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© accountingclassroom.com2008 Student Notes for ACCA F3-Financial Accounting

Elements of FinancialStatements

Topic 2


Session Objectives

Explain the main elements of financialstatementsDescribe the purpose of financialstatementsIdentify the main types of businesstransactions


Session Objectives

Describe the accounting equationExplain the matching convention andduality conceptDraft simple financial statements


What are Financial Statements

“Reports that quantitatively summarize the financial status of an organization for a stated period of time. They include an income statement and balance sheet describing the flow of resources, profit or loss, and the distribution or retention of profits.”




Primary Financial Statements

Balance sheetIncome StatementStatement of Cash Flows


Balance Sheet

Describes where the enterprise stands ata specific date. It can be shown in twoformats:

HorizontalVertical


Example of a HorizontalBalance Sheet


Example of a Vertical BalanceSheet




Income Statement

Depicts the revenue and expenses for adesignated period of time.Net income (or net loss) is simply thedifference between revenues andexpenses.


Example of Income Statement


Statement of Cash Flows

Depicts the ways cash has changedduring a designated period of time.


Balance Sheet Equation

Assets – Liabilities = Proprietor's CapitalHorizontal format balance sheet is anexpansion of this form of the accountingequationAssets = Proprietor's Capital + Liabilities




Assets

Assets are economic resources that areowned by the business and are expectedto provide positive future cash flows.


Assets


Types of Assets

Fixed AssetsAny tangible or intangible asset acquired ona long-term basis to be used in providing aservice to the businessNot held for resale in normal course ofbusiness e.g. land and buildings, plant andmachinery


Types of Assets

Current AssetsAssets which are expected to be realised inthe normal course of tradingDisclosed in the balance sheet with leastliquid asset first e.g. Stock, debtors




Liabilities

Liabilities are debts that representnegative future cash flows for theenterprise.


Liabilities


Types of Liabilities

Long-term liabilitiesPayable more than 12 months after thebalance sheet date e.g. loan

Current liabilitiesPayable within 12 months of the balancesheet date e.g. creditors, bank overdraft


Owners’ Equity

Owners’ equity represents the owner’sclaim to the assets of the business.




Owners’ Equity


Changes in Owners’ Equity


Understanding IncomeStatement


The Concept of the BusinessEntity

According to this concept, a businessentity is separate from the personalaffairs of its owner..




Revisiting AccountingEquation


Relationships Among FinancialStatements



© SmartClasses.com 2007 Student Notes for Financial Accounting

Financial AccountingDouble Entry Bookkeeping


Accounting YearScenario involves a company ABC Ltd.(The company sells clothing items)

12 months, but not necessarily coinciding with calendaryear.

Define a period for which accounting books are maintainedand summarized for yearly financial statements.


Financial Statements

Trading and Profit &Loss Account

Summary of Income(Sales plus any other income) andExpensesHighlight Profit orLoss generated for anaccounting period

Balance Sheet

A snapshot of theAssets, Liabilities andCapitalConfirm to Accountingequation:

Accounting Equation

Assets = Liabilities + Capital


Scenario involves ABC LTD.A company is into clothing business

Assets: Owned by ABC Fixed Assets

• Material things ownedby ABC Ltd. that givesit benefit in a periodexceeding oneaccounting period

Current Assets• Cash• Stock or inventory• Debtors: Businesses

that owe money to ABC Ltd.

Liabilities: Owed by ABC Long-term liabilities

• Loans taken by ABCLtd. that are repayablein more than oneaccounting period

Short-term liabilities• Overdraft• Accruals: Unpaid bills • Creditors: Businesses

to whom ABC Ltd.owes money


Duality Concept in recordingaccounting transactions

Monetary transaction in day to daybusiness at ABC Ltd. would involve:

Buying of assets for cash or creditSelling of assets for cash or credit

Creates a two-sides to a transaction inany of the four combinations:

Assets decreaseDebtors increase

Assets increaseCreditors increase

Assets decreaseCash increases

Assets increaseCash decreases


Recording of a transaction

Recorded in ledgers – that are accountscreated for each of the asset, liability,income and expenseA ledger has two sides for accounting entryEach transaction will either impact its DebitSide or its Credit Side

Credit Side(expressed as Cr)

Debit Side(expressed as Dr)

Right SideLeft Side




A typical ledger format

£DetailsDate£DetailsDate

CrName of the accountFor example: Cash; Plant & Machinery; Sales

Dr


Impact on ledger

Debit side isimpacted whenincrease in:

AssetsExpensesDrawings (money withdrawn by owner from the business for personal reasons. The action decreases Capital)

Credit side isimpacted whenincrease in:

LiabilityIncomeCapital (money invested by the owners into the business at the start or during the course of business)


Recording a cash transaction

TRANSACTION ONE: On 1 Jan 2008: ABC Ltd. was incorporated with investmentof £ 50000.00 from its owner. Money deposited into company bank account.

