Why is "Treating dividends as an expense in the SOPL" a common mistake in Financial Statements for Limited Companies?

Why it happens: Money leaves the company. How to avoid it: Dividends are a distribution of profit (an appropriation), deducted in the SOCE from retained earnings — not in the statement of profit or loss. Source: 9706 Examiner Reports

Why is "Charging only the debenture interest paid" a common mistake in Financial Statements for Limited Companies?

Why it happens: Using the cash figure. How to avoid it: Charge the FULL year's interest (matching); the unpaid part is an accrual (current liability). Source: 9706 Examiner Reports

Why is "Putting the whole share issue in share capital" a common mistake in Financial Statements for Limited Companies?

Why it happens: Ignoring the premium. How to avoid it: Share capital takes the NOMINAL value; the excess over nominal goes to SHARE PREMIUM. Source: 9706 Examiner Reports

Why is "Recognising a proposed dividend as a liability" a common mistake in Financial Statements for Limited Companies?

Why it happens: Treating it like a year-end accrual. How to avoid it: Only dividends PAID are recognised (in the SOCE); a dividend proposed after the year end is disclosed, not recognised. Source: 9706 Examiner Reports

Why is "Omitting the tax liability from the SOFP" a common mistake in Financial Statements for Limited Companies?

Why it happens: Only deducting tax in the SOPL. How to avoid it: Unpaid tax for the year is shown as a current liability (tax payable) in the statement of financial position. Source: 9706 Examiner Reports

Why is "Paying a cash dividend out of a capital reserve" a common mistake in Financial Statements for Limited Companies?

Why it happens: Treating all reserves as distributable. How to avoid it: Only REVENUE reserves (retained earnings, general reserve) can pay cash dividends; share premium and revaluation reserve cannot. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Financial Statements for Limited Companies

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Detailed Study Notes

Detailed notes on Preparation of Financial Statements for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Financial Statements for Limited Companies — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

Preparing a company's financial statements to International Accounting Standards. Learn the company statement of profit or loss (with distribution costs, administrative expenses, finance costs and tax), the statement of changes in equity, and the equity section of the statement of financial position.

At a glance

Company SOPL: Revenue → Gross profit → Profit from operations → less finance costs → Profit before tax → less tax → Profit for the year.
Expenses are grouped into distribution costs and administrative expenses.
Finance costs = interest on loans/debentures; tax is an estimate deducted to reach profit for the year.
Statement of changes in equity (SOCE): reconciles opening to closing share capital, share premium, revaluation reserve and retained earnings.
SOCE movements: share issues, revaluation, dividends paid, profit for the year.
SOFP equity section: share capital + reserves (share premium, revaluation reserve, retained earnings).
Prepared to IAS formats; dividends are an appropriation (in the SOCE), not an expense.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.5.4 — Prepare a statement of profit or loss, statement of financial position and statement of changes in equity for a limited company (trading or service business).
Understand the distinction between capital reserves (share premium, revaluation reserve) and revenue reserves (retained earnings, general reserve).
Link 1.1 — limited liability, and 3.1.5 (A Level) — the statement of cash flows.

The company statement of profit or loss

From revenue to profit for the year, via operations, finance costs and tax.

A company's statement of profit or loss has more layers than a sole trader's:

Statement of profit or loss	$
Revenue	X
Less Cost of sales	(X)
Gross profit	X
Add Other income	X
Less Distribution costs	(X)
Less Administrative expenses	(X)
Profit from operations	X
Less Finance costs (loan/debenture interest)	(X)
Profit before tax	X
Less Tax	(X)
Profit for the year	X

Distribution costs = costs of selling and delivering (e.g. carriage outwards, sales staff wages, delivery vehicle depreciation).
Administrative expenses = running the business (e.g. office wages, rent, admin depreciation).
Finance costs = interest on debentures and loans (note: debenture interest is always charged in full for the year, even if unpaid).
Tax is an estimate for the year, deducted to reach profit for the year.

Revenue → gross profit → profit from operations → profit before tax → profit for the year.
Expenses split into distribution costs and administrative expenses.
Finance costs = loan/debenture interest (charged in full for the year).
Tax is deducted to reach profit for the year.

See the full worked example for financial statements for limited companies →

The statement of changes in equity

Reconcile opening to closing share capital and each reserve.

