Financial Statement Preparation Lecture Notes PDF

INTRODUCTION TO FINANCIAL ACCOUNTING (ACC2001) LECTURE NOTES REVIEW OF FINANCIAL STATEMENT PREPARATION COMMON FINANCIAL STATEMENT ADJUSTMENTS The adjustments most commonly applied in financial statement preparation are summarised below....

INTRODUCTION TO FINANCIAL ACCOUNTING (ACC2001) LECTURE NOTES REVIEW OF FINANCIAL STATEMENT PREPARATION COMMON FINANCIAL STATEMENT ADJUSTMENTS The adjustments most commonly applied in financial statement preparation are summarised below. Treatment in Statement of Treatment in Statement of Profit or Loss Financial Position Adjustments for owings/accruals Expenses owing The amount owing must be The unpaid portion is treated as added to the amount already a current liability paid Revenue owing The outstanding portion must be The outstanding portion must be added to the amount already listed as a current asset received Additional note: ▪ Always add accruals (note the alliteration AAA) ▪ Always subtract prepayments Adjustments for prepayments Expenses prepaid The prepaid portion must be The prepaid portion must be deducted from the total amount included as a current asset paid Revenue prepaid The prepaid portion must be The amount received in advance deducted from the total received must be listed as a current liability Adjustments for bad debt and provision for bad debts Bad debt Bad debt amount should be Bad debt amount is deducted recorded as an expense from the debtor’s account (this is usually already done in the question) Provision for bad debt Compute the new PFBD based The full amount of the new on the information given in the PFBD is subtracted from the notes, and compare it to the debtors/accounts receivable PFBD given in the trial balance balance 1  If there is an increase in the PFBD, record the difference in other expenses If there is a decrease in the PFBD, record the difference in other revenue Adjustments for depreciation To account for depreciation Record as an expense (for each Add to the existing provision for asset) depreciation account balance (for each asset) The total is then deducted from the corresponding asset cost Additional notes: ▪ Straight line depreciation expense = cost of non-current asset x depreciation rate ▪ Reducing balance depreciation expense = (cost of non-current asset – provision for depreciation) x depreciation rate 2 TEMPLATES FOR SOLE TRADER FINANCIAL STATEMENTS XYZ Enterprise Statement of profit or loss for the year ended … $ $ $ Net sales Sales XXX less Sales returns/return inwards (XXX) less Discounts allowed (XXX) XXX less: Cost of goods sold Opening stock XXX add Purchases XXX add Carriage inwards XXX less Purchases returns/return outwards (XXX) less Discounts received (XXX) less Closing stock (XXX) (XXX) Gross profit XXX add: Other revenue Rent received XXX add Owing/less Prepayment XXX XXX Commission received XXX Decrease in provision for bad debts, etc. XXX XXX less: Other expenses Insurance XXX add Owing/less Prepayment XXX XXX Rent XXX Carriage outwards XXX Depreciation XXX Increase in provision for bad debts XXX Bad debt, etc. XXX (XXX) Net profit/(loss) XXX 3  XYZ Enterprise Statement of financial position as at … $ $ $ Non-current assets Cost Accumulated Net book depreciation value Land and building XXX (XXX) XXX Motor vehicle XXX (XXX) XXX Plant XXX (XXX) XXX XXX Current assets Closing stock XXX Debtors/accounts receivable XXX less Provision for bad debts (XXX) XXX Revenue owing XXX Expense prepaid XXX Bank (if on the debit side) XXX Cash XXX XXX XXX Current liabilities Creditors/accounts payable XXX Bank overdraft (if on the credit side) XXX Expense owing XXX Revenue prepaid XXX XXX Non-current liabilities Mortgage/Loan/Debenture XXX Equity Capital XXX add Net profit (from stmt of profit or loss) XXX less Drawings (XXX) XXX XXX 4