£50000.00Capital01-01-08

CrBank AccountDrAccount Ledger impacted: Bank Account of ABC Ltd.

Increase in cash(current assets)hence debit entry

£50000.00Bank01-01-08

CrCapital AccountDrAccount Ledger impacted: Capital Account of Owner

Increase in capitalhence credit entry



£4750.00Computers01-01-08

CrBank AccountDr

£4750.00Bank

01-01-08

CrComputer AccountDr

TRANSACTION TWO: On 1 Jan 2008: ABC Ltd. purchased computersby paying cheque of £ 4750.00

Account Ledger impacted: Bank Account

Account Ledger impacted: Computer Account

Decrease in cash (current assets)hence credit entry

Increase in fixed assets hence debit entry



£250.00Stationery05-01-08

CrBank AccountDr

£250.00Bank05-01-08

CrOffice Stationery AccountDr

TRANSACTION THREE: On 5 Jan 2008: ABC Ltd. purchased stationery itemsby paying cheque of £ 250.00 to their supplier.

Account Ledger impacted: Bank Account

Account Ledger impacted: Office Stationery Account

Decrease in cash (current assets)hence credit entry

Increase in expenseshence debit entry



TRANSACTION FOUR: On 6 Jan 2008: ABC Ltd. sold clothing itemsAnd received cash of £ 2500.00

£2500.00Sales06-01-08

CrBank AccountDrAccount Ledger impacted: Bank Account

Increase in cash (current assets)hence debit entry

£2500.00Bank06-01-08

CrSales AccountDrAccount Ledger impacted: Sales Account

Increase in income (sales) hence credit entry




Recording a credit transaction

TRANSACTION FIVE: On 10 Jan 2008: ABC Ltd. purchased fabric (raw material)worth £ 4500.00 from its regular supplier Joe Ltd. Payment to be made in 60 days.

£4500.00Joe Ltd.10-01-08

CrPurchases AccountDrAccount Ledger impacted: Purchases Account

Increase in stock(current assets)hence debit entry

£4500.00Purchases10-01-08

CrJoe Ltd. AccountDrAccount Ledger impacted: Joe Ltd. Account

Increase in creditors(current liabilities)hence credit entry


Recording a credit transaction

£1750.00Malcolm Ltd.12-01-08

CrSales AccountDr

£1750.00Sales12-01-08

CrMalcolm Ltd. AccountDr

TRANSACTION SIX: On 12 Jan 2008: ABC Ltd. sold clothing itemsworth £ 1750.00 to their regular client Malcolm Ltd. Payment due in 30 days.

Account Ledger impacted: Sales Account

Account Ledger impacted: Malcolm Ltd. Account

Increase in income hence credit entry

Increase in debtors (current assets)hence debit entry


Balancing the ledger accounts

£4,750.00

250.0047,500.0052,500.00

ComputersStationeryBalance c/fTotal

01-01-0805-01-0831-01-08

£50,000.00

2,500.0052,500.00

47,500.00

Capital

SalesTotal

Balance b/f

01-01-08

06-01-08

01-02-08

CrBank AccountDr

END OF MONTH: All ledgers are balanced by making the Debit and the Creditsides EQUAL in the particular ledger account on last day of the month.

Balancing the Bank Account ledger

Balance carried forward (c/f) is the amount that makes the smaller side(debit OR credit) equal to the larger side.

Balance brought forward (b/f) is the starting balance on the first dayof the new month.


Balances – The Importance

Balance c/fIs an asset or aliability at the ENDof the accountingperiod.

Balance b/fIs an asset or aliability at thebeginning of theNEXT accountingperiod.


