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CA BUSINESS SCHOOL EXECUTIVE DIPLOMA IN BUSINESS AND ACCOUNTING SEMESTER 1:Preparation of Financial Statements. Preparation of Financial S tatements. M B G Wimalarathna (FCA , ACMA, ACIM, SAT, ACPM)(MBA–USJ/PIM). Introduction
EXECUTIVE DIPLOMA IN BUSINESS AND ACCOUNTING
SEMESTER 1:Preparation of Financial Statements
Preparation of Financial Statements
M B G Wimalarathna
(FCA, ACMA, ACIM, SAT, ACPM)(MBA–USJ/PIM)
We discussed key aspects of overall accounting functions including environment of accounting and corporate governance in our previous chapters. Hence, it is high time to discuss final product of overall accounting process; preparation and presentation of financial statements/final accounts.
Basis of preparation and presentation of financial statements will vary based on the nature/types of an organization. As we already aware, preparation and presentation of financial statements in quoted public companies quite complex than any other types of organizations.
Based on the requirement of accounting standards and companies act, set of financial statements refers following components;
Note: the above key components and their respective specified formats will only be mandatory for companies.
In general, following key adjustments are expected to make when preparing financial statements with the available data/information. (trial balance)
Comprehensive discussion of the above key adjustments will be as follows;
The value derived based on LKAS – 02 (after conducting annual physical stock count/verification) will be shown as;
Current asset in B/S (till convert to sales)
Reduction from purchases during the year in Trading A/C
Cost of purchase 01 unit of “X” is LKR 5.00 and brokerage will be total of LKR 50,000.00. Company will procure 100,000 units and further LKR 80,000.00 will incur as cost of conversion. Company plans to sell 01 unit at LKR 7.50 and sales commission of LKR 60,000.00 will be incurred in the event of sales.
Compute the value of inventory based on LKASs and show the entries appeared in relevant places.
Income and expenditures will be recorded in the books regardless whether they actually paid or received by means of cash or not if (and only if) such income and expenditures are relevant to the particular financial period.
Expenditures : Relevant expenditure A/C Dr (I/S)
Expenditure accruals/payables A/C Cr (B/S)
Income : Income receivables A/C Dr (B/S)
Relevant income A/C Cr (I/S)
Some of the particulars belongs to PQR Ltd is given below;
Compute the value of accruals. Show the ledger entries and places where they should shown in F/S ending 31st March 2012.
Pre-incurred expenditures: The value pertaining to current financial year should only be treated as an expenditure in I/S and value pertaining to next financial year should shown as an asset in the B/S.
Pre-incurred expenditure Dr (B/S)
Relevant to current year Dr (I/S)
Cash Cr (B/S)
Income received in advance: The value pertaining to current financial year should only be an income in I/S and value pertaining to next financial year should shown as a liability in the B/S.
Cash Dr (B/S)
Received for next year Cr (B/S)
Relevant to current year Cr (I/S)
Details of transactions pertaining to XYZ Ltd are given below;
Compute the value of Pre-incurred expenditures and income received in advance and show necessary ledger entries along with the places to be appeared in F/S ending 31st March 2012.
Bad debtors should be an expenditure of the company for the period in which it is identified and make sure such balances couldn’t be recoverable.
Bad debtors (exp) Dr (I/S)
Debtors (control a/c) Cr (B/S)
Note: if bad debtors recovered during the current year, it should be debited to cash book and credit should be to the income statement as other income.
A doubtful debtor is a provision made in line with prudent concept and such value depicts the uncertainty of recoverability.
Doubtful debtors (exp) Dr (I/S)
Provision for doubtful debtors Cr (B/S)
Note: value of debtors which based for provision of doubtful debtors should be net of bad debtors. The closing balance of doubtful provision a/c should be shown as deduction against net debtors at the balance sheet.
Total value of the debtor balance of ABC Ltd as at 31st March 2012 is LKR 5 million. Company is certain that the following debtors balances couldn’t be recoverable.
Company also decided to provide for doubtful debtors as follows;
X 0.8 10
Y 0.4 10
Z 0.2 20
Company is also decided to provide for doubtful debtors by using a flat rate of 8% of closing balance.
Compute bad debtors/specific & general provision of doubtful debtors and show necessary ledger entries along with the balances appeared in F/S.
Depreciation is simply a adjustment made in the books in order to justify that depreciable amount of the particular asset will be allocated through useful lifetime since ability of generating economic benefits will deteriorated when use in the business.
Depreciable amount of the asset will be ascertained by eliminating scrap value from the cost of the asset. (generally in straight line method)
Annual depreciation of the particular asset is concern will be calculate using following methods.
Straight line: most common and simple mechanism where depreciable amount of the asset will be allocate in a systematic manner throughout the useful life time of the asset.
Annual depreciation = (Cost – Scrap value)/Useful life time
Reducing balance: quite conservative mechanism where more depreciation will be charge at the beginning and low will be charge at the latter part of the useful life time.
Annual depreciation = Net book value* depreciation rate
Net book value = Cost – accumulated depreciation
Depreciation rate = derived through the useful life time of the asset
Accounting: annual depreciation calculated as above will be accounted for as follows;
Depreciation (exp) A/C Dr (I/S)
Provision for depreciation A/C Cr (B/S)
Note: provision for depreciation balance will be deducted from the respective asset value at the year end in B/S.
When disposing the asset which is already used in the business, disposal A/C to be opened and then cost/accumulated depreciation and disposal value should be recorded respectively and profit/loss of such disposal should transfer to the I/S immediately.
PQR Ltd procured a motor vehicle for the value of LKR 2.5 million and expected to generate revenue over next 5 years. After fifth year it could be sold for LKR 0.5 million.
Based on the prudent concept, it is required to make suitable provision for obsolete or/and slow moving inventories.
Obsolete stock Dr (I/S)
Provision for obsolete stock Cr (I/S)
Note: year end balance of provision A/C should be shown as deduction against expenditures in trading A/C.
Based on the provisions available in provident fund act of 15 of 1958, trust fund act of 46 of 1980 and IRD act, company is bound to pay/remit statutory payments in a systematic manner.
EPF/ETF/PAYE (exp) Dr (I/S)
EPF/ETF/PAYE payables Cr (B/S)
When payments made actually:
respective payables Dr
Following transactions are belongs to ABC Ltd for the year ended 31st March 2012.
You are required to record each of the transactions in accounting worksheet showing affect to the accounting equation. You also required to show the ledger entries along with the preparation of trial balance and extract of financial statements as at 31st march 2012.
Motor vehicle LKR 4 Mn
Machinery LKR 6 Mn
Furniture & fittings LKR 2 Mn