Prepare limited-company financial statements
Connect company profit to the statement of changes in equity and statement of financial position for a trading or service business.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover objective 1.5.4: ordinary shares, rights and bonus issues, debentures, dividends, reserves, company statements and finance choices. Preference shares are excluded by the syllabus. The statement formats follow Cambridge Teacher Guidance for 9706 Accounting (examination from 2023). Practice is self-checked, not an official Cambridge grade; full timed-paper practice and human subject-teacher review remain outstanding.
Before you begin
- Use Topics 1.2 and 1.5.1–1.5.3 to interpret double entries, period adjustments and the difference between business profit and an owners’ distribution.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A company earns $30,000 before tax and pays $4,000 ordinary dividends. What amount is profit before tax?
What you will learn
- Prepare a company statement of profit or loss using the syllabus format
- Reconcile share capital and reserves in the statement of changes in equity
- Present company equity and liabilities in the statement of financial position
Prepare the profit statement in a clear sequence
For a trading company, show revenue, cost of sales and gross profit, then distribution costs and administrative expenses to find profit from operations. Deduct finance costs to find profit before tax, then tax to find profit for the year. A service company may have no cost-of-sales line unless its records and business activity require one.
The statement of profit or loss reports performance for a period. Dividends are not deducted as operating expenses. The Cambridge Teacher Guidance format distinguishes profit from operations, finance costs, profit before tax, tax and profit for the year.
Carry equity movements into closing balances
A statement of changes in equity begins with each opening equity balance, then records share issues, profit for the year, reserve transfers and dividends in the appropriate columns. The closing retained earnings and other reserve balances feed into the statement of financial position.
The statement of financial position reports assets and equity and liabilities at one date. Present share capital and reserves within equity; show debentures and other borrowing as liabilities according to their terms. Check that total assets equal total equity and liabilities.
Pause and explain
A company has $40,000 assets, $9,000 liabilities and $21,000 share capital. What are its reserves in total?
Worked example
A trading company has revenue $120,000, cost of sales $72,000, distribution costs $8,000, administrative expenses $14,000, finance costs $4,000 and tax $5,000. Opening equity consists of share capital $50,000, share premium $5,000, general reserve $2,000 and retained earnings $12,000. During the year it issues shares for $10,000, earns the stated profit and pays dividends of $3,000. No reserve transfer occurs. Calculate profit for the year and closing equity total.
Show the worked solution
- Gross profit = 120,000 − 72,000 = $48,000.
- Profit from operations = 48,000 − 8,000 − 14,000 = $26,000.
- Profit before tax = 26,000 − 4,000 = $22,000; profit for the year = 22,000 − 5,000 = $17,000.
- Closing equity = opening $69,000 + share issue $10,000 + profit $17,000 − dividends $3,000 = $93,000.
Answer Profit for the year is $17,000 and closing equity is $93,000. The share issue increases equity; the dividend reduces retained equity and is not an expense in the profit calculation.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A company’s opening retained earnings are $18,000. Profit for the year is $9,000 and dividends paid are $2,000. No other retained-earnings movement occurs. Find closing retained earnings and explain the dividend treatment.
Give me a hint
Use opening retained earnings plus profit less distributions.
Compare my reasoning
- Closing retained earnings = 18,000 + 9,000 − 2,000 = $25,000.
- The $2,000 dividend is a deduction in the statement of changes in equity.
- Do not deduct the dividend in the statement of profit or loss.
Closing retained earnings are $25,000. The paid dividend is an equity distribution, not a statement-of-profit-or-loss expense.
Look for these in your work
- Closing balance correct
- Dividend shown in equity
- Profit statement treatment correct
A service company has revenue $90,000, administrative expenses $48,000, finance costs $2,000 and tax $8,000. Calculate profit from operations, profit before tax and profit for the year.
Give me a hint
There is no stated cost of sales; begin from revenue and the listed expenses.
Compare my reasoning
- Profit from operations = 90,000 − 48,000 = $42,000.
- Profit before tax = 42,000 − 2,000 = $40,000.
- Profit for the year = 40,000 − 8,000 = $32,000.
Profit from operations is $42,000; profit before tax is $40,000; profit for the year is $32,000.
Look for these in your work
- No invented cost of sales
- Finance cost applied
- Tax applied
A draft company statement of financial position balances only after a $6,000 debit is added to retained earnings as a plug. Explain why the result is not yet reliable and name the movements to reconcile.
Give me a hint
A balancing total does not prove each equity movement is classified correctly.
Compare my reasoning
- Reconcile opening reserves to closing balances through profit, dividends and transfers.
- Check share issues are split between nominal share capital and premium.
- Check debt balances and current liabilities independently; remove any unsupported balancing figure and trace the source documents.
The balancing plug is not evidence that retained earnings are correct. Reconcile profit, paid dividends, reserve transfers and share issues to their proper equity columns, then verify borrowings and liabilities separately using records.
Look for these in your work
- Equity bridge required
- Share issue split checked
- Unsupported plug rejected
Common mistakes
- Deducting dividends before calculating profit for the year
- Putting debentures in share capital
- Using a closing reserve balance that does not reflect the statement of changes in equity
What can you explain now?
Where is a debenture shown in a limited company’s statement of financial position?
Compare with the explanation
As a liability
A debenture is borrowing, not an ownership share.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
State the order from revenue to profit for the year and list the main equity movements carried into the statement of changes in equity.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.