Opening Balances

Asset accountWill always have aDEBIT entryExpense accountWill always have aDEBIT entry

Liability accountWill always have aCREDIT entryIncome accountWill always have aCREDIT entry


Other accounts & transactions

Debit SideSales returns -inwards (loss)

Discounts allowedCarriage InwardsOverheads( expenses paid such as salaries; utilities; advertising, carriage outwards)Debtors

Credit SidePurchases returned – outwards (gain)

Discounts receivedVAT ( Unpaid tax received as component of Gross Selling Price )Sales (cash or credit)Creditors




Topic 8

Non-current Assets


Session Objectives

Define non-current assetsRecognise the difference between current and non-current assetsExplain the difference between capital and revenueitemsClassify expenditure as capital or revenueexpenditurePrepare ledger entries to record the acquisition anddisposal of non-current assets


Session ObjectivesRecord profits or losses on disposal of non-currentassets in the income statement including partexchange transactionsRecord the revaluation of a non-current asset inledger accounts, the statement of comprehensiveincome and in the statement of financial positionCalculate the profit or loss on disposal of a revaluedassetIllustrate how non-current asset balances and

movements are disclosed in financial statements


Session ObjectivesExplain the purpose and function of an assetregisterUnderstand and explain the purpose of depreciationCalculate the charge for depreciation using straightline and reducing balance methodsIdentify the circumstances where different methodsof depreciation would be appropriateIllustrate how depreciation expense andaccumulated depreciation are recorded in ledgeraccounts




Session ObjectivesCalculate depreciation on a revalued non-currentasset including the transfer of excess depreciationbetween the revaluation reserve and retainedearningsCalculate the adjustments to depreciation necessaryif changes are made in the estimated useful lifeand/or residual value of a non-current assetRecord depreciation in the income statement andstatement of financial position


Characteristics of Non-currentAssets

Long term in natureNot normally acquired for resaleCould be tangible or intangibleUsed to generate income directly orindirectlyNot normally liquid asset


Capital Expenditure

Expenditure on acquisition of Non-current assets for use in businessExpenditure on increasing the earningcapacity of existing assets.Expenditure incurred for a long term thatcreates an asset with value

Examples: New machineries purchased,renovation of buildings, purchase of furnitureand fixtures, purchase of computerequipment and office vehicles


Revenue Expenditure

Expenditure incurred for carrying on theday-to-day operations of theorganisation.Expenditure on current assetsExpenses for maintaining the earningcapacity

Examples : Salaries paid to employees,expenditure on rent incurred, interestpayments, administrative expenses, salescommissions etc.




Non-current Assets Registers

Records of individual tangible Non-current assets held by the business.Function of the Register is to controlNon-current assets and keep a track ofthem


Non-current Assets Registers

The details include:Cost, Date of PurchaseDescription of Asset, Serial / referencenumberLocation of assetDepreciation method, Expected useful lifeNet book value


Acquisition of Non-currentAssets

Cost of Non-current asset = Amountincurred to acquire the Non-current assetand bring it to working condition

Cost includes: Purchase price + Delivery cost + Legal fees+ Subsequent expenditure which enhancesthe assetCost DOES NOT include revenue expenditure such as repairs or renewals orrepainting cost


Acquisition of Non-currentAssets

Entry to record purchase of asset:Dr. Non-current asset(Non-current Asset = Real account: Debit what comes in)Cr. Bank / Cash / Creditors(Bank and Creditors: Personal account: Credit the giver)

A separate account should be kept foreach category of Non-current asset.




Subsequent Expenditure whichEnhances the Asset

This expenditure can only be recordedas a part of the cost or capitalised if itenhances the benefits of the asset.

Example includes: extension to a shopbuilding. However, repair work does not forma part of this expenditure.


Depreciation

According to IAS 16, depreciation is

“the measure of the cost or revalued amount of the economic benefits of the tangible non-current asset that has been consumed during the period”


Causes of Depreciation

UsePhysical wear and tearPassing of timeObsolescence through technology andmarket changesDepletion


Methods of CalculatingDepreciation

Straight line methodReducing balance method




Straight Line Method

Depreciation charge is the same eachyear as the assumption is that thebenefit is consumed evenly over the lifeof the assetUseful for assets which provide equalbenefit each year e.g. machinery


Straight Line Method

Depreciation charge = (Cost – Residualvalue) / Useful economic lifeResidual value or scrap value or salvagevalue = Estimated disposal value of theasset. Often this value is zeroUseful economic life = Estimated numberof years during which the business willuse the asset


Reducing Balance Method

Reducing amount of depreciation ischarged each yearUseful for assets which provide morebenefit in the earlier years e.g carsDepreciation charge = X% x Net BookValue (NBV)NBV = original cost – accumulateddepreciation


Accounting for Depreciation

Dr Depreciation ExpenseCr Accumulated depreciation

Reduce the balance sheet value of the Non-current asset by cumulative depreciation toreflect the wearing out.Record the depreciation charge as anexpense in the income statement to matchthe revenue generated by the Non-currentasset.




