THE INSTITUTE OF CHARTERED ACCOUNTANTS
OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND
FINANCE - 2013/2014
Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya
B.Com Special (Col), ACA
Preparation of Financial
Statements- LKAS 1
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The objective of financial statements is to provide
information about the financial position, financial
performance and cash flows of an entity that is useful
to a wide range of users in making economic decisions.

A complete set of financial statements comprises.
(a) Statement of Financial Position
(b) Statement of Comprehensive Income
(c) Statement of Changes in Equity
(d) Statement of Cash Flows
(e) Notes, comprising a summary of significant
accounting policies and other explanatory information
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Statement of Financial Position

Statement of Financial Position provides the
financial status of the company as at a prescribe
date. This prescribe date is the date where
financial accounts are prepared. As discussed in
the accounting process, at the financial period
end all accounts of the ledger are closed and the
balances of nominal accounts are transferred to
statement of Comprehensive income where as
personal and real accounts whose balances are
carried forward. These Balances will be shown in
the Statement of financial position.
Statement of Comprehensive Income

Objective of Statement of Comprehensive Income
is to find out the profitability of the financial
period. Profitability is the Performance of the
organization.
Statement of Cash Flows

Statement of Cash Flows explains the cash & cash
equivalent generated & how it is distributed with
in the period. This enables users to evaluate the
changes in net asset of an enterprise, its financial
structure, and its ability to affect the amount and
timing of cash flows in order to adopt to changing
circumstances and opportunities.
Statement of Changes in Equity
An entity shall present a statement of changes in equity
showing in the statement:
Total comprehensive income for the period, showing
separately the total amounts attributable to owners of
the parent and to non-controlling interests;
For each component of equity, the effects of
retrospective application or retrospective restatement
recognized in accordance with LKAS 8; and
For each component of equity, reconciliation between
the carrying amount at the beginning and the end of
the period, separately disclosing changes resulting
from:
a)
b)
c)
i.
ii.
iii.
Profit or loss;
Each item of other comprehensive income; and
Transactions with owners in their capacity as
owners, showing separately contributions by and
distributions to owners and changes in ownership
interests in subsidiaries that do not result in a loss
of control.
Disclosure of accounting policies
An entity shall disclose in the summary of significant
accounting policies:
a)
b)
The measurement basis (or bases) used in
preparing the financial statements, and
The other accounting policies used that are
relevant to an understanding of the financial
statements.
Key Adjustments need in FS

Following key adjustments are expected to make when
preparing financial statements using trial balance.
Closing stock adjustment
Adjustments for Deprecation
Bad & doubtful debtors
Accruals
Adjustments for EPF/ETF/PAYE
Adjustments for Pre-paid expeses & income
received in advance
Closing Stock Adjustment

Generally closing stock is arrived at by a Physical
stock count. Stock should be valued under LKAS 2.
(Lowest between the cost & the nest realizable
value)

Adjustment entry are as follows.
Stock Account
Debit
Trading Account
Credit
(Reduction from purchases during the year )
Adjustments for Deprecation

The property, plant & equipment that are in use for carry
out business have to depreciated in line with LKAS 16.
• Depreciation is the systematic allocation of the
depreciable amount of an asset over its estimated useful
life
• The depreciable amount of an asset is its cost (or
substitute) less its residual value
Annual depreciation of the particular asset is concern can be
calculate using following methods.
1.
Straight line
2.
Reducing balance
3.
Units of production

In accounting there are two methods applied for deprecation
1.
Written down method
2.
Provision for deprecation Method
Written down method
According to this method Deprecation is charged to the asset
account. Accordingly double entry would be
Deprecation Account Debit
Asset Account
Credit
Provision for deprecation Method
According to this method Deprecation is charged to Provision for
deprecation account instead writing off against asst account.
Accordingly Assets account shows the cost of the asset ( Unless it is
revalued)

Double Entry
◦ Deprecation Account
Debit
◦ Provision for deprecation account
Credit
Here Deprecation account is transferred to Statement of
comprehensive income as expense and provision for depreciation
balance will be deducted from the respective asset value at the year
end in statement of financial position.
Bad & Doubtful debtors

Debts that are not recoverable from Debtors are treated as Bad
debts. If the amount not received can be ascertained accurately
treated as the bad debt.
Bad debtors (exp)
Debit
Debtors
Credit
If debt already written off is received
01. If already written off debt is received in the same year.
Cash
Debit
Bad debt account
Credit
02. If Debt Written off in a previous year is received
◦ Cash
◦ Bad Debt Already Written off Account
Debit
Credit
Provision for Bad Debts
A doubtful debtor is a provision made in line with prudent concept and
such value depicts the uncertainty of recoverability. This estimation is
done as per LKAS 10.
Bad Debt Provision is mainly in two types, There are
1. General Provision
2. Specific Provision
Specific Provision is made with regard to an indentified debtor or set
of debtors. Other wise it is required a general provision.
Accruals
Income and expenditures will be recorded regardless whether they
actually paid or received by cash only if such income and expenditures are
relevant to the particular financial period.
Expenditures
:
Relevant expenditure A/C
Debit ( I/S)
Accrued Expense A/C/payables A/C
Credit (SFP)
Income
:
Income receivables A/C
Debit (SFP)
Relevant income A/C
Credit ( I/S)
Pre-incurred expenditures and income
received in advance
Prepaid Expenses
The value relevant to current financial year should only be treated
as an expenditure in I/S and value pertaining to subsequent
financial year should shown as an asset in the statement of
Financial Position.
Prepayment Expenditure A/C
Cash
Debit (SFP)
Credit
Income received in advance: Any income received for subsequent
years should not be treated as a income for this current financial year
but should be shown as a liability in the statement of Financial
Position
Cash
Debit
Income received in advance A/C
Credit