Principles & Preparation of Financial Statements
Learning Outcomes - Principles and Preparation of Financial Statements
At the end of this unit students will be to
Income statements (trading and profit and loss accounts
- calculate the gross and net profits or losses based on accounting principles, for a specified period
- recognise that net profit (or loss) is the increase (or decrease) in the net assets during that period.
Balance sheets
- recognise that they are statements of balances of assets and liabilities on a specified date
- recognise and define non-current assets (fixed assets), intangible assets, current assets, current liabilities (creditors: amounts due within 12 months), long-term liabilities (creditors: amounts due after more than one year), working capital, capital employed and capital owned
- comment on the inter-relationship of balance sheet items.
Preparation of financial statements (final accounts)
Sole traders
- explain the difference between a trading business and a service business
- prepare income statements (trading and profit and loss accounts) and balance sheets for trading
businesses in either horizontal or vertical form - prepare income statements (profit and loss accounts) and balance sheets for service businesses in
either horizontal or vertical form - make adjustments for provision for depreciation using the straight line (equal instalment), diminishing (reducing) balance and revaluation methods
- make adjustments for accrued and prepaid expenses and accrued and prepaid income
- make adjustments for bad debts and provisions for doubtful debts
- make adjustments for goods taken by the owner for own use.
Partnerships
- explain the advantages and disadvantages of forming a partnership
- outline the importance and contents of a partnership agreement
- explain the purpose of an appropriation account
- prepare income statements (trading and profit and loss accounts), appropriation accounts and balance sheets in either horizontal or vertical form
- show the treatment of interest on partners’ loans, interest on capital, interest on drawings, partners’ salaries and the division of the balance of profit or loss
- make adjustments to financial statements (final accounts)
- explain the uses of, and differences between, capital and current accounts
- draw up partners’ capital and current accounts in ledger account form and as part of a balance sheet presentation.
Limited liability companies
- understand the meaning of the term limited liability
- prepare simple appropriation accounts in either horizontal or vertical form
- understand and distinguish between authorised, called-up, paid-up share capital
- understand and distinguish between share capital (preference shares and ordinary shares) and loan capital (debentures)
- understand the capital structure of a limited company comprising preference share capital, ordinary share capital, general reserve and retained profits (profit and loss account)
- prepare appropriation accounts in either horizontal or vertical format
- prepare balance sheets in either horizontal or vertical form.
Clubs and societies
- distinguish between receipts and payments accounts and income and expenditure accounts
- prepare receipts and payments accounts
- prepare accounts for revenue-generating activities, e.g. refreshments, subscriptions
- prepare income and expenditure accounts and balance sheets
- make adjustments
- calculate the accumulated fund.
Manufacturing accounts
- distinguish between direct and indirect costs
- distinguish between direct material, direct labour, prime cost and factory overheads
- understand and make adjustments for work in progress
- calculate factory cost of production
- prepare manufacturing financial statements: income statements (trading and profit and loss accounts) and balance sheets
- make adjustments to financial statements (final accounts)
Incomplete records
- prepare opening and closing statements of affairs
- calculate net profit or loss from changes in capital over time
- calculate sales, purchases, gross profit, trade receivables (debtors) and trade payables (creditors) and other figures from incomplete information
- prepare income statements (trading and profit and loss accounts) and balance sheets
- make adjustments to financial statements (final accounts)
- apply the techniques of mark-up, margin and inventory (stock) turnover to arrive at missing figures.