Unit 2 FS Preparation 1 - Hong Kong Education City -...

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Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum

Technology Education Section, Curriculum Development InstituteEducation Bureau, HKSARG

August 2008

Unit 2 : Financial Statements Preparation 1

Course 1 : Contemporary Perspectives on Accounting

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On completion of this unit, you should be able to:- Describe the elements and components of financial statements.

- Explain the structures and contents of income statement and balance sheet.

- Explain the overall considerations in relation to presentation of financial statements, including consistency of presentation, aggregation and offsetting.

- Prepare properly presented income statement and balance sheet for a sole proprietor.

- Prepare properly presented income statement and balance sheet for a partnership.

Learning ObjectivesLearning Objectives

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OrganisationOrganisation of Unit 2of Unit 2

−prepare financial statements.

−post them to ledger accounts and prepare adjusted trial balance; and

−journalise balancing day adjustments,

−prepare trial balance;

−post the journal entries to ledger accounts;

−journalise the transactions;

The Accounting Cycle

Definitions:- asset- liability- equity- revenue- expense

Overall considerations:- going concern- accrual basis of accounting- consistency of presentation- materiality and aggregation- offsetting- true and fair view

Basic Book-keeping Skills for Learners

- Case Study 1: Service Business

- Case Study 2: Trading Business

Financial Statements:Sole Trader vs Partnership

Financial statements structures:- Income statement (internal & external)

- balance sheet

Exercise – Sole Trader

Exercise – Partnership

Financial Statements Preparation 1

Learning Resources Corner

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This Unit focuses on the preparation of financial statements based on an adjusted trial balance. First, we will recapitulate the accounting cycle. Then we will take a look on some basic techniques in the preparation of financial statements.

The Accounting Cycle The Accounting Cycle (1)(1)

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For details on basic book-keeping skills, please click the button and go to the Learning Resources Corner.

Learning Resources Corner


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Okay, let’s take a brief look on the accounting cycle first. `


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The Accounting CycleGENERAL JOURNAL

Date Account Titles and Narrative Dr $ Cr $2007

Jan 1 Cash 50,000Capital 50,000

To record the capital invested by the owner.

After the occurrence of business transactions, a book-keeper is required to:1. journalise the transactions


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GENERAL JOURNAL

Date Account Titles and Narrative Debit $ Credit $2007



After the occurrence of business transactions, a book-keeper is required to:1. journalise the transactions;

OWNERS' EQUITY

EXPENSEDebit Credit(+) (-)

REVENUEDebit Credit

(-) (+)

ASSETDebit Credit(+) (-) (+)

Debit Credit(-) (+)

LIABILITYDebit Credit

(-)

2. post the journal entries to ledger accounts;


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GENERAL JOURNAL




After the occurrence of business transactions, a book-keeper is required to:1. journalise the transactions;

OWNERS' EQUITY


REVENUEDebit Credit

(-) (+)


Debit Credit(-) (+)


(-)

2. post the journal entries to ledger accounts;

Please note that the entries to ledger accounts follow the Accounting Equation, ieAsset = Liability + Equity


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INCOMEDebit Credit

(-) (+)


CAPITALDebit Credit

(-) (+)


(-)

GENERAL JOURNAL




After the occurrence of business transactions, a book-keeper is required to:1. journalise the transactions;2. post the journal entries to ledger accounts;3. prepare trial balance;

Dr $ Cr $Cash 500 Accounts payable 1,000 Fixed assets 50,000 Capital 50,000 Revenue 2,000 Administrative expenses 500 Total 52,000 52,000

Trial Balance as at 31 December 2007

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OWNERS' EQUITY


INCOMEDebit Credit

(-) (+)


Debit Credit(-) (+)


(-)

GENERAL JOURNAL




After the occurrence of business transactions, a book-keeper is required to:1. journalise the transactions;2. post the journal entries to ledger accounts;3. prepare trial balance;4. journalise balancing day adjustments (final adjustments), post them to

ledger accounts and prepare adjusted trial balance;

Final adjustments, like depreciation, accrual, prepayment, allowance for

doubtful accounts


Trial Balance as at 31 December 2007

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(for increase)

