Edexcel A-Level Accounting: Financial statements of organisations (YAC11) – Revision Notes

These notes condense topic 1.3, Financial statements of organisations, from Unit 1 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2 (September 2018). They cover outcomes 1.3.1 to 1.3.22, all International AS content, for the January, June and October examinations. For full explanations and worked statements, read the study guide first.

Then test yourself with the practice questions. Depreciation methods and the ledger entries behind these statements are in the principles revision notes. The course hub, checklist and free diagnostics help you plan what to revise.

Terms to use (IAS)

Use	Not
Statement of profit or loss (and other comprehensive income)	Trading and profit and loss account
Statement of financial position	Balance sheet
Revenue / Inventory	Sales / Stock
Other receivables / Other payables	Prepayments / Accruals (as headings)
Irrecoverable debts; allowance for irrecoverable debts	Bad debts; provision for doubtful debts
Profit for the year	Net profit
Carrying value	Net book value

Sole traders (1.3.1–1.3.2)

Statement of profit or loss: revenue − cost of sales = gross profit; + other operating income − expenses = profit for the year.

Cost of sales = opening inventory + purchases (+ carriage inwards − returns) − closing inventory.

Statement of financial position: non-current assets (cost − accumulated depreciation = carrying value) → current assets → current liabilities → non-current liabilities → capital.

Closing capital = opening capital + profit for the year − drawings (+ any capital introduced).

Year-end adjustments (1.3.3–1.3.6)

Item	Statement of profit or loss	Statement of financial position
Expense accrued	Add to expense	Other payables
Expense prepaid	Deduct from expense	Other receivables
Income accrued	Add to income	Other receivables
Income in advance	Deduct from income	Other payables
Depreciation	Expense	Deducted from cost
Irrecoverable debt	Expense	Deducted from receivables
Allowance for irrecoverable debts	Change only	Full balance deducted from receivables

A provision is an amount charged against profit for a known cost or loss whose amount is uncertain. It applies prudence.

Method in steps: expense with opening and closing adjustments

1. Start with cash paid in the year.
2. Add opening prepayment; subtract opening accrual.
3. Add closing accrual; subtract closing prepayment.

Reminder: rates paid 5,400; prepaid 900 at the start and 1,100 at the end. Expense = 5,400 + 900 − 1,100 = 5,200.

Reminder: receivables 22,000 after write-offs, allowance 3% = 660. Last year’s allowance was 800, so the decrease of 140 is added to profit. Receivables shown at 21,340.

Departmental statements (1.3.7)

• One column per department plus a total column.
• Direct costs go to their own department.
• Shared costs are apportioned: floor area (rent, rates, heating), revenue (advertising, carriage out), staff numbers (staff welfare), asset value (insurance of equipment).

Reminder: heating 9,000 shared by floor area 500 : 250 : 150 m² = 5,000 : 2,500 : 1,500.

Incomplete records (1.3.8)

Find	Method
Opening capital	Statement of affairs: assets − liabilities
Credit sales	Receipts + closing receivables − opening receivables
Credit purchases	Payments + closing payables − opening payables
Profit (net assets only)	Closing net assets − opening net assets + drawings − capital introduced
Missing inventory	Opening + purchases − cost of sales (from mark-up or margin)

Mark-up = gross profit ÷ cost. Margin = gross profit ÷ revenue.

Mark-up	Margin
25%	20%
50%	33⅓%
100%	50%

Partnerships (1.3.9–1.3.13)

Appropriation account order: profit for the year + interest on drawings − salaries − interest on capital = residual profit, shared in the agreed ratio.

Reminder: profit 40,000; interest on drawings 600; salary 8,000; interest on capital 4,600. Residual = 40,000 + 600 − 8,000 − 4,600 = 28,000, so 14,000 each if shared equally.

Fixed capital: capital account holds only capital introduced or withdrawn; salaries, interest, shares and drawings go to the current account. Floating (fluctuating) capital: everything goes through the capital account; no current account.

Section 24, Partnership Act 1890 (no agreement):

Item	Rule
Profit or loss	Shared equally
Salaries	None
Interest on capital	None
Interest on drawings	None (Section 24 makes no provision)
Loans beyond agreed capital	5% a year interest

Loan interest is a charge against profit in the statement of profit or loss, not an appropriation.

Goodwill on admission or retirement (not kept in books):

1. Credit all old partners’ capital accounts in the old ratio.
2. Debit the partners of the new firm, in the new ratio.

Assets a new partner brings in are debited to the asset account and credited to their capital account. A retiring partner’s current account is transferred to capital; the total is paid in cash or moved to a loan account.

Clubs and non-profit-making organisations (1.3.14–1.3.19)

Receipts and payments account	Income and expenditure account
Cash basis	Accruals basis
Includes capital items	Revenue items only
Ends with a cash or bank balance	Ends with a surplus or deficit
No depreciation	Includes depreciation

Reminder: opening bank 640 + receipts 9,310 − payments 8,770 = closing bank 1,180.

