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

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 If there is an increase in the
PFBD, record the difference in
other expenses

If there is a decrease in the

Adjustments for depreciation
To account for depreciation
PFBD, record the difference in
other revenue
Record as an expense (for each
asset)
Add to the existing provision for
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

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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

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 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