Lecture 10

Preparation of accounting statements

Appendix A 483-497
UB: 2.10
UB: 1.1-1.6, 2.8, 2.10, 2.16

VA(18) JD (35)
-1-

Preparation for mid-term Week 9

Work out examples in the lecture
Looking at lecture notes is insufficient, you need to take a pen
and paper and solve it (illusion of competence)
Look at the broader picture first, then go into the details.
Work out examples in text and then class assignments. Just
sitting and thinking will not help!

-2-

Preparing financial statements from

the trial balance
The trial balance is the starting point
The net result of all the revenues and expenses in the income
statement represents net income or net loss for the period.

Net income is added to retained earnings in the Statement of

Financial Position.

-3-

The year-end trial balance

a.

Includes all account balances

b. All cash transactions have been recorded

c.

The accountants task is to make the accounting year-end

adjustments and prepare the financial statements

-6-

Year-end adjustments
a.

Cost of sales calculation (Periodic inventory)

b.

Inventory write-downs

c.

Depreciation

d.

Profit or losses on disposal of assets

e.

Provisions for bad and doubtful debts

f.

Accruals/prepayments

g.

Taxation charge and liability

h.

Dividends

i.

Unrecorded transactions/or transactions

posted in temporary accounts

-7-

Preparing financial statements

The exercise in handout VA(18) will be solved during
the lecture.
This exercise is ideal for preparation for the midterm test.

-8-

Hughes Ltd prepares statements to 31 October each year. The companys trial balance at 31
October 2011 is as follows:

Land at valuation
Buildings at cost
Equipment and motor vehicles at cost
Allowances for depreciation at 1 November 2010
Buildings
Equipment and motor vehicles
Disposal of vehicle
Inventory at 1 November 2010
Trade receivables and payables
Allowance for doubtful receivables at 1
November 2010
Bank balance
Taxation
9% Loan stock (repayable 2015)
Purchases and sales
Returns inwards and outwards
Directors fees
Wages and salaries
General administrative expenses
General distribution costs
Royalties received
Interest paid
Dividends paid
Ordinary shares of 1
Revaluation reserve
Retained earnings at 1 November 2010

250,000
300,000
197,400

60,000
105,750
18,000
87,520
71,500

103,290
1,520
10,390

8,400
483,230
27,110
50,000
102,400
143,440
107,050

120,000
1,025,420
12,570

10,270
6,220
35,000

______
1,869,270

80,000
75,000
247,060
1,869,270

-9-

The following information is also

available:

1- Land is non-depreciable and is to be revalued at 280,000 on 31 October

2011.

- 10 -

Year-end accounting adjustments (1)

Dr Land
30,000
Cr Revaluation reserve 30,000
DR

Land at valuation

b/d 31.10.11

250,000

(1) R.Reserve

30,000

DR

CR

Revaluation reserve

CR

b/d 31.10.11
(1) Land

75,000
30,000

- 11 -

Year-end accounting adjustments (1)

Dr Land
30,000
Cr Revaluation reserve 30,000
DR

Land at valuation

b/d 31.10.11

250,000

(1) R.Reserve

30,000

CR
c/d 31.10.11

280,000

b/d 1.11.11 280,000

DR
c/d 31.10.11

Revaluation reserve
105,000

CR

b/d 31.10.11

75,000

(1) Land

30,000

b/d 1.11.11

105,000

- 12 -

2- The buildings were acquired on 1 November 2000. At that time, their

useful life was estimated to be 50 years and it was decided to adopt the
straight-line method of depreciation, assuming no residual value. On 1
November 2010, it was determined that the useful economic life of the
buildings would end on 31 October 2040. The estimate of the residual
value remains unchanged.

