FINANCIAL ACCOUNTING –TOPIC 4

PREPARATION OF FINANCIAL STATEMENTS

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A Regional University Transcending Boundaries

 PREPARATION OF FINANCIAL STATEMENTS

 Learning outcomes of Preparation of Financial Statements

 Statement of profit or loss and Other Comprehensive Income (Income statement)

 Statement of financial Position (Balance sheet)

 Statement of Cash flows

 Statement of changes in equity

 Tutorial Questions 2
 LEARNING OUTCOMES FOR PREPARATION OF FINANCIAL STATEMENTS

Financial Reporting Frameworks: identify and apply relevant accounting standards (e.g., IFRS,
GAAP).
Prepare Core Financial Statements: compile all the four financial reports / statements
Apply Accounting Principles: use accrual accounting, matching, and consistency principles.
Analyze Financial Data: interpret financial statements to assess business performance.
Ensure Compliance: adhere to regulatory and ethical financial reporting requirements.
Utilize Accounting Software: apply technology in financial statement preparation (ERP)

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 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

1. Statement of Profit or Loss and Other Comprehensive Income (Section)

•Revenue (or Sales) – Total income from goods sold or services provided.
•Cost of Sales (or Cost of Goods Sold - COGS) – Direct costs related to production or service delivery.
•Gross Profit – Revenue minus Cost of Sales.
•Operating Expenses –administrative, selling, and distribution expenses.
•Net operating profit – Gross profit less operating expenses
•Other Income – Earnings from non-core business activities (e.g., rental income, interest income).
•Operating Profit (EBIT) – Earnings before interest and tax.
•Finance Costs – Interest paid on loans and borrowings.
•Profit Before Tax (PBT) – Operating profit minus finance costs.
•Income Tax Expense – Taxes payable on profits.
•Profit for the Period (Net Profit) – Final profit after tax.
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 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

2. Other Comprehensive Income (OCI) Section

This section captures gains and losses not included in the profit or loss section but affect equity.

•Revaluation Gains/Losses on property, plant, and equipment (PPE-Non-current assets).

•Foreign Currency Translation Differences from foreign subsidiaries.

•Gains/Losses on Financial Instruments (e.g., fair value changes of investments).

•Actuarial Gains/Losses on defined benefit pension plans.

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 FYR-1/1/2024-31-2024 Ugx Amt=Payable Paid
Provisional = XYZ= Returns Sept=2024 = 100,000,000 * 30% = 30,000,000 = 20,000,000
March 2025 120,000,000 * 30% = 36,000,000 = 16,000,000 –DTL

TP Paid
Provisional = XYZ= Returns Sept=2024 = 100,000,000 * 30% = 30,000,000 = 20,000,000
March 2025 60,000,000 * 30% = 18,000,000 = 2,000,000 -DTA

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 STATEMENT OF FINANCIAL POSITION
COMPANY NAME
STATEMENT OF FINANCIAL POSITION as at [Date]
ASSETS Ugx
Non-Current Assets:
 Land and Buildings x
 Plant and Equipment x
 Motor-vehicles x
 Furniture, Fittings and fixtures x
 Computers x

 Intangible non-current Assets x

 Investments in Subsidiaries/Associates x
 Deferred Tax Assets x
Total Non-Current Assets xx 8
 STATEMENT OF FINANCIAL POSITION

Current Assets: Ugx

 Inventory x
 Receivables (Debtors) x
 Prepayments x
 Bank x
 Cash x
Total Current Assets x
Total Assets (Non-current + Current assets) xx

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 STATEMENT OF FINANCIAL POSITION

Financed by
EQUITY AND LIABILITIES Ugx
Equity:
 Share Capital x
 Retained Earnings x
 Revaluation Reserves x
 Share premium x
Total Equity x

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 STATEMENT OF FINANCIAL POSITION

Non-Current Liabilities: Ugx.

 Long-term Borrowings (Loans) x
 Deferred Tax Liabilities x
 Lease Liabilities x
Total Non-Current Liabilities x
Current Liabilities:
 Trade Payables (Creditors) x
 Short-term Borrowings (<1 Year) x
 Tax Payable x
 Accrued Expenses x
 Bank overdraft x
Total Current Liabilities x
TOTAL EQUITY AND LIABILITIES xx

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 FORMAT OF THE STATEMENT OF CHANGES IN EQUITY

Share Share Premium

Particulars Retained Earnings Total Equity
Capital Revaluation Reserve
Opening Balance (Beginning of Period) xxx xxx xxx xxx xxx
Changes in Share Capital
Issue of Shares +xxx +xxx
Redemption of Shares -xxx -xxx
Net Income for the Period +xxx +xxx
Other Comprehensive Income (OCI)
Revaluation Surplus +xxx +xxx +xxx
Foreign Currency Translation Adjustment +xxx +xxx
Transfers (to/from Reserves)
Transfer from Retained Earnings -xxx +xxx 0
Transfer to Retained Earnings +xxx -xxx 0
Dividends -xxx -xxx
Closing Balance (End of Period) xxx xxx xxx xxx
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 PROVISION FOR BAD DEBTS

 Provision for bad and doubtful debts is an estimate of the amount a company expects to lose from
customers who may not pay their outstanding balances.
 It ensures that financial statements reflect a more realistic view of the company's receivables.
 Ensures that financial statements reflect the true recoverable value of trade receivables, adhering to
the prudence concept in accounting.