CAPITALDebit Credit

(for decrease) (for increase)


(for decrease)

ASSETDebit Credit

(for increase) (for decrease)

INCOMEDebit Credit


EXPENSEDebit Credit


GENERAL JOURNAL




After the occurrence of business transactions, a book-keeper is required to:1. journalise the transactions;2. post the journal entries to ledger accounts;3. prepare trial balance;4. journalise balancing day adjustments (final adjustments), post them to

ledger accounts and prepare adjusted trial balance;

Final adjustments, like depreciation, accrual, prepayment and provision

doubtful debts


Adjusted Trial Balance as at 31 December 2007

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Balance SheetAs at 31 Dec 2007

Assets $Fixed assets 50,000Accounts receivable 5,000Cash and bank 500

55,500LiabilitiesAccounts payable (1,000)

54,500

EquityCapital 50,000Retained profit 4,500

54,500

(for increase)

CAPITALDebit Credit



(for decrease)

ASSETDebit Credit


INCOMEDebit Credit


EXPENSEDebit Credit



Adjusted Trial Balance as at 31 December 2007Income Statement

For the year ended 31 Dec 2007

$Sales 10,000Cost of sales (5,000)Gross profit 5,000Distributive costs (1,000)Administration expenses (1,000)Finance costs (500)Profit before tax 2,500Tax (375)Profit for the year 2,125

GENERAL JOURNAL




After the occurrence of business transactions, a book-keeper is required to:1. journalise the transactions;2. post the journal entries to ledger accounts;3. prepare trial balance; 4. journalise balancing day adjustments (final adjustments), post them to

ledger accounts and prepare adjusted trial balance; and5. prepare financial statements (income statement and balance sheet).

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Financial Statements Preparation

Now, it’s time to take a look on some basic techniques in the preparation of financial statements.

Financial Statements Financial Statements (1)(1)

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With the adjusted trial balance, we will classify those items in the adjusted trial balance into the following categories: (1) Balance Sheet – Asset (B/S – Asset), (2) Balance Sheet – Liability (B/S – Liability), (3) Balance Sheet – Equity (B/S – Equity), (4) Income Statement – Revenue (I/S – Revenue), and (5) Income Statement – Expense (I/S – Expense).


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As at 31 December 2007Dr $ Cr $

Bank 500 Accounts receivable 1,200 Plant & equipment, at cost 50,000 Accumulated depreciation 15,000 Inventories 6,000 Retained profit, at 1 Jan 2007 16,800 Accounts payable 2,000 Capital 20,000 Sales 35,000 Cost of sales 15,000 Carriage outwards 2,000 Office expenses 8,000 Interest expenses 500 Tax 600 Depreciation 5,000 Total 88,800 88,800

Adjusted Trial Balance

This is an adjusted trial balance. Before extracting the data to the financial statements, please perform the aforesaid classification.

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As at 31 December 2007$ $

Bank B/S-Asset 500 Accounts receivable B/S-Asset 1,200 Plant & equipment, at cost B/S-Asset 50,000 Accumulated depreciation B/S-Asset 15,000 Inventories B/S-Asset 6,000 Retained profits, at 1 Jan 2007 B/S-Equity 16,800 Accounts payable B/S-Liability 2,000 Capital B/S-Equity 20,000 Sales revenue I/S-Revenue 35,000 Cost of sales I/S-Expense 15,000 Carriage outwards I/S-Expense 2,000 Office expenses I/S-Expense 8,000 Interest expenses I/S-Expense 500 Income tax expenses I/S-Expense 600 Depreciation expense I/S-Expense 5,000 Total 88,800$ 88,800$


Check your classification with above answer.