Consistency and SubjectivityWhen Accounting for

DepreciationIAS 16 Property, Plant and Equipmentrequires the following:

• Depreciation method should be reviewedat each year end and changed if themethod used no longer reflects thepattern of use of the asset

• Residual value and useful economic lifeshould be reviewed at each year end andchanged if expectations differ fromprevious estimates


Disposal of Non-currentAssets

Profit / loss on disposalAn accounting profit or loss will arise on thedisposal of Non-current asset.If:• Proceeds > NBV (at disposal date) PROFIT• Proceeds < NBV (at disposal date) LOSS• Proceeds = NBV (at disposal date) NEITHER

PROFIT NOR LOSS


Disposal for CashConsideration

Step 1: Remove the original cost of the Non-current asset from the Non-current assetaccountDr. Disposals (Original cost)Cr. Non-current assets(Original cost)


Disposal for CashConsideration

Step 2: Remove Accumulated depreciation onthe Non-current asset from accumulateddepreciation account.Dr. Accumulated DepreciationCr. Disposals

Step 3: Record the cash proceedsDr. Cash (proceeds)Cr. Disposals (proceeds)



©accountingclassroom.com2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com2008 Student Notes for ACCA F3-Financial Accounting

Disposal for Part-ExchangeAgreement

Step 1: Remove the original cost of the Non-current asset from the Non-current assetaccountDr. Disposals (Original cost)Cr. Non-current assets (Original cost)Step 2: Remove Accumulated depreciation onthe Non-current asset from accumulateddepreciation account.Dr.Accumulated DepreciationCr. Disposals


Disposal for Part-ExchangeAgreement

Step 3: Record the part-exchangeallowance (PEA) as proceeds:Dr. Non-current assets (Part of cost of new

asset)Cr. Disposal (Sale proceeds of old asset)

Step 4: Record the cash paid for newasset

Dr. Non-current assets (Cash)Cr. Cash (Cash)





Revaluation of Non-currentAssets

Business may need to revalue assetsto present the revalued amounts in thebalance sheet.The difference between the NBV andthe revalued amount is shown asrevaluation reserve in the balancesheetThe gain is not recorded in the incomestatement as it is unrealised gain


Depreciation of a RevaluedAsset

The charge for depreciation should bebased on the revalued amount and theremaining useful life of the assetThis charge will be higher thandepreciation prior to the revaluation


Depreciation of a RevaluedAsset

The excess of the new depreciationcharge over the old depreciation chargeshould be transferred from therevaluation reserve to the accumulatedprofitsThis is done within the capital section ofthe balance sheet

Dr. Revaluation reserveCr. Accumulated profits



© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting

Topic 10Books of Prime Entry andControl Accounts


Session Objectives

Identify and explain the function of the main datasources in an accounting systemOutline the contents and purpose of different typesof business documentationUnderstand the basic function and form ofaccounting records in a typical manual systemUnderstand the purpose of control accounts foraccounts receivable and accounts payableUnderstand how control accounts relate to thedouble-entry system


Session Objectives

Prepare ledger control accounts from giveninformationPerform control account reconciliations for accountsreceivable and accounts payableIdentify errors which would be highlighted byperforming a control account reconciliationIdentify and correct errors in control accounts andledger accountsRecord cash transactions in ledger accounts


Session Objectives

Understand the need for a record of petty cashtransactionsDescribe the features and operation of a petty cashimprest systemAccount for petty cash using imprest and non-imprest methodsUnderstand the importance of, and identify controlsand security over the petty cash system




Business DocumentationQuotation: Asking price. Used for establishing pricefrom various suppliersPurchase order: A written authorization preparedby a buyer for the purchase of goods or services ata specified price.Sales order: An order received by a business froma customer. A sales order may be for productsand/or services.


