THE ACCOUNTING CYCLE and Presentention of Financial Statements

Accounting cycle & Presentation of financial statements(IAS1)

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Compiled by Nsama Musawa Njebele 1

8/14/2014 1Accounting cycle & Presentation of financial statements(IAS1)

Introduction Learning ObjectivesUnderstand the accounting cyclePrepare an entity’s financial statements

in accordance with prescribed structure and content

Prepare and explain the contents and purpose of the statement of changes in equity

Prepare notes to the financial statement8/14/2014 2


The accounting cycleis a series of procedures in the

collection, processing, andcommunication of financialinformation.


The Accounting Cycle


The Accounting Cycle 1. Identifying and Analyzing Business Transactions 2. Recording in the Journals already done 3. Posting to the Ledger 4.Unadjusted Trial Balance

5. Adjusting Entries6. Adjusted Trial Balance 7. Financial Statements8.Closing Entries9. Post-Closing Trial Balance


5.Adjusting EntriesAdjusting entries are prepared as an

application of the accrual basis of accounting.eg

1. Accrued revenue-revenue earned but not recorded

Dr Revenue Receivable/cashCr Revenue



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5.Adjusting Entries2.Un earned revenue-revenue

recorded but not earned.Dr RevenueCr Un earned revenue


6.Adjusting Entries3. Accrual expenses-expenses

incurred but not recorded.Dr expense A/cCr Expanse payable

4. PrepaymentsDr expenseCr prepayment


6.Adjusting Entries5. Depreciation

Dr Depreciation expenseCr Accumulated Depreciation

6. ProvisionsDr expense to be providedCr Provision payable


6. Adjusted Trial BalanceAn adjusted trial balance may be

prepared after adjusting entries aremade and before the financialstatements are prepared.This is to test if the debits are equal to

credits after adjusting entries are made.


7.Financial Statements A complete set of financial statements is made

up of a 1. Statement of Comprehensive Income or

Income Statement and Other Comprehensive Income

2. Statement of Changes in Equity, 3. Statement of Financial Position or Balance

Sheet,4. Statement of Cash Flows, and 5. Notes to Financial Statements


Presentation of Financial Statements(IAS 1)

IAS 1 Presentation offinancial statements givessubstantial guidance on theform and content ofpublished financialstatements.



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primary reasons for introducing theamendments were;

1. To achieve improved consistency andclarity in the way that othercomprehensive income is presented

2. To enhance convergence with USGAAP, following changes made byUS FASB



The main components are:Statement of financial positionStatement of comprehensive

incomeStatement of changes in equityNotes to the financial statements



Futures to be included1. Entity should identify each financial statement

and the notes very clearly2. Name of the reporting entity 3. Whether the accounts cover the single entity

only or a group of entities4. date of the end of the reporting period 5. presentation currency (e g ZMK)6. level of rounding used in presenting amounts


The statement of financial position

XYZ Group Statement of Financial Position as at 31 December 20X2 20X1 20X2 Assets K K Non-current assets: Property, plant and equipment X X Investments X X Intangibles X X X X Current Assets: Inventories X X Trade receivables X X Cash and cash equivalents X X X X Total Assets: X X


The statement of financial position(continue)

Equity and Liabilities Capital and reserves: Shares capital X X Retained earnings X X Other components of equity X X X X Total Equity: X X Non-current Liabilities Long-term borrowings X X Deferred tax X X X X Current Liabilities Trade and other payables X X Short-term borrowings X X Current tax payable X Short-term provisions X X X X Total equity and liabilities X X


The statement of financial position(Notes)

Notes give more detailed on some lineitems appearing on the notes

The sub-classification details will in partdepend ,

the requirementsof IFRSs. The size, nature and function of the

amounts involvedNature of operation Below are examples of notes



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Property, plant and equipment classified by class as described in IAS 16, Property,

plant and equipment

Land and Plant and Total Buildings Machinery K K K Cost XX XX X X Acc/ Depreciation b/f (XX) ( XX) (XX) Depreciation Change (XX) ( XX) (XX) for the year Carrying value XXX XXX XXX 8/14/2014 19


Receivablesare analysed between amounts receivable from trade customers, other members of the group, receivables from related parties, prepayments and other amounts


Inventoriesare sub-classified, in accordance

with IAS 2 Inventories, intoclassifications such asmerchandise, productionsupplies, materials, work inprogress and finished goods


