Interpretation of final accounts
BE REMINDED that account concepts and principles are key to solving an accounting problem. We have covered quite a lot, and hope you will retain as many as possible. Below are some concepts and their definition and/or types. Always apply accounting principles correctly to secure the grade appropriate for success.
ADJUSTMENTS
The year-end adjustments are done in the final accounts to arrive at incomes and expenses of the current year, in accordance with the matching principle.
EXPENSES
Types of expenses are:
1. Expenses accrued: a. Expenses accrued at the beginning of the year are expenses from the last year. They will be either deducted OR credited in the expense account.
b. Expenses accrued at the end of the year is the expense for the current year? They are added OR debited in the expense account.
c. Accrued expenses are liabilities which are to be recorded under current liabilities in the balance sheet.
2. Expenses prepaid: i. Expenses prepaid in the beginning of the year are expenses for the current year. They are added OR debited in the expense account.
ii. Prepaid expenses at the end of the year are advance payments for the following year. They are deducted OR credited in the expense account.
INCOMES
Receivable income at the:
■ Beginning of the year are income from the previous year; they are deducted OR debited in the income account.
■ End of the year are income for the current year; they are added OR credited in the income account.
CAPITAL OWNED
This is capital invested by the owner in the business. It is affected by: i. Additional investment ii. Drawings iii. Net profit iv. Net loss
WORKING CAPITAL
■ This is the day-to-day cash available to operate the business.
■ It is current assets less current liabilities.
CAPITAL EMPLOYED
This is: a. Capital owned plus long-term liabilities. b. Total assets less current assets. c. Fixed assets plus working capital.
ADJUSTMENTS IN FINAL ACCOUNTS
Adjustments are given at the end of the year after the trial balance has a double effect on the accounts.
CLOSING STOCK
These are listed in the trading account and in current asset in the balance sheet.
PROVISION FOR DEPRECIATION
The current year expense and accumulated depreciation are deducted from fixed asset in the balance sheet.
PROVISION FOR BAD DEBTS
This can either be an increase or decrease in the profit and loss account – the current year balance to be deducted from debtors in balance sheet.
WORKED EXAMPLE
Question:
You are required to: a. State the formula for calculating working capital.
b. Calculate the working capital from the balances BELOW. [[>1] Show all workings. c. Give TWO examples of problems a business may have if there is not enough working capital.
d. Describe and explain TWO ways in which a sole trader can increase the working capital.
REASONING SOLUTION
a. Working capital = Current assets – Current liabilities.
b.
c. TWO examples of problems a business may have if there is not enough working capital are:
i. Business will not be able to capitalise on cash discounts since creditors may not be paid on time.
ii. There is always the likelihood of the business not being in a position to benefit from profitable business opportunities at a convenient time.
d. The sole trader can at any time:
1. Bring in additional capital in the form of cash; this allows for capital to increase as well as cash in hand, resulting in working capital being increased.
2. Increase the amount of working capital by taking a long-term loan, which allows additional flow of cash in the business, thus increasing working capital.
Step out into your examination prepared to give the questions your best shot. Just apply the principles you have learnt and endeavour to do your best.
This is all we have time for this week but, always bear in mind, you must get up each morning with renewed determination if you want to go to bed with full satisfaction. Never let what you cannot do stand in the way of what you can.