Limited company accounts: practice questions

How to approach these questions

Limited company questions test whether you can adapt the statements you already know to the extra features of a company. First read the requirement to see which statement is wanted. It may be an income statement, a statement of changes in equity, a statement of financial position, or an extract of one.

The vocabulary is precise. A company has share capital instead of a single capital account. It may have reserves such as a general reserve, and retained earnings.

Its profit is called profit for the year. Find these company items in the trial balance first, because they behave differently from a sole trader's capital and drawings.

Work through the income statement in the usual order down to profit from operations. Then bring in the company items. Debenture interest is a finance cost.

Charge it as an expense in arriving at profit for the year, whether or not it has been paid, so accrue any interest still owing. Directors' remuneration and auditors' fees are ordinary expenses in the income statement. If the question gives a tax charge, deduct it after profit before tax to reach profit for the year.

Dividends are not an expense. They are a distribution of profit, not a charge against it, so they never appear in the income statement.

Dividends and reserve transfers belong in the statement of changes in equity or a retained earnings working. Start with retained earnings brought forward. Add profit for the year.

Deduct dividends paid during the year and any transfer to a general reserve. The result is retained earnings carried forward. For example, retained earnings brought forward are RM40,000, profit for the year is RM30,000, a dividend of RM12,000 was paid and RM5,000 was transferred to general reserve.

Retained earnings carried forward are 40,000 + 30,000 − 12,000 − 5,000 = RM53,000. Keeping this working separate from the income statement earns method marks. It shows you know that sharing out profit is different from calculating it.

In the statement of financial position, take care with the equity section. It is the part that most distinguishes a company. Show issued share capital first, then reserves such as share premium and general reserve, then retained earnings.

Together they give total equity. Long-term borrowings such as debentures are non-current liabilities. Tax owing and interest accrued but unpaid are current liabilities.

Label ordinary and preference shares separately, because they carry different rights. Check that total equity plus total liabilities equals total assets.

Trace each company item to its correct home. The profit for the year you calculated must feed the statement of changes in equity.

The retained earnings carried forward from that statement must appear in the equity section. Accrued debenture interest must appear as a finance cost in the income statement and as a current liability in the statement of financial position.

Marks are mostly lost on these points. Treating dividends as an expense is the largest. It understates profit and misstates equity.

Forgetting to accrue debenture interest is the second. If the question gives a debenture value and a rate, work out the charge. A RM100,000 debenture at 6% needs a RM6,000 finance cost even if nothing has been paid.

Others are confusing share premium with retained earnings, showing the tax charge but not the tax liability, and mixing up authorised and issued share capital. Only issued capital appears in the totals.

If company accounts feel like a new subject, we can help. One of our teachers can show you how they extend what you already know, using one past-paper question from start to finish. Book a trial class