COMPANY FINANCIAL STATEMENTS (LIVE) 09 APRIL 2015 Section A: Summary Notes and Examples

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1 COMPANY FINANCIAL STATEMENTS (LIVE) 09 APRIL 2015 Section A: Summary Notes and Examples Adjustments Here are the most common adjustments pertaining to companies and how to do them. You will need to practise several examples in order to master these adjustments, but every adjustment can be placed in one of the categories below. As you work through examples, you will gradually become an expert at identifying the relevant adjustment! (Refer to Chapter 3 pages for examples) 1. Trading stock deficit / Consumable stores on hand This common adjustment usually takes the following form: A physical stock take revealed that the following were on hand at the end of the financial year: Trading stock R Stationery R380 (Instead of stationery, there could be consumable stores or packing material on hand as well). 2. Accrued income This is income that you have earned during the financial year, but that will only be received in the next financial year. Example: Interest on the fixed deposit of R is 12% per annum, payable quarterly. One quarter s interest has not yet been received. 3. Accrued expenses These are expenses that you have incurred during the financial year, but that will only be paid in the next financial year. Example: February s phone bill of R2 900 has not yet been paid. 4. Deferred income / Income received in advance This is income that you have received during the financial year, but that will only be earned in the next financial year. Example: The business lets a building to a tenant. Two months rent has been received in advance for the next financial year. The monthly rent was unchanged throughout the year. 5. Prepaid expenses These are expenses that you have paid during the financial year, but that will only be incurred in the next financial year. Page 1

2 Example: The insurance of R8 650 includes R3 600 paid as an annual premium on 1 October The financial year ends on 28 February Depreciation The steps for this adjustment are simple: 1. Calculate total depreciation for the year on Vehicles and Equipment. 2. Record depreciation in the statement of comprehensive income as an operating expense. You should only have one figure for depreciation in the statement of comprehensive income you do not record depreciation on vehicles and equipment separately. 3. Record depreciation in note 3 the fixed asset note in the statement of financial position. Here, you will have separate columns for depreciation on vehicles and on equipment. Remember that land and buildings do not depreciate. 4. The journal entries for depreciation are as follows: Dr Depreciation (expense) Cr Accumulated depreciation on vehicles / equipment (negative asset) See the chapter on fixed assets for additional hints on calculating depreciation. 7. Provision for bad debts adjustment A provision for bad debts is an amount that is set aside to account for debtors who do not pay. Since the debtors change all the time, it is necessary to adjust this provision at the end of the financial year to account for these changes. Example: The provision for bad debts must be adjusted to 5% of book debtors. (Note that provision for bad debts adjustment can be either an income or an expense, depending on whether the existing provision is too big or too small. Also don t confuse the adjustment with the provision itself they are two different things!) 8. Errors You will often get adjustments where an inexperienced bookkeeper has made a mistake in recording a transaction. Here, you simply need to make whatever entry is necessary to correct the error. Examples: 1) Stationery of R560 was bought on credit. This was mistakenly recorded as R650. 2) An improvement to a storeroom for R50 000, paid in cash, was mistakenly debited to Repairs. Page 2

3 9. Omissions This type of adjustment refers to all transactions that have not been recorded. Omissions can take many forms (e.g. bad debts, trading stock returned, donations of stock by the business, drawings). One common example of an omission is when an employee s salary was not recorded: 10. Current portions of loans or fixed deposits This is the easiest adjustment of all to do, but it is one that learners often forget to do. It occurs when part of a loan or fixed deposit will be paid back or received during the financial year, and involves moving it from the non-current section of the statement of financial position to the current section. Example: The business has a loan of R with ABSA. This loan is repaid at R2 000 per month. 11. Income tax for the year When dealing with companies, you are usually given the income tax at the end of the year (or you may have to calculate it as a percentage of the net profit). Remember that companies pay provisional tax, so an end-of-year adjustment will have to be done. Example: The net profit for the year was R Income tax is calculated at 30% of pre-tax profits. 12. Dividends declared at the end of the year When a business recommends a final dividend at the end of the year, it owes its shareholders money for that dividend. This must therefore be recorded. Example: A final dividend of 20c per share was declared at the end of the financial year. Page 3