Equity capital and reservesare analysed showing separately the

various classes of paid in capital, share premium and reservesThe standard lists some specific

disclosures which must be made, either on the face of the statement of financial position or in the related notes


Equity capital and reserves Share capital disclosures

Number of shares authorised (ii) Number of shares issued and fully paid, and issued but not fully paid (iii) Par value per share, or that the shares have no par value (iv) Reconciliation of the number of shares outstanding at the beginning and at the end of the year (v) Rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital (vi) Shares in the entity held by the entity itself or by related group companies (vii) Shares reserved for issuance under options and sales contracts, including the terms and amounts 8/14/2014 23


Equity capital and reservesDescription of the nature and

purpose of each reserve withinowners' equity egRevaluation reserveGeneral reserve

Note: Some types of entity have no share capital,e.g. partnerships. Such entities should discloseinformation which is equivalent to that listedabove



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Assets and liabilitiesasset or liability to be classified as

current if:It will be settled within 12 months of

the reporting date, or It is part of the entity’s normal operating cycle.Otherwise classify it as non current


Statement of changes in equityShare Share Retained Revaluation Total

capital Premium Earnings Reserve equity Balance at 31 December 2012 XXX XXX XXX XXX XXX

Changes in equity for 2013

Changes in Accounting XXX XXX

Restated balance XXX XXX XXX XXX XXX

Issue of share capital XXX XXX

Total Comprehensive income XXX XXX XXX Dividends (XXX) (XXX)

Balance at 31 December 2013 XXX XXX XXX XXX XXX


Income Statement and Other comprehensive Income

Total comprehensive income is the realized profit or loss for the period plus other comprehensive income.

Other comprehensive income is income and expenses that are not recognized in income statement .egrevaluation of noncurrent assets in accordance with IAS 16


Income Statement the year ended 31 December 2012

2011 2012 Revenue X X Cost of Sales (X) (X) Gross profit X X Distribution costs (X) (X) Administrative expenses (X) (X) Profits from operations X X Finance costs (X) (X) Investment income X X Profits before tax X X Income tax expense (X) (X) Profit for the year (X) X Other comprehensive income Gain/loss on revaluation (IAS 16) (X) X Gain/loss on fair value through other comprehensive (X) X Income financial assets (IFRS 9) Total comprehensive income for the year X X


Notes to the Income statementEach of the items on the face of

the income statement may havenotes depending on the natureof the company and theadjusting notes given


AssignmentUsing the latest financial

statements, evaluate theapplication of IAS 1 by thecompanies listed on the LusakaStock Exchange



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How to answer Questions Step 1:Prepare Adjusting Journal Step 2: Prepare the adjusted trail balance

or just note the accounts affected by the adjustments on the trail balance

Step 3:Anlyse the trail balance noting which items will g to the Income statement and the statement of financial position

Step 4: Prepare the statements & notes


Question 1The following information has been extracted from the books of ABC for the year to 31 March 2009. Dr. Cr. Administrative expenses 680,000 Interest paid 20,000 Called up share capital (ordinary shares of 800,000 Dividend 24,000 Cash at back and in hand 36,000 Income tax (remaining balance from 40,000 Previous year Warranty provision 360,000 Distribution costs 960,000 Land and buildings: At cost (Land K 440,000, Buildings K400,000) 840,000 Accumulated depreciation (at 1 April 20X8 192,000 Plant and machinery: At cost 500,000 Accumulated depreciation (at 1 April 20X8 300,000 Retained earnings (at 1 April 20X8) 1,080,000 10% Loan 320,000 Purchases 1,880,000 Sales 5,200,000 Inventory (at 1 April 20X8) 600,000 Trade payables 240,000 Trade receivables 2,912,000 8,492,000 8,492,000


Question 1Additional Information (1) Inventory at 31 March 20X9 was valued at K1000, 000. (2) Buildings and plant and machinery are depreciated on a straight-line basis (assuming no residual value) at the following rates: On cost: Buildings 5% Plant and machinery 20% (3) There were no purchases or sales of non-current assets during the year to 31 March 20X9. (4) The depreciation charges for the year to 31 March 20X9 are to be apportioned as follows: Cost of sales 60% Distribution costs 20% Administrative Expenses 20%


Question 1Income taxes is for the year to 31 March 2009 (at a rate of 30%) are estimated to be K540, 000. (6) The loan is repayable in five years. (7) The year end provision for warranty claims has been estimated at K300,000. Warranty costs are charged to administrative expenses. Required: Prepare adjusting journals for the notes Prepare ABC plc’s Income statement for the year to 31 March 2009 and a statement of financial position as at that date in a form suitable for presentation to the shareholders and in accordance with the requirements of International Accounting Standards