The statement of changes in equity (SOCE) shows how each component of equity changed during the year:

SOCE	Share capital $	Share premium $	Revaluation reserve $	Retained earnings $	Total $
Balances at start	X	X	X	X	X
Share issue	X	X			X
Revaluation of property			X		X
Profit for the year				X	X
Dividends paid				(X)	(X)
Balances at end	X	X	X	X	X

A share issue adds to share capital (nominal value) and share premium (excess over nominal).
A revaluation of property goes to the revaluation reserve.
The profit for the year is added to retained earnings.
Dividends paid are deducted from retained earnings (they are an appropriation, not an expense).

SOCE reconciles opening to closing equity, column by column.
Share issue → share capital + share premium.
Profit for the year → retained earnings; dividends paid → deducted.
Revaluation → revaluation reserve.

See the full worked example for financial statements for limited companies →

The equity section of the SOFP

Share capital plus reserves make up shareholders' equity.

The statement of financial position of a company shows equity in place of a sole trader's capital:

Equity	$
Share capital (ordinary shares)	X
Share premium	X
Revaluation reserve	X
Retained earnings	X
Total equity	X

Below equity sit non-current liabilities (e.g. debentures, long-term loans) and current liabilities (payables, tax payable, accruals).

Reserves:

Capital reserves — not normally available for cash dividends: share premium and revaluation reserve.
Revenue reserves — available for dividends: retained earnings and any general reserve.

Total equity equals the company's net assets (assets − all liabilities).

Equity = share capital + share premium + revaluation reserve + retained earnings.
Capital reserves (share premium, revaluation) ≠ available for dividends.
Revenue reserves (retained earnings, general) = available for dividends.
Total equity = net assets.

See the full worked example for financial statements for limited companies →

Company-specific adjustments to watch

Debenture interest, dividends, tax and the share premium on issue.

A few company-specific points recur in questions:

Debenture/loan interest is a finance cost and is charged in full for the year, even if only part has been paid — the unpaid part is an accrual (current liability).
Dividends are not an expense — dividends paid are deducted in the SOCE (from retained earnings); a proposed dividend after the year end is not recognised (only disclosed).
Tax for the year is an estimate, charged in the SOPL and shown as tax payable (current liability) until paid.
A share issue at a premium splits into share capital (nominal) and share premium (the excess).
Depreciation is allocated between distribution costs and administrative expenses.

Debenture interest = finance cost, charged in full; unpaid part is an accrual.
Dividends paid → SOCE (not an expense); proposed dividends are not recognised.
Tax = an estimate, shown as a current liability until paid.
Share issue at a premium splits into share capital and share premium.

See the full worked example for financial statements for limited companies →

Quick recap

Company SOPL: revenue → gross profit → profit from operations → finance costs → profit before tax → tax → profit for the year.
Expenses grouped into distribution costs and administrative expenses.
SOCE reconciles share capital, share premium, revaluation reserve and retained earnings.
Profit for the year increases retained earnings; dividends paid reduce them.
SOFP equity = share capital + reserves = net assets.
Debenture interest charged in full (unpaid part accrued); dividends are not an expense.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Profit from operations − finance costs = profit before tax; − tax = profit for the year.
SOCE: opening + share issue + profit for the year − dividends paid = closing equity.
Capital reserves (share premium, revaluation) not for dividends; revenue reserves (retained earnings) are.
Debenture interest = finance cost in full; dividends paid = SOCE (not an expense).

How it’s examined

A core Paper 2/Paper 3 task: Prepare the statement of profit or loss and Complete the statement of changes in equity (the 9706/22 Feb-Mar 2024 Q1 was [14] + [7]), plus the equity section of the SOFP. Examiner reports note candidates treating dividends as an expense, not accruing unpaid debenture interest, and splitting the share issue incorrectly.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706/22 Paper 2 question paper & mark scheme, Feb/Mar 2024 (Q1); 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Financial Statements for Limited Companies

Step-by-step solutions to past-paper-style questions on financial statements for limited companies, written exactly the way a tutor would explain them at the board.

