elements of financial statements ppt

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Elements of Financial Statements

Topic 2


Session Objectives

� Explain the main elements of financial statements

� Describe the purpose of financial statements

� Identify the main types of business transactions


Session Objectives

� Describe the accounting equation

� Explain the matching convention and duality concept

� Draft simple financial statements


What are Financial Statements

“Reports that quantitatively summarize

the financial status of an organization for

a stated period of time. They include an

income statement and balance sheet describing the flow of resources, profit or

loss, and the distribution or retention of

profits.”


Primary Financial Statements

� Balance sheet

� Income Statement

� Statement of Cash Flows


Balance Sheet

� Describes where the enterprise stands at a specific date. It can be shown in two formats:

� Horizontal

� Vertical


Example of a Horizontal

Balance Sheet


Example of a Vertical Balance

Sheet


Income Statement

� Depicts the revenue and expenses for a designated period of time.

� Net income (or net loss) is simply the difference between revenues and expenses.


Example of Income Statement


Statement of Cash Flows

� Depicts the ways cash has changed during a designated period of time.


Balance Sheet Equation

� Assets – Liabilities = Proprietor's Capital

� Horizontal format balance sheet is an expansion of this form of the accounting equation

� Assets = Proprietor's Capital + Liabilities


Assets

� Assets are economic resources that are owned by the business and are expected to provide positive future cash flows.


Assets


Types of Assets

� Fixed Assets

� Any tangible or intangible asset acquired on a long-term basis to be used in providing a service to the business

� Not held for resale in normal course of business e.g. land and buildings, plant and machinery


Types of Assets

� Current Assets

� Assets which are expected to be realised in the normal course of trading

� Disclosed in the balance sheet with least liquid asset first e.g. Stock, debtors


Liabilities

� Liabilities are debts that represent negative future cash flows for the enterprise.


Liabilities


Types of Liabilities

� Long-term liabilities

� Payable more than 12 months after the balance sheet date e.g. loan

� Current liabilities

� Payable within 12 months of the balance sheet date e.g. creditors, bank overdraft


Owners’ Equity

� Owners’ equity represents the owner’s claim to the assets of the business.


Owners’ Equity


Changes in Owners’ Equity


Understanding Income

Statement


The Concept of the Business

Entity

� According to this concept, a business entity is separate from the personal affairs of its owner..


Revisiting Accounting

Equation


Relationships Among Financial

Statements

1

© SmartClasses.com 2007 Student Notes for Financial Accounting

Financial AccountingDouble Entry Bookkeeping


Accounting YearScenario involves a company ABC Ltd.(The company sells clothing items)

12 months, but not necessarily coinciding with calendar year.

Define a period for which accounting books are maintained and summarized for yearly financial statements.


Financial Statements

� Trading and Profit & Loss Account

� Summary of Income

(Sales plus any other income) and

Expenses

� Highlight Profit or Loss generated for an

accounting period

� Balance Sheet

� A snapshot of the

Assets, Liabilities and Capital

� Confirm to Accounting

equation:

Accounting Equation

Assets = Liabilities + Capital


Scenario involves ABC LTD.A company is into clothing business

� Assets: Owned by ABC

� Fixed Assets

• Material things owned

by ABC Ltd. that gives it benefit in a period exceeding one

accounting period

� Current Assets

• Cash

• Stock or inventory

• Debtors: Businesses that owe money to

ABC Ltd.

� Liabilities: Owed by ABC

� Long-term liabilities

• Loans taken by ABC

Ltd. that are repayable in more than one accounting period

� Short-term liabilities

• Overdraft

• Accruals: Unpaid bills

• Creditors: Businesses

to whom ABC Ltd. owes money


Duality Concept in recording

accounting transactions

� Monetary transaction in day to day business at ABC Ltd. would involve:� Buying of assets for cash or credit

� Selling of assets for cash or credit

� Creates a two-sides to a transaction in any of the four combinations:

Assets decrease

Debtors increase

Assets increase

Creditors increase

Assets decrease

Cash increases

Assets increase

Cash decreases


Recording of a transaction

� Recorded in ledgers – that are accounts created for each of the asset, liability, income and expense

� A ledger has two sides for accounting entry

� Each transaction will either impact its Debit Side or its Credit Side

Credit Side

(expressed as Cr)

Debit Side

(expressed as Dr)

Right SideLeft Side

2


A typical ledger format

£DetailsDate£DetailsDate

CrName of the account

For example: Cash; Plant & Machinery; Sales

Dr


Impact on ledger

� Debit side is impacted when increase in:

� Assets

� Expenses

� Drawings (money withdrawn by owner from the business for personal reasons. The action decreases Capital)

� Credit side is impacted when increase in:

� Liability

� Income

� Capital (money invested by the owners into the business at the start or during the course of business)


Recording a cash transaction

TRANSACTION ONE: On 1 Jan 2008: ABC Ltd. was incorporated with investment

of £ 50000.00 from its owner. Money deposited into company bank account.