Solution Step 1 prepare adjusting journals Note (1) Dr Inventory 1000,000 Cr COS 1000,000


SolutionNote 2Dep buiding 400,000 x 0.05=20,000Dep plant & Eq 500,000 x 0.2 =100,000 120,000COS 120,000x 0.6 =72,000 Dist 120,000 x0.2 =24,000Adm 120,000 x0.2=24,000



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Solution Note 2 journal entry

Dr Cr COS 72,000 Dist 24,000 Admin 24,000 Acc dep building 20,000 Acc dep Plant& Eq 100,000


Solution Note 5 Accrued expense(tax) Dr Cr Income tax expense 540,000 Tax payable 540,000

Note 6 Loan expense should be 320,000 x 0.1 32,000 Dr interest expense 12,000 Cr tax payable 12,000


Solution Note 7 Dr warrant provision 60,000 Cr Adm exp 60,000


Adjusted trail balance

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Solution ABC Income statement for the year ended 31 March 20X9 K Revenue 5,200,000 Cost of sales (w1) (1,552,000) Gross Profit 3,648,000 Distribution (W2) (984,000) Administration (W3) (644,000) Profit from operations 2,020,000 Finance Costs (32,000) (K320, 000 x 10%) Profit before tax 1,988,000 Income Tax (W4) (580,000) Profit for the year 1,408,000 8/14/2014 41


Solution ABC plc’s Statement of financial position as at March 31 20x9 K K Non-current assets Tangible (W5) 728,000 Current assts Inventory 1000,000 Receivables 2,912,000 Bank 36,000 3,948,000 4,676,000 Share capital 800,000 Retained earnings (W6) 2,464,000 3,264,000 Non-current liabilities Loan 320,000 Provision for warranties 300,000 620,000 Current liabilities (W7) 792,000 4,676,000



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Solution Working 1 COS Inventory at 1 April 20X8 600,000 Purchases 1,880,000 Inventory at 31 March 20X9 (1,000,000) Depreciation (120,000X60%) 72,000 1,552,000 Working 2 Distribution costs as per TB 960,000 Depreciation (120,000X20%) 24,000 984,000 8/14/2014 43


Solution Working 3 Administrative expenses as per TB 680,000 Depreciation (120,000X20%) 24,000 Over provision on Warranty cost (360,000-300,000) (60,000 ) 644,000 Working 4 Income tax (remaining balance from 40,000 Previous year as per TB Charge for the year 540,000 580,000


Solution Working 5 Land and Plant and Total Buildings Machinery K K K Cost b/f 840,000 500,000 1,340,000 Depreciation b/f 192,000 300,000 492,000 Change 20,000* 100,000 120,000 c/f 212,000 400,000 612,000 Carrying value c/f 628,000 100,000 728,000 *Depreciation charged only on Building(400,000X5%) no charge for land


Solution Working 6 K Profit for the year 1,408,000 Dividends (24,000) 1,396,000 Retained earnings b/f 1,080,000 Retained earnings of 2,464,000 8/14/2014 46


Solution Working 7 Current Liabilities Trade payables 240,000 Provision for income tax 540,000 Accrued interest (320,000X10%)-20,000 paid) 12,000 792,000


8.Closing EntriesClosing entries are journal

entries that ,1. Transfer the results of

operations(net income or netloss) to owners equity

2. Reduce revenue, expense &drawing balances to Zero



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8.Closing EntriesThe income and expense

summary account is used as thetemporary account to makeclosing entriesIt is also called income

summary


Closing Entries Procedure1.Close revenue a/c balances by Dr revenue A/cCr income summery2.Closs expense a/c balances byDr income summeryCr expense a/cs


Closing Entries Procedure3.Closs the income summary A/c by

transferring net income or loss to owners equity

Dr income summary Cr owners equity if its profitDr owners equityCr income summary if its loss


Closing Entries ProcedureThe drawings /dividends account is

closed by Dr owners equityCr dividend /drawings a/c


questionPrepare closing entries forquestion 1 above


9.Post closing Trial balanceThis is the final step in the

accounting cycleOnly the permanent accounts

should have balances these areAssets, Liabilities and capital Expenses and Revenue should have

zero balances in readiness for the following financial year



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questionPrepare post trial balance forquestion 1 above


THE ACCOUNTING CYCLE and Presentention of Financial Statements

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