How to draw a full financial statement with adjustment for depreciation ?

 Business used non-current assets to generate future profit.  The purpose of buying non-current assets are for used in the business.  

However, we will still need to take into account that non-current assets are subjected to :

1 wear and tear

2. obselences

3 usage 

So, we need to provide depreciation to take into account the above.  

Depreciation : the spreading of the cost of the non-current assets over its useful life

Accumulated depreciation- depreciation accumulated over the years in  the business

Here I will only show you two methods of depreciation:=

Straight line method

Reducing balance/Diminishing balance method.

We will incorparate that into the financial statement and how you can prepare a financial statement with depreciation.

Question

The following balances were extracted from of Ivy, Ivory Trading Enterprise on 30 September 2019.

	$
Sales revenue	179,880
Cost of sales	96,576
Sales returns	3,500
Inventory	5,100
Fixtures and Fittings	42,000
Accumulated depreciation of Fixtures and Fittings	420
Wages and salaries	37800
Insurance	3,045
Interest expense	300
Motor vehicles	30,880
Commission income Accumulated depreciation of motor vehicle	6,000            10,000
Trade receivables	7,485
Trade payables	4,306
Cash at bank (overdrawn)	320
5% Loan from Bank	8,000
Drawings	4,240
Capital, 1 October 2018	22,000

 Additional information

1. Depreciation of motor vehicle is at 20% using the reducing balance method

2. Deprecation of Fixtures and Fittings is at 10% using the straight line method.

    

REQUIRED

(a)          Prepare the statement of financial performance/ Income statement for the year ended 30 September 2019.                             

(b)     Prepare the statement of financial position/balance sheet as at 30 September 2019.

Answer : 

Step 1 : Highlght those items needed to draw up the statement of financial performance 

Step 2 : Calculate the depreciation and put it into the questions directly so that you will not miss out any items when you do the statement.

1.  Depreciation of Motor Vehicle = 20% x (30880-10000) = $4176

$4176 = depreciation,  will appear in the Financial performance as an expense

$4176 will be added to the accumulated dep to appear in the financial position

 

 ie 4176 +10000 = $14176

2 Depreciation of Fixtures and Fittings = 10% x 42000=$4200

$4200 = depreciation for Fixtures and Fittings , will appear in the Financial performance as an expense

$4200  will be added to the accumulated dep to appear in the financial position

ie 4200 +420 = $4620

	$
Sales revenue	179,880
Cost of sales	96,576
Sales returns	3,500
Inventory	5,100
Fixtures and Fittings	42,000
Accumulated depreciation of Fixtures and Fittings	420+4200
Wages and salaries	37800
Insurance	3,045
Interest expense	300
Motor vehicles	30,880
Commission income Accumulated depreciation of motor vehicle	6,000            10,000+4176
Trade receivables	7,485
Trade payables	4,306
Cash at bank (overdrawn)	320
5% Loan from Bank	8,000
Drawings	4,240
Capital, 1 October 2018	22,000

 Additional information

1. Depreciation of motor vehicle ($4176) is at 20% using the reducing balance method

2. Deprecation of Fixtures and Fittings($4200) is at 10% using the straight line method.

    

After the calculation, we will be able draw up the statement for financial performance by using all the items highlighted in blue.

Ivory Trading Enterprise
Statement of financial performance for the year ended 30 September  2019
				$	$
Sales revenue					179880
less sales returns					3500
Net sales revenue					176380
less cost of sales					96576
Gross Profit					79804
Add other income
Commission income					6000
less expenses
Wages				37800
Insurance				3045
Interest expense				300
Depreciation of Motor Vehicles				4176
Depreciation of Fixtures and Fittings				4200
					49521
Profit for the year					36283

After the Statement of financial performance is done, we will then draw up the statement of financial position by using the rest of the items.

Ivory Trading Enterprise
Statement of financial position for the year ended 30 September  2019
Non Current Assets				cost	Accu dep	Net book value
Motor Vehicle				30880	14176	16704
Fixtures and fittings				42000	4620	37380
						54084
Current Assets
Inventory					5100
Trade Receivable					7485
						12585
Total Assets						66669
Equity and liabilities
Equity
Capital (22000+36283-4240)						54043
Non Current Liabilities
Long Term borrowing						8000
Current Liabilities
Trade Payables					4306
Bank overdraft/short term borrowing					320
						4626
Tota Equity and Liabilities						66669