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

Calculate annual depreciation

Cost/Useful life = x per year

Times by the number of years for 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

NBV = Cost - accumulated depreciation

Cost - disposal of PPE = cost end of the year

Depreciation (start) - depreciation of PPE - depreciation of sold PPE = total depreciation

Cost end of year - total depreciation

Different 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 (Paid too little)

• 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

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 $\rightarrow$ DEBIT.

• Bank (Asset) is decreasing $\rightarrow$ 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).