AFIN102: FINANCIAL ACCOUNTING

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AFIN102: FINANCIAL ACCOUNTING
 BALANCE SHEET FOR SOLE TRADER
BALANCE SHEET

Learning outcome:

• Preparation of the Balance Sheet for Sole trader.

• A Balance Sheet is statement showing the balances for assets,
capital and liabilities.

• It is also known as a Statement of Financial Position (SOFP)

• Hence, all ledger accounts for assets, capital and liabilities

which have brought down balances (b/d) are included in the
balance sheet.

•
 BALANCE SHEET
BALANCE SHEET

• The Balance sheet is not part of the double entry process but a
report that shows the financial position of the business at the end
of the accounting period.
• The main assets that are included in the balance sheet for a sole
trader are:

• (a) Non-Current Assets (or Fixed Assets) - These include Land

and Buildings, Motor Vehicles, Plant and Equipment and
Furniture and Fittings (or Fixture and Fittings).

• (b) Current Assets – These include stock (closing stock),

Debtors, cash and bank balances.
 BALANCE SHEET

• The main liabilities that are included in the balance sheet for a sole
trader are:

• (a) Current Liabilities – These are payable in less than a year

and include creditors, bank overdrafts etc.

• (b) Non-current liabilities (or long term liabilities) These are

payable after more than once year and include bank loans.
• The capital entries in the balance sheet include:

• Opening capital – at the beginning of the accounting period.

• New capital – any new capital that the owner of the business
introduces during the accounting period.

• Profit for the year – which is added to the capital at the end of the
accounting period.
 BALANCE SHEET
• Drawings – all drawings made by the owner of the business during the
accounting period are deducted from the capital at the end of the
accounting period.
BALANCE SHEET
 BALANCE SHEET

• The capital entries in the balance sheet include:

• Opening capital – at the beginning of the accounting period.

• New capital – any new capital that the owner of the business
introduces during the accounting period.

• Profit for the year – which is added to the capital at the end of the
accounting period.
• Drawings – all drawings made by the owner of the business during the
accounting period are deducted from the capital at the end of the
accounting period.
BALANCE SHEET

• Detailed Balance Sheet template for a sole trader

• Class Exercise 9.1

 SOLE RTRADR ACCOUNTS

• FURTHER CONSIDERATIONS

• Carriage inwards
• Carriage outwards
• Finance costs
 FURTHER CONSIDERATIONS
• Carriage inwards refers to transportation costs for purchases
bought by the business.

• Whenever, carriage inwards are charged separately by the

supplier, they should always be added to the cost of purchases
when calculating the cost of sales.

Carriage outwards refers to transportation costs for delivery of

goods bought by customers.
The Accounting treatment for carriage outwards is that they are
treated as expenses in the Profit and Loss Account.
ADJUSTMENTS TO FINANCIAL STATEMENTS
ADJUSTMENTS TO FINANCIAL STATEMENTS
ADJUSTMENTS TO FINANCIAL STATEMENTS
 FURTHER CONSIDERATIONS

• Class Exercise 9.2

 AFIN102: FINANCIAL ACCOUNTING

ADJUSTMENTS TO FINANCIAL STATEMENTS

ADJUSTMENTS TO FINANCIAL STATEMENTS
Learning outcomes:
• Bad Debts and Provision for doubtful debts
• Depreciation
• Disposal of assets
• Accruals and prepayments
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• In order for the financial statements to be complete, it may be

necessary to make other accounting transactions at the end of the
financial year.

• These other transactions that affect the financial statements

include:

• Bad Debts and Provision for doubtful debts

• Depreciation
• Accruals and prepayments
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Bad Debts

• Once a debt has been declared ‘bad’, the accounting treatment is

that:

• You debit the bad debt account with the amount of the bad debt
and credit the debtor’s account to complete the double entry.

• At the end of the period, the total of the bad debts account is
charged to the profit and loss account as an expense.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Provision for Doubtful debts

• In some instances, it may not be obvious that the debtor will

definitely not pay, but there could be a possibility of failure to pay.

• The accounting rule for providing for the possible accounting

events occurring is known as a Provision.

• In this instance, this is known as Provision for Doubtful debts.

 ADJUSTMENTS TO FINANCIAL STATEMENTS

• The accounting entries needed for the provision for doubtful debts
are:

1. Debit the profit and loss account with the amount of the provision
(i.e. deduct it from gross profit as an expense).

2. Credit the Provision for Doubtful Debts Account, to complete

the double entry.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Increasing the provision for doubtful debts

• Sometimes, it becomes necessary to adjust upwards or

downwards the provision for doubtful debts figure. The accounting
treatment is:

• 1. Debit Profit and Loss Account with the increase in the provision
• 2. Credit the Provision for Doubtful Debts Account
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Note: Only the difference in the adjustment is debited and credited:

i.e. the difference between the previous provision and the new
provision.

• Reduction in the provision for doubtful debts

• To reduce the provision, you simply do the opposite to what you

did to increase it.

