1.5 Preparation of Financial Statements

2026 Syllabus Objectives

By the end of this topic, you should be able to:

1.5.1 Adjustments to draft financial statements

  • Calculate and record adjustments for accruals and prepayments of income and expenses
  • Calculate and record adjustments for irrecoverable debts, irrecoverable debts recovered, and allowance for irrecoverable debts
  • Calculate and record depreciation
  • Apply inventory valuation
  • Record the correction of errors and explain their effect on financial statements

1.5.2 Sole traders

  • Prepare a statement of profit or loss and a statement of financial position for a sole trader from full or incomplete accounting records (trading or service business)

1.5.3 Partnerships

  • Prepare a statement of profit or loss, appropriation account, and statement of financial position for a partnership
  • Explain why partners maintain separate capital and current accounts
  • Prepare partners' capital and current accounts
  • Describe the contents of a partnership agreement
  • Explain the advantages and disadvantages of a partnership agreement
  • Apply the provisions of the Partnership Act 1890

1.5.4 Limited companies

  • Understand ordinary shares, bonus issues, rights issues, debentures, dividends, and reserves
  • Evaluate advantages and disadvantages of bonus issues, rights issues, issuing shares, and issuing debentures
  • Distinguish between capital reserves and revenue reserves
  • Prepare ledger accounts for share issues
  • Prepare a statement of profit or loss, statement of financial position, and statement of changes in equity for a limited company
  • Understand sources of finance and use financial accounts to make business decisions

Section 1.5.1 — Adjustments to Draft Financial Statements

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What is a "draft" financial statement?

Before a business finalises its accounts, it produces a draft (rough version). At this stage, several adjustments may still be needed to make the accounts accurate. These adjustments follow the accruals concept — meaning income and expenses must be matched to the correct time period.

Accruals and Prepayments

Accruals (amounts owed but not yet paid/received)

An accrual is money that has been earned or used during the accounting period but has NOT yet been paid or received by the end of that period.

Example — Expense accrual: A business's accounting year ends on 31 December. Electricity used in December costs $200, but the bill has not been paid yet. The $200 must still appear as an expense this year, even though it hasn't been paid.

  • Effect on statement of profit or loss: Add the accrued amount to the expense (increases the expense).
  • Effect on statement of financial position: The accrual appears as a current liability (money the business owes).

Example — Income accrual: A business rented out space and earned $300 in December, but the tenant has not paid yet. That $300 is still income for this year.

  • Effect on statement of profit or loss: Add the accrued income to the income figure (increases income).
  • Effect on statement of financial position: The accrual appears as a current asset (money owed to the business).

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