- 13 -

Year-end accounting adjustments (2)

Non-current assets
Buildings at cost
300,000
Allowance for depreciation
60,000
NBV of Buildings at 31.10.10
240,000
Depreciation over 30 years
(1.11.10-31.10.2040): 240,000/30 8,000
NBV of buildings at 31.10.11
232,000

- 14 -

Year-end accounting adjustments (2)

Non-current assets
Buildings at cost
300,000
Allowance for depreciation
60,000
NBV of Buildings at 31.10.10
240,000
Depreciation over 30 years
(1.11.10-31.10.2040): 240,000:30 8,000
NBV of buildings at 31.10.11
232,000
DR

Depreciation

Dr Depreciation
Cr Accumulated
depreciation
(Buildings)

8,000

8,000

CR

(2a) Accumulated depn 8,000

DR

Accumulated depreciation (Buildings)

b/d 31.10.11

CR
60,000

(2a) Depreciation 8,000

- 15 -

3- Equipment and vehicles are depreciated at 25% per annum on the reducing
balance basis. A full years depreciation is charged in the year of acquisition.
No depreciation is charged in the year of disposal. In June 2011, a
distribution vehicle which had cost 64,000 in February 2007 was sold for
18,000. This amount was debited to the bank account and credited to a
disposal account, but no further entries have yet been made with regard to
this disposal.

- 16 -

Accumulated depreciation of vehicle

Oct 08

Purchase
date: Feb
2007

Oct 07

Oct 10

Oct 09

Disposal date:
June 11

Full year depreciation charge

- 17 -

Year-end accounting adjustments (3)

Notes re sold vehicle:
(i) NBV vehicle sold: 64,000 75% 75% 75% 75% = 20,250
OR
64,000 43,750 = 20,250.
Acc. Dep. vehicle sold=
Year 1 64,000*25%=
Year 2 (64,000 16,000)*25% =48,000*25% =
Year 3 36,000*25% =
Year 4 27,000*25% =
(ii)
NBV of disposed vehicle
Proceeds from disposal
Loss on disposal

16,000
12,000
9,000
6,750
43,750

20,250
18,000
2,250

- 18 -

Year-end accounting adjustments (3)

3b. Disposal
Dr Disposal account
64,000
Cr Equipment & vehicles at cost
Dr Accumulated depreciation
(Equipment & vehicles)
Cr Disposal account
3c. Dr Loss on disposal
Cr Disposal account

64,000

43,750
43,750
2,250
2,250

- 19 -

Year-end accounting adjustments (3)

Equipment and vehicles at cost
(197,400 - 64,000)
Acc Depreciation to 31.10.10
(105,750 - 43,750)
NBV of equipment &vehicles
at 31.10.10

Depreciation for year

(25% 71,400)
NBV of equipment & vehicles
at 31.10.11

133,400

62,000
71,400

Vehicle disposed cost

Vehicle disposed-acc.deption

17,850
53,550

- 20 -

Year-end accounting adjustments (3)

3a. Depreciation of equipment

Dr Depreciation
17,850
Cr Accumulated depreciation (Equipment &Vehicles )
17,850

- 21 -

Year-end accounting adjustments (3)

DR

Disposal of vehicle

(3b) Equipment 64,000

b/f 31.10.11

CR
18,000

DR

Loss on disposal

CR

(3b) Accum dep 43,750 (3c)Disposal a/c2,250

(3c) Loss on dis. 2,250
DR

Equipment and motor vehicles (cost)

b/d 31.10.11 197,400

(3b) Disposal a/c 64,000

c/d 31.10.11
b/d 1.11.11

CR

133,400 DR

133,400

(3a) Accum dep 8,000

(3b) Accum dep 17,850

DR Accumulated depreciation (EquipMV) CR

(3b)Disposal 43,750

b/d 31.10.11

c/d 31.10.11

(3a)Depreciation 17,850

79,850

b/d 1.11.11

Depreciation ExpenseCR

105,750
79,850

- 22 -

4- The cost of the inventory at 31 October 2011 is

92,280.