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As at 31 December 2007$ $

Bank B/S-Asset 500 Accounts receivable B/S-Asset 1,200 Plant & equipment, at cost B/S-Asset 50,000 Accumulated depreciation B/S-Asset 15,000 Inventories B/S-Asset 6,000 Retained profits, at 1 Jan 2007 B/S-Equity 16,800 Accounts payable B/S-Liability 2,000 Capital B/S-Equity 20,000 Sales revenue I/S-Revenue 35,000 Cost of sales I/S-Expense 15,000 Carriage outwards I/S-Expense 2,000 Office expenses I/S-Expense 8,000 Interest expenses I/S-Expense 500 Income tax expenses I/S-Expense 600 Depreciation expense I/S-Expense 5,000 Total 88,800$ 88,800$


Now, you may ask how we can know the category of each item. To answer the question, we have to understand the structure of financial statements as well as definitions of “asset”, “liability”, “equity”, “revenue” and “expense”.

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Balance Sheet

EquityLiabilityAsset

Income Statement

ExpenseRevenue

The elements directly related to the measurement of financial position are presented in the balance sheet, i.e. asset, liability and equity.

The elements directly related to the measurement of financial performance are presented in the income statement, i.e. revenue and expense.


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Sorry, please try again.

Financial Statements Financial Statements

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Balance Sheet


Income Statement

ExpenseRevenue

The elements are defined1 as:

(a) An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Question 1: Is an acquired software an asset ?

1 You may refer to the Framework of the Preparation and Presentation of Financial Statements issued by Hong Kong Institute of Certified Public Accountants.

NoYes


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Balance Sheet


Income Statement

ExpenseRevenue

Correct, an acquired software1 is an asset as:- it is a resource under an enterprise’s control;- economic benefits of a software can be received through the use.

1 You may refer to the HKAS 38 Intangible Assets issued by Hong Kong Institute of Certified Public Accountants.


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Balance Sheet


Income Statement

ExpenseRevenue

(b) A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Question 2: Is a provision for legal claims a liability?

NoYes


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Balance Sheet


Income Statement

ExpenseRevenue

Correct, provision1 is a liability as:- it is a present obligation to an enterprise;- it is probable that the enterprise needs to settle the legal claims (accordingly cause an outflow of economic benefits) in future, though the timing is uncertain.

1 You may refer to the HKAS 37 Provisions, Contingent Liabilities and Contingent Assets issued by Hong Kong Institute of Certified Public Accountants.


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Balance Sheet


Income Statement

ExpenseRevenue

(c) Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

Capital and retained profit are classified as equity because they represent the owners’ interest in an enterprise.


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Balance Sheet


Income Statement

ExpenseRevenue

(d) Revenue is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or a decrease of liabilities that results in an increase in equity, other than those relating to contributions from equity participants (owners).

Question 3: Is sales a kind of revenue ?

NoYes


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Balance Sheet


Income Statement

ExpenseRevenue

Correct, sales is a revenue because economic benefits (in the form of cash or other assets) are received during the sales activities.


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Balance Sheet


Income Statement

ExpenseRevenue

(e) Expense is a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or an incurrence of liabilities that results in a decrease in equity, other than those relating to distributions to equity participants (owners).

Question 4: Is salary expenditure an expense?

NoYes


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Balance Sheet


Income Statement

ExpenseRevenue

Correct, salary expenditure is an expense because economic benefits (in the form of cash or incurrence of a liability) are paid by an employer.


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Bank 16,500 Accounts receivable 1,200 Fixed assets, at cost 50,000 Accumulated depreciation 15,000 Retained profit, at 1 Jan 2007 16,800 Accounts payable 2,000 Bank loan, repayable after 5 years 10,000 Capital 20,000 Sales 35,000 Cost of sales 15,000 Carriage outwards 2,000 Office expenses 8,000 Interest expenses 500 Tax 600 Depreciation 5,000 Total 98,800 98,800


Let’s look at the adjusted trial balance and classify the above items again basing on the aforesaid definitions (please click the adjusted trial balance).

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Bank B/S-Asset 16,500 Accounts receivable B/S-Asset 1,200 Fixed assets, at cost B/S-Asset 50,000 Accumulated depreciation B/S-Asset 15,000 Retained profit, at 1 Jan 2007 B/S-Equity 16,800 Accounts payable B/S-Liability 2,000 Bank loan, repayable after 5 yrs B/S-Liability 10,000 Capital B/S-Equity 20,000 Sales I/S-Revenue 35,000 Cost of sales I/S-Expense 15,000 Carriage outwards I/S-Expense 2,000 Office expenses I/S-Expense 8,000 Interest expenses I/S-Expense 500 Tax I/S-Expense 600 Depreciation I/S-Expense 5,000 Total 98,800 98,800


Please check whether your classification are the same as above.

