Financial Statements

What are the accounts needed for the gross profit calculations?

Account Type	Description	Trial Balance Balance Type
Sales Revenue	Total value of goods sold.	Credit
Sales Returns/Returns Inwards	Value of goods returned by customers.	Debit
Opening Inventory	Value of goods on hand at the start of the period.	Debit
Purchases	Total value of goods bought for resale.	Debit
Purchases Returns/Returns Outwards	Value of goods returned to suppliers.	Credit
Direct Expenses	Costs directly related to getting goods ready for sale (e.g., carriage inwards).	Debit

Where is the closing inventory found?

"Additional Information"

Calculate Net Sales Revenue

Net Sales Revenue = Sales Revenue - Sales Returns 

Calculate Cost of Goods Sold (COGS)

COGS = Opening Inventory + Net Purchases - Closing Inventory 

Calculate Gross Profit

Gross Profit = Net Sales Revenue - Cost of Goods Sold 

What are the accounts needed for operating expenses?

Expense Item	Where to Find on Trial Balance (Debit Balances)	Common Adjustments/Calculations Needed
Wages and Salaries	"Wages," "Salaries," or "Payroll Expense" account.	Must include any accrued wages (wages owed but unpaid at year-end, found in additional info). Must exclude wages for production staff (part of COGS).
Rent and Rates	"Rent Expense," "Rates Expense," "Property Taxes" account.	Adjust for prepayments(rent paid in advance, reduces expense) or accruals (rent owed but unpaid, increases expense).
Utilities	"Electricity," "Water," "Gas," "Telephone Expense" accounts.	Adjust for accruals at the year-end based on meter readings or unpaid bills.
Depreciation	No calculation needed for this year's expense. The expense figure is usually provided as an adjustment or in a separate "Depreciation Expense" account.	The calculation method (straight-line, reducing balance) is applied to the asset's cost/book value based on company policy (found in notes).
Advertising/Marketing	"Advertising Expense" or "Marketing" account.	Adjust for prepayments if an annual contract was paid upfront for a period extending into the next year.
Insurance	"Insurance Expense" or "General Insurance" account.	Adjust for prepayments if the policy covers a period extending past the year-end date.
Carriage Outwards	"Delivery Expenses" or "Carriage Outwards" account.	This is the cost of delivering goods to the customer. (Note: Carriage Inwards goes into COGS).
Discounts Allowed	"Discounts Allowed" or "Sales Discounts" account.	No calculation needed; the total amount is listed directly.
Maintenance & Repairs	"Repairs Expense" or "Maintenance Expense" account.	Ensure capital expenditure (upgrades that improve asset value) isn't included here; only routine repairs.

Are the expenses credit or debit?

These expenses are all sourced as debit balances from the trial balance.

Accruals (Expense Incurred, Not Paid)

• Calculation: Estimated monthly cost x months owed

Expense in SoPL = Trial Balance Amount + Accrued Amount

Prepayments (Expense Paid, Not Incurred)

• Calculation: Prepayment = total paid x months for the year/total months covered

Expense in SoPL = Trial Balance Amount - Prepaid Amount

Prepayment vs Accrual

Feature	Prepayment	Accrual
Cash Timing	Paid before use.	Paid after use.
B/S Category	Current Asset	Current Liability
Effect on Profit	Increases Profit (reduces expense).	Decreases Profit (increases expense).

Depreciation

• Straight-Line Method:

  • Formula: (Cost of Asset - Residual Value) / Useful Life (Years)

  • Formula: Original cost x %

  • Result: Provides an equal annual expense amount each year.

• Reducing (Diminishing) Balance Method:

  • Formula: (Carrying Value at start of year) * Rate of Depreciation (%)

  • (Carrying Value = Cost - Accumulated Depreciation)

  • Result: Provides a higher expense in the early years and a lower expense in later years.

What are the accounts needed for non-operating income?

Item Name	Calculation	Where to Find on Trial Balance
Interest Received	No calculation needed; the total amount is listed directly.	Credit balance account named "Interest Received" or "Interest Income".
Dividends Received	No calculation needed; the total amount is listed directly.	Credit balance account named "Dividends Received" or "Dividend Income".
Gain on Disposal of Asset	The gain is the difference between the sale price and the carrying (book) value of an asset sold.	The resultant gain (credit balance) usually appears as an adjustment or a specific income line item aft

What accounts are needed for finance costs?

