How to draw up a financial statement with all different types of adjustment

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 In the part of the blog, I will show you how the whole statement of financial position and performance look like with all the adjustment on prepayment, accrual and impairment loss on Trade receivable. 

Question

Step 1 : Do all the adjustment for the additional information

Item (1) : Dr drawings Cr Inventory  ie Drawings (+) and Inventory (-)

Item (2) : Dr Commission received  Cr Commission received in advance 

               ie, Commission received (-)

Item (3) : Dr Prepaid Utilities Cr Utilities expenses

             ie, Utilities expenses (-)

Note : commission received in advance will appear in the Financial position as CL

           Prepaid Utilities will appear in the Financial position as CA

Item (4) Dr Bank Loan Cr Current Portion of Long Term borrowing

         ie, Bank loan (-) 

Current portion of Long Term borrowing will appear in the Financial position as CL

Item (5) :Dr Allowance for impairment loss on Trade receivable Cr Trade Receivable

      ie, Allowance for impairment (-) and Trade receivable (-)

Item (6) : Dr Impairment loss on Trade Receivable Cr Allowance for impairment loss on TR

                ($450)                                                                 ($450)

  ie  $800 - $550 = $250

then, $700 - $250 = $450 -- impairment loss on Trade receivable 

Step 2 : highlight all the items in the trial balance for those to appear in the statement of financial performance with the above adjustment done inside if possible.

The whole trial balance will look like this after you have done the above

For the allowance for impairment and impairment loss, you must do the calculation outside and just put in the corrected figure into the trial balance.  In this question, I only show the adjustment till item 5 for allowance for impairment on Trade receivable.  

Answer

Now, we will look at one more question with depreciation added into the additional information.

Note : The format for the statement of financial position will look slightly different on the Non current Assets side once accumulated depreciation is introduced.

Question 2

Step 1 : Do all the adjustment for the additional information

item (1) Calculate the depreciation of Motor vehicle.  Q required to use the reducing balance method, 

             so, we must use the original cost - accumulated depreciation to get the net book value.

            Then use the net book value to multipy by the percentage given.  ie

  Depreciation of Motor Vehicle = (60000 - 21600 )x 20% = $7680

   Dr Depreciation of MV $7680 Cr Accumulated Depreciation of MV $7680

This means that depreciation will appear in the financial performance and accumulated depreciation will appear in the financial position.  So, accumulated depreciation = $7680 +$21600 =$29280

Depreciation of Equipment using the straight line method will simply be the depreciation percentage multipy by the percentagae given.

 Depreciation of Equipment = 30000 x10% =$3000 based on straight line method.

Dr Depreciation of Equipment $3000 Cr Accumulated depreciation of equipment $3000

Accumulated depreciation of Equipment to appear in the financial position =$3000+$9000 =$12000.

item (2)  Dr Prepaid insurance Cr Insurance

  ie, Insurance expenses (-)

Note :  Prepaid Insurance will appear in the Financial position as CA

item (3)  6% x 63000 =$3780

Dr Interest expenses Cr Interest Payable

Note :  Interest payable will appear in the Financial position as CL

  Item (4) This is the financial position item.  The bank loan - long term borrowing will left with 80% and the other 20% is known as current portion of long term borrowing.

Note :  Current portion of long term borroiwng will appear in the Financial position as CL

Item (5) Allowance for impairment will decrease by a $100

Dr Allowance for impairment on Trade receivable Cr Impairment loss on  TR reversal

Note: the reversal on impairment will be minus away from expenses as there is a drop in the estimate for the TR not able to pay.  

Item (6) Dr rental expense Cr cash at bank

ie, rental expense (+) and cash at bank (-)

Item (7) Inventory net realisable value is lesser than the cost price listed in the Trial balance above.

$27710 -27000 =$710

So, this $710 is the impairment loss on inventory.

Dr Impairment loss on inventory $710 and Cr Inventory $710

The whole Trial balance will look like this after the additional information is adjusted.


The yellow highlighted items are the newly added into the Question under additional information

The green highlight items are expenses and income for the financial performance

The blue highlight items are the trading items in the financial performance

We will of course do the statement of financial performance first, using all the highlighted items in the question above , followed by the statement of financial position, the items not highlighted.

Answer










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