Business DocumentationDelivery Note (Goods Delivery Note): A writtendocument from the seller to the buyer thataccompanies a delivery of goods and specifies typeof goods and quantity.Purchase Invoice: Produced by company receivingthe goods as a proof of receipt.Credit Note: A monetary instrument issued by aseller that allows a buyer to purchase an item orservice from that seller on a future date.


Business DocumentationDebit Note: Note to a person or a companysignifying an amount owed. Although it is verysimilar to an invoice, the invoice always representssales, whereas a debit note is used for deductingmoney without a sale being made.Remittance Advice: A statement sent to providersshowing that claims were processed and theamount for which the beneficiary is responsible. Ifdenied, an explanation of denial is provided.

Receipt: Details of payments received


Books of Prime Entry

Sales Day Book – Recording credit salesPurchases day book - Recording credit purchasesSales returns day book – Recording sales returnsPurchases returns day book - Recordingpurchases returnsCash book - All cash / bank transactionsPetty cash book – All small cash transactionsJournal – All transactions not recorded elsewhere




Ledger Accounts

General ledger – Contains all accounts or asummary of all accounts necessary to produce thetrial balance and financial statementsAccounts receivables ledger - Contains anaccount for each credit customer. An account tosummarise this information , Sales ledger control account , is normally contained in the General ledgerAccounts payable ledger - Contains an account foreach credit supplier. An account to summarise thisinformation , Purchase ledger control account , isnormally contained in the General ledger


Sales Day Book Format


Sales Day Book Double Entry

Double entry will depend on whether individualaccounts are maintained in individual ledger orsales ledger control account in general ledger

Individual accounts part of double entry:Dr. Sam $4500Dr. John $10,000Cr Sales $14,500

(Total sales posted to sales ledger control account)


Sales Day Book Double Entry

Sales Ledger Control Account part of doubleentry:Dr. Sales Ledger Control Account $14,500Cr. Sales $14,500

Each entry also posted to individual memorandumaccounts in accounts receivable ledger




Purchases Day Book, SalesReturns Day Book, Purchases

Returns Day Book

Format is similar to that of sales day book.

Dr. PurchasesCr. Purchase ledgercontrol account

Each entry also postedto individualmemorandum accountsin accounts payable

ledger

Dr. PurchasesCr. Individual Accounts inaccounts payable ledger

Total purchases postedto purchases ledger controlaccount

Purchases DayBook

Control accountspart of doubleentry

Individual accountspart of double entry


Sales Returns Day Book

Dr Sales ReturnsCr Sales ledger controlaccount

Each entry posted toindividual memorandumaccounts in accountsreceivable ledger

Dr Sales ReturnsCr Individual accounts inaccounts receivables ledger

Total returns posted tosales ledger control account

Sales returnsday book




Purchases Returns Day Book

Dr. Purchase ledgercontrol accountCr. Purchases returns

Each entry posted toindividual memorandumaccounts in accounts

payable ledger

Dr. Individual accounts inaccounts payable ledgerCr. Purchases returns

Total returns posted topurchases ledger controlaccount

Purchasesreturns daybook




Control Accounts

Sales Ledger Control AccountPurchases Ledger Control Account




Sales Ledger Control AccountFormat


Purchases Ledger ControlAccount Format


Contra Entries

These are entries made when acustomer is also a supplier.

Dr. Purchase ledger control accountCr. Sales ledger control account

Individual receivables and payables

must also be updated to reflect this.


Cash Book

All transactions involving cash and bankare recorded in cash book.Many businesses may have separatebooks for cash receipts and cashpaymentsA note of cash discounts is also made inthe cash bookBusinesses generally use a columnarformat of cash book




Petty Cash Book

All transactions involving small amounts arerecorded in the petty cash bookPetty cash is maintained using ImprestSystem


Imprest System

Step 1: Business decides on an amount to be heldas a float

Dr. Petty CashCr. Bank

Step 2: As petty cashier makes payments herecords them in the petty cash book. Allexpenditure must be evidenced by an expensereceiptStep 3: Cheque is drawn to return the petty cash tothe original float levelFloat = Cash in petty cash box + Sum total of expense

vouchers since last disbursement




Topic 9

From Trial Balance toFinancial Statements


Session Objectives

Identify the purpose of a trial balanceExtract ledger balances into a trial balancePrepare extracts of an opening trial balanceIdentify and understand the limitations of a trialbalanceIllustrate process of adjusting the financialstatements for accruals and prepayments,depreciation, irrecoverable debts and allowances forreceivables


Trial BalanceTrial balance is a statement of generalledger accounts that enables an accountantto confirm whether amounts debited equalamounts credited.