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Good. Now, we move forward to the preparation of financial statements. Revenue and expense items are extracted from the adjusted trial balance and stated in the income statement.




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For the year ended 31 December 2007Dr $ Cr $

Sales I/S-Revenue 35,000 Cost of sales I/S-Expense 15,000 Carriage outwards I/S-Expense 2,000 Office expenses I/S-Expense 8,000 Interest expenses I/S-Expense 500 Tax I/S-Expense 600 Depreciation expense I/S-Expense 5,000

Income Statement

Good. Now, we move forward to the preparation of financial statements. Revenue and expense items are extracted from the adjusted trial balance and stated in the income statement.


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For the year ended 31 December 2007$ $

Sales 35,000 Cost of sales (15,000) Gross profit 20,000

Distribution costs Carriage outwards (2,000)

Administrative expenses Office expenses (8,000) Depreciation (5,000) (13,000)

Finance costs Interest expenses (500)

Profit before tax 4,500 Tax (600) Profit for the year 3,900

Income Statement (For Internal Use)

After the extraction, we will tidy up the items into the format suggested by Hong Kong Accounting Standard 1 “Presentation of Financial Statements”, as above.

Please note that expenses are generally required to be classified into “Cost of Sales”, “Distribution Costs”, “Administrative Expenses”, “Finance Costs” and “Income Tax Expenses”, basing on the function of the expenses.

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For the year ended 31 December 2007$

Sales 35,000 Cost of sales (15,000) Gross profit 20,000

Distribution costs (2,000) Administrative expenses (13,000) Finance costs (500) Profit before tax 4,500 Tax expenses (600) Profit for the year 3,900

Income Statement (For External Use)

After the extraction, we will tidy up the items into the format suggested by Hong Kong Accounting Standard 1 “Presentation of Financial Statements”, as above.

Please note that expenses are generally required to be classified into “Cost of Sales”, “Distribution Costs”, “Administrative Expenses”, “Finance Costs” and “Income Tax Expenses”, basing on the function of the expenses.

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Then, asset, liability and equity items are extracted from the adjusted trial balance and stated in the balance sheet.




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Then, asset, liability and equity items are extracted from the adjusted trial balance and stated in the balance sheet.


Bank B/S-Asset 16,500 Accounts receivable B/S-Asset 1,200 Fixed assets, at cost B/S-Asset 50,000 Accumulated depreciation B/S-Asset 15,000 Retained profit, at 1 Jan 2007 B/S-Equity 16,800 Accounts payable B/S-Liability 2,000 Bank loan, repayable after 5 yrs B/S-Liability 10,000 Capital B/S-Equity 20,000



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As at 31 December 2007ASSETS $ $Non-current assetsPlant & equipment, at cost 50,000 Accumulated depreciation (15,000)

35,000 Current assetsAccounts receivable 1,200 Bank 16,500

17,700 Total assets 52,700

EQUITY AND LIABILITIESCapital 20,000 Retained profit (at 31 Dec 2007) 20,700 Total equity 40,700

Non-current liabilitiesBank loan (repayable after 5 years) 10,000

Current liabilitiesAccounts payable 2,000 Total liabilities 12,000 Total equity and liabilities 52,700

Balance Sheet

Again, we will tidy up the items into the format suggested by Hong Kong Accounting Standard, HKAS 1 “Presentation of Financial Statements”, as above.

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Balance Sheet

Please note that the retained profit ($20,700) in the balance sheet represent the retained profit at the end of an accounting year, while retained profit stated on adjusted trial balance ($16,800) represent the balance at the beginning of an accounting year.

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Balance Sheet

We need to use the following formula to compute the retained profits stated in the balance sheet, rather than extracting directly from the adjusted trial balance: Closing retained profit = Opening retained profit ($16,800) + Profit for the year ($3,900) – Drawings for the year ($0) = $20,700.

