Preparation of

Financial Statements
TOPIC 5

Wan Mardyatul Miza Wan Tahir

TOPIC OUTCOME
At the end of this topic, you should be able to:

• Prepare statement of profit or loss (SoPL) and statement of financial

position (SoFP) by taking into accounts additional adjustments.

• Understand the effects of adjustments in the preparation of adjusted

financial statements.
TOPIC
• Introduction to double entry, journal and ledger
• Preparation of trial balance
• Adjustments in the preparation of adjusted financial statements
i. Accruals and prepayments
ii. Bad debt and bad debts recovered
iii. Doubtful debt and allowance for doubtful debt
iv. Acquisition and depreciation of non-current assets
• Preparation of final accounts with adjustments using vertical format
 INTRODUCTION –
FINANCIAL STATEMENT

SoPL SoFP
1-Revenue 3-Asset
4-Capital
2-Expenses 5-Liability
THE ACCOUNTING CYCLE
BUSINESS
TRANSACTION

CLOSING
JOURNAL
ENTRIES

FINANCIAL
LEDGER
STATEMENT

ADJUSTED UNADJUSTED
TRIAL BALANCE TRIAL BALANCE

ADJUSTING
ENTRIES
 Double entry
• Double-entry accounting means that every transaction will
involve at least two accounts.
• The rules of double entry bookkeeping can be stated as
follows:
INCREASE => DEBIT INCREASE => CREDIT

Asset Expenses Capital Liability Revenue

DECREASE => CREDIT DECREASE => DEBIT

 Journal entry
• A journal is a book in which the business transactions of a
business are first recorded and in chronological order.
• In the journal, the accountant records the transaction in the
books of accounts using the double-entry system.
• Journal is the first step of the accounting cycle where all the
accounting transactions are analyzed and recorded as the
journal entries.
GENERAL JOURNAL
Date DEBIT (RM) CREDIT (RM)
1 Apr 21 Cash 20,000
Capital 20,000
(Owner invested cash in business)
 Ledger/T-account
• Draw a T-account.
• Debit amounts will be entered on the left side of the T-account,
and credit amounts will be entered on the right side.
• The title of the account will appear at the top of each "T".
Name of account
Date Particular RM Date Particular RM
Debit side Credit side
 PREPARATION OF TRIAL BALANCE
• Trial Balance is a list of closing balances of ledger accounts on a certain
date and is the first step towards the preparation of financial
statements. It is usually prepared at the end of an accounting period to
assist in the drafting of financial statements.
• Ledger balances are segregated into debit balances and credit balances.
• Asset & expense accounts appear on the debit side of the trial balance
whereas liabilities, capital & revenue accounts appear on the credit
side.
• If all accounting entries are recorded correctly and all the ledger
balances are accurately extracted, the total of all debit balances
appearing in the trial balance must equal to the sum of all credit
balances.
 Adam Trading
Trial Balance as at 30th June 2020

Trial Balance
RM RM
Debit Credit
Land 200,000
Buildings 75,000

- Format
Motor vehicles 50,000
Furniture and fittings 15,000
Accumulated depreciation
- Building 56,000
- Motor vehicle 20,000
- Furniture and fittings 7,500
Account receivables 9,300
Inventory, 1st July 2019 2,100
Bank 16,000
Cash 1,200
Account payables 11,900
Long term loan 50,000
Capital 144,500
Drawings 2,400
Sales 197,000
Purchases 32,800
Sales return 300
Purchases return 500
Carriage inwards 700
Carriage outwards 400
Custom duties on purchases 1,100
Salaries expenses 63,200
Utilities expenses 3,400
Repairs expenses 600
Interest on long term loan 1,000
Salesman salaries 18,000
Insurance expense 6,600
Miscellaneous expenses 1,400
Rental income 13,000
Allowance for doubtful debts 100
500,500 500,500
ADJUSTMENTS IN THE PREPARATION OF
ADJUSTED FINANCIAL STATEMENTS
 Accruals - Expenses
• Accrued expenses are expenses which have been incurred during an accounting
period but which have not yet been paid for.
Cash paid Accrual

1 July 2019 30 June 2020

• At the end of the accounting period, such an expense will be considered to be a

current liability, which will be shown in the SoFP at the end of the current
accounting period.
• Adjustment:
RM100 of utilities expenses is still outstanding at the end of the accounting period.
Adjusting entries
RM RM
Dr Utilities expenses 100
Cr Accrued utilities expenses 100
 Accruals - Revenue
• Income receivable refers to income which has been earned during an accounting
period but which has not yet been received in terms of payment at the end of the
accounting period.
Cash received Accrual