Purpose of Trial Balance

Check that for every debit entry there is anequal credit entryIt is the first step towards preparation offinancial statements




Limitations of Trial Balance

Trial balance does not identify all the errors.It does not identify where those errors havebeen made or what those errors are


Adjustments Required

Closing inventoryDepreciationAccrualsPrepaymentsIrrecoverable DebtsAllowance for Receivables


Adjustments Entry for ClosingInventory

Dr. Inventory (Balance Sheet)Cr. Cost of Sales (Income Statement)


Adjustments Entry forDepreciation

Dr. Depreciation Expenses (Income Statement)Cr. Accumulated Depreciation (Balance Sheet)




Adjustments Entry forAccruals

Dr. Expenses (Income Statement)Cr. Accrual (Balance Sheet)


Adjustments Entry forPrepayments

Dr. Prepayments (Balance Sheet)Cr. Expenses (Income Statement)


Adjustments Entry forIrrecoverable Debts

Dr. Irrecoverable debt (Income Statement)Cr. Receivables (Balance Sheet)


Adjustments Entry forAllowance for Receivables

Dr. Irrecoverable debt (Income Statement)Cr. Allowance for Receivables (Balance Sheet)




Topic 7

Irrecoverable Debts andAllowances for Receivables


Session ObjectivesIdentify the benefits and costs of offeringcredit facilities to customersUnderstand the purpose of an agedreceivables analysisUnderstand the purpose of credit limits


Session ObjectivesPrepare the bookkeeping entries to write off a baddebtRecord a bad debt recoveredIdentify the impact of bad (irrecoverable) debts onthe income statement and on the statement offinancial position sheet


Session ObjectivesPrepare the bookkeeping entries to create andadjust an allowance for receivablesIllustrate how to include movements in theallowance for receivables in the income statementand how the closing balance of the allowanceshould appear in the statement of financial position




Provision of Credit Facilities

Benefits: Enable businesses to enter new marketsPossibility of increased salesEncourages customer loyalty

Costs Can prove costly to the businessMay adversely affect the business cash flowPotential risk of irrecoverable debts


Aged Receivables Analysis

It is an analysis usually in the form of alist, ordered by name, showing howmuch each customer owes and how oldtheir debts areIt is used for keeping track ofoutstanding debts and follow up any thatis overdue


Important Terms Associatedwith Debts

Irrecoverable debt: Debt unlikely to bereceived from the customerDoubtful debt: Debt where there issome doubt whether a customer can orwill pay his debtAllowance for receivables: Anallowance created on doubtful debts


Accounting Entries: Cash Sale

When the sale is made Dr. Cash accountCr. Sales account




Accounting Entries: CreditSale

When the sale is made Dr. Receivables accountCr. Sales account

On settlement of amount due Dr. Cash accountCr. Receivables account

If amount becomes irrecoverable Dr. Irrecoverable debt or Bad debtCr. Receivables account


Accounting for IrrecoverableDebts Recovered

When the debt is written off Dr. Irrecoverable debt or Bad debtCr. Receivables account

When recoverable debt is recovered Dr. Cash accountCr. Irrecoverable debt or Bad debt


Allowance for Receivables

Specific allowance:Allowance for debts where the customer isknown to be in financial difficulties and isdisputing their invoice or is refusing to pay

General Allowance:A general allowance for receivables expected tobe irrecoverable.


Accounting for Allowance forReceivables

For Setting up allowance

Dr. Irrecoverable debts expense accountCr. Allowance for receivables account




Movement in the Allowancefor Receivables

Write irrecoverable debtsCalculate receivables balance as adjustedfor write offsAscertain specific allowanceDeduct debt specifically allowed for


Movement in the Allowancefor Receivables

Multiply the remaining receivables balanceby general allowance percentageThus,% (Closing receivables – Irrecoverable debts –

Specific allowance)

Add the specific and general allowancesCompare with brought forward allowanceAccount for change in allowance


In Case of ExistingAllowance

• Charge only the movement in the profit tothe profit and loss account

closing allowance – opening allowance

financial elements

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