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Balance Sheet

What’s more, HKAS 1 requires assets and liabilities to be further classified as “current” and “non-current” assets.Do you have any idea on how to distinguish an asset from current to non-current?

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Balance Sheet

Generally, we will classify an asset as current if it is expected to be realised or sold or consumed within twelve months after the balance sheet date.

All other assets should be classified as non-current.

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Balance Sheet

Similarly, we will classify a liability as current if it is expected to be settled within twelve months after the balance sheet date.

All other liabilities should be classified as non-current.

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I am sure that you are now equipped with the basic technique in the preparation of financial statements. But this is not enough. I would like to tell you more on the considerations required by HKAS 1 “Presentation of Financial Statements” in preparing financial statements.

First of all, the management of an entity shall make an assessment of an entity’s ability to continue as a going concern when preparing financial statements.

Overall Considerations (1)

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Financial statements shall be prepared on a going concern basis unless the entity is going to liquidate or cease trading.

When the management has significant doubt on the entity’s ability to continue as a going concern, those uncertainties shall be disclosed in the financial statements.


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Secondly, an entity (whatever a sole trader, a partnership or a company) is required to prepare its income statement and balance sheet using the accrual basis of accounting (in opposite of the cash basis of accounting).


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Accordingly, assets, liabilities, equity, revenue and expenses are recorded in accounting records and presented in financial statements when they satisfy the definitions and: - associated future economic benefit is probable to flow to or from the entity;

and - the cost (or value) can be measured with reliability.


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For example: a sales transaction is recorded as revenue when goods are delivered to the customers (accrual basis of accounting), rather than when the sales consideration is received (cash basis of accounting).


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Thirdly, the presentation and classification of items in the financial statements are required to be retained from one period to the next (known as Consistency of Presentation), unless in rare circumstance.


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Fourthly, material class of similar items is required to be presented separately in the financial statements. Items of a dissimilar nature or function should be presented separately, unless they are immaterial (Materiality and Aggregation).

For example, accounts receivable and other receivables should be presented in the balance sheet separately in regard of the dissimilar nature. However, if they both are immaterial, we can group them together as “receivables” and present it as a single item in the balance sheet.


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Overall Considerations

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Fifthly, unless in rare situation, assets and liabilities should not be offset(offsetting).

Question 5: If a bank’s balance of an entity is $1,000 (asset) while another bank’s balance is an overdraft of $600 (liability), should we offset the bank balance against the bank overdraft?

Yes No


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Correct, we should not offset the bank balance against the bank overdraft and present the net bank balance of $400 in the balance sheet as an asset. Instead, we should present bank balance of $1,000 as an asset and bank overdraft of $600 as a liability, separately, in the balance sheet.


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Overall Considerations

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Similarly, revenue and expenses should not be offset.

Question 6: An entity sells goods of $1,000 (revenue) to Peter on 1.1.2007. The entire amount is due on 31.3.2007. Peter does not pay on time and he goes into bankrupt on 30.12.2007 and, therefore, the amount due becomes a bad debt (expense). Should we offset the sales revenueagainst the bad debt expense?

Yes No


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Correct, we should not offset the sales revenue against the bad debt expense and present the net amount of $0 in the income statement. Instead, we should present sales revenue of $1,000 as revenue and bad debt expense of $1,000 as an expense, separately, in the income statement.


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Last but not least, financial statements shall give a true and fair view of the financial position, financial performance and cash flows of an entity.


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True and fair view requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework1.

Presumably, the application of Hong Kong Financial Reporting Standards will result in financial statements that give a true and fair view.

1 You may refer to HKAS 1 “Presentation of Financial Statements” issued by Hong Kong Institute of Certified Public Accountants.


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We will prepare financial statements for sole traders, partnerships or companies (which we will look into details in Unit 3). The major difference among those types of financial statements is attributable to the variation in their legal structures, which affect the composition of the equity.