1 July 2019 30 June 2020

• Such an amount will be considered a current asset in the SoFP of the business at the
end of the accounting period.
• Adjusment:
Commissions earned by a business amounting to RM2,800 at the end of the current
accounting period of the business but not yet received.
Adjusting entries
RM RM
Dr Accrued – Commission received 2,800
Cr Commission received 2,800
 Prepayments - Expenses
• Prepaid expenses are expenses which have been paid for in advance and expected
to be used up during the current period of the business.
Cash paid Prepayment

1 July 2019 30 June 2020

• However, where a portion of these resources are not yet used up during the current
period, it will be treated as a current asset at the end of the current period.
• Adjustment:
At the end of the period, RM200 of insurance expenses is still remain unexpired.
Adjusting entries
RM RM
Dr Prepaid – Insurance expenses 200
Cr Insurance expenses 200
 Prepayments - Revenue
• An unearned revenue refers to revenue which has been received in advance from a
customer, the service or goods for which have not yet been provided.
Cash received Prepayment

1 July 2019 30 June 2020

• At the end of an accounting period, such revenue received in advance is considered

to be a current liability of the business.
• Adjustment
The business received 13 months' rent of RM13,000 in advance one month rental
income for the beginning of next accounting period.
Adjusting entries
RM RM
Dr Rental income 1,000
Cr Prepaid – Rental income 1,000
 Doubtful debt and
Allowance for doubtful debt (AFDD)
• Doubtful debts are potential bad debts by create a contra account that nets against
the total receivables presented on the SoFP called as allowance for doubtful debt
(AFDD) accounts. AFDD estimates the percentage of accounts receivable that are
expected to be uncollectible.
• Increase in AFDD is classified as expenses.
• Adjustment:
Allowance for doubtful debts to be provided at 2% of net account receivables.
RM
Account receivable 9,300
Allowance for doubtful debts 100
Bad debt (additional information) 460
• Adjustment:
Increase in AFDD
Allowance for doubtful debts to be provided at 2% of net account receivables.
RM
Account receivables 9,300
Allowance for doubtful debts 100
Bad debt 460

Allowance for doubtful debts = [RM9,300 – RM460] x 2%

= RM176.80
Increase in AFDD by RM76.80 (RM176.80 – RM100) classified as expenses.
Adjusting entries
RM RM
Dr Increase in AFDD/Bad debts 76.80
Cr Allowance for doubtful debt (AFDD) 76.80
 Let say, Decrease in AFDD
• Adjustment:
Allowance for doubtful debts to be provided at 1% of net account receivables.
RM
Account receivables 9,300
Allowance for doubtful debts 100
Bad debt 460
Allowance for doubtful debts = [RM9,300 – RM460] x 1%
= RM88.40
Decrease in AFDD by RM11.60 (RM88.40 – RM100) classified as revenue/income
Adjusting entries
RM RM
Dr Allowance for doubtful debt (AFDD) 11.60
Cr Decrease in AFDD 11.60
•
Bad debt
Bad debts are debtor accounts that are proven to be bad, i.e. uncollectible because of
bankruptcy, dishonesty or some other financial problems faced by the debtors.
• Bad debts is classified as expenses.
• Adjustment:
During the year, one of the regular
customer was declared bankrupt. He
still owed RM460. Thus, the debt
needs to be written off.

Adjusting entries
RM RM
Dr [Increase in] Allowance for doubtful debt (AFDD)/Bad debt 460
Cr Account Receivables 460
 AFDD (2%) & Bad debts

Allowance for doubtful debts (AFDD) account

Date Particular RM Date Particular RM
Account receivables – Bad debts 460.00 Balance b/d 100.00
Balance c/d 176.80 Increase in AFDD (SoPL) 536.80
636.80 636.80
 Let say, Bad debts recovered
• Bad debts recovered is the payment received that was previously written off against
a company's receivables.
• Bad debts recovered is classified as revenue.