• The provision for doubtful debts has a credit balance. Therefore,

to reduce it we would need a debit entry in the provision account.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• The credit would be in the profit and loss account and added to
gross profit as other income.
 ADJUSTMENTS TO FINANCIAL STATEMENTS
• Exercise

• Ben is a retailer. Most of his sales are made on credit terms. The
following information relates to the first four years that he has been
in business:

• Year 2015 2016 2017 2018

• Trade debtors as at 31 December: K60 000 K55 000 K65 000
K70 000
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• The trade is one that experiences a high level of bad debts.

Accordingly, Ben decides to set aside a provision for bad and doubtful
debts equivalent to 10 per cent of trade debtors as at the end of the
year.

• Required:
• (a) Show how the provision for bad and doubtful debts would be
disclosed in the respective balance sheets as at 31 December 2015,
2016, 2017 and 2018.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• (b) Calculate the increase/decrease in provision for bad and

doubtful debts transferred to the respective profit and loss accounts
for each of the four years.

• Depreciation

• Although non-current assets last for several accounting periods, most

wear out. The only exception is freehold land (i.e. land that is owned
for ever).
 ADJUSTMENTS TO FINANCIAL STATEMENTS
• Cars, machines, office equipment all wear out and will eventually be
scrapped or sold for a (usually low) second hand value.

• The loses in value as an assets gets older is known as Depreciation.

• Note that it is not the purpose of depreciation to value the asset at its
net realisable value as it wears out.

• Methods of depreciation
 ADJUSTMENTS TO FINANCIAL STATEMENTS
• There are two main methods of depreciation used in financial
statements:

• 1. Straight line

• 2. Reducing balance

• Straight line
 ADJUSTMENTS TO FINANCIAL STATEMENTS
• Cost = k24,000; scrap (residual) value at end of life k4,000;
estimated useful life = 5 years.

• Show the depreciation charge (expense) for each year, the

accumulated depreciation and the net book value at the end of
each of the four years.

• Formula:
original cost of the asset – estimated residual
value estimated life of the asset
• Reducing balance
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• In this method, a fixed percentage for depreciation is deducted

from the cost in the first year.

• In the second or later years the same percentage is taken of the

reduced balance (i.e. cost less depreciation already charged).

• This method is also known as the diminishing balance method or

the diminishing debit balance method.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Example
• If a machine is bought for K100,000 and depreciation is to be charged
at 20 per cent, the calculations for the first three years would be as
follows:

K
Cost 100,000
First year: depreciation (20%) ( 20,000)
80,000
Second year: depreciation (20% of K80,000) ( 16,000)
 ADJUSTMENTS TO FINANCIAL STATEMENTS
64,000
Third year: depreciation (20% of K64,000) (12,800)
Cost not yet apportioned, end of Year 3 51,200
 10.6 REDUCING BALANCE DEPRECIATION

• Formula for Reducing Balance:

𝑛 𝑠
𝑟=1 −
𝑐

• Where:
• n = the number of years
• s = the net residual value (this must be a significant amount or the answers will be absurd,
since the depreciation rate would amount to nearly one)
• c = the cost of the asset
• r = the rate of depreciation to be applied.
10.6 REDUCING BALANCE DEPRECIATION

• Example

• n=4 years s
• =residual value K256
• =cost K10,000
•
 ADJUSTMENTS TO FINANCIAL STATEMENTS

4 256 4
𝑟=1 − = 1- = 0.6 or 60
10 ,000 10 %

• A separate ledger account is maintained for the cost of fixed

assets whilst another ledger account called Provision for
Accumulated Depreciation Account is opened.

• The Double entry for depreciation charge for the year is:
• Debit the Depreciation (as an expense) Account profit and loss
account
• Credit the Provision for Accumulated Depreciation Account

ADJUSTMENTS TO FINANCIAL STATEMENTS

• Exercise
• Machine 1
Machine 2
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Cost
K12,000
K8,000

• Purchase date
1 January 2017
1 January 2018
• Depreciation method
20% straight line
10% reducing
• balance

• What is the total

depreciation charge
for the years ended
31 December 2017
and 2018?
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• An accrued
expenses is an
amount owing for a
service provided
during a particular
accounting period
but still unpaid for at
the end of it, and has
not yet been included
 in the financial
records.

• The accrual will be

included in the
amount charged to
the profit and loss
account for the
period as part of the
cost of the service
provided.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Therefore, accruals
should be added to
expenses and
included under
current liabilities in
the balance sheet.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• A prepaid expense
is an amount paid in
cash during an
accounting period for
a service that will be
provided in a
subsequent period.

• Prepayments made
during the year will
 ADJUSTMENTS TO FINANCIAL STATEMENTS

be deducted from
the amount charged
to the profit and
loss account.

• Therefore,
prepayments should
be deducted from
expenses and
included under
 current assets in
the balance sheet.

• Accrued revenue is
income that is due to
the business that has
not yet been included
in the financial
statements e.g. rent
receivable.
 ADJUSTMENTS TO FINANCIAL STATEMENTS

• Accounting
Treatment:

• Debit Receivables
(add to debtors
(currents assets) in
balance sheet.
• Credit Revenue
(income) (add to
 sales in Trading
account.

End

•Class Exercise 10.5 – Full Income Statement and

Balance sheet with year-end adjustments.