Preparation of Financial Statements- LKAS 1

The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.

A complete set of financial statements comprises. (a) Statement of Financial Position (b) Statement of Comprehensive Income (c) Statement of Changes in Equity (d) Statement of Cash Flows (e) Notes, comprising a summary of significant

accounting policies and other explanatory information

Statement of Financial Position

Statement of Financial Position provides the financial status of the company as at a prescribe date. This prescribe date is the date where financial accounts are prepared. As discussed in the accounting process, at the financial period end all accounts of the ledger are closed and the balances of nominal accounts are transferred to statement of Comprehensive income where as personal and real accounts whose balances are carried forward. These Balances will be shown in the Statement of financial position.

Statement of Comprehensive IncomeObjective of Statement of Comprehensive

Income is to find out the profitability of the financial period. Profitability is the Performance of the organization.

Statement of Cash Flows

Statement of Cash Flows explains the cash & cash equivalent generated & how it is distributed with in the period. This enables users to evaluate the changes in net asset of an enterprise, its financial structure, and its ability to affect the amount and timing of cash flows in order to adopt to changing circumstances and opportunities.

Statement of Changes in EquityAn entity shall present a statement of changes in equity

showing in the statement:

a) Total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests;

b) For each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with LKAS 8; and

c) For each component of equity, reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from:

i. Profit or loss;ii. Each item of other comprehensive income; andiii. Transactions with owners in their capacity as owners,

showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.

Disclosure of accounting policies

An entity shall disclose in the summary of significant accounting policies:

a) The measurement basis (or bases) used in preparing the financial statements, and

b) The other accounting policies used that are relevant to an understanding of the financial statements.

Key Adjustments need in FS

Following key adjustments are expected to make when preparing financial statements using trial balance.

Closing stock adjustmentAdjustments for DeprecationBad & doubtful debtorsAccrualsAdjustments for EPF/ETF/PAYEAdjustments for Pre-paid expeses &

income received in advance

Closing Stock Adjustment

Generally closing stock is arrived at by a Physical stock count. Stock should be valued under LKAS 2. (Lowest between the cost & the nest realizable value)

Adjustment entry are as follows.

Stock Account Debit

Trading Account Credit (Reduction from purchases during the year )

Adjustments for Deprecation

The property, plant & equipment that are in use for carry out business have to depreciated in line with LKAS 16.

• Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life

• The depreciable amount of an asset is its cost (or substitute) less its residual value

Annual depreciation of the particular asset is concern can be calculate using following methods.

1. Straight line

2. Reducing balance

3. Units of production

In accounting there are two methods applied for deprecation

1. Written down method

2. Provision for deprecation Method

Written down method

According to this method Deprecation is charged to the asset account. Accordingly double entry would be

Deprecation Account Debit

Asset Account Credit

Provision for deprecation Method

According to this method Deprecation is charged to Provision for deprecation account instead writing off against asst account.

Accordingly Assets account shows the cost of the asset ( Unless it is revalued)

Double Entry

◦ Deprecation Account Debit◦ Provision for deprecation account Credit

Here Deprecation account is transferred to Statement of comprehensive income as expense and provision for depreciation balance will be deducted from the respective asset value at the year end in statement of financial position.

Bad & Doubtful debtors Debts that are not recoverable from Debtors are treated as

Bad debts. If the amount not received can be ascertained accurately treated as the bad debt.

Bad debtors (exp) Debit

Debtors Credit

If debt already written off is received

 01. If already written off debt is received in the same year.

Cash Debit

Bad debt account Credit

02. If Debt Written off in a previous year is received ◦ Cash Debit◦ Bad Debt Already Written off Account Credit

Provision for Bad Debts

A doubtful debtor is a provision made in line with prudent concept and such value depicts the uncertainty of recoverability. This estimation is done as per LKAS 10.

Bad Debt Provision is mainly in two types, There are

1. General Provision

2. Specific Provision

Specific Provision is made with regard to an indentified debtor or set of debtors. Other wise it is required a general provision.

Accruals

Income and expenditures will be recorded regardless whether they actually paid or received by cash only if such income and expenditures are relevant to the particular financial period.

 

Expenditures :

Relevant expenditure A/C Debit ( I/S)

Accrued Expense A/C/payables A/C Credit (SFP)

 

Income :

Income receivables A/C Debit (SFP)

Relevant income A/C Credit ( I/S)

Pre-incurred expenditures and income received in advance

Prepaid Expenses

The value relevant to current financial year should only be treated as an expenditure in I/S and value pertaining to subsequent financial year should shown as an asset in the statement of Financial Position.

Prepayment Expenditure A/C Debit (SFP)

Cash Credit

Income received in advance: Any income received for subsequent years should not be treated as a income for this current financial year but should be shown as a liability in the statement of Financial Position

Cash Debit

Income received in advance A/C Credit