In the financial statements of a sole trader, sole trader’s capital account is the only component of the equity. The sole trader’s capital at the end of an accounting year is calculated as followings:

Closing Capital = Opening Capital + Profit for the year - Drawings

Sole Trader vs Partnership (1)

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As there are more than one owner in a partnership, the equity will be comprised of partners’ capital accounts and current accounts in the financial statements of a partnership.


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Partners’ capital accounts are used in recording capital invested and withdrawn by the partners.


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Partners’ current accounts are used in recording usual affairs between the partners and partnership firm, e.g.:(a) salaries to the partners;(b) interest to the partners for their contributed capital;(c) share of profit or loss in accordance with agreed profit-sharing ratio;(d) drawings of partners from their share of profit; and(e) the charge of interest on drawings from partners.


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Besides, we will prepare an appropriation account (as presented above) in order to show how profit for the year is divided among partners in accordance with partnership agreement, e.g. partners’ salaries, share of profit or loss.

$ $Profit for the year P

Add: Interest on partners’ drawings: - A IA

- B IB I

XLess: Interest for partners' capital: - A iA - B iB i

YLess: Salaries to partners: - A SA

- B SB S

Balance of profit Z

- A ZA

- B ZB

Z

A & B PartnershipAppropriation Account for the year ended 31 December 2007

Balance of profit divided in accordance with the agreed ratio:


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Now, it is time to do exercises. Please attempt the following two exercises:

1.Prepare the financial statements for a sole trader; and

2.Prepare the financial statements for a partnership.

Your Show Time

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Dr $ Cr $Accounts payable 5,000Accounts receivable 8,000Carriage outwards 700Bank 3,000Bank loan, repayable after five years 10,000Cost of sales 20,000Electricity expense 1,300Motor vans, at cost 40,000Motor vans – Accumulated depreciation at 31 December 2007 8,000Rent and rate expenses 7,000Other operating expenses (including depreciation) 13,000Sales 50,000Capital, at 1 Jan 2007 40,000Drawings ( made during the year) 20,000

113,000 113,000

Tommy TAdjusted Trial Balance as at 31 December 2007

Tommy Tam carries a retailing business, called Tommy T. The adjusted trial balance on the business’ books as at 31 December 2007 is as above. Please prepare the financial statements for Tommy T in accordance with the HKAS 1 “Presentation of Financial Statements”.

Exercise: Sole Trader

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$Sales 50,000Cost of sales (20,000)Gross profit 30,000Distribution costs (700)Administrative expenses (13,000 + 1,300 + 7,000) (21,300)Profit for the year 8,000

Tommy TIncome Statement for the year ended 31 December 2007

Please compare your answer with above suggested answer for the income statement.

Answer: Sole Trader (1)

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ASSETS $ $Non-current assetsMotor vans, at cost 40,000Motor vans – Accumulated depreciation (8,000)

32,000Current assetsAccounts receivable 8,000Bank 3,000

11,000Total assets 43,000

EQUITY AND LIABILITIESCapital, at 1 Jan 2007 40,000Profit for the year (extracted from the income statement) 8,000Drawings (made during the year) (20,000)Capital, at 31 Dec 2007 28,000


Current liabilitiesAccounts payable 5,000Total liabilities 15,000Total equity and liabilities 43,000

Tommy TBalance Sheet as at 31 December 2007

Please compare your answer with above suggested answer for the balance sheet.

Answer: Sole Trader (2)

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Dr $ Cr $Accounts payable 5,000Accounts receivable 8,000Carriage outwards 700Bank 3,000Bank loan, repayable after five years 10,000Cost of sales 20,000Electricity expense 1,300Motor vans, at cost 40,000Motor vans – Accumulated depreciation at 31 December 2007 8,000Rent and rate expenses 7,000Other operating expenses (including depreciation) 13,000Sales 50,000Capital account - Bruce, at 1 Jan 2007 15,000Capital account - Robin, at 1 Jan 2007 15,000Current account - Bruce, at 31 Dec 2007 15,000Current account - Robin, at 31 Dec 2007 5,000Drawings - Bruce (made during the year) 20,000

118,000 118,000

Additional information: (1) Bruce entitles to receive a salary of $3,000 per annum. (2) Profit and loss sharing ratio between Bruce and Robin is 1:1

Bruce and Robin operated a business in partnership, namely R&B Company. The adjusted trial balance of the partnership as at 31 December 2007 is as above. Please prepare the financial statements for R&B Company in accordance with HKAS 1 “Presentation of Financial Statements”.

