Financial Statements of Limited Companies
Limited companies prepare a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows. Candidates must be fluent in the format rules: non-current assets split into intangible, property plant and equipment and investments; current assets in order of liquidity; equity shown as share capital, share premium, revaluation reserve, retained earnings. Learn the journal mechanics behind each adjustment - depreciation, revaluation (gain to OCI, excess depreciation to retained earnings), issue of shares at a premium, loan note interest accrual, corporation tax charge and provision, and dividends declared versus paid.
Traps: dividends are never an expense in profit or loss; they reduce retained earnings. A bonus (capitalisation) issue moves amounts from reserves to share capital with no cash. Rights issues need the bonus element split. Deferred tax arises on temporary differences such as accelerated capital allowances. Watch closing inventory errors and goods on sale or return.
Rule of thumb: profit for the year = profit before tax − tax charge; closing retained earnings = opening + profit for year − dividends. Worked example: opening retained earnings £80,000, profit after tax £45,000, dividend paid £12,000, dividend proposed £8,000. Closing = 80,000 + 45,000 − 12,000 = £113,000 (proposed dividend is a liability only if declared before year end under applicable rules; in AAT context treat proposed dividends as disclosed, not provided).