£

50000.00Capital01-01-08

CrBank AccountDr

Account Ledger impacted: Bank Account of ABC Ltd.

Increase in cash (current assets)hence debit entry

£

50000.00Bank01-01-08

CrCapital AccountDr

Account Ledger impacted: Capital Account of Owner

Increase in capital hence credit entry



£

4750.00Computers01-01-08

CrBank AccountDr

£

4750.00Bank01-01-08

CrComputer AccountDr

TRANSACTION TWO: On 1 Jan 2008: ABC Ltd. purchased computersby paying cheque of £ 4750.00

Account Ledger impacted: Bank Account

Account Ledger impacted: Computer Account

Decrease in cash (current assets)hence credit entry

Increase in fixed assets hence debit entry



£

250.00Stationery05-01-08

CrBank AccountDr

£

250.00Bank05-01-08

CrOffice Stationery AccountDr

TRANSACTION THREE: On 5 Jan 2008: ABC Ltd. purchased stationery itemsby paying cheque of £ 250.00 to their supplier.


Account Ledger impacted: Office Stationery Account

Decrease in cash (current assets)hence credit entry

Increase in expenses hence debit entry



TRANSACTION FOUR: On 6 Jan 2008: ABC Ltd. sold clothing itemsAnd received cash of £ 2500.00

£

2500.00Sales06-01-08

CrBank AccountDr


Increase in cash (current assets)hence debit entry

£

2500.00Bank06-01-08

CrSales AccountDr

Account Ledger impacted: Sales Account

Increase in income (sales) hence credit entry

3


Recording a credit transaction

TRANSACTION FIVE: On 10 Jan 2008: ABC Ltd. purchased fabric (raw material)

worth £ 4500.00 from its regular supplier Joe Ltd. Payment to be made in 60 days.

£

4500.00Joe Ltd.10-01-08

CrPurchases AccountDr

Account Ledger impacted: Purchases Account

Increase in stock (current assets)hence debit entry

£

4500.00Purchases10-01-08

CrJoe Ltd. AccountDr

Account Ledger impacted: Joe Ltd. Account

Increase in creditors (current liabilities)hence credit entry


Recording a credit transaction

£

1750.00Malcolm Ltd.12-01-08

CrSales AccountDr

£

1750.00Sales12-01-08

CrMalcolm Ltd. AccountDr

TRANSACTION SIX: On 12 Jan 2008: ABC Ltd. sold clothing itemsworth £ 1750.00 to their regular client Malcolm Ltd. Payment due in 30 days.

Account Ledger impacted: Sales Account

Account Ledger impacted: Malcolm Ltd. Account

Increase in income hence credit entry

Increase in debtors (current assets)hence debit entry


Balancing the ledger accounts

£

4,750.00

250.00

47,500.00

52,500.00

Computers

Stationery

Balance c/f

Total

01-01-08

05-01-08

31-01-08

£

50,000.00

2,500.00

52,500.00

47,500.00

Capital

Sales

Total

Balance b/f

01-01-08

06-01-08

01-02-08

CrBank AccountDr

END OF MONTH: All ledgers are balanced by making the Debit and the Creditsides EQUAL in the particular ledger account on last day of the month.

Balancing the Bank Account ledger

�Balance carried forward (c/f) is the amount that makes the smaller side

(debit OR credit) equal to the larger side.�Balance brought forward (b/f) is the starting balance on the first day

of the new month.


Balances – The Importance

� Balance c/f

Is an asset or a liability at the END

of the accounting period.

� Balance b/f

Is an asset or a liability at the beginning of the

NEXT accounting period.