• Adjustment: 2018 2020

One of a customer whose debt has been written off in 2018 owing an amount of
RM1,500 has comes and paid his debt by cash.
Adjusting entries
RM RM
Dr Cash 1,500
Cr [Decrease in] Allowance for doubtful debt (AFDD)/Bad debt recovered 1,500
 AFDD (2%) & Bad debts recovered

Allowance for doubtful debts (AFDD) account

Date Particular RM Date Particular RM
Decrease in AFDD (SoPL) 1,423.20 Balance b/d 100.00
Balance c/d 176.80 Cash – Bad debts recovered 1,500.00
1,600.00 1,600.00
 Acquisition of non-current assets
• The term used to describe the purchase of a non-current asset. It is a capital
expenditure (spending on items expected to be used more than one year) and
shows on the SoFP.
• Companies purchase non-current assets with the aim of using them in the business
since their benefits will last for a period exceeding one year. The assets may be
amortized or depreciated, depending on its type.
• Adjustment:
The company purchase a furniture of RM1,200 and paid by cheque.
Adjusting entries
RM RM
Dr Furniture and fittings 1,200
Cr Bank 1,200
 Depreciation of Non-current asset (NCA)
• A depreciable asset can be defined as a long-term tangible asset, the economic
benefits of which will be used up over its useful life.
• Depreciation is the allocation of the original cost of a NCA over its expected useful
or economic life. It is the recognising of the gradual using up of the cost of a NCA
over all the accounting periods or years in which that NCA will be used.
• There are many causes of depreciation, among them being the normal wear and
tear of the asset, obsolescence or the causing of a fixed asset to be out of date due
to new technological changes as well as the effluxion or the passage of time.
• Other causes include such physical factors as evaporation, dampness, inadequacy or
superfluity of the asset caused by changes in the size of the business’s scale of
operations and general changes in the prices or foreign exchange rates.
 Depreciation – Straight line method
• The straight line method of depreciation charges the same amount for depreciation
expense every year in the useful life of a NCA.
• The rate used for the straight-line method is applied on the cost of the NCA.
• Adjustment:
Depreciation expense for buildings for the year ended is to be provided at 5% on cost.
Cost RM
Building 75,000

Depreciation = 5% x RM75,000 = RM3,750

Adjusting entries
RM RM
Dr Depreciation - Buildings 3,750
Cr Accumulated depreciation - Buildings 3,750
•
Depreciation – Reducing balance method
The reducing balance method charges a higher amount of depreciation expense in the
initial years of the useful life of a NCA and lesser amounts towards the end of the
useful life of a NCA.
• The reducing balance method determines a rate to be used on the book value of the
NCA.
• Adjustment:
Motor vehicle and furniture and fittings depreciate at 20% per annum and 10% per
annum respectively on net book value.
Cost RM Accumulated depreciation RM
Motor vehicle 50,000 Motor vehicle 20,000
Furniture and fittings 15,000 Furniture and fittings 7,500
Net book value:
Motor vehicle = RM50,000 – RM20,000 = RM30,000
Furniture and fittings = RM15,000 – RM7,500 = RM7,500
 Depreciation – Reducing balance method
• Adjustment:
Motor vehicle and furniture and fittings depreciate at 20% per annum and 10% per
annum respectively on net book value. The company purchase a furniture of RM1,200
during the year in January 2020. (Note: Financial year ended 30th June 2020)
Depreciation:
Motor vehicle = RM30,000 x 20% = RM6,000
Furniture and fittings = [RM7,500 x 10%] + [RM1,200 x 10% x 6/12] = RM810
Adjusting entries
RM RM
Dr Depreciation – Motor vehicle 6,000
Cr Accumulated depreciation – Motor vehicle 6,000
Dr Depreciation – Furniture and fittings 810
Cr Accumulated depreciation – Furniture and fittings 810
 Others – Drawing
• A drawing in accounting terms refer to money (cash or cheque) or asset that is taken
by the owner from the business for personal use.
• It must be recorded as a reduction of assets and owner's equity.
• Adjustment:
The owner took RM300 cash for personal use and this has not yet been recorded in the
books of the business.

Adjusting entries
RM RM
Dr Drawings 300
Cr Cash 300
 Let say – Drawing
• Adjustment:
The owner took goods worth RM800 for personal use and this has not yet been recorded
in the books of the business.

Adjusting entries
RM RM
Dr Drawings 800
Cr Purchases 800
 Others – Closing inventory
• Closing inventory, also referred to as ending inventory, refers to the amount of
inventory a business has left in stock at the end of the accounting year. Closing
inventory is counted:
– to reflect the physical amount of products left in stock
– to reflect the monetary value of products left in stock
• Adjustment:
An inventory count valued the closing inventory at RM2,900.
Adjusting entries
RM RM
Dr Closing inventory (Current asset) 2,900
Cr Closing inventory (COGS/COS) 2,900
Worksheet
-Example
 Unadjusted Adjustment Adjusted SoPL SoFP
Ledger account
Trial Balance (Adjusting entries) Trial Balance items items

