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FUNDAMENTALS OF FINANCIAL ACCOUNTING
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
6. The balance of the rent and local business tax account includes a payment of rent for
the 3 months to 31 December 20X3 of $1,200 and a payment of local business tax for
the 6 months to 31 March 20X4 of $4,000.
7. Following a review of receivables at the year end, it is decided that a bad debt of
$1,207 should be written off, and an allowance for receivables made, of 2 per cent of
receivables.
8 . O f fi ce equipment is to be depreciated at 10 per cent per annum on cost, and motor
vehicles are to be depreciated at 20 per cent per annum on cost.
9. Loan interest of 10 per cent per annum is to be accrued.
Requirement
Using the above information, prepare an income statement of Yusuf for the period ended
30 November 20X3 together with his statement of fi nancial position at that date.
7.4 Step 1: Labelling the trial balance
The trial balance contains all of the account balances from the ledger of Yusuf. It, therefore,
includes assets, liabilities, capital, expenses and revenue. You should remember that the assets,
liabilities and capital are shown in the statement of fi nancial position, and the expenses and
revenue in the income statement where they are used to calculate net profi t, which is then
also transferred to the statement of fi nancial position. If you are unsure about the correct cat-
egory for any of the items in the trial balance it might help to remember the following:
Debit balances usually represent either assets or expenses and these are always shown
in the left-hand column of a trial balance. Therefore, credit balances (shown in the right-
hand column) are usually revenue, liabilities or capital.
You should also remember that values shown in the trial balance have, by defi nition,
been posted to the ledger accounts and that, therefore, the double entry is complete. Other
pieces of information given by way of a note have not been recorded in the ledger accounts
and consequently will require both a debit and a credit entry (which is usually effected by
entering them in both the income statement and the statement of fi nancial position).
The fi rst step, then, is to identify the items in the trial balance that are to be entered in
the trading account part of the income statement; those to be entered in the rest of the
income statement, and those to be entered in the statement of fi nancial position. These are
shown below marked with ‘ T ’ , ‘ I ’ or ‘ B ’ . In addition, it is useful to mark those values that
are to be affected by the additional information. This has been done with an asterisk (*)
and the note number in the layout below.