Opening Balances

� Asset account

Will always have a DEBIT entry

� Expense account

Will always have a DEBIT entry

� Liability account

Will always have a CREDIT entry

� Income account

Will always have a CREDIT entry


Other accounts & transactions

� Debit Side

� Sales returns -

inwards (loss)

� Discounts allowed

� Carriage Inwards

� Overheads

(expenses paid such as salaries; utilities;

advertising, carriage

outwards)

� Debtors

� Credit Side

� Purchases returned –

outwards (gain)

� Discounts received

� VAT (Unpaid tax received

as component of Gross

Selling Price)

� Sales (cash or credit)

� Creditors


Topic 8

Non-current Assets


Session Objectives

� Define non-current assets

� Recognise the difference between current and non-current assets

� Explain the difference between capital and revenue items

� Classify expenditure as capital or revenue expenditure

� Prepare ledger entries to record the acquisition and disposal of non-current assets


Session Objectives

� Record profits or losses on disposal of non-current assets in the income statement including part exchange transactions

� Record the revaluation of a non-current asset in ledger accounts, the statement of comprehensive income and in the statement of financial position

� Calculate the profit or loss on disposal of a revaluedasset

� Illustrate how non-current asset balances and movements are disclosed in financial statements


Session Objectives

� Explain the purpose and function of an asset register

� Understand and explain the purpose of depreciation

� Calculate the charge for depreciation using straight line and reducing balance methods

� Identify the circumstances where different methods of depreciation would be appropriate

� Illustrate how depreciation expense and accumulated depreciation are recorded in ledger accounts


Session Objectives

� Calculate depreciation on a revalued non-current asset including the transfer of excess depreciation between the revaluation reserve and retained earnings

� Calculate the adjustments to depreciation necessary if changes are made in the estimated useful life and/or residual value of a non-current asset

� Record depreciation in the income statement and statement of financial position


Characteristics of Non-current

Assets

� Long term in nature

� Not normally acquired for resale

� Could be tangible or intangible

� Used to generate income directly or indirectly

� Not normally liquid asset


Capital Expenditure

� Expenditure on acquisition of Non-current assets for use in business

� Expenditure on increasing the earning capacity of existing assets.

� Expenditure incurred for a long term that creates an asset with value

� Examples: New machineries purchased, renovation of buildings, purchase of furniture and fixtures, purchase of computer equipment and office vehicles


Revenue Expenditure

� Expenditure incurred for carrying on the day-to-day operations of the organisation.

� Expenditure on current assets

� Expenses for maintaining the earning capacity

� Examples : Salaries paid to employees, expenditure on rent incurred, interest payments, administrative expenses, sales commissions etc.


Non-current Assets Registers

� Records of individual tangible Non-current assets held by the business.

� Function of the Register is to control Non-current assets and keep a track of them


Non-current Assets Registers

� The details include:

� Cost, Date of Purchase

� Description of Asset, Serial / reference number

� Location of asset

� Depreciation method, Expected useful life

� Net book value


Acquisition of Non-current

Assets

� Cost of Non-current asset = Amount incurred to acquire the Non-current asset and bring it to working condition

� Cost includes:Purchase price + Delivery cost + Legal fees + Subsequent expenditure which enhances the asset

� Cost DOES NOT include revenue expenditure such as repairs or renewals or repainting cost


Acquisition of Non-current

Assets

� Entry to record purchase of asset:

Dr. Non-current asset

(Non-current Asset = Real account: Debit what comes in)

Cr. Bank / Cash / Creditors

(Bank and Creditors: Personal account: Credit the giver)

� A separate account should be kept for each category of Non-current asset.


Subsequent Expenditure which

Enhances the Asset

� This expenditure can only be recorded as a part of the cost or capitalised if it enhances the benefits of the asset.

� Example includes: extension to a shop building. However, repair work does not form a part of this expenditure.


Depreciation

� According to IAS 16, depreciation is

“the measure of the cost or revaluedamount of the economic benefits of the tangible non-current asset that has been consumed during the period”


Causes of Depreciation

� Use

� Physical wear and tear

� Passing of time

� Obsolescence through technology and market changes

� Depletion


Methods of Calculating

Depreciation

� Straight line method

� Reducing balance method


Straight Line Method

� Depreciation charge is the same each year as the assumption is that the benefit is consumed evenly over the life of the asset

� Useful for assets which provide equal benefit each year e.g. machinery


Straight Line Method

� Depreciation charge = (Cost – Residual value) / Useful economic life

� Residual value or scrap value or salvage value = Estimated disposal value of the asset. Often this value is zero

� Useful economic life = Estimated number of years during which the business will use the asset


Reducing Balance Method

� Reducing amount of depreciation is charged each year

� Useful for assets which provide more benefit in the earlier years e.g cars

� Depreciation charge = X% x Net Book Value (NBV)

� NBV = original cost – accumulated depreciation


Accounting for Depreciation

Dr Depreciation Expense

Cr Accumulated depreciation

� Reduce the balance sheet value of the Non-current asset by cumulative depreciation to reflect the wearing out.