Item Name	Calculation	Where to Find on Trial Balance
Interest Paid/Expense	No calculation needed for the primary value. The amount reflects the total interest incurredfor the period.	Debit balance account named "Interest Expense," "Interest Paid," or "Bank Interest."
Accrued Interest Expense	This is an adjustment. If the amount paid(cash basis) is different from the amount incurred(accrual basis), an adjustment is needed.	The accrued amount is usually found in "Additional Information" notes at the end of the

What accounts are needed for taxation?

Item Name	Calculation	Where to Find on Trial Balance
Current Tax Expense	This is typically an estimated figure provided by the company’s accountants at year-end.	The estimated expense amount is typically found in the "Additional Information" section or in a dedicated "Income Tax Expense" account with a debit balanceafter adjustments.

Non-Current Assets (NCAs)

ATB Accounts Used	SFP Calculation Detail
Asset Cost Accounts (Debit)	The original cost is taken directly from the individual asset accounts (e.g., Land, Buildings, Machinery).
Accumulated Depreciation (Credit)	This contra-asset account's balance must be subtracted from the cost. This is a crucial calculation performed before presentation.
Final Calculation:	Non-Current Assets (NBV) = Cost - Accumulated Depreciation

Current Assets (CAs)

ATB Accounts Used	SFP Calculation Detail
Inventory (Debit)	The final adjusted figure is used (must be at the lower of cost or NRV).
Trade Receivables (Debit)	The gross receivable amount.
Allowance for Doubtful Debts (Credit)	This contra-asset balance must be subtracted from the trade receivables balance.
Prepayments (Debit)	The unexpired portion of expenses paid in advance.
Cash/Bank (Debit)	The positive balance in the Bank account. If it has a Credit balance, it is not an asset; it is an overdraft liability (see Section 4).

Current Liabilities (CLs)

ATB Accounts Used	SFP Calculation Detail
Trade Payables (Credit)	Taken directly from the ATB (amounts owed to suppliers).
Accrued Expenses Payable (Credit)	The balance from the adjusting entry for expenses incurred but not paid (e.g., accrued wages, interest payable).
Unearned Revenue (Credit)	Money received for services not yet delivered (e.g., prepaid subscriptions).
Tax Payable (Credit)	The full Corporation Tax charge for the year (from the adjusting entry).
Dividends Payable (Credit)	The liability for dividends approved before year-end (from the adjusting entry).
Bank (Overdraft) (Credit)	If the Bank account on the ATB has a Credit balance, that amount is listed here.

Net current assets

Net Current Assets = Total Current Assets - Total Current Liabilities

Non-Current Liabilities (NCLs)

ATB Accounts Used	SFP Calculation Detail
Bank Loans/Mortgages (Credit)	The total loan balance is used, but a portion must be reclassified. The amount due within 12 months (the current portion) must be moved to Current Liabilities.
Other Long-Term Debt (Credit)	Bonds or debentures due beyond one year.

Net assets

Net Assets = Total Assets - Total Liabilities

Equity

ATB Accounts Used	SFP Calculation Detail
Share Capital (Credit)	Taken directly from the ATB. This is the nominal value of issued shares.
Share Premium (Credit)	Taken directly from the ATB. This is the excess paid over nominal value.
Retained Earnings (Credit)	This requires an external calculation (see below).

Retained Earning Calculation

Ending Retained Earnings = Opening Retained Earnings (ATB) + Net Profit For The Year (P&L) - Dividends declared/Paid (Debit balance from ATB)

Equity Components

Equity Component	Trial Balance Source	Notes
Share Capital	Share Capital Account (Credit)	Nominal value of shares issued.
Share Premium	Share Premium Account (Credit)	Excess cash received over nominal value upon issue.
Retained Earnings	Retained Earnings Account (Credit)	This is the Opening Balance.

Opening balances

The balances of the equity accounts on the Unadjusted Trial Balance (UTB) are usually the opening balances (or closing balances from the previous year). These form the first line of the SOCIE.

Extract the Profit/Loss for the Year

• Profit: Increases Retained Earnings.

• Loss: Decreases Retained Earnings.