1. Accounting Treatment
Profit & Loss Account (Income Statement)
– Increase in provision → Recorded as an expense
– Decrease in provision → Recorded as income (reversal)
Statement of Financial Position (Balance Sheet)
 Deducted from Trade Receivables (Debtors) under Current Assets
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 PROVISION FOR BAD DEBTS

Example
Palazo Ltd has total trade receivables of Ugx.50,000,000. Based on past trends, the company estimates
that 5% of receivables may not be collected.
Step 1: Calculation of Provision
Provision = 5% of Ugx.50,000,000 = Ugx. 2,500,000

Step 2: Accounting Treatment

1.Profit & Loss Account (P&L)
 The provision of Ugx. 2,500,000 is recorded as an expense in the income statement:
2. Statement of Financial Position (Balance Sheet)
 Trade Receivables before provision: Ugx. 50,000,000
Less: Provision for Bad Debts: (Ugx. 2,500,000)
Net Trade Receivables: Ugx. 47,500,000
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 PROVISION FOR BAD DEBTS

3. Adjustment for Provision Changes

Case 1: Increase in Provision

•If provision increases to Ugx.3,000,000 the additional Ugx. 500,000 will be recorded as an expense:
•Dr. P & l as an expense (Increase in Provision for Bad Debts (P&L): Ugx.500,000

Case 2: Decrease in Provision

•If provision decreases to Ugx. 2,200,000, the reduction of Ugx.300,000 will be recorded as income:

•Cr. P & l if decrease in Provision for Bad Debts (P&L): Ugx. 300,000 (Gain)
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 PROVISION FOR DEPRECIATION

 Depreciation refers to the systematic allocation of the cost of PPE over its useful life.
 Represents reduction in value of non-current assets due to wear and tear, obsolescence, or passage of time.
 Is recorded as an expense in the financial statements to match the cost of using the asset with the revenue
it helps generate.
Causes of Depreciation on Non-Current Assets
1. Wear and Tear: Continuous use of assets leads to physical deterioration, reduces efficiency and lifespan.
2. Obsolescence: Technological advancements or changes in industry standards make assets outdated, even if
they are still functional.
3. Passage of Time: Some assets naturally degrade over time due to environmental factors like weathering.
4. Depletion: Assets such as mines, oil fields, or quarries lose value as natural resources are extracted.
5. Legal or Contractual Limits: Assets may have limited useful life due to legal restrictions: patents or lease
agreements.
6. Accidental Damage: Unexpected damages: fires or breakdowns, reduce asset’s value, even if repaired.
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 PREPAYMENTS

 Prepayments refer to expenses paid in advance for goods or services that will be received in the future.

 In accounting, prepayments are classified as current assets on the statement of financial position:
 until the benefit is received,

 after which they are expensed in the statement of profit or loss (income statement), e.g., rent,
insurance, fuel and subscriptions.

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 ACCRUALS

 Accruals are revenues and expenses that have been incurred but not yet recorded in the accounting
books
 Accrual accounting recognizes transactions when they occur, rather than when cash is received or
paid.

Types of Accruals:
Accrued Revenues: Income earned but not yet received (e.g., interest income, services rendered but not
billed).
Accrued Expenses: Costs incurred but not yet paid (e.g., wages payable, interest payable).

 Accruals are essential in the accrual basis of accounting, ensuring that financial statements reflect the
true financial position of a company by matching revenues with expenses in the correct accounting
period.

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 GAIN /LOSS ON DISPOSAL OF ASSET

 Gain or Loss on Disposal of an Asset refers to the difference between the asset's carrying amount
(book value) and the amount received from its sale or disposal.

•Gain on Disposal occurs when the selling price of the asset exceeds its book value.
•Loss on Disposal occurs when the selling price is lower than its book value.

Formula:
Gain/Loss on Disposal = Sale Proceeds − Book Value of the Asset
Where:
•Sale Proceeds = Amount received from selling the asset.
•Book Value = Original cost of the asset minus accumulated depreciation and any impairment losses.
 The gain or loss is recorded in the income statement under Other Income (for gains) or Other
Expenses (for losses).
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