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Business Processes & Accounting Systems · Week 06

Statement of Financial Position, Closing Inventory, Depreciation & LKAS 16

Preparing the statement of financial position, the closing inventory adjustment (lower of cost and NRV), LKAS 16 PPE (definition, recognition, cost, cost vs revaluation model), straight-line and reducing-balance depreciation, and disposals.

ITE36223 videos · 63 min📄 Financial position statment and adjustment.pdf📄 Property Plant and Equipments - LKAS 16.pdf📄 Practice questions – SOFP & adjustments.pdf

▶Lecture videos

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Preparing Final Statements I

Preparing final accounts, part 1.

00:02Introduction: the trading account01:17Purpose: gross profit or loss02:35Trading account components: opening stock, purchases, returns, carriage05:09From trading account to income statement05:58Income statement components: administrative and distribution expenses07:36Format of the trading and P&L account10:13Other classification: comprehensive income and operating profit

Preparing Final Statements II

Part 2.

00:02Introduction and learning outcomes01:31What financial statements are (CSE annual reports)03:34The five components of a set of financial statements04:41Purpose: information for stakeholders' decisions07:20Input → accounting process → output08:42Linking trial balance accounts to the statements11:43Statement of financial position (balance sheet) format14:37Assets: definition17:11Non-current vs current assets19:41Liabilities: non-current vs current23:05Equity: residual interest25:50Worked example: classifying items

Preparing Final Statements III

Part 3.

00:05Introduction: the cash flow statement01:19What a cash flow statement shows02:09Cash flow statement vs income statement05:28Three categories of cash flows06:10Operating activities: inflows and outflows09:37Investing activities12:13Financing activities13:23Direct vs indirect method15:30The direct method16:43The indirect method: steps and adjustments18:32Advantages and disadvantages of each method20:04Summary

1The statement of financial position (SFP)

Definition

The statement of financial position (balance sheet) shows a business's wealth at a particular date: its assets, liabilities and capital.

Element Meaning Examples
Non-current assets Used for more than one year, not for resale Land, buildings, machinery, motor vehicles, furniture (at cost less accumulated depreciation)
Current assets Turned into cash within 12 months or the operating cycle Inventory (closing stock), trade receivables (debtors), prepayments, bank, cash
Current liabilities Due within 12 months Trade payables (creditors), accruals, bank overdraft, the current part of loans
Non-current liabilities Due after 12 months Long-term bank loans
Capital (owner's equity) The owner's claim Opening capital + net profit (+ capital introduced) − drawings

Format (sole trader):

Statement of financial position as at 31 March 20xx Rs Rs
Non-current assets (cost − accumulated depreciation) xxx
Current assets: inventory, receivables, prepayments, bank, cash xxx
Total assets xxxx
Capital: opening + net profit − drawings xxx
Non-current liabilities: long-term loan xxx
Current liabilities: payables, accruals, overdraft xxx
Total capital and liabilities xxxx

2Adjustment 1: closing inventory

  • Why it's an adjustment: goods bought are recorded as an expense (Purchases a/c), so the value of unsold stock isn't in the books.
  • At year end, it's physically counted and valued at the lower of cost and net realisable value (LKAS 2, Week 8).
Closing stock A/C Dr / Cost of sales (Trading A/C) Cr

Effects:

  1. It reduces cost of sales, which increases gross profit.
  2. It appears as a current asset on the SFP.

This year's closing stock is next year's opening stock.

3LKAS 16 — Property, Plant & Equipment

Objective: prescribe the accounting for PPE: recognition, carrying amounts, depreciation and impairment.

Definition of PPE

Tangible items that are:

  1. held for use in production or supply of goods or services, for rental to others, or for administrative purposes, and
  2. expected to be used for more than one period.

Recognition: it's probable that future economic benefits will flow to the entity, and the cost can be measured reliably.

Initial measurement: at cost

Cost = everything needed to bring the asset to working condition for its intended use.

Purchase cost of PPE Rs
Purchase price xxxx
Less: trade discounts (xxx)
Less: subsidies (xxx)
Carriage inwards (delivery and handling) xxxx
Direct and non-refundable taxes / import duties xxxx
Installation charges xxxx
Test-run expenses xxxx
Site preparation, professional fees (architects, engineers) xxxx
Estimated dismantling and site-restoration cost xxxx
Total cost xxxx
Not part of cost

Refundable taxes (e.g. VAT that can be claimed back), repairs and maintenance (revenue expenditure, Week 4), training, and general overheads.

