A company's financial statements Cambridge IGCSE Accounting (9–1) revision
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In plain words
A company's statement of profit or loss looks much like a sole trader's. The differences come afterwards: the profit belongs to the shareholders, and a third statement shows what was done with it.
6 things to know
- In a company's statement of profit or loss, debenture interest and loan interest are expenses. Dividends are not: they are a share of the profit.
- The statement of changes in equity shows how each part of equity changed over the year: share capital, general reserve and retained earnings.
- Retained earnings: opening balance + profit for the year − dividends paid − transfers to general reserve = closing balance.
- A transfer to general reserve moves an amount from retained earnings to the general reserve. Total equity does not change.
- A new issue of shares increases share capital, and so increases total equity.
- In the statement of financial position, the equity section lists ordinary share capital, preference share capital, the general reserve and retained earnings. Debentures are shown as a non-current liability.
Worked example
A company has share capital of $100 000, a general reserve of $10 000 and retained earnings of $18 000. In the year it makes a profit of $25 000, pays dividends of $9000 and transfers $4000 to general reserve. Find the closing balances and the total equity.
- Retained earnings = 18 000 + 25 000 − 9000 − 4000 = $30 000.
- General reserve = 10 000 + 4000 = $14 000.
- Share capital is unchanged at $100 000.
- Total equity = 100 000 + 14 000 + 30 000 = $144 000.
Tips and tricks
- A transfer to general reserve comes out of one column and goes into another. It cannot change the total.
- Only dividends actually paid in the year are deducted. A dividend that has only been proposed is not.
It lands in your notebook with its questions as flashcards.
A company's financial statements: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
In which statement are dividends paid shown?
They are deducted from retained earnings.
What is the effect of a transfer to general reserve on total equity?
The amount moves from retained earnings to the general reserve.
Where is debenture interest shown?
It is a cost of borrowing.
Opening retained earnings $12 000, profit for the year $20 000, dividends paid $8000. What are the closing retained earnings?
12 000 + 20 000 − 8000.
Which of these is part of a company's equity?
Equity is share capital plus reserves.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
2 questions, 5 marks. Write your answers on paper, then check them.
A company's financial statements
Cambridge IGCSE Accounting (9–1) 0985 · 5 marks · papermunch.org
Name ______________________________ Date ______________
Retained earnings were $40 000 at the start of the year. The profit for the year is $31 000, dividends paid are $15 000 and $6000 is transferred to general reserve. Calculate the closing retained earnings.[3]
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$50 000. 40 000 + 31 000 − 15 000 − 6000.
State where debentures and debenture interest are each shown in a company's financial statements.[2]
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Debentures are a non-current liability in the statement of financial position. Debenture interest is an expense in the statement of profit or loss.
Answers: A company's financial statements
- 1. $50 000. 40 000 + 31 000 − 15 000 − 6000.
- 2. Debentures are a non-current liability in the statement of financial position. Debenture interest is an expense in the statement of profit or loss.