INTRODUCTION
The following is a checklist of frequent adjustments. Students should ensure that they understand fully the treatment of each one:
- Depreciation of Non-Current Assets,
- Write off of Bad Debts
- Change to Bad Debt Provision
- Dividend to Preference Shareholders
- Debenture Interest
- Accrual / Prepayment of expenses
- Opening stock under/over stated
- Provision of Goods on Approval
- Cost of asset included in closing stock valuation
- Insurance Due for damage to stock
- Proceeds from sale of motor vehicle included in sales
- Proceeds from issue of shares included in sales
- Stock damaged – Include at lower of cost and net realisable value
- Provision for discount on Trade Receivables
- Extension to warehouse cost included in purchases and wages
- Goods supplied free of charge by way of promotion
- Revaluation of Land
We will now work through each of the adjustments listed above then work through a number of full exam standard questions.
PREPARATION OF LIMITED COMPANY ACCOUNTS
To prepare the Statement of Comprehensive Income and Statement of Financial Position of a limited company the following steps should be followed:
Step 1
Extract a trial balance from the nominal ledger. In the Formation Two Accounting Framework examination this is normally given in the question.
Step 2
Ascertain the correct closing inventory figure. A closing inventory figure is usually given which requires certain adjustments:
- Goods sold on a sale or return basis or on approval will have to be included in closing inventory at their cost.
- Damaged inventory will be shown at the lower of cost and net realisable value.
- Capital expenditure items incorrectly included in closing inventory.
Step 3
The sales figure will need to be adjusted for any or all of the following:
- Goods on a sale or return basis or on approval, these should be deducted from sales with a corresponding reduction in Trade Receivables.
- The proceeds from the sale of property, plant and equipment.
- Value added recoverable tax which should be brought to the value added tax account.
Step 4
The opening inventory may be incorrectly stated. This can be dealt with by altering the opening inventory and the opening reserve figures.
Step 5
Purchases for operating expenditure may have to be adjusted for:
- The fact that some of the goods may have been used in the construction of property, plant and equipment, in which case the amount should be excluded from purchases and included in the cost of the property, plant and equipment.
- It may include items which are of capital nature e.g. purchase of office equipment.
Step 6
Wages should be adjusted if they include amounts paid to staff while involved in the construction of a property, plant and equipment.
Step 7
Account for bad debts, the bad debt provision, the discount allowed provision and Trade Receivables.
Step 8
Provide for depreciation as instructed in the question and calculate any profit/loss on disposal of property, plant and equipment.
Step 9
Account for accruals and prepayments including any interest accrual.
Step 10
Provide for proposed final dividends.
Step 11
Prepare an Statement of Comprehensive Income account.
Step 12
Prepare a Statement of Financial Position.