Subsequent measurement: two models

Cost model

Carried at cost − accumulated depreciation − impairment

Revaluation model

Carried at fair value at the revaluation date − later depreciation and impairment, if fair value can be measured reliably (gains go to OCI, Week 5)

Key terms

Term Meaning
Depreciable amount Cost − residual value
Residual value The scrap value at the end of the useful life
Useful life The period over which the asset is expected to be used
Depreciation Systematic allocation of the depreciable amount over the useful life
Carrying amount (NBV) Cost − accumulated depreciation − impairment

All PPE is depreciated except land.

4Adjustment 2: depreciation

Depreciation A/C Dr / Provision for (accumulated) depreciation A/C Cr
  • The expense goes to the income statement.
  • The provision is deducted from cost on the SFP.
Method Formula Pattern
Straight-line (Cost − Residual value) ÷ Useful life The same charge every year
Reducing balance Charge = rate × NBV at the start of the year, where rate = 1 − ⁿ√(S/C) × 100% Higher early, decreasing later

(n = useful life, S = residual value, C = cost.)

🧪 Try it — Depreciation schedule calculator

5Disposal of PPE

An asset is derecognised (removed from the SFP) when it's disposed of, or withdrawn from use with no further benefits expected. The gain or loss = proceeds − carrying amount, recognised in profit or loss.

Steps using a disposal account:

  1. Remove the cost: Dr Disposal / Cr Asset (cost)
  2. Remove the accumulated depreciation: Dr Provision for depreciation / Cr Disposal
  3. Record the proceeds: Dr Cash / Debtor / Cr Disposal
  4. Balancing figure: a credit balance on the disposal account is a profit; a debit balance is a loss. Transfer it to the income statement.
🧪 Try it — Disposal calculator

LKAS 16 disclosures (for each class of PPE)

  • Measurement basis for the carrying amount
  • Depreciation method(s)
  • Useful lives or depreciation rates
  • Gross carrying amount and accumulated depreciation and impairment
  • A reconciliation of the carrying amount from start to end of the period
Exam focus

Expect:

  • Prepare the SFP (classify current vs non-current correctly; capital + profit − drawings)
  • The closing-stock journal and its effect
  • The LKAS 16 definition and recognition of PPE
  • Calculating cost (include installation and test runs; exclude refundable taxes and trade discounts)
  • Cost vs revaluation model
  • Straight-line and reducing-balance calculations (use 1 − ⁿ√(S/C))
  • The disposal account and the profit or loss

6Practice questions (course paper)

Full financial statements

Q1: Kapila Enterprises (year to 31 Mar 2019)

Income statement

Rs.
Net sales: 210,420 − 4,900 205,520
Cost of sales: 9,410 + 108,680 − 3,720 + 840 − 11,290 (103,920)
Gross profit 101,600
Expenses: carriage out 1,115 + salaries 41,800 + motor 912 + rent 6,800 + sundry 318 (50,945)
Net profit 50,655

Statement of financial position

Rs.
Non-current assets: motor vehicles 14,400 + fixtures 912 15,312
Current assets: inventory 11,290 + receivables 23,200 + bank 4,100 + cash 240 38,830
Total assets 54,142
Capital 18,827 + profit 50,655 − drawings 29,440 40,042
Accounts payable 14,100
Total equity and liabilities 54,142
Q2: Thilan Enterprises (year to 31 Mar 2019), with 10% depreciation

The PDF's columns are jumbled. Reading them back gives Dr = Cr = 514,194 ✓

Rs.
Sales 276,400
Cost of sales: 52,800 + 141,300 − 2,408 + 1,350 − 58,440 (134,602)
Gross profit 141,798
Carriage out 5,840 · wages 63,400 · rates 3,800 · selling 714 · commission 1,930 · insurance 1,830 · sundry 208 (77,722)
Depreciation 10%: buildings 12,500 + fixtures 110.60 (12,610.60)
Net profit 51,465.40

SOFP: buildings 112,500 + fixtures 995.40 = 113,495.40 · current assets 58,440 + 45,900 + 31,420 + 276 = 136,036 · total 249,531.40

Capital 210,516 + 51,465.40 − 37,320 = 224,661.40 + creditors 24,870 = 249,531.40 ✓

Cost of PPE (LKAS 16)

What goes into cost

Include: purchase price less trade discounts, import duties and non-refundable taxes, delivery, installation, and professional (legal) fees.