� Record the depreciation charge as an expense in the income statement to match the revenue generated by the Non-current asset.


Consistency and Subjectivity

When Accounting for

Depreciation

� IAS 16 Property, Plant and Equipment requires the following:

• Depreciation method should be reviewed at each year end and changed if the method used no longer reflects the pattern of use of the asset

• Residual value and useful economic life should be reviewed at each year end and changed if expectations differ from previous estimates


Disposal of Non-current

Assets

� Profit / loss on disposal

� An accounting profit or loss will arise on the disposal of Non-current asset.

� If:

• Proceeds > NBV (at disposal date) PROFIT

• Proceeds < NBV (at disposal date) LOSS

• Proceeds = NBV (at disposal date) NEITHER PROFIT NOR LOSS


Disposal for Cash

Consideration

� Step 1: Remove the original cost of the Non-current asset from the Non-current asset account

Dr. Disposals (Original cost)

Cr. Non-current assets (Original cost)


Disposal for Cash

Consideration

� Step 2: Remove Accumulated depreciation on the Non-current asset from accumulated depreciation account.

Dr. Accumulated Depreciation

Cr. Disposals

� Step 3: Record the cash proceeds

Dr. Cash (proceeds)

Cr. Disposals (proceeds)

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Disposal for Part-Exchange

Agreement

� Step 1: Remove the original cost of the Non-current asset from the Non-current asset account

Dr. Disposals (Original cost)

Cr. Non-current assets (Original cost)

� Step 2: Remove Accumulated depreciation on the Non-current asset from accumulated depreciation account.

Dr. Accumulated Depreciation

Cr. Disposals


Disposal for Part-Exchange

Agreement

� Step 3: Record the part-exchange allowance (PEA) as proceeds:

Dr. Non-current assets (Part of cost of new asset)

Cr. Disposal (Sale proceeds of old asset)

� Step 4: Record the cash paid for new asset

Dr. Non-current assets (Cash)

Cr. Cash (Cash)



Revaluation of Non-current

Assets

� Business may need to revalue assets to present the revalued amounts in the balance sheet.

� The difference between the NBV and the revalued amount is shown as revaluation reserve in the balance sheet

� The gain is not recorded in the income statement as it is unrealised gain


Depreciation of a Revalued

Asset

� The charge for depreciation should be based on the revalued amount and the remaining useful life of the asset

� This charge will be higher than depreciation prior to the revaluation


Depreciation of a Revalued

Asset

� The excess of the new depreciation charge over the old depreciation charge should be transferred from the revaluation reserve to the accumulated profits

� This is done within the capital section of the balance sheet

Dr. Revaluation reserve

Cr. Accumulated profits

© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting

Topic 10

Books of Prime Entry and

Control Accounts


Session Objectives

� Identify and explain the function of the main data sources in an accounting system

� Outline the contents and purpose of different types of business documentation

� Understand the basic function and form of accounting records in a typical manual system

� Understand the purpose of control accounts for accounts receivable and accounts payable

� Understand how control accounts relate to the double-entry system


Session Objectives

� Prepare ledger control accounts from given information

� Perform control account reconciliations for accounts receivable and accounts payable

� Identify errors which would be highlighted by performing a control account reconciliation

� Identify and correct errors in control accounts and ledger accounts

� Record cash transactions in ledger accounts


Session Objectives

� Understand the need for a record of petty cash transactions

� Describe the features and operation of a petty cash imprest system

� Account for petty cash using imprest and non-imprest methods

� Understand the importance of, and identify controls and security over the petty cash system


Business Documentation

� Quotation: Asking price. Used for establishing price from various suppliers

� Purchase order: A written authorization prepared by a buyer for the purchase of goods or services at a specified price.

� Sales order: An order received by a business from a customer. A sales order may be for products and/or services.