- 23 -

Year-end accounting adjustments (4)

(3) Cost of sales
Opening inventory
Purchases
Returns outwards
Closing inventory

87,520
483,230
(12,570)
(92,280)
465,900
Entries

3a. Dr Cost of sales

87,520
Cr Inventory
87,520
3b. Dr Cost of sales
483,230
Cr Purchases
483,230
3c. Dr Returns outwards 12,570
Cr Cost of sales
12,570
3d. Dr Inventory
92,280
Cr Cost of sales
92,280
- 24 -

Year-end accounting adjustments (4)

DR

Purchases

CR

b/d 31.10.11
483,230
DR

Cost of Sales

CR

(3a) Inventory 87,520

(3c)Returns out 12,570

(3b) Purchases 483,230

(3d)Inventory
(7)P+L a/c

DR
b/d 31.10.11
(3d) COS

Inventory

92,280
465,900

CR

87,520 (3a) Cost of sales 87,520

92,280
DR

Returns outwards

(3c)COS

12,570

b/d 31.10.11

CR

12,570

- 25 -

Year-end accounting adjustments (4)

DR

Purchases

b/d 31.10.11
483,230

(3b)COS

CR
483,230
DR

Cost of Sales

CR

(3a) Inventory 87,520

(3c)Returns out 12,570

(3b) Purchases 483,230

(3d)Inventory
(7)P+L a/c

DR
b/d 31.10.11
(3d) COS

Inventory

92,280
465,900

CR

87,520 (3a) Cost of sales 87,520

92,280

b/d 1.11.11 92,280

c/d 31.10.11

92,280
DR

Returns outwards

(3c)COS

12,570

b/d 31.10.11

CR

12,570

- 26 -

5- Trade receivables include bad debts of 2,000 which should

be written off. The allowance for doubtful receivables should
then be adjusted to 2% of the remaining trade receivables.

- 27 -

Year-end accounting adjustments (5)

Bad and doubtful debts
Bad debt:
a. Dr Bad debt written-off
Cr Trade receivables

DR

b/d 31.10.11

2,000

Bad debt written-off

(4a) Trade rec. 2,000

DR

2,000

(7)P+L a/c

Trade receivables

71,500

(4a) Bad debt

CR
2,000

CR

2,000

- 28 -

Year-end accounting adjustments (5)

Bad and doubtful debts
Bad debt:
a. Dr Bad debt written-off
Cr Trade receivables

DR

b/f 31.10.11
b/d 1.11.11

2,000

Bad debt written-off

(4a) Trade rec. 2,000

DR

2,000

(7)P+L a/c

Trade receivables

71,500

CR
2,000

CR

(4a) Bad debt

2,000

c/d 31.10.11

69,500

69,500

- 29 -

Year-end accounting adjustments (5)

Provision for doubtful debts (71,5002,000)*2% = 1,390
Existing provision for doubtful debts = 1,520
Release in provision =(130)

4b. Dr Provision for doubtful debts (B/S) 130

Cr Provision for doubtful debts (I/S)
130
DR

Provision for doubtful debts (B/S)

b/d 31.10.10
DR

Provision for doubtful debts (I/S)

(7)P+L a/c

130

CR

1,520
CR

(4b) Allowance 130

- 30 -

Year-end accounting adjustments (5)

Provision for doubtful debts (71,5002,000)*2%1,520=(130)

b. Dr Provision for doubtful debts (B/S) 130

Cr Provision for doubtful debts (I/S)
130
DR

Provision for doubtful debts (B/S)

(4b) Provision
c/d 31.10.11

DR

130

b/d 31.10.11

1,520

b/d 1.11.11

1,390

1,390

Provision for doubtful debts (I/S)

(7)P+L a/c

CR

130

CR

(4b) Allowance 130

- 31 -

6- The companys tax liability for the year to 31 October 2010 was
underestimated by 8,400. The liability for the year to 31 October
2011 is estimated to be 20,000 and falls due on 1 August 2012.