4 Section B: Practice Questions Question 1 Shrek Limited has an authorised share capital of ordinary shares. Calculate the new Net profit amount after adjustments and complete the required notes (70) Information The following balances appeared in the General Ledger of Shrek Limited on 28 February 2013: BALANCE SHEET ACCOUNTS SECTION Ordinary Share Capital ( shares) Retained Income (1 March 2012) Loan: Okra Bank Land and Buildings, at cost Vehicles, at cost Equipment, at cost Accumulated Depreciation: Vehicles (1 March 2012) Accumulated Depreciation: Equipment (1 March 2012) Trading Inventory Debtors Control Provision for Bad Debts (1 March 2012) Creditors Control Bank Petty Cash Cash Float Deposit: Water and Electricity 500 S.A Pension Fund SARS - Income Tax (Dr) NOMINAL ACCOUNTS SECTION Ordinary Share Dividends FINAL ACCOUNTS SECTION Profit and Loss Account R Page 4

5 1. The net profit of R , was arrived at before the following items had been taken into account: Packing material on hand at 28 February 2013: R 589 Interest on loan due to OKRA: R Provision for bad debts was increased by R 28 Insurance pre-paid by the business amounted to R The total rent received by the business for the year amounted to R This amount included rent for March Rent was increased by 12,5% on 1 October Depreciation on Equipment was calculated at R Depreciation on Vehicles amounted to R The directors declared a final dividend of 8 cents per share on 28 February 2013, payable on 31 March The interim dividend of 16 cents per share was paid on 30 September new shares were issued during the year on 31 August Income tax for the year amounts to R The loan agreement with OKRA bank stipulates an annual repayment of R to be made on 31 July each year. 5. Post-dated cheques issued to creditors on 28 February 2013 amounted to R Page 5

6 Answer Book Question 1 Notes to the financial statements for the year ended 28 February INVENTORY (3) Trading inventory Consumable stores 5. TRADE AND OTHER RECEIVABLES (7) Trade Debtors Provision for Bad debts Net trade Debtors Pre-paid Expenses 7. ORDINARY SHARE CAPITAL (12) Authorised Issued Page 6

7 8. RETAINED INCOME/ACCUMULATED PROFIT (14) 9. TRADE AND OTHER PAYABLES (22) Page 7

8 Section C: Solutions Question 1 Calculate the new Net profit amount after adjustments: (12) R = ( ) RI= 7x +6(1,125x) x +6,75x = ,75 x = /13,75 = before increase of 12,5% (3 000 x 12,5% ) = 375 Shrek Limited Notes to the financial statements for the year ended 28 February INVENTORY (3) Trading inventory Consumable stores on hand ( ) 5. TRADE AND OTHER RECEIVABLES (7) Trade Debtors Provision for Bad debts Net trade Debtors Pre-paid Expenses Deposit: Water & electricity (4 028) ( ) 7. ORDINARY SHARE CAPITAL (12) Authorised ordinary shares at R2 par value Page 8

9 Issued ordinary shares at R2 at beginning of year ordinary shares at R2 issued during the year ordinary shares at R2 in issue RETAINED INCOME/ACCUMULATED PROFIT (14) Balance at beginning of year Net profit after tax ( ) ( ) Ordinary share dividends (72 000)( ) Paid Recommend Balance at the end of the year ( ) 10. TRADE AND OTHER PAYABLES (22) Creditors ( ) Accrued expense Income received in advance Shareholders for dividends ( x 0.08) SARS-Income Tax ( ) Short term loan SA Pension fund 3 000( ) 3 375( ) ( ) ( ) Page 9