STRAND 4: ACCOUNTING REPORTS

4.1 Final Accounts

Achievement Indicators
 Identify the different types of balance day adjustments.
 Prepare journal entries for various balance day adjustments.
 Show the effects of balance day adjustments in the ledger and final accounts.
 Prepare Worksheets incorporating balance day adjustments.
 Outline the major financial statements of a sole trader.
 State the purpose, components and limitations of statement of financial performance. ·
 Prepare and present a fully classified statement of financial performance using the new
format.
 Distinguish between the final accounts of a trading and service business.
 State the purpose, components, and limitations of statement of financial position.
 Prepare and present a fully classified statement of financial position (new format: A – L = P).
 Close off temporary ledger accounts at the end of the accounting period.
 Incorporate reversal entries in final accounts.
 Outline methods of presenting accounting reports

Balance Day Adjustments

 Are adjustments that need to be made on some accounts at the end of the financial year, so
that they accurately reflect the performance of the business.
 Are only required when a company is using the accrual accounting system, as income or
expenses may be recognized and paid or received at different times.
 Accounting concepts: Accrual Basis, Matching and Accounting Period Concept

Balance day Definition Also known as Accounts Element Classification in

adjustment affected Final Accounts
Prepayments Expenses which are - Unexpired Dr. Prepaid Current Asset Statement of
paid during the year Cost Expenses Financial
but relates to the - Expenses paid Position
next accounting in advance Cr. Expenses Expenses Statement of
period - Prepaid Financial
expenses Performance
Accrued Expenses which - Expenses due Dr. Related Expenses Statement of
Expenses has been incurred - Unpaid Expense Financial
but not yet paid expenses Account Performance
- Expenses Cr. Expenses Current Liability Statement of
accrued due Financial
- Expenses owed Position

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Balance day Definition Also known as Accounts Element Classification in
adjustment affected Final Accounts
Income It is the income that - Income in Dr. Income due Current Asset Statement of
Accrued is earned during the arrears Financial
accounting period - Income due Position
but not received on - Income Cr. Related Revenue Statement of
balance day receivable Income Account Financial
Performance
Revenue It represents the - Income in Dr. Related Revenue Statement of
received in income that is not advance Income Account Financial
advance earned but received - Unearned Performance
in advance on revenue Cr. Income Current Liability Statement of
balance day - Pre-received received in Financial
revenue advance Position
Bad Debts Is the loss arising Account written Dr. Bad Debts Expense Statement of
from the debtor’s off (Financial exp) Financial
inability to pay his Performance
or her debt. Cr. Accounts Current Asset Statement of
Receivable Financial
Position
Doubtful Debts Are those debts To create or Dr. Doubtful Expenses Statement of
which a business is increase Debts (Financial exp) Financial
unlikely to collect Provision for Performance
from accounts Doubtful debts Cr. Provision for Current Assets Statement of
receivable. Doubtful Debts Financial
Position
To decrease Dr. Provision for Current Asset Statement of
Provision for Doubtful Debts Financial
Doubtful debts Position
Cr. Doubtful Other Revenue Statement of
Debts Financial
Performance
Formulae for calculating the Provision for Doubtful Debts:
Provision for Doubtful Debts = (Accounts Receivable – Additional Bad Debts) x Rate/100

Depreciation Refers to the Dr. Depreciation Expenses Statement of

writing off of the (on name of the Financial
cost of an Fixed Asset) Performance
Asset over its Cr. Provision for Fixed Asset Statement of
estimated useful Depreciation (on Financial
life name of the Position
Asset

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WORKSHEET

The worksheet is a nature of a blueprint divided into various columns, which assists the accountant
to collect and organise the information relating to formulate financial statements.

PROCEDURE FOR PREPARING THE WORKSHEET

1. Trial Balance Column

Ledger account balances to be entered in the correct columns of the Trial Balance. Debit must
equal to credit side.

2. Adjustments Column
All given balance day adjustments to be entered on the Debit or Credit side of the adjustment
column. New entries to be done below the Trial balance totals.

3. Adjusted Trial Balance Column

Figures derived from the adjustment columns are added or subtracted from the trial balance to
gage the amount that will be entered in the Statement of Financial Performance and Statement of
Financial Position.

4. Statement of Financial Performance

Transfer all income and expense items from the adjusted trial balance to these columns to find
out the net profit or loss. The difference between the two columns represents Net Profit or Net
Loss.

5. Statement of Financial Position

From the adjusted trial balance transfer the Assets, Liabilities and capital to the Statement of
Financial Position.

PREPARATION OF FINAL REPORTS

 Trading businesses operate with a view to make profit by selling goods to their customers.
Example: supermarkets, clothes shop, car dealers etc.
 The major difference between the Trading entity and service entity is that the revenue statement
in a Trading business will show cost of goods sold to calculate gross profit. It will have opening
and closing inventory.

There are four major financial statements prepared by a Sole Trader business, which are:
 Statement of Financial Performance
 Cash Flow Statements
 Statement of Financial Position
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 Statement of Changes in Equity

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