PREPARE FINANCIAL
STATEMENTS
D1.HFI.CL8.06
D1HFA.CL7.04
D2.TFA.CL7.06
Slide 1
Introduction
Prepare financial statements

Classroom schedule

Trainer contact details

Assessments

Resources:
• Calculator, pen and paper
Slide 2
Introduction
Ice breaker:

What is your name?

Where do you live?

Why are you doing this course?

Where do you work?

What do you like most about your workplace?

Have you studied a module or unit similar to this
before?
Slide 3
The Accounting system

A Definition of Accounting:
“The systematic recording, reporting
and analysis of financial transactions
of a business.”

The Accounting System
The people and the processes by which an
organisation records, reports and analyses
financial transactions
Slide 4
The Accounting system
Accounts
Receivable
Accounts
Payable
Fixed
Assets
General
Ledger
Other
Payroll
FINANCIAL STATEMENTS
Slide 5
Financial statements – the theory

What are financial statements?
• Financial transactions, activities and events
• Summary

Why are financial statements prepared?
• Financial performance and position
• Growth and the future

Who prepares financial statements
• Personnel involved
Slide 6
Financial statements – the theory
Key characteristics of the tourism and hospitality industry

Sales volatility
• Seasonal
• Daily turnover

Product perishability
• Food and beverage outlets
• Accommodation venues
Slide 7
Financial statements – the theory
Key characteristics (continued)

High fixed costs
• Accommodation venues
• Relationship to profit

Labour intensive activities
• People business
• Cost
Slide 8
Financial Statements – the theory
Two categories of financial statements
1.
Financial accounting
2.
Management accounting
Slide 9
Financial Statements – the theory
Financial accounting reports:

Terminology differences
• Location
• External and internal requirements

Profit and loss statement

Balance sheet

Statement of changes in equity

Statement of cash flows
Slide 10
Financial Statements – the theory
Management accounting reports:

Profit and loss summary

Balance sheet

Revenue report

Bank reconciliation statement

Fixed asset register
Slide 11
Financial Statements – the theory
How often are financial statements produced?

Arbitrary reporting periods of equal length

Ownership

Financial and management accounting reports
Slide 12
Financial Statements – the theory
Financial accounting reports:

Regulatory requirements
• Annually
• Interim reports

Internal users
• Threshold guidelines
• Monitor, review and evaluate financial transactions
• Support decision making
Slide 13
Financial Statements – the theory
Management accounting reports:

Internal use only

Address key characteristics of the industry

Size and scope of organisation

Information required by interested parties
Slide 14
Financial Statements – the theory
True and Fair View:

What does this mean?

Accounting standards

Implication for hospitality and tourism
• Revenue
• Assets
• Costs
Slide 15
Financial Statements – the theory
Considerations:

Disclosure
• Factors
• Relevant reports

Confidentiality
• Work practices
• Preparation of financial data
• Distribution of reports
Slide 16
Financial Statements – the theory
Considerations (continued):

Access to information
• Outside the organisation
• Statistical data for analysis
• Market value or trading data
Slide 17
Financial Statements – the theory
Assumptions underlying financial reports:

Jigsaw activity
• Discuss and provide an explanation
for the key assumptions given to your
group. Use examples where you can
• Create a class set of explanations and examples
based on this activity
Slide 18
Financial Statements – the theory
The format for financial reports:

Accounting standards and principles
• GAAP
• Local guidelines

Uniform system of accounts – USALI
• Guided by activity
• Location or region

External requirements
Slide 19
Prepare the Fixed Assets Register
Fixed Assets Register
Slide 20
Prepare the Fixed assets register
Key concepts:

Relationship to revenue

Current and non-current assets
• Examples from tourism and hospitality

Internal control to safeguard assets
• Substantial investment

Cost principle
Slide 21
Prepare the Fixed assets register
What does a fixed asset register look like?