Question type:

1Profit from operations (4 marks)
Getting startedMulti-step problem• 9706 Paper 2 style• SOPL, AO2
Question
Gross profit $180,000; other income$ 5,000; distribution costs $48,000; administrative expenses$ 60,000. Calculate the profit from operations. (4 marks)
Step-by-step solution
1. Step 1
  Add other income: 180,000 + 5,000 = 185,000.
2. Step 2
  Less distribution costs 48,000 and administrative expenses 60,000.
3. Step 3
  Profit from operations = 185,000 − 108,000 = $77,000.
Answer
Profit from operations = $77,000.
Examiner tip
Deduct distribution costs and administrative expenses from gross profit + other income.
2Down to profit for the year (5 marks)
Building confidenceMulti-step problem• SOPL, AO2
Question
Profit from operations $77,000; debenture interest$ 6,000; tax estimated $14,000. Calculate the profit before tax and the profit for the year. (5 marks)
Step-by-step solution
1. Step 1
  Profit before tax = profit from operations − finance costs = 77,000 − 6,000 = $71,000.
2. Step 2
  Less tax 14,000.
3. Step 3
  Profit for the year = 71,000 − 14,000 = $57,000.
Answer
Profit before tax $71,000; profit for the year$ 57,000.
Examiner tip
Finance costs come before tax; tax is then deducted to reach profit for the year.
3Debenture interest charged in full (5 marks)
Building confidenceMulti-step problem• finance costs, AO2
Question
A company has 8% debentures of $200,000, issued at the start of the year. Only the first half-year's interest has been paid. Calculate the finance cost for the year and any accrual. (5 marks)
Step-by-step solution
1. Step 1
  Annual debenture interest = 8% × 200,000 = 16,000.
2. Step 2
  Charge the full $16,000 as a finance cost (matching), even though not all paid.
3. Step 3
  Paid = half-year = 8,000; so accrued (unpaid) = 16,000 − 8,000 = $8,000.
4. Step 4
  The $8,000 accrual is a current liability.
Answer
Finance cost $16,000 (full year); accrual$ 8,000 (current liability).
Examiner tip
Charge the full year's interest; the unpaid part is accrued.
4Split a share issue (4 marks)
Building confidenceMulti-step problem• share issue, AO2
Question
A company issues 100,000 ordinary shares of $0.50 each at$ 0.80 per share. Calculate the amount credited to share capital and to share premium. (4 marks)
Step-by-step solution
1. Step 1
  Share capital (nominal) = 100,000 × 0.50 = $50,000.
2. Step 2
  Premium per share = 0.80 − 0.50 = 0.30.
3. Step 3
  Share premium = 100,000 × 0.30 = $30,000.
4. Step 4
  Total cash received = 100,000 × 0.80 = 80,000.
Answer
Share capital $50,000; share premium$ 30,000 (total $80,000).
Examiner tip
Share capital uses the nominal value; the excess goes to share premium.
5Complete a statement of changes in equity (6 marks)
StretchMulti-step problem• SOCE, AO2
Question
Opening: share capital $400,000; share premium$ 60,000; retained earnings $90,000. During the year: profit for the year$ 57,000; dividends paid $25,000; a share issue raised$ 50,000 share capital and $20,000 share premium. Calculate the closing balances of share capital, share premium and retained earnings. (6 marks)
Step-by-step solution
1. Step 1
  Share capital = 400,000 + 50,000 = $450,000.
2. Step 2
  Share premium = 60,000 + 20,000 = $80,000.
3. Step 3
  Retained earnings = 90,000 + 57,000 (profit) − 25,000 (dividends) = $122,000.
Answer
Share capital $450,000; share premium$ 80,000; retained earnings $122,000.
Examiner tip
Profit increases retained earnings; dividends paid reduce them; the share issue adds to capital and premium.
6Equity section of the SOFP (5 marks)
StretchMulti-step problem• SOFP, AO2
Question
At the year end: share capital $450,000; share premium$ 80,000; revaluation reserve $40,000; retained earnings$ 122,000. Show the equity section and state the total equity. (5 marks)
Step-by-step solution
1. Step 1
  List: share capital 450,000; share premium 80,000; revaluation reserve 40,000; retained earnings 122,000.
2. Step 2
  Total equity = 450,000 + 80,000 + 40,000 + 122,000 = $692,000.
3. Step 3
  Total equity equals the company's net assets.
Answer
Total equity = $692,000 (= net assets).
Examiner tip
Equity = share capital + all reserves; it equals net assets.
7Dividends are not an expense (4 marks)
StretchWord problem• dividends, AO2
Question
Explain why dividends paid are not shown as an expense in the statement of profit or loss, and where they appear instead. (4 marks)
Step-by-step solution
1. Step 1
  Dividends are a distribution of profit to the owners (shareholders), not a cost of running the business.
2. Step 2
  So they are not an expense in the statement of profit or loss.
3. Step 3
  Dividends paid are deducted in the statement of changes in equity (from retained earnings).
4. Step 4
  This reflects that they are an appropriation of profit, like drawings for a sole trader.
Answer
Dividends are a distribution of profit (not a business cost), so they appear in the SOCE (deducted from retained earnings), not the SOPL.
Examiner tip
Dividends are an appropriation, shown in the SOCE.
8Tax and the current liability (4 marks)
StretchMulti-step problem• tax, AO2
Question
Profit before tax is $80,000; tax for the year is estimated at$ 18,000, none of which has been paid by the year end. State (a) the profit for the year and (b) how the tax appears in the statement of financial position. (4 marks)
Step-by-step solution
1. Step 1
  (a) Profit for the year = 80,000 − 18,000 = $62,000.
2. Step 2
  (b) The unpaid $18,000 tax is a current liability (tax payable) in the statement of financial position.
Answer
(a) Profit for the year $62,000; (b)$ 18,000 tax payable (current liability).
Examiner tip
Tax is deducted in the SOPL and shown as a current liability until paid.
9Capital vs revenue reserves (4 marks)
StretchIdentify & classify• reserves, AO2
Question
Classify each as a capital reserve or a revenue reserve, and state whether it can be used to pay a cash dividend: (i) share premium; (ii) retained earnings; (iii) revaluation reserve; (iv) general reserve. (4 marks)
Step-by-step solution
1. Step 1
  (i) Share premium → capital reserve → not for cash dividends.
2. Step 2
  (ii) Retained earnings → revenue reserve → available for dividends.
3. Step 3
  (iii) Revaluation reserve → capital reserve → not for cash dividends.
4. Step 4
  (iv) General reserve → revenue reserve → available for dividends.
Answer
(i) Capital (no); (ii) Revenue (yes); (iii) Capital (no); (iv) Revenue (yes).
Examiner tip
Capital reserves (share premium, revaluation) are not distributable as cash dividends.
10Full statement of profit or loss (8 marks)
StretchMulti-step problem• SOPL, AO2
Question
Revenue $600,000; cost of sales$ 360,000; other income $4,000; distribution costs$ 80,000; administrative expenses $96,000; 10% debentures$ 100,000 (interest unpaid); tax estimated $13,000. Prepare the statement of profit or loss down to profit for the year. (8 marks)
Step-by-step solution
1. Step 1
  Gross profit = 600,000 − 360,000 = 240,000.
2. Step 2
  Add other income 4,000 → 244,000.
3. Step 3
  Less distribution 80,000 + administrative 96,000 → profit from operations 68,000.
4. Step 4
  Finance costs = 10% × 100,000 = 10,000 (charged in full).
5. Step 5
  Profit before tax = 68,000 − 10,000 = 58,000.
6. Step 6
  Less tax 13,000 → profit for the year = $45,000.
Answer
Profit for the year = $45,000.
Examiner tip
Charge the full debenture interest; deduct tax last to reach profit for the year.

