Preparation of Income Statement & Balance Sheet

For solving the Final Accounts Questions in which you are required to prepare Income Statement and Balance Sheet of a Limited Company you should adopt the following method.

Step 1: Read & Mark the Adjustment Notes

Adjustment Notes are given after the Trial Balance (TB). Read and Mark them as O, S, R, D, B, A, P & C depending upon what each point is all about.
O =

Other Adjustments
Other Adjustments are those which are not covered under any other point mentioned below. These are mainly Errors which have been made by the book keeper before the Trial Balance was prepared by him and therefore need to be corrected by you whilst preparing I/S & B/S.

S R D B A P C

= Sale of Asset = Revaluation of Asset = Depreciation to be charged during the year = Bad Debts = Accruals = Prepayments = Closing Inventory

Step 2 : Workings: Do workings in the same order as above and as suggested below.
O
= First do workings for the points of Other Adjustments. Make corrections. CHANGE the related figures in the TB according to the corrections made.

= Do Sale of Asset and calculate profit or loss on sale. Sale Price of the Asset Net Book Value of the Asset = Profit or Loss = = = x (x) x This figure will go to I /S

CHANGE the following figures in the TB. 1. Cross off the figure of Cost of the Asset in the TB and write the new figure after decreasing it by the Original Cost of the Asset Sold. 2. Cross off the figure of Accumulated Depreciation in the TB and write the new figure after decreasing it by the share of accumulated depreciation belonging to the sold asset. Note that Depreciation is not charged on the sold asset for the year of sale at all, whereas it is charged for the whole year in the year of purchase without caring for the time of sale or purchase during the year. 3. Cross off the amount of Disposal Account and write Zero in its place. 4. Write the profit made on the credit side of the TB after the totals. If there is a Loss then write it on the Debit side.

= Do Revaluation of Asset and calculate the amount of Revaluation Reserve Re valued Amount of the Asset - Net Book Value of the Asset = Revaluation Reserve = = = x (x) x This figure will go to B/S Under Equity after Share Premium

CHANGE the following figures in the TB. 1. Cross off the figure of the COST of the Re-valued Asset in the TB and write the NEW (Re-valued Figure). 2. Cross off the figure of the Accumulated Depreciation on the re -valued asset in the TB and write ZERO in its place. 3. Write Revaluation Reserve calculated above on the Credit side of the TB after the totals.

= Calculate Depreciation to be charged during the year, for each asset. CHANGE the following figures in the TB. 1. Write down the Depreciation Charge for each asset separately at the end of the TB on the Debit side. 2. Cross off the Accumulated Depreciation in the TB (you will find it on the Credit Side) and write the new Figure by adding the Depreciation Charge calculated in (1) above to the present figure for each asset.

= Calculate Bad Debts Cost to be taken to the Income Statement and New Trade Receivables for the Balance sheet as follows. Always start with Provision for Bad & Doubtful Debts Provision for Bad & Doubtful Debts Opening Provision for Bad & Doubtful Debts per TB Closing Provision for Bad & Doubtful Debts Required @ Y/E Increase or Decrease in Provision = = = x x x

If Required Provision @ Y/ E ( Closing Provision ) is greater than the provision per TB ( Opening Provision ) then it is an increase. If the Required Provision @ Y / E is lesser than the T/B provision then it is a Decrease. Bad Debts Bad Debts are those debts which are NOT EXPECTED to be recovered from the Customers and the business has lost that money. If there was a Bad Debt that happened during the year then that would already appear in Trial Balance. But there might be some more Bad Debts which either happen at the year end or are discovered at the year end. We deal with the Bad Debts as follows. Bad Debts as per the Trial Balance + + = Bad Debts Discovered @ Y/E Increase / (Decrease) in Provision as above Final Bad Debts Cost to go to Income statement = = = = x x x/(x) x This will go to I / S

Trade Receivables Trade Receivables per Trial Balance _ _ = Bad Debts Discovered @ Y/E Closing Provision of Doubtful Debts @ the Y/E Final Trade Receivables to go to Balance Sheet = = = = x (x) (x) x This will go to B/ S CHANGE the following figures in the TB. 1. Cross off the figure of Provision for Bad / doubtful debts and write ZERO in its place. 2. Cross off the figure of Trade Receivables and write the new figure calculated above. 3. Cross off the figure of Bad Debts in the TB and write the new figure in its place. If there is no figure given in the TB then write it at the end of the TB on the Debit side.

= Do Accruals. As Accruals always INCREASE expenses, therefore cross off the amounts of the expenses for which you are doing Accruals and write the increased amounts instead, next to the old figures in the Trial Balance.

CHANGE the following figures in the TB. 1. Cross off the figures of Expenses and write new figures after increasing them by the accruals. 2. Write the total amount of Accruals on the Credit side of the TB at the end.

= Do Prepayments. As Prepayments always DECREASE expenses, therefore cross

off the amounts of the expenses for which you are doing Prepayments and write the decreased amounts instead, next to the old figures in the Trial Balance.

CHANGE the following figures in the TB. 1. Cross off the figures of Expenses and write new figures after Decreasing them by the Prepayments. 2. Write the Prepayments on the Debit side of the TB at the end.

= Closing Inventory is the result of Stock Take Procedure conducted at the closing hour of business on the last day of the accounting year. This figure is either given in the (1) Adjustment Notes in most Exam Questions or (2) inside the TB in some exam questions. (1) If Closing Inventory is given in the Adjustment Notes. Do the following entry at the end of the TB. Dr Cr
Closing Inventory ( B/S) Closing Inventory ( I /S ) x x

(2) If Closing Inventory is given inside the TB. Then NO ENTRY IS REQUIRED.

Step 3:

Kill All 7 Birds With One Stone

It means that in ONE ROUND of all the Trial Balance and the Adjustment Notes by putting the tip of your finger on the first item of the Trial Balance and moving it down each item one by one, we would allocate all the items as given in the Trial Balance to the 4 Categories of Expenses, Property Plant & Equipment, Income Statement and the Balance Sheet. Once the trial balance items are all finished then move your finger tip down to each item in the adjustment notes as follows.
(1)

(2) Distribution Cost = x = x = (x)

(3) Administrative Expenses

(4) Finance Cost

Cost of Sales Op. Inv. Add: Purchase Less: Cl. Inv.

(5)
Property, Plant & Equipment Non Current Asset Cost Accumulated Depreciation Net Book Value

L = Land and Building P = Plant & Machinery F = Fixtures & Fittings M = Motor Vehicle O = Office Equipment

(6) Income Statement Fill All The Relevant Figures In The Format

(7) Balance sheet Fill All The Relevant Figures In The Format

Notes :

Few Useful Acronyms for parts of Balance Sheet

Use following acronyms to remember the various parts of Balance Sheet. CURRENT ASSETS I = Inventory T = Trade Receivables P = Prepayments C = Cash & Cash Equivalent

CURRENT LIABILITIES T = Trade Payables O = Other Payables A = Accruals B = Bank Overdraft

EQUITY S = Share Capital S = Share Premium R = Revaluation Reserves R = Retained Earnings