How to draw up a Full Financial Statement with adjustment on Expenses and income?

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After you have learnt how to draw up a simple financial statement, it is time for you to learn the steps to draw up the financial statement with adjustment.

For this section, we will only look at the adjustment on expenses and income.  This will make it easier for first time learner to see how each of the adjustment will be treated in both the statement of financial performance and financial position.

Question

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

 

$

Sales revenue

189,880

Cost of sales

96,576

Sales returns

3,500

Inventory

5,022

General expenses

42,078

Discounts received

420

Wages and salaries

37800

Insurance

3,045

Interest expense

300

Motor vehicles

30,880

Commission income

            6,000

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.             Interest on loan is at 5% per annum. The interest expense is not fully paid yet.

2.            The following adjustment need to be made at 30 Sept 2019

                        (a)      Insurance paid in advance $400

                         (b)    Wages and salaries owing $1200

                         (c)     Commission income receivable $2000

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 :  Do the adjustment and put it into the questions directly so that you will not miss out any items when you do the statement.

Additional information item
 (1)
Interest on loan = 5% x8000 =$400 per year

But in the trial balance extract, the interest on loan paid = $300

So $400- $300 =$100 still owing

ie, $400 will appear in the Financial performance as expense
    $100 will appear in the Financial position as  Current Liability - interest payable

(2)

(a)  Insurance paid in advance = insurance paid but expense not incurred yet

In the Trial Balance, Insurance paid = $3045

$400 is paid in advance is for used next accounting period, so we must deduct from the amount paid. 

 $3045 - $400 = $2645  -- insurance expense incurred for this accounting period

$2645 will appear in Financial performance as expense
 $400 will appear in the Financial position as  Current Asset - Prepaid insurance

(b) Wages and salaries owing = wages and salaries already incurred but not yet paid

In the Trial Balance, wages and salaries paid = $37800

$1200 is the amount still owing so must add to the amount paid.

$37800 +$1200 =$39000 -- wages and salaries expense incurred for this accounting period

$39000 will Financial performance as expense
$1200 will appear in the Financial position as Current liability - wages and salaries payable

(c) Commision income receivable = commission earned but not yet received

$2000 is the amount still not received after services were performed, so must be added to the commision income.

$6000 + $2000 = $8000 

$6000 will appear in Financial performance as other income
$2000 will appear in the Financial position as Current Asset - Commission income receivable




After we have done the addtional information, we are ready to draw up the statement of financial performance.

I will use those highlighted in yellow to prepare trading portion of the statement.  Follow by the green highlghted part to put into the other income portion.  The last part will be all the expenses.  By following this step, you will not miss out any items and risk the need to re-draw the statement.



The rest of the items [not highlighted items] will appear in the statement of Financial position plus those items appear in the purple highlighted additional information. 

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