Model Answers — Financial Statements for Limited Companies

High-scoring sample answers for financial statements for limited companies on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style4 marks
Q (4 marks). Gross profit $220,000; distribution costs$ 55,000; administrative expenses $70,000; other income$ 6,000. Calculate the profit from operations.
Model answer
Profit from operations = gross profit + other income − distribution costs − administrative expenses = 220,000 + 6,000 − 55,000 − 70,000 = $101,000.
Why this scores
Marking (point-based, 4). Add other income (1); deduct distribution (1) and admin (1); $101,000 (1).
Question 2
9706 Paper 2 style4 marks
Q (4 marks). Profit from operations $101,000; finance costs$ 9,000; tax estimated $20,000. Calculate the profit before tax and the profit for the year.
Model answer
Profit before tax = 101,000 − 9,000 = $92,000. Profit for the year = 92,000 − 20,000 = $72,000.
Why this scores
Marking (point-based, 4). Deduct finance costs → $92,000 (2); deduct tax →$ 72,000 (2).
Question 3
9706 Paper 2 style4 marks
Q (4 marks). A company issues 200,000 ordinary shares of $0.25 each at$ 0.60 per share, fully subscribed. Calculate the amounts credited to share capital and to share premium.
Model answer
Share capital = 200,000 × 0.25 = $50,000 (nominal value). Premium per share = 0.60 − 0.25 = 0.35; share premium = 200,000 × 0.35 = $70,000. (Total cash received = 200,000 × 0.60 = $120,000.)
Why this scores
Marking (point-based, 4). Share capital $50,000 (2); share premium$ 70,000 (2).
Question 4
9706 Paper 2 style (mirrors 9706/22 Feb-Mar 2024 Q1(b))6 marks
Q (6 marks). Complete the statement of changes in equity. Opening: share capital $500,000; share premium$ 90,000; retained earnings $120,000. During the year: profit for the year$ 72,000; dividends paid $30,000; a bonus issue was NOT made; a fresh share issue raised$ 40,000 share capital and $24,000 share premium. Calculate the three closing balances.
Model answer
Share capital: 500,000 + 40,000 = $540,000. Share premium: 90,000 + 24,000 = $114,000. Retained earnings: 120,000 + 72,000 (profit) − 30,000 (dividends) = $162,000.
Why this scores
Marking (point-based, 6). Share capital $540,000 (2); share premium$ 114,000 (2); retained earnings $162,000 (2).
Question 5
9706 Paper 2/3 style5 marks
Q (5 marks). A company has 6% debentures of $300,000, in issue all year. By the year end, only$ 9,000 of the interest had been paid. (a) Calculate the finance cost charged in the statement of profit or loss. (b) Calculate and classify any amount in the statement of financial position.
Model answer
(a) Annual interest = 6% × 300,000 = $18,000, charged in full as a finance cost (matching).

