liability: disclosed in a note, not recorded. Corriebank Appliances plc estimates warranty claims at 2% of revenue of 600,000 = 12,000. The existing provision is 9,500, so 2,500 is charged to profit and 12,000 shown as a liability. Unlike a transfer to reserves, a provision reduces profit.

2.1.12 to 2.1.15: Purchase and merger of companies

The vendor closes its books; the purchaser records what it acquired. In a merger, two companies combine, often into a new company.

• Revaluation account: restates assets and liabilities to agreed values; the net gain or loss goes to shareholders.
• Realisation account (vendor): closes off what is transferred and finds the profit or loss on sale.
• Sundry shareholders account (vendor): what shareholders are owed, settled in shares or cash.
• Acquisition account (purchaser): consideration against assets and liabilities taken over; goodwill is the balance.

Worked example 3: Larchfield plc buys Tolgarth Ltd

Tolgarth’s carrying values: property 180,000, machinery 64,000, inventory 41,000, trade receivables 28,500, bank 9,500, trade payables 31,000; equity is ordinary shares 200,000 and retained earnings 92,000. Larchfield takes over all but the bank, at agreed values: property 230,000, machinery 52,000, inventory 38,000, receivables 27,000, payables 31,000. It pays 150,000 of its 1.00 ordinary shares valued at 2.20, plus 40,000 cash.

Purchase price and goodwill (2.1.13, 2.1.15). Revalued net assets = 230,000 + 52,000 + 38,000 + 27,000 − 31,000 = 316,000. Consideration = 150,000 × 2.20 + 40,000 = 370,000. Goodwill = 370,000 − 316,000 = 54,000.

Tolgarth (vendor). Realisation account: debit assets at carrying value (313,500); credit trade payables (31,000) and Larchfield (370,000). Profit on realisation = 87,500, credited to sundry shareholders, whose account (200,000 + 92,000 + 87,500 = 379,500) is cleared by Larchfield shares (330,000) and bank (9,500 + 40,000 = 49,500).

Had Tolgarth first revalued to agreed values (net gain 33,500), the realisation profit would be exactly 54,000: the goodwill.

Larchfield (purchaser). Acquisition account: debit share capital 150,000, share premium 180,000 (150,000 × 1.20), bank 40,000, trade payables 31,000 (401,000); credit the four assets 347,000 and goodwill 54,000 (401,000).

Statement of financial position after the purchase (2.1.14). Larchfield before: property 420,000, equipment 96,000, inventory 72,000, receivables 55,000, bank 118,000, payables 64,000, 6% debentures 100,000 (net assets 597,000).

Goodwill	54,000
Property (420,000 + 230,000)	650,000
Plant and equipment (96,000 + 52,000)	148,000	852,000
Inventory	110,000
Trade receivables	82,000
Bank (118,000 − 40,000)	78,000	270,000
Total assets		1,122,000
Equity: ordinary shares 550,000; share premium 230,000; retained earnings 147,000		927,000
Non-current liabilities: 6% debentures		100,000
Current liabilities: trade payables		95,000
Total equity and liabilities		1,122,000

Goodwill is an intangible non-current asset, not amortised but tested for impairment at least annually. If consideration is below the fair value of net assets, the difference is a bargain purchase gain taken to profit or loss.

Common errors

• Using the vendor’s carrying values in the purchaser’s statement.
• Valuing consideration shares at nominal value and missing the share premium.
• Treating dividends as an expense, a bonus issue as cash, or a provision as a reserve.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015), Pearson Education Limited. Unit 2, topic 2.1: Limited companies.