Account for Equity Transactions (Movements)

Transaction Type	TB Source / Calculation	Impact on Equity
New Share Issue	Share Capital (Credit) and Share Premium (Credit) accounts.	Increases Share Capital and Share Premium.
Dividends Paid/Declared	Dividends Declared/Paid Account (Debit) or Dividends Payable (Credit).	Reduces Retained Earnings. (Interim dividends paid, and final dividends declared before year-end).

Calculate the closing balance

Closing Balance = Opening Balance + Increases - Decreases

Inventory is scrapped

Write off the cost of the scrapped inventory, then take away from the closing inventory

Seen as (closing) inventory on the SoFP

Disposal of PPE

1. D - Dates: How many years/months have we owned this specific asset? (Purchase date to disposal date).

2. A - Amount: What was the original cost of this specific asset?

3. P - Policy: Apply the specific depreciation method (Straight Line or Reducing Balance) for the time owned.

• Result: Annual Charge x Time Owned = Hidden Accumulated Depreciation

NBV = Cost - accumulated depreciation

Profit or loss on disposal = sold for - NBV (other income on SoPL) (Retained earnings increase on SoFP)

The original cost is taken off the non-current asset

How much it was sold for would increase cash on current assets

Customer in administration

Write off how much is owed (Doubtful debt on SoPL)

decrease TR (current asset on SoFP), increase bad debts

Calculate the new provision

Change the allowance for DD to match the new provision (difference is an expense on SoPL)

NBV for PPE when sold PPE involved

Step 1: The "Cost" Column (Cleaning the List)

You must remove the original price of the sold asset from your total cost pool.

• Formula: Opening Cost (from Trial Balance) - Original Cost of Sold Asset = Closing Cost

Step 2: The "Accumulated Depreciation" Column

You must remove all the depreciation that was ever built up for that specific asset.

• Formula: Opening Accum. Depr + Depreciation Charge for Current Year - Total Accum. Depr of Sold Asset = Closing Accum. Depr

Step 3: The Final NBV (The SoFP Figure)

This is the number that actually appears on your balance sheet.

• Formula: Closing Cost (Step 1) - Closing Accum. Depr (Step 2) = Closing NBV

Interests

Interest expense = percentage of interest paid (SoPL)

Interest payable = percentage of interest paid - interest already paid (interest expense on TB) (SoFP)

Corporation tax for the year

Tax expense = SoPL

Tax payable = SoFP

When final dividend is approved and paid before the year ends

Number of shares x dividend per share

Deduction on retained earnings of the SOCIE

SoFP

Cash will decrease

Retained earnings will decrease

Increase in bank overdraft

TB overdraft + price of sold disposal - dividends paid = SoFP overdraft

Bad and doubtful debts

Bad debt written off (increase + or decrease - in allowance) = total

Alternative Account Names for property and plants

• Freehold Property or Land and Buildings

• Fixtures and Fittings (which you mentioned earlier)

• Office Equipment or Computer Equipment

• Motor Vehicles

• Machinery

Need to be debit

Finding cash on the trial balance

Look for the account named "Bank," "Cash at Bank," or "Cash in Hand."

• If it’s a DEBIT balance: This is an Asset. The company has money in the bank.

• If it’s a CREDIT balance: This is a Liability. The company has a Bank Overdraft.

Proposed vs approved dividends

• Proposed Dividends: If the directors merely "propose" a dividend but it hasn't been formally approved by shareholders by the year-end date, it is not recorded in the accounts at all. It is only mentioned in the disclosure notes.

• Approved Dividends: Once approved, it becomes a legal obligation and must be recorded as a liability (if unpaid).

Retained earnings

Profit for the year is added to retained earnings

Subtract dividends from retained earnings

If your Net Assets (Total Assets - Total Liabilities) equal this Total Equity figure, your accounts are perfectly balanced.

New shares issued

If the company issued new shares during the year:

• The nominal value goes in Share Capital.

• The excess goes in Share Premium.

Differences of PPE

Asset Type	Basis of Calculation	Does it stay the same?
P&M	Original Cost	Yes
Vehicles	Current Value (NBV)	No (it decreases every year)
Property	Original Cost	Yes

SoPL vs SoFP for depreciation

• Concept: Spreading the cost of a long-term asset over its useful life.

• Formulas:

  • Straight Line: Original Cost x %

  • Reducing Balance: (Cost - Accum. Depr) x %

• Entries:

  • SoPL: The current year's charge only.

  • SoFP: Subtract the new total accumulated depreciation from the cost to show NBV.