- 32 -

Year-end accounting adjustments (6)

(6) Taxation
Taxation charge for the year:
Tax liability
20,000
Tax under-provision 8,400
28,400

a. Dr Taxation expense (I/S)

Cr Taxation liability (B/S)
b. Dr Taxation expense (I/S)
Cr Taxation liability (B/S)

20,000
20,000
8,400
8,400

- 33 -

Year-end accounting adjustments (6)

DR

Taxation (I/S)

(5a)Tax (B/S) 20,000

(7)P+L a/c

CR
28,400

(5b) Tax (B/S) 8,400

DR

Taxation (B/S)

CR

b/d 31.10.11

8,400 (5a)Taxation(I/S)

20,000

(5b)Taxation(I/S)

8,400

- 34 -

Year-end accounting adjustments (6)

DR

Taxation (I/S)

(5a)Tax (B/S) 20,000

CR

(7)P+L a/c

28,400

(5b) Tax (B/S) 8,400

DR

Taxation (B/S)

b/d 31.10.11

8,400 (5a)Taxation(I/S)

20,000

c/d 31.10.11

20,000 (5b)Taxation(I/S)

8,400

b/d 1.11.11

CR

20,000

- 35 -

7- The loan stock was issued on 1 January 2011. Interest is payable

half-yearly on 30 June and 31 December. The interest due on 30 June
2011 was paid on the due date. Accrued interest at 31 October 2011
has not yet been accounted for.

- 36 -

Year-end accounting adjustments (7)

(7) Loan stock interest accrued: 120,000*9%*4/12 = 3,600

Dr Interest expense
3,600
Cr Accrued interest
3,600
DR
b/d 31.10.11

Interest expense
6,220

(7)P+L a/c

CR
9,820

(6) Accrued interest 3,600

DR

Accrued interest
(6) Interest exp.

c/d 31.10.11

CR
3,600

3,600
b/d 1.11.11

3,600
- 37 -

Solution
Hughes Ltd
Income Statement for the year to 31 October 2011

Sales revenue(net of returns in)

998,310
Cost of sales
465,900
Gross profit
532,410
Administration expenses
143,440
Directors' fees
50,000
Wages and salaries
102,400
Buildings depreciation
8,000
Equipment depreciation
17,850
Bad debts
2,000
Reduction in allowance for receivables
(130)
Distribution costs
107,050
Operating profit
101,800
Loss on disposal
2,250
99,550
Other income
10,270
Finance costs
(9,820)
Profit before taxation
100,000
Taxation
28,400
Profit for the year or Net Income
71,600

Sales = 1,025,420
Sales Returns = (27,110)
Net sales rev = 998,310

Interest paid

- 38 -

Solution
Hughes Ltd
Balance sheet as at 31 October 2011

Assets
Non-current assets
Property, plant and equipment
Current assets
Inventories
92,280
Trade receivables
68,110
Total assets
Liabilities
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables
106,890
Bank overdraft
10,390
Current tax payable
20,000
Equity
Share capital
80,000
Other reserves
105,000
Retained earnings
283,660
Total equity and liabilities

Land = 280,000
Equipment = 133,400
Equipment depreciation =(79,800)
Building at cost = 300,000
Building depreciation =(68000)
--------------------------------------PPE =
565,550
-----------------------------------------

565,550

160,390
725,940

120,000

Trade receivable = 69,500

Allowance (provision) for doubtful
debt = (1390)
------------------------------------Trade receivable = 68,110

Trade payable (trial balance) = 103,290

Interest payable
= 3600
------------------------------------Trade and other payable
= 106,890

137,280
Revaluation
reserve

468,660
725,940

RE (1/11/10) = 247,060
NI
= 71,600
Dividend
= (35,000)
-------------------------------- 39 RE
= 283,660

Further work
Look for video on financing a company the video will help
will assignment for next class
Come prepared to lecture on Monday (31/10/16) by watching
the video we will discuss the concept briefly and move on.

- 40 -

Thanks!

Saipriya

- 41 -