Accumulated fund = assets − liabilities (the club’s capital).

Club statement of financial position: closing accumulated fund = opening accumulated fund + surplus (or − deficit). Subscriptions in arrears are other receivables; subscriptions in advance are other payables; the life membership fund is shown separately from the accumulated fund.

Reminder: opening accumulated fund 12,400 and a surplus of 1,850 give a closing accumulated fund of 14,250.

Subscriptions account: debit opening arrears and closing advance; credit opening advance, cash received and closing arrears. The balancing figure (on the debit side) is income for the year.

Activity trading accounts (bar, café, shop): revenue − cost of sales − direct costs = profit, taken to income and expenditure as income.

Life membership: credit fees to a life membership fund; transfer a fixed share to income each year under the club’s policy.

Losses of inventory or cash: expected figure − counted figure = loss, charged as expenditure.

Manufacturers (1.3.20–1.3.22)

Raw materials consumed (opening + purchases + carriage in - closing)
+ Direct labour + direct expenses (e.g. royalties)
= Prime cost
+ Factory overheads (indirect wages, factory power, depreciation of
  factory assets, factory share of shared costs)
+ Opening work in progress - closing work in progress
= Production cost
+ Manufacturing profit (if goods are transferred at a mark-up)
= Transfer to statement of profit or loss

Apportionment: split shared costs between factory and office (functions), and factory overheads between products, on a fair basis.

Reminder: factory rent 24,000 shared by floor area 600 : 400 m² between two products = 14,400 and 9,600.

Unrealised profit in finished goods = finished goods at transfer price × mark-up ÷ (100 + mark-up). Deduct only the increase in the provision from profit; show finished goods at cost.

Must-know distinctions

• Gross profit vs profit for the year: gross profit is before expenses and other income; profit for the year is after them.
• Irrecoverable debt vs allowance: a write-off removes a known bad debt; the allowance estimates further debts that may not be paid.
• Prime cost vs production cost: prime cost is direct costs only; production cost adds factory overheads and the work in progress adjustment.
• Profit vs surplus: businesses make profits; clubs make surpluses.

Quick self-test

1. Wages paid 31,200; accrued 700 at the start and 950 at the end. Expense for the year?
2. Rent received 6,600, of which 550 is for next year. Rent income for the year?
3. Vehicle cost 24,000, accumulated depreciation 9,000, 25% reducing balance. Depreciation charge?
4. Net assets rose from 27,500 to 31,900. Drawings 14,600; capital introduced 2,000. Profit?
5. Cost of sales 45,000; mark-up 40%. Revenue?
6. Revenue 72,000; margin 25%. Cost of sales?
7. Residual profit 30,800 shared 3:1. Each share?
8. No agreement. A partner lends the firm 12,000 for six months of the year. Loan interest?
9. Goodwill 40,000, not kept. New ratio X 2 : Y 2 : Z 1. Debit to new partner Z?
10. A club received subscriptions of 4,870, including 120 owed from last year and 210 for next year. No other balances. Subscription income?
11. Closing finished goods at transfer price 13,200; mark-up 10%. Unrealised profit?
12. A club’s expected cash is 860 but the count shows 795. Loss?

Answers

1. 31,200 − 700 + 950 = 31,450
2. 6,600 − 550 = 6,050
3. (24,000 − 9,000) × 25% = 3,750
4. 31,900 − 27,500 + 14,600 − 2,000 = 17,000
5. 45,000 × 1.4 = 63,000
6. 72,000 × 75% = 54,000
7. 23,100 and 7,700
8. 12,000 × 5% × 6/12 = 300, charged as an expense
9. 40,000 × 1/5 = 8,000
10. 4,870 − 120 − 210 = 4,540
11. 13,200 × 10/110 = 1,200
12. 860 − 795 = 65, charged as expenditure

Where marks are usually lost

• Putting the full allowance for irrecoverable debts in the statement of profit or loss instead of the increase or decrease.
• Showing only one effect of an adjustment, when the statement of financial position entry is also needed.
• Using a mark-up percentage as if it were a margin, or the reverse.
• Forgetting to add interest on drawings in the appropriation account, or deducting it.
• Putting a partner’s loan interest in the appropriation account.
• Applying salaries or interest on capital when the question says there is no agreement.
• Crediting goodwill in the new ratio instead of the old.
• Recording only the current year’s subscriptions in cash, ignoring arrears and advances.
• Calling a club’s result “profit” instead of “surplus” or “deficit”.
• Deducting the whole unrealised profit provision from profit, rather than only the change.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018, first teaching September 2015 (Pearson Education Limited). Unit 1, topic 1.3.