� Delivery Note (Goods Delivery Note): A written document from the seller to the buyer that accompanies a delivery of goods and specifies type of goods and quantity.

� Purchase Invoice: Produced by company receiving the goods as a proof of receipt.

� Credit Note: A monetary instrument issued by a seller that allows a buyer to purchase an item or service from that seller on a future date.



� Debit Note: Note to a person or a company signifying an amount owed. Although it is very similar to an invoice, the invoice always represents sales, whereas a debit note is used for deducting money without a sale being made.

� Remittance Advice: A statement sent to providers showing that claims were processed and the amount for which the beneficiary is responsible. If denied, an explanation of denial is provided.

� Receipt: Details of payments received


Books of Prime Entry

� Sales Day Book – Recording credit sales

� Purchases day book - Recording credit purchases

� Sales returns day book – Recording sales returns

� Purchases returns day book - Recording purchases returns

� Cash book - All cash / bank transactions

� Petty cash book – All small cash transactions

� Journal – All transactions not recorded elsewhere


Ledger Accounts

� General ledger – Contains all accounts or a summary of all accounts necessary to produce the trial balance and financial statements

� Accounts receivables ledger- Contains an account for each credit customer. An account to summarise this information , Sales ledger control account, is normally contained in the General ledger

� Accounts payable ledger- Contains an account for each credit supplier. An account to summarise this information , Purchase ledger control account, is normally contained in the General ledger


Sales Day Book Format


Sales Day Book Double Entry

� Double entry will depend on whether individual accounts are maintained in individual ledger or sales ledger control account in general ledger

Individual accounts part of double entry:

Dr. Sam $4500

Dr. John $10,000

Cr Sales $14,500

(Total sales posted to sales ledger control account)


Sales Day Book Double Entry

Sales Ledger Control Account part of double entry:

Dr. Sales Ledger Control Account $14,500

Cr. Sales $14,500

Each entry also posted to individual memorandum accounts in accounts receivable ledger


Purchases Day Book, Sales

Returns Day Book, Purchases

Returns Day Book

Format is similar to that of sales day book.

Dr. Purchases

Cr. Purchase ledger control account

Each entry also posted to individual memorandum accounts in accounts payable

ledger

Dr. Purchases

Cr. Individual Accounts in accounts payable ledger

Total purchases posted to purchases ledger control

account

Purchases Day Book

Control accounts part of double entry

Individual accounts part of double entry


Sales Returns Day Book

Dr Sales Returns

Cr Sales ledger control account

Each entry posted to individual memorandum accounts in accounts receivable ledger

Dr Sales Returns

Cr Individual accounts in accounts receivables ledger

Total returns posted to sales ledger control account

Sales returns day book




Purchases Returns Day Book

Dr. Purchase ledger control account

Cr. Purchases returns

Each entry posted to individual memorandum accounts in accounts

payable ledger

Dr. Individual accounts in accounts payable ledger

Cr. Purchases returns

Total returns posted to purchases ledger control account

Purchases returns day book




Control Accounts

� Sales Ledger Control Account

� Purchases Ledger Control Account


Sales Ledger Control Account

Format


Purchases Ledger Control

Account Format


Contra Entries

� These are entries made when a customer is also a supplier.

Dr. Purchase ledger control account

Cr. Sales ledger control account

� Individual receivables and payables must also be updated to reflect this.


Cash Book

� All transactions involving cash and bank are recorded in cash book.

� Many businesses may have separate books for cash receipts and cash payments

� A note of cash discounts is also made in the cash book

� Businesses generally use a columnar format of cash book


Petty Cash Book

� All transactions involving small amounts are recorded in the petty cash book

� Petty cash is maintained using ImprestSystem


Imprest System

� Step 1: Business decides on an amount to be held as a float

Dr. Petty CashCr. Bank

� Step 2: As petty cashier makes payments he records them in the petty cash book. All expenditure must be evidenced by an expense receipt

� Step 3: Cheque is drawn to return the petty cash to the original float levelFloat = Cash in petty cash box + Sum total of expense

vouchers since last disbursement


Topic 9

From Trial Balance to

Financial Statements


Session Objectives

� Identify the purpose of a trial balance

� Extract ledger balances into a trial balance

� Prepare extracts of an opening trial balance

� Identify and understand the limitations of a trial balance

� Illustrate process of adjusting the financial statements for accruals and prepayments, depreciation, irrecoverable debts and allowances for receivables


Trial Balance

� Trial balance is a statement of general ledger accounts that enables an accountant to confirm whether amounts debited equal amounts credited.