(b) Paid = $9,000, so accrued (unpaid) = 18,000 − 9,000 = $9,000, shown as a current liability (interest accrued) in the statement of financial position.
Why this scores
Marking (point-based, 5). Full interest $18,000 (2); accrual$ 9,000 (2); current liability (1).
Question 6
9706 Paper 3 style6 marks
Q (6 marks). Show the equity section of the statement of financial position and state total equity: share capital $540,000; share premium$ 114,000; revaluation reserve $60,000; general reserve$ 30,000; retained earnings $162,000.
Model answer
Equity

$
Share capital 540 000
Share premium 114 000
Revaluation reserve 60 000
General reserve 30 000
Retained earnings 162 000
Total equity 906 000

Total equity = $906,000, which equals the company's net assets.
Why this scores
Marking (point-based, 6). Correct listing of share capital + all reserves (4); total equity $906,000 (1); equals net assets (1).
Question 7
9706 Paper 3 style5 marks
Q (5 marks). Explain why dividends are not treated as an expense in the company's statement of profit or loss, and how a dividend that is only proposed (not yet paid or declared) at the year end should be treated.
Model answer
Dividends are a distribution of profit to the shareholders (the owners), not a cost of running the business. Like an owner's drawings, they are an appropriation of profit, so they are not charged as an expense in the statement of profit or loss. Instead, dividends paid are deducted from retained earnings in the statement of changes in equity.

A dividend that is only proposed at the year end (not yet paid or formally declared) does not meet the conditions to be recognised as a liability, because there is no present obligation at the reporting date. It is therefore not recognised in the financial statements — it is only disclosed (e.g. in a note) and recognised when actually paid/declared in the following period.
Why this scores
Marking (point-based, 5). Dividends = distribution/appropriation, not an expense → SOCE (~3); proposed dividend not recognised, only disclosed (~2).
Question 8
9706 Paper 2/3 style4 marks
Q (4 marks). Distinguish between a capital reserve and a revenue reserve, giving one example of each and stating which can be used to pay a cash dividend.
Model answer
A capital reserve arises from non-trading events and is not available to pay cash dividends — for example the share premium (or revaluation reserve), which arises from issuing shares above nominal value (or revaluing assets).

A revenue reserve arises from trading profits retained in the business and is available to pay cash dividends — for example retained earnings (or a general reserve).

So a cash dividend can be paid out of revenue reserves (retained earnings) but not out of capital reserves (share premium/revaluation reserve).
Why this scores
Marking (point-based, 4). Capital reserve + example, not distributable (~2); revenue reserve + example, distributable (~2).
Question 9
9706 Paper 2/3 style8 marks
Q (8 marks). Prepare the statement of profit or loss down to profit for the year: revenue $720,000; cost of sales$ 432,000; other income $5,000; distribution costs$ 90,000; administrative expenses $118,000; 5% debentures$ 200,000 (in issue all year, interest unpaid); tax estimated $11,000.
Model answer
Gross profit = 720,000 − 432,000 = $288,000. Add other income 5,000 → 293,000. Less distribution costs 90,000 and administrative expenses 118,000 → profit from operations $85,000. Finance costs = 5% × 200,000 = 10,000 → profit before tax $75,000. Less tax 11,000 → profit for the year $64,000.
Why this scores
Marking (point-based, 8). Gross profit $288,000 (2); profit from operations$ 85,000 (2); finance costs $10,000 (1); profit before tax$ 75,000 (1); tax (1); profit for the year $64,000 (1).
Question 10
9706 Paper 2 style3 marks
Q (3 marks). State, in order, the three sub-totals between gross profit and profit for the year in a company's statement of profit or loss.
Model answer
Profit from operations (after distribution costs and administrative expenses).

