Preparing Basic Financial Statements

The process of preparing financial statements

The basic financial reporting process is as follows:

• transactions and events are recorded in the books of prime entry,
• totals from the books of prime entry are entered into the general ledger accounts,
• the control accounts are reconciled,
• the ledgers are balanced off,
• a trial balance is produced,
• errors are corrected,
• year-end journals are made,
• the financial statements are extracted from the final, extended trial balance.

Year-end adjustments to the initial trial balance

As well as adjusting the trial balance figures for any errors identified there are also a number of common adjustments made at the end of the accounting period. These include:

• closing inventory
• depreciation for the year
• accruals and prepayments
• irrecoverable debts and allowances for doubtful debts
• income tax
• provisions and contingent liabilities, and
• events after the reporting period 

These adjustments need to be processed before the financial statements can be created.

Common year-end adjustments

The following is a list of some of the common year-end adjustments that would be made prior to preparing the financial statements:

(i) Closing inventory

Dr Inventory (SFP)

Cr Cost of sales (IS)

(ii) Depreciation charge for the year

Dr Depreciation expense (IS)

Cr Accumulated depreciation (SFP)

(iii) Accruals (chapter 10)

Dr Expenses (IS)

Cr Accrual (Liability) (SFP)

(iv) Prepayments

Dr Prepayment (Current Asset) (SFP)

Cr Expenses (IS)

(v) Irrecoverable debts

Dr Irrecoverable debt expense (IS)

Cr Receivables (SFP)

(vi) Allowance for receivables

Increase in allowance:

Dr Irrecoverable debt expense (IS)

Cr Allowance for receivables (SFP)

Decrease in allowance:

Dr Allowance for receivables (SFP)

Cr Irrecoverable debt expense (IS)

(vii) Tax estimate for the year

Dr Tax charge (IS)

Cr Current tax liabilities (SFP)

(viii) Adjustments for prior year tax estimates

Overprovision in prior year:

Dr Current tax provision (SFP)

Cr Tax charge for the year (IS)

Underprovision in prior year:

Dr Tax charge for the year (IS)

Cr Current tax provision (SFP)

IAS 1 Presentation of Financial Statements

The required formats for published company financial statements are provided by IAS1. This requires the following components to be presented:

• a statement of financial position
• an income statement
• a statement of comprehensive income
• a statement of changes in equity
• a statement of cash flows, and
• notes to the accounts.

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Tags:	trial balance;errors;IAS 1;financial statements;financial statement;annual accounts