Exclude: recoverable VAT, insurance for the year (an expense), and training.

Q3: Machine cost
Rs.
Purchase price 500,000 − trade discount 10% 450,000
Carriage inwards 30,000
Legal fee 35,000
Installation 4,000
Non-recoverable VAT: 60% × 40,000 24,000
Cost 543,000
Q4: Furniture cost
Rs.
Purchase cost 600,000
Transport 20,000
Legal fee 15,000
Direct tax 60,000
Non-recoverable VAT: 20% × 30,000 6,000
Less government subsidy (deducted from cost) (20,000)
Cost 681,000

The year's insurance (4,000) is an expense, not cost. If the subsidy is treated as deferred income instead of being deducted, the cost is 701,000.

Depreciation

Q5: Machine 800,000, residual 200,000, life 4 years

Straight line: (800,000 − 200,000) / 4 = 150,000 a year

Reducing balance: rate = 1 − ⁴√(200,000 / 800,000) = 29.29%

Year SL charge SL NBV RB charge RB NBV
2015 150,000 650,000 234,315 565,685
2016 150,000 500,000 165,685 400,000
2017 150,000 350,000 117,157 282,843
2018 150,000 200,000 82,843 200,000
Q6: Machine 1,000,000, residual 100,000, life 3 years (year end 31 March)

Straight line: 900,000 / 3 = 300,000 a year → NBV 700,000, 400,000, 100,000

Reducing balance: rate = 1 − ³√0.1 = 53.58%

Year to 31 Mar RB charge RB NBV
2016 535,841 464,159
2017 248,715 215,443
2018 115,443 100,000
Q7: the dates in the PDF

The paper says the purchases and the sale happened in 2013, but asks about 2019. These are taken as 2019 dates.

Q7: Depreciation for 2019 (10% straight line, time-apportioned)
Asset Calculation 2019 charge
Building (opening) 500,000 × 10% 50,000
New building (1 July) 300,000 × 10% × 6/12 15,000
Furniture (opening) 300,000 × 10% 30,000
New furniture (1 Oct) 400,000 × 10% × 3/12 10,000
Land Not depreciated —
Total 105,000

Land sold: proceeds 800,000 − cost 500,000 = profit 300,000, leaving land of 500,000.

Disposals

Q8 to Q11: Profit or loss on disposal
Q Cost Accumulated depreciation at disposal NBV Proceeds Result
8 800,000 300,000 (sold 1 Jan, no charge for 2019) 500,000 600,000 Profit 100,000
9 500,000 200,000 + 2018 charge 50,000 = 250,000 250,000 400,000 Profit 150,000
10 600,000 2 years × 120,000 + 6 months 60,000 = 300,000 300,000 500,000 Profit 200,000
11 500,000 9 months 56,250 + 6 months 37,500 = 93,750 406,250 300,000 Loss 106,250

Depreciation for the year:

  • Q10: sold machine 60,000 + the rest (400,000 × 20%) 80,000 = 140,000
  • Q11: sold furniture 37,500 + the rest (300,000 × 15%) 45,000 = 82,500

Q10 and Q11 assume straight line on cost, apportioned by month.

Disposal account

Dr Disposal with the cost. Cr Disposal with the accumulated depreciation and the proceeds. The balancing figure is the profit (credit side short) or loss (debit side short).

7Quick revision sheet

Concept Remember it as
SFP Wealth at a date: assets = capital + liabilities
Current assets Inventory, receivables, prepayments, bank, cash
Current liabilities Payables, accruals, overdraft
Capital Opening + profit − drawings
Closing stock Lower of cost and NRV; Dr Closing stock / Cr Trading; lowers COS, raises GP
PPE Tangible, used in operations, more than one period
Recognition Probable benefits + reliable cost
Cost Price − discounts − subsidies + carriage + non-refundable taxes + installation + test run + dismantling
Models Cost vs revaluation
Depreciable amount Cost − residual value
SL (C − S) ÷ n
RB Rate = 1 − ⁿ√(S/C), applied to NBV
Land Not depreciated
Disposal Proceeds − carrying amount = gain or loss

?Self-check quiz

10 questions on this week. Answer them all, then press Check my answers. Your best and latest scores are saved and shown on the subject page.

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