Worksheet
RM RM RM RM RM RM RM RM RM RM
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Land 200,000 200,000 200,000
Buildings 75,000 75,000 75,000
Motor vehicles 50,000 50,000 50,000
Furniture and fittings 15,000 1,200 16,200 16,200
Accumulated depreciation
- Building 56,000 3,750 59,750 59,750
- Motor vehicle 20,000 6,000 26,000 26,000
- Furniture and fittings 7,500 810 8,310 8,310
Account receivables 9,300 460 8,840 8,840
Inventory, 1st July 2019 2,100 2,100 2,100
Bank 16,000 1,200 14,800 14,800
Cash 1,200 300 900 900
Account payables 11,900 11,900 11,900
Long term loan 50,000 50,000 50,000
Capital 144,500 144,500 144,500
Drawings 2,400 300 2,700 2,700
Sales 197,000 197,000 197,000
Purchases 32,800 32,800 32,800
Sales return 300 300 300
Purchases return 500 500 500
Carriage inwards 700 700 700
Carriage outwards 400 400 400
Custom duties on purchases 1,100 1,100 1,100
Salaries expenses 63,200 63,200 63,200
Utilities expenses 3,400 100 3,500 3,500
Repairs expenses 600 600 600
Interest on long term loan 1,000 1,000 1,000
Salesman salaries 18,000 18,000 18,000
Insurance expense 6,600 200 6,400 6,400
Miscellaneous expenses 1,400 1,400 1,400
Rental income 13,000 1,000 12,000 12,000
Allowance for doubtful debts 100 77 177 177
500,500 500,500
Accrued utilities 100 100 100
Accrued commission received 2,800 2,800 2,800
Commission received 2,800 2,800 2,800
Prepaid - insurance 200 200 200
Prepaid - Rental income 1,000 1,000 1,000
Increase in AFDD/Bad debts 537 537 537
Depreciation
- Buildings 3,750 3,750 3,750
- Motor vehicle 6,000 6,000 6,000
- Furniture and fittings 810 810 810
Closing inventory 2,900 2,900
16,697 16,697 514,037 514,037
Net profit 72,603 72,603
215,200 215,200 374,340 374,340
 Adam Trading
Statement of Profit or Loss for the year ended 30th June 2020

SOPL Sales
Less: Sales return
Less: Discount allowed
RM RM
197,000
(300)
0
Net sales 196,700

Less: Cost of Goods Sold

Opening inventory 2,100
Add: Purchases 32,800
Less: Purchase return (500)
Less: Discount received 0
34,400
Add: Carriage inwards 700
Add: Custom duties 1,100
36,200
Less: Closing inventory (2,900) (33,300)
Gross profit 163,400

Add: Other income

Rental income (13,000-1,000) 12,000
Commission received 2,800 14,800

Less: Expenses
Carriage outwards 400
Salaries expenses 63,200
Utilities expenses (3,400 + 100) 3,500
Repairs expenses 600
Interest on long term loan 1,000
Salesman salaries 18,000
Insurance expense (6,600-200) 6,400
Miscellaneous expenses 1,400
Depreciation:
Building 3,750
Motor vehicle 6,000
Furniture and fittings 810
Increase in AFDD/Bad debts (460 + 76.80) 537
(105,597)
Net profit 72,603
 Adam Trading
Statement of Financial Position as at 30th June 2020

SOFP Non-current assets

Land
Buildings
RM
Cost
200,000
75,000
RM
Acc.depn

59,750
RM
NBV
200,000
15,250
Motor vehicles 50,000 26,000 24,000
Furniture and fittings 16,200 8,310 7,890
247,140
Current assets
Cash (1,200-300) 900
Bank (16,000-1,200) 14,800
Account receivables (9,300-460) 8,840
Less: AFDD (100+76.80) (177) 8,663
Closing inventory 2,900
Accrued commission received 2,800
Prepaid insurance expenses 200
30,263
277,403

Capital 144,500
Add: Net profit 72,603
217,103
Less: Drawings (2,400+300) (2,700)
214,403

Non-current liability
Long term loan 50,000

Current liabilities
Account payables 11,900
Accrued - utilities 100
Prepaid - rental income 1,000
13,000
277,403
 ACCOUNTING FOR INVENTORY
Return and Discount

Discount received Discount allowed

Purchases Sales

SUPPLIER CUSTOMER

Purchase return Sales return

(Return outwards) (Return inwards)
 FINANCIAL YEAR END
• Fiscal year-end refers to the completion of a one-year, or 12-
month, accounting period.
YEAR END
1 January 2020 31 December 2020
1 April 2020 31 March 2021
1 May 2020 30 April 2021
1 July 2020 30 June 2021
1 October 2020 30 September 2021
Tutorial Question