Profit before tax (after finance costs).

Profit for the year (after tax).
Why this scores
Marking (point-based, 3). 1 mark each in the correct order.

	$
Share capital	540 000
Share premium	114 000
Revaluation reserve	60 000
General reserve	30 000
Retained earnings	162 000
Total equity	906 000

Key Definitions and Keywords — Financial Statements for Limited Companies

Definitions to memorise and the exact keywords mark schemes credit for financial statements for limited companies answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Profit from operations
Examiner keyword
Gross profit plus other income less distribution costs and administrative expenses; before finance costs and tax.
Distribution costs
Examiner keyword
Costs of selling and delivering goods (e.g. carriage outwards, sales staff wages, delivery vehicle depreciation).
Administrative expenses
Examiner keyword
Costs of running the business generally (e.g. office wages, rent, administrative depreciation).
Finance costs
Examiner keyword
Interest on debentures and loans; charged in full for the year (the unpaid part is accrued).
Statement of changes in equity
Examiner keyword
A statement reconciling the opening and closing balances of share capital and each reserve, showing share issues, profit, dividends and revaluations.
Share premium
Examiner keyword
The excess of the issue price of shares over their nominal value; a capital reserve, not distributable as a cash dividend.
Retained earnings
Examiner keyword
Accumulated profits not distributed as dividends; a revenue reserve available for dividends.
Revaluation reserve
A capital reserve created when a non-current asset is revalued upwards; not distributable as a cash dividend.
Dividends
Examiner keyword
Distributions of profit to shareholders; dividends paid are deducted in the statement of changes in equity, not the statement of profit or loss.

Common Mistakes and Misconceptions — Financial Statements for Limited Companies

The traps other students keep falling into on financial statements for limited companies questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Treating dividends as an expense in the SOPL
9706 Examiner Reports
Why it happens
Money leaves the company.
How to avoid it
Dividends are a distribution of profit (an appropriation), deducted in the SOCE from retained earnings — not in the statement of profit or loss.
✕Charging only the debenture interest paid
9706 Examiner Reports
Why it happens
Using the cash figure.
How to avoid it
Charge the FULL year's interest (matching); the unpaid part is an accrual (current liability).
✕Putting the whole share issue in share capital
9706 Examiner Reports
Why it happens
Ignoring the premium.
How to avoid it
Share capital takes the NOMINAL value; the excess over nominal goes to SHARE PREMIUM.
✕Recognising a proposed dividend as a liability
9706 Examiner Reports
Why it happens
Treating it like a year-end accrual.
How to avoid it
Only dividends PAID are recognised (in the SOCE); a dividend proposed after the year end is disclosed, not recognised.
✕Omitting the tax liability from the SOFP
9706 Examiner Reports
Why it happens
Only deducting tax in the SOPL.
How to avoid it
Unpaid tax for the year is shown as a current liability (tax payable) in the statement of financial position.
✕Paying a cash dividend out of a capital reserve
9706 Examiner Reports
Why it happens
Treating all reserves as distributable.
How to avoid it
Only REVENUE reserves (retained earnings, general reserve) can pay cash dividends; share premium and revaluation reserve cannot.

Financial Statements for Limited Companies

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Profit from operations (4 marks)

2Down to profit for the year (5 marks)

3Debenture interest charged in full (5 marks)

4Split a share issue (4 marks)

5Complete a statement of changes in equity (6 marks)

6Equity section of the SOFP (5 marks)

7Dividends are not an expense (4 marks)

8Tax and the current liability (4 marks)

9Capital vs revenue reserves (4 marks)

10Full statement of profit or loss (8 marks)

Profit from operations

Distribution costs

Administrative expenses

Finance costs

Statement of changes in equity

Share premium

Retained earnings

Revaluation reserve

Dividends

✕Treating dividends as an expense in the SOPL

✕Charging only the debenture interest paid

✕Putting the whole share issue in share capital

✕Recognising a proposed dividend as a liability

✕Omitting the tax liability from the SOFP

✕Paying a cash dividend out of a capital reserve