Prepayments (Paid too much)

• Concept: You paid for a service that extends past your year-end date.

• Formula: Prepayment = Invoice Amount x Months outside current year x Total months in invoice

• Entries:

  • SoPL: Subtract from the Trial Balance expense.

  • SoFP: Record as a Current Asset.

• Flashcard Tip: "If it covers next year, take it out of the SoPL and put it in the SoFP."

Accruals

• Concept: You used a service but haven't paid/recorded the bill yet.

• Formula: Accrual = Monthly Cost x Months unpaid/missing

• Entries:

  • SoPL: Add to the trial balance expense.

  • SoFP: Record as a Current Liability.

• Flashcard Tip: "If we used it but didn't pay, add to expenses and add to debt."

Net Trade Receivables (SoFP)

Net Trade Receivables = Gross Receivables - specific write-offs - general allowance (adjusted receivables x %)

Inventory Valuation (The "Lower of" Rule)

Cost of Problem Items: Units x orginal cost

NRV = expected selling price - cost to repair = per unit

Total NRV = unit x per unit price

Cost - total NRV = write down amount

Initial cost - write down amount = closing balance

NBV for PPE

Cost - accumulated depreciation (TB) - depreciation = NBV

Add it all up

Non current asset on SoFP

Retained Earnings

Closing retained earnings = opening balance (TB) + profit of the year - interim and final dividends

What goes in what?

If an item is an income (Sales) or an expense (Rent, Cost of Sales, Depreciation Charge), it goes in the SoPL. If it is a thing (Van, Cash) or an obligation (Loan, Accrual), it goes in the SoFP.

DEAD CLIC

Debit increases:	Credit increases:
Drawings / Dividends	Capital (Share Capital/Premium)
Expenses (Rent, Rates, Cleaning)	Liabilities (Loans, Payables)
Assets (Cash, PPE, Inventory)	Income (Sales/Revenue)
	Control Accounts (Provision/Allowance)

The 4-Step Double Entry Process

Step 1: Identify the Accounts

Look at the transaction and name the two (or more) accounts affected.

Step 2: Apply the "Increase/Decrease" Rule

Determine if the balance in those accounts is going up or down.

Step 3: Match to DEAD CLIC

• Rent (Expense) is increasing DEBIT.

• Bank (Asset) is decreasing CREDIT (because a decrease in an Asset is the opposite of a Debit).

Step 4: Record and Verify

Write the journal entry and ensure DR = CR

Reference table for double book keeping

Account Category	To Increase (+)	To Decrease (-)	Statement
Assets (Cash, Stock)	Debit	Credit	SoFP
Expenses (Rent, Depr)	Debit	Credit	SoPL
Liabilities (Loans, Debt)	Credit	Debit	SoFP
Income (Sales, Fees)	Credit	Debit	SoPL
Equity (Share Capital)	Credit	Debit	SoFP

The opposite effect

• To increase an Asset: Debit it (e.g., getting cash).

• To decrease an Asset: Credit it (e.g., spending cash).

• To increase a Liability: Credit it (e.g., taking a loan).

• To decrease a Liability: Debit it (e.g., paying off a loan).

How do you handle the year of sale?

• "Full year in year of purchase, none in year of sale": If you bought it in 2021 and sold it in 2024, you only calculate depreciation for 3 years (2021, 2022, 2023).

• "Pro-rata / Monthly basis": If you sold it halfway through the year, you must add 6 months of depreciation to your "Accumulated" total before you finish the disposal.

Allowance for doubtful debts

Step 1: The Calculation (The "Net" Rule)

Before you calculate the 4%, you must subtract any specific bad debts (customers you know won't pay) from the total.

• Formula: (Trade Receivables - Irrecoverable Debts) x 4% = New Allowance

Step 2: The SoPL Impact (The Adjustment)

You don't put the whole 4% into your expenses. You only put the change from last year.

• If the allowance Increased: The increase is an Expense.

• If the allowance Decreased: The decrease is Other Income.

Step 3: The SoFP Impact (The Asset)

In the Statement of Financial Position, you always subtract the full new allowance (the 4% figure) from your receivables.

• Calculation: Receivables - New Allowance = Net Trade Receivables

Bank Loan Interest Adjustment

The 3-Step Process

1. Calculate the Total Annual Interest

Look at the Non-Current Liabilities section of your Trial Balance to find the principal loan amount.