Activity
• Create an example of a fixed asset register to share
with the group for a hospitality or tourism
organisation
Slide 22
Prepare the Fixed assets register
Format of a register should include:

Administrative details
• Unique asset code
• Description of the asset
• Location of the asset
• General ledger code
• General ledger sub-category details
Slide 23
Prepare the Fixed assets register
Format of a register should include:

Purchase details
• Date of purchase
• Purchase price

Valuation details
• Residual value
• Useful life
• Depreciation rate and method
Slide 24
Prepare the Fixed assets register
Format of a register should include:

Cumulative values
• Accumulated depreciation
• Book value or Net Book Value

Disposal details (where relevant)
• Disposal date
• Disposal price
• General ledger adjustments
Slide 25
Prepare the Fixed assets register
Depreciation:

It may not be what you think…

Why is it calculated?

When is the calculation performed?

Remember there is no monetary exchange!
Slide 26
Prepare the Fixed assets register
Key terms and phrases:

Depreciation methods

Depreciation rate

Useful life

Residual or salvage value

Book value or Net book value

Accumulated depreciation
Slide 27
Prepare the Fixed assets register
Depreciation methods:
Straight-line depreciation


•
Equal charge across life of the asset
•
Always calculates annual depreciation charge
Method 1 – Depreciation rate
• Purchase price X Depreciation rate
= Annual depreciation charge
Slide 28
Prepare the fixed assets register
Depreciation methods:

Method 2 – Useful life
Purchase price – residual value
Useful life of the asset
= Annual depreciation charge
• Remember that residual value and useful life are
estimates
• CAUTION : ANNUAL CHARGE
Slide 29
Prepare the Fixed assets register
Depreciation methods:
Reduced balance method

•
Use asset more in earlier years
•
Always calculates annual depreciation charge
Only one method but two steps

•
Calculate Net book value
•
Calculate depreciation charge
Slide 30
Prepare the Fixed assets register
Reduced balance method:
Calculate Net Book Value

•
Book Value – Accumulated depreciation
= Net Book Value
•
Previous period data used
Depreciation charge

•
Net Book Value X Depreciation rate
= Annual Depreciation charge
Slide 31
Prepare the Fixed assets register
Useful life
Residual value
Slide 32
Prepare the Fixed assets register
Maintaining the fixed assets register:

Why?
• Accurate and timely information
• Valuation

Integrity and security of data
• Secure access
• Authorised changes
• Assets sighted
Slide 33
Prepare the Fixed assets register
Maintaining the fixed assets register:

Periodic updates
• Financial reports
• Physical count
• Annual reviews

Purchases of fixed assets
• Asset sighted
• Asset categorised
• Depreciation details
Slide 34
Prepare the Fixed assets register
Maintaining the fixed assets register:

Disposal of fixed assets
• Authorisation
• Valuations
• Adjustments
Slide 35
Prepare the Fixed assets register
Produce the fixed assets register report:

Format
• To meet internal requirements

Frequency
• Reconcile to the general ledger
• Significant updates
• Other internal time requirements
Slide 36
Prepare the Fixed assets register
Produce the fixed assets register report:

Examples
• Annual review
• Record of changes
• Depreciation schedule
• Management decision making
Slide 37
Maintain the General Ledger

The Accounting cycle
TRANSACTIONS
SOURCE DOCUMENTS
JOURNALS
LEDGERS
TRIAL BALANCE
FINANCIAL ACCOUNTING REPORTS
MANAGEMENT ACCOUNTING REPORTS
Slide 38
Maintain the general ledger
Principles for recording transactions in the general ledger:

Double entry accounting
Slide 39
Maintain the general ledger
Principles for recording transactions in the general ledger:

Double entry accounting
Slide 40
Maintain the general ledger
Principles for recording transactions in the general ledger:

Journals
• Cash receipts journals
• Cash payments journal
• Sales journal
• Purchases journal
• General journal
Slide 41
Maintain the general ledger
Principles for recording transactions in the general ledger:

An example of the cash receipts journal
•
Note that each amount is entered twice:
•
Payment has been received (1) for a room charge (2)
•
Payment has been received (3) for restaurant sales (4)
•
The total amount in the bank is the sum of (1) and (3) and will be posted to the ledger
account called Cash at Bank.
•
The total amount for each sale will be posted to their individual ledger accounts
Slide 42
Maintain the general ledger
Principles for recording transactions in the general ledger:

An example of the general journal format
Slide 43
Maintain the general ledger
Principles for recording transactions in the general ledger:


Ledger accounts
•
Classified into revenue, expense, asset, liabilities and
equity
•
Unique code
•
Current balance maintained
Subsidiary ledger accounts
•
Different from journals
•
Reconciled to the main ledger account
Slide 44
Maintain the general ledger
Principles for recording transactions in the general ledger:


External transactions
•
Source document recorded
•
Journal totals “posted” to the appropriate general ledger
accounts
•
Subsidiary ledgers balanced, reconciled and details
posted
Internal transactions
•
General journal
•
Subsidiary ledgers
Slide 45
Maintain the general ledger
Activity
Record the following transactions in the general journal for
an accommodation venue:

2,500 cash received for room sales

Cash paid of 400 to staff for wages

Rent paid for one month of 1,000

400 paid for advertising expenses
Slide 46
Maintain the general ledger
The trial balance:
Activity

What is the trial balance?

Why is a trial balance prepared?

Format for the trial balance

When is the trial balance prepared?
Slide 47
Maintain the general ledger
Key concepts when preparing the trial balance:

Debits must equal Credits
• BEWARE the computerised accounting system

Checklist for locating and adjusting errors

General journal records adjustments
Slide 48
Maintain the general ledger
Adjusting entries

What is an adjusting entry?

Tourism and hospitality examples

Accounting principles
•
Accrual assumption
•
Matching principle
•
Revenue recognition principle

General journal

Posted to the general ledger
Slide 49
Maintain the general ledger
Activity
Slide 50
Maintain the general ledger
Closing the general ledger:

The process

Financial accounting reports

Management accounting reports

Closing entries

Reversing entries
Slide 51
Prepare the Bank Reconciliation
Introduction:

Definition of cash

Safeguarding cash

•
Revenue
•
Hospitality and tourism industry
Internal controls
•
Collection and counting
•
Transfer
•
Storage
Slide 52
Prepare the Bank Reconciliation
The general ledger bank account:

What does it include?

How is it updated?
• Cash journals
• General journal

Increases and decreases to the cash balance
• Debits and credits
Slide 53
Prepare the Bank Reconciliation
The bank statement:

What is it?

When is it provided?

Deposits and withdrawals

CAUTION
• Debits
• Credits
Slide 54
Prepare the Bank Reconciliation
The bank reconciliation:

Verifying the balances agree
• General ledger bank account
• Bank statement

Are there differences?
• Timing
• Errors
• Dishonoured payments
• Other
Slide 55
Prepare the Bank Reconciliation
The bank reconciliation:

Prepare your workspace
• Secure
• Documentation
• Access to general ledger accounts
• Access to computerised bank account if appropriate
• Notes and workplace procedures
Slide 56
Prepare the Bank Reconciliation
The bank reconciliation:

Check outstanding items
• Previous period

Compare deposit entries
• Cash receipts journal = cash deposits in bank
account
• CAUTION - Individual and daily amounts
• Mark entries that appear in both locations
Slide 57
Prepare the Bank Reconciliation
The bank reconciliation:

Investigate missing deposit entries
• In accounting system, update as
appropriate
• In bank statement, timing difference
• Bank error, only adjusted by bank

Differences
• Recorded on the bank reconciliation statement
Slide 58
Prepare the Bank Reconciliation
The bank reconciliation:

Compare withdrawal entries
• Cash payments journal = cash withdrawals from the
bank account
• Mark entries that appear in both locations
• Generally, entries appear individually
Slide 59
Prepare the Bank Reconciliation
The bank reconciliation:


Investigate missing withdrawals
•
In accounting system, clerical
errors
•
In bank statement, unpresented
cheques
•
Items originated from bank, update accounting system
•
Bank error, only adjusted by bank
Differences
•
Recorded on the bank reconciliation statement
Slide 60
Prepare the Bank Reconciliation
The bank reconciliation:

Fees and charges
• Identify
• Update accounting system

Differences
• Recorded on the bank reconciliation statement
Slide 61
Prepare the Bank Reconciliation
The bank reconciliation:

Update general ledger balances with any and all
changes as part of the reconciliation process
• Cash journals
• General journal

New general ledger balance noted

Accurate record keeping
Slide 62
Prepare the bank reconciliation
Slide 63
Prepare the Bank Reconciliation
Produce the bank reconciliation statement:

Key points
•
Heading
•
Reporting period
•
Debits and credits
•
Begin with Bank Statement
•
End with a total that agrees to the General ledger
account
•
Distribution, review and filing procedures
Slide 64
Produce Financial statements
TRANSACTIONS
SOURCE DOCUMENTS
JOURNALS
LEDGERS
TRIAL BALANCE
FINANCIAL ACCOUNTING REPORTS
MANAGEMENT ACCOUNTING REPORTS
Slide 65
Produce Financial statements
Compile all necessary information:

Final adjusted trial balance
• Worksheet

Budgets and forecasts

Previous period financial statements

Financial and operational ratios

External data

Activity
Slide 66
Produce Financial statements
The Revenue report

Purpose

Frequency

Format

Nature of the financial information
• Sales
• Budget or forecast
• Prior periods
• Ratios
Slide 67
Produce Financial statements
The Revenue report (an example)
Slide 68
Produce Financial statements
The profit and loss statement:

Definition and purpose

Revenue less Expenses = Net Profit or Loss

Frequency

Format
• Internal requirements (Management)
• External requirements
• Classification of categories (USALI)
Slide 69
Produce Financial statements
Preparing the profit and loss statement:

Headings

Sales accounts

Cost of sales or Cost of goods sold

Gross profit

Other expenses
Slide 70
Produce Financial statements
The profit and loss statement (an example)
Slide 71
Produce Financial statements
The Balance sheet:

Definition and purpose

The Accounting equation
Assets – Liabilities = Equity

Frequency

Format
• Account or Narrative
Slide 72
Produce Financial statements
The Balance sheet:

Assets and Liabilities
• Current
• Non-current

Equity
• Capital
• Retained Earnings
Slide 73
Produce Financial statements
Preparing the Balance sheet:

Headings

Account balances

Sub-category balances

Net Assets

Comparative data
Slide 74
Produce Financial statements
The balance sheet (an example)
Your Place
Balance Sheet
as at Day, Month, Year
Assets
Current Assets
Bank
64,203
Accounts Receivable
11,000
Inventory
15,000
Total Current Assets
90,203
Non Current Assets
Equipment
52,000
Accumulated depreciation-Equipment
(16,000)
Furniture
25,000
Accumulated depreciation-Furniture
(4,000)
Total Non Current Assets
57,000
Total Assets
147,203
Liabilities
Current Liabilities
Unearned Revenue
500
Accounts Payable
25,850
Taxes
3,706
Unearned Revenue
Total Current Liabilities
30,056
Non Current Liabilities
Loan
Total Non Current Liabilities
25,000
25,000
Total Liabilities
55,056
NET ASSETS
92,147
Equity
Capital
76,000
Retained Earnings
16,147
Total Equity
92,147
Slide 75
Produce Financial statements
Other information:

Explanatory notes
• Financial detail
• Non-financial information
• External requirements
• Internal requirements
Slide 76
Produce Financial statements
The final steps:

Validate financial statements
• Error free
• Transcription of data

Update internal records
• Closing entries
• General ledger balances
• Printing and archiving
Slide 77
Produce Financial Statements
The final steps (continued):

Distribution of financial statements
• Confidentiality
• Adhere to reporting deadlines

External distribution
• Detailed requirements
• Maintain confidentiality
Slide 78
Produce Financial Statements
The final steps (continued):

Internal distribution
• Schedule to follow
• Maintain confidentiality
• Secure passwords
Slide 79