Purpose of Trial Balance

� Check that for every debit entry there is an equal credit entry

� It is the first step towards preparation of financial statements


Limitations of Trial Balance

� Trial balance does not identify all the errors.

� It does not identify where those errors have been made or what those errors are


Adjustments Required

� Closing inventory

� Depreciation

� Accruals

� Prepayments

� Irrecoverable Debts

� Allowance for Receivables


Adjustments Entry for Closing

Inventory

Dr. Inventory (Balance Sheet)

Cr. Cost of Sales (Income Statement)


Adjustments Entry for

Depreciation

Dr. Depreciation Expenses (Income Statement)

Cr. Accumulated Depreciation (Balance Sheet)



Accruals

Dr. Expenses (Income Statement)

Cr. Accrual (Balance Sheet)



Prepayments

Dr. Prepayments (Balance Sheet)

Cr. Expenses (Income Statement)



Irrecoverable Debts

Dr. Irrecoverable debt (Income Statement)

Cr. Receivables (Balance Sheet)



Allowance for Receivables

Dr. Irrecoverable debt (Income Statement)

Cr. Allowance for Receivables (Balance Sheet)


Topic 7

Irrecoverable Debts and Allowances for Receivables


Session Objectives

� Identify the benefits and costs of offering credit facilities to customers

� Understand the purpose of an aged receivables analysis

� Understand the purpose of credit limits


Session Objectives

� Prepare the bookkeeping entries to write off a bad debt

� Record a bad debt recovered

� Identify the impact of bad (irrecoverable) debts on the income statement and on the statement of financial position sheet


Session Objectives

� Prepare the bookkeeping entries to create and adjust an allowance for receivables

� Illustrate how to include movements in the allowance for receivables in the income statement and how the closing balance of the allowance should appear in the statement of financial position


Provision of Credit Facilities

� Benefits:

� Enable businesses to enter new markets

� Possibility of increased sales

� Encourages customer loyalty

� Costs

� Can prove costly to the business

� May adversely affect the business cash flow

� Potential risk of irrecoverable debts


Aged Receivables Analysis

� It is an analysis usually in the form of a list, ordered by name, showing how much each customer owes and how old their debts are

� It is used for keeping track of outstanding debts and follow up any that is overdue


Important Terms Associated

with Debts

� Irrecoverable debt: Debt unlikely to be received from the customer

� Doubtful debt: Debt where there is some doubt whether a customer can or will pay his debt

� Allowance for receivables: An allowance created on doubtful debts


Accounting Entries: Cash Sale

When the sale is made

Dr. Cash account

Cr. Sales account


Accounting Entries: Credit

Sale

When the sale is made

Dr. Receivables account

Cr. Sales account

On settlement of amount due

Dr. Cash account

Cr. Receivables account

If amount becomes irrecoverable

Dr. Irrecoverable debt or Bad debt



Accounting for Irrecoverable

Debts Recovered

When the debt is written off

Dr. Irrecoverable debt or Bad debt


When recoverable debt is recovered

Dr. Cash account

Cr. Irrecoverable debt or Bad debt


Allowance for Receivables

� Specific allowance:

� Allowance for debts where the customer is known to be in financial difficulties and is disputing their invoice or is refusing to pay

� General Allowance:

� A general allowance for receivables expected to be irrecoverable.


Accounting for Allowance for

Receivables

For Setting up allowance

Dr. Irrecoverable debts expense account

Cr. Allowance for receivables account


Movement in the Allowance

for Receivables

� Write irrecoverable debts

� Calculate receivables balance as adjusted for write offs

� Ascertain specific allowance

� Deduct debt specifically allowed for


Movement in the Allowance

for Receivables

� Multiply the remaining receivables balance by general allowance percentage

Thus,

% (Closing receivables – Irrecoverable debts –Specific allowance)

� Add the specific and general allowances

� Compare with brought forward allowance

� Account for change in allowance


In Case of Existing

Allowance

• Charge only the movement in the profit to the profit and loss account

closing allowance – opening allowance

elements of financial statements ppt

Documents

student notes

financial statementsreports

financial status

horizontal balance sheet

vertical balance sheet

accounting equation

net income

normal course of business