Accounting Lecture 5

• Statement of financial position

  An itemised statement of what one owns, what one owes, and what one is worth
• Income statement


  • Statement shows if the business makes profit or loss during a particular period
  • Shows the financial performance of the company
• Structure of an Income Statement

  • Typical structure of the statement of financial position
  • Non-current assets + current assets = total assets
  • Current liabilities + non-current liabilities
  • Net assets = total assets – total liabilities = CAPITAL OR EQUITY
• Matching Principle


  • Refers to the assumption that in the measurement of profit, costs should be set against the income which they generate, i.e. during period when income rises
  • Only include the cost of rent for 12 months not for the total amount of time it's being paid – income and expenses are recorded over 12 month periods
• Preparation of financial statements from a trial balance

  1. The trial balance lists the balances on the ledger accounts – these are used to prepare the financial statements

  2. Period-end adjustments are necessary to comply with the matching principle:

  3. Costs of sales

  4. Depreciation

  5. Bad debt written off and provision for bad debt

  6. Accruals and prepayments
• Cost of Sales


  The value of goods removed from inventory because they have been sold – their value is converted from an asset to an expense
• Carriage in


  Delivery costs
• Calculation of cost of sales and gross profit

  1. Revenue and purchases are after deducting terms

  2. This level of detail is unlikely to be shown on the face of the statement; it may be disclosed through notes to the accounts
• Depreciation and Non-Current Assets

  • Two possible ways to value non-current assets under IFRS:
  • Historical cost accounting
  • Fair value
• Historical cost accounting


  • Non-current assets are valued at their cost less the aggregate/accumulated depreciation from the date of acquisition to the date of the statement of financial position
  • This value is known as the written down value (WDV), net book value (NBV) or net carrying amount
  • Assets are reported in the statement of financial position at the NBV
• Historical cost accounting example

  • A company bought a machine for £3,000 3 years ago and it is used till now. Notes that the machine depreciates every year by £3,000 per annum
• Depreciation


  IAS 16 requires all tangible non-current assets except land and investment properties to be depreciated
• Accounting for depreciation


  1. An annual depreciation of £A is recorded as an expense in the P&L account for that year

  2. In the balance sheet, NBV = Cost – Accumulated depreciation (provision for depreciation)
• Straight line method


  • Same amount of depreciation charged to the income statement in respect of an asset each year throughout its useful economic life
  • Depreciation p.a. = cost – residual value/useful economic life
• Straight line method example

  • Historical cost = 30,000
  • Useful economic life = 10 years
  • Residual value = £0
  • Depreciable amount = cost – residual value = 30000
  • Depreciation per year = cost - residual value/useful life = 30000 – 0/10 = 3000
• Reducing balance method


  • Convex profile – faster depreciation rate in earlier periods
  • Operates by applying depreciation rate to net book value brought forward, e.g. (with rate = 50%)