• Formula: Loan Amount x Interest Rate

• Example: £20,000 x10% = £2,000 (Total for the year)

2. Check the Trial Balance for "Interest Paid"

Look for "Interest" or "Finance Costs" in the Trial Balance (Debit column).

• If it says £1,500: You still owe £500 (£2,000 - £1,500). This £500 is your accrual.

• If it isn't there: You owe the full £2,000 as an Accrual.

3. Record in the Financial Statements

• SoPL: Put the Full £2,000 under Finance Costs.

• SoFP: Put the Unpaid (Accrued) amount under Current Liabilities (Accruals).

"Bad and Doubtful Debt"

• Bad Debts Written Off (Add)

• Increase in Allowance (Add)

• OR Decrease in Allowance (Subtract)

From the bad debt expense in the trial balance

The Share Issue Step-by-Step

Calculate the Nominal Value (Share Capital)

Find out exactly how many new shares were issued and multiply by the Nominal Value (usually £1, 50p, or 25p per share).

• Formula: Quantity of New Shares x Nominal Price

• Action: This amount gets added to the share capital balance on the trial balance.

Step 2: Calculate the Share Premium (The "Extra")

Find out the Total Cash received for the shares and subtract the Nominal Value you found in Step 1.

• Formula: Total Cash Received - Nominal Value (from Step 1)

• Action: This amount gets added to the Share Premium balance on the Trial Balance.

Step 3: The Bank Check (Working 8)

Ensure the Total Cash (Capital + Premium) is added to your Bank balance for the Statement of Financial Position.

Inventory Valuation (Cost vs. NRV)

"Always value inventory at the lower of what you paid for it (Cost) or what you will get into your pocket after selling it (NRV)."

Formula: Expected Selling Price - Costs to Complete/Sell (NRV)

Compare Cost and NRV and use the lowest for your new inventory value

The Heart of Prudence

"Never overstate your assets or income, and never understate your liabilities or expenses."

The Two Golden Rules

1. Anticipate no profit: Only record profit when it is actually realized/certain.

2. Provide for all possible losses: Record a loss as soon as it becomes a "probable" outcome, even if the exact amount isn't known yet.

Prudence Defin

Prudence refers to the exercise of caution when making judgements under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated. It is also important not to be over-prudent as this conflicts with the requirement for financial information to have the property of neutrality. 

Going concern.

The going concern basis means that the entity is assumed to continue in business for the foreseeable future 

If the going concern basis is not applicable, then financial statements are prepared on a break-up basis 

This means that accounting standards no longer apply, and management must develop appropriate accounting policies. 

For example, assets are measured at their expected selling price. 

Inventory Valuation

1. Identify the Unit Cost: Find the original price paid.

2. Calculate the Unit NRV: Start with the expected sale price and subtract every cost required to make that sale happen.

Estimated Selling Price minus Costs to Complete (repairs/packaging) minus Costs to Sell (marketing/commission)

1. The Comparison: Select the lower of the two figures.

Original cost- estimated selling price

1. Calculate the Total Value: Multiply the "Lower Figure" by the total number of units held.

Receipts from Trade Receivables

Opening Balance+Credit Sales-Closing Balance= Cash Receipts

Relevance & Faithful Representation

• Predictive Value: Helps users forecast future outcomes.

• Confirmatory Value: Provides feedback about (confirms or changes) previous evaluations.

• Materiality: An entity-specific aspect of relevance. Information is material if its omission or misstatement could influence decisions based on its nature or magnitude.

Faithful Representation

Information must faithfully represent the economic substance of phenomena (Substance over Form). To be perfectly faithful, it must be:

• Complete: Includes all information necessary for a user to understand the phenomenon.

• Neutral: Unbiased in selection and presentation. Supported by Prudence (exercising caution/neutrality under uncertainty).

• Free from Error: No errors or omissions in the description or the process used to produce the information.

Improving Already Useful Information

1. Comparability
Enables users to identify and understand similarities and differences between items.

• Comparison can be with other entities (Inter-firm) or with the same entity over different periods (Intra-firm).

2. Verifiability
Assures users that information is a faithful representation.

• It means different knowledgeable and independent observers could reach a consensus (not necessarily total agreement) that a depiction is faithful.

3. Timeliness: Having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is, the less useful it becomes.

4. Understandability Information is classified, characterised, and presented clearly and concisely.