Exercise: Partnership

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$Sales 50,000Cost of sales (20,000)Gross profit 30,000Distribution costs (700)Administrative expenses (13,000 + 1,300 + 7,000) (21,300)Profit for the year 8,000

R&B CompanyIncome Statement for the year ended 31 December 2007

Please compare your answer with above suggested answer for the income statement.

Answer: Partnership (1)

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Please compare your answer with above suggested answer for the appropriation account.

$Profit for the year 8,000

Less: Salary to parnters: - Bruce (3,000)Balance of profit 5,000

- Bruce (1/2) 2,500- Robin (1/2) 2,500

5,000

R&B CompanyAppropriation Account for the year ended 31 December 2007

Balance of profit divided in accordance with the agreed ratio:

Exercise: Partnership (2)

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ASSETS $ $ $Non-current assetsMotor vans, at cost 40,000Motor vans – Accumulated depreciation (8,000) 32,000

Current assetsAccounts receivable 8,000Cash 3,000 11,000Total assets 43,000

EQUITY AND LIABILITIES Bruce Robin TotalCapital accounts, at 1 Jan 2007 15,000 15,000 30,000Profit for the year (extracted from the appropriate account) 2,500 2,500 5,000Drawings (made during the year) (20,000) - (20,000)Capital accounts, at 31 Dec 2007 (2,500) 17,500 15,000

Current accounts, at 1 Jan 2007 15,000 (5,000) 10,000Salary to partners 3,000 - 3,000Current accounts, at 31 Dec 2007 18,000 (5,000) 13,000Total equity 15,500 12,500 28,000


Current liabilitiesAccounts payable 5,000Total liabilities 15,000Total equity and liabilities 43,000

R&B CompanyBalance Sheet as at 31 December 2007

Please compare your answer with above suggested answer for the balance sheet.

Answer: Partnership (3)

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Now, you have come to the end of the unit.

Let us recapitulate the essential points of the following inthe next two slides:

• Structures and contents of financial statements

• Overall considerations for presentation of financial statements

• Preparation of income and balance sheet for a sole trader and a partnership

RecapitulationRecapitulation (1)(1)

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Structures and contents of financial statements- Financial statements are comprised of income statement and

balance sheet.

- Asset, liability and equity are elements that presented in the balance sheet.

- Revenue and expense are elements that presented in the income statement.


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Overall considerations for presentation of financial statements:- going concern;- accrual basis of accounting; - consistency of presentation;- materiality and aggregation;- offsetting; and- true and fair view.

Preparation of income statement and balance sheet for:- a sole proprietor; and- a partnership.


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• Yau, L. and Yau, R. (2001), Book-Keeping and Accounts, Hong Kong Institute of Accredited Accounting Technicians Limited, 2nd Edition.

• Li, T. M. and Ng, P. H. (2005), Financial Accounting, Hong Kong Institute of Accredited Accounting Technicians Limited.

‧ 邱韞華及邱在光 (2001), 簿記與會計, 香港財務會計協會有限公司, 第二版.

Further ReadingsFurther Readings

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This is the end of Unit 2. This is the end of Unit 2. Please go to the Unit Please go to the Unit Assessment before Assessment before attempting the next unit.attempting the next unit.

EndEnd--ofof--unit Assessmentunit Assessment

End of the UnitEnd of the Unit

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If you would like toIf you would like to(a)(a) learn learn Basic BookBasic Book--keeping Skills for Learnerskeeping Skills for Learners, , andand(b)(b) do do Case StudiesCase Studies, , please go to the please go to the Learning Resources Corner.Learning Resources Corner.

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Unit 2 FS Preparation 1 - Hong Kong Education City -...

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Transcript of Unit 2 FS Preparation 1 - Hong Kong Education City -...