Preparation of financial statements

• Year-end adjustments: accruals and prepayments of expenses and income, irrecoverable debts (and debts recovered), the allowance for irrecoverable debts, depreciation, inventory at the lower of cost and net realisable value, and corrections of errors.
• Sole traders: a statement of profit or loss and a statement of financial position, from full records or rebuilt from incomplete records.
• Partnerships: the same statements plus an appropriation account, and capital and current accounts for each partner. Without an agreement the Partnership Act 1890 applies.
• Limited companies: ordinary shares issued at par or at a premium, rights and bonus issues, debentures, dividends, and capital and revenue reserves.
• Companies prepare a statement of profit or loss, a statement of changes in equity and a statement of financial position.
• The choice between shares, debentures and other sources depends on what the money is for.

Match each item to its period

The matching (accruals) concept charges each period with the expenses it used and credits it with the income it earned, whatever the cash movement.

Worked example

Rent payable: $600 was prepaid at 1 January 2025, $7,800 was paid during the year, and $700 was owing at 31 December 2025. Rent receivable: the tenant owed $500 at 1 January, paid $6,300 during the year, and had paid $450 in advance at 31 December. Prepare both accounts.

The rent expense is $9,100; the rent income is 6,300 − 500 − 450 = $5,350. At 31 December the rent owing of $700 and the rent received in advance of $450 are both current liabilities.

Prudence applied to trade receivables

irrecoverable debt irrecoverable debts recovered