1. Advanced Financial Accounting FIN-611
Mian Ahmad Farhan
Lecture-22
Limited Companies

2. Company Accounts

3. Methods of Preparing Income Statement
Two methods of Income Statement as per IAS-1:
Nature of expenses method
Function of expenses method

4. Income Statement (Nature of Expenses Method)
Total Income:
Sales xxx
Other income xxx
Profit on disposal of assets xxx
Interest on deposits xxx xxx
Less: Total Expenses:
Changes in inventory xxx
Raw material purchased xxx
Staff cost xxx
Depreciation expenses xxx
Operating expenses:
Selling and distribution xxx
Advertisement xxx
Interest on loan xxx
Income tax expenses xxx (xxx)
Profit xxx

5. Functions of Expenses Cost of sales Administration expenses
Selling expenses
Financial expenses
Income tax expenses

6. Income Statement (Functions of expenses method)
Sales xxx
Less Cost of goods sold (xxx)
Gross profit xxx
Less Operating expenses
Administrative expenses xxx
Selling & distribution xxx
(xxx)
Profit from operations xxx
Add: other income xxx
Less: Financial expenses (xxx)
Income before tax xxx
Less: Income tax (xxx)
Profit after tax xxx

7. Statements of Changes in Equity
Opening balance b/f xxx
Add Profit for the year xxx
Less Dividend payment xxx
Less transfer to reserves xxx
Closing balance c/f xxx

8. Simple Ltd Co. Trial Balance As at 31st December 2005
Debit Credit
Rs.(000) Rs. (000)
Sales ,345
Opening inventories ,456
Purchases 4,239
Manufacturing wages 2,386
Other manufacturing costs
Selling & distribution costs 1,895
Administration expenses
Interest expenses
Interim dividend paid
Long term investments
Non current assets at cost ,579
Depreciation (Provision) ,756
Trade receivables 1,923
Prepayments
Staff loans

9. Simple Ltd Co. Trial Balance As at 31st December 2005
Debit Credit
Rs.(000) Rs. (000)
Bank and cash balances
Bank overdraft
Trade payables
Accruals
Debenture redeemable in ,000
Two million ordinary shares of 25 paisa each
Share premium
Retained profits (1st January 2005) 1,132
23, ,090

10. Additional Information:
Closing inventories have been counted and valued at Rs. 978,000.
The tax charge for the year has been estimated at Rs.879,000.
An interim dividend of 45 paisa per share was paid. A final dividend of 75 paisa per share has been proposed.
Transfer Rs. 600,000 to Debenture Redemption Reserve.
All other routine adjustments have been made (e.g., depreciation, bad debts)

11. Simple Ltd Co. Income statement For the year ending 31st August 2005
Rs. 000
Sales ,345
Cost of goods sold (7,749)
Gross profit ,596
Sales and distribution expenses (1,895)
Administration expenses (998)
Profit from operations ,703
Interest received/paid and similar items (400)
Profit before tax ,303
Income tax expenses ( 879)
Profit for the year ,424

12. Provision For Tax Journal Entry: Income tax expense account xxx
To Provision for tax account xxx

13. Statements of Retained Earning
Rs. 000
Opening balance b/f 1,132
Profit for the year 2,424
Dividend payment (900)
Transfer to reserves (600)
Closing balance c/f 2,056

14. Capital Redemption Reserve
Rs. 000
Opening balance
Profit for the year
Reserve
Dividend
Closing balance

15. Contra items
Provision for depreciation
Sales return
Purchases return
Provision for doubtful debts
Payment against dividend or drawings

16. Simple Ltd Co. Balance sheet As on 31st August 2005
Assets Rs. (000) Rs. (000)
Non-current Assets:
Investment
Tangible non-current assets 3,823 4,723
Current Assets:
Inventories
Trade and other receivables 1,935
Prepayments
Cash ,669
Total Assets ,392

17. Simple Ltd Co. Balance sheet As on 31st August 2005
Equity & Liabilities Rs. (000) Rs. (000)
Equity:
Share capital
Share premium
Debenture redemption reserve
Retained earnings 2,056 3,406

18. Simple Ltd Co. Balance sheet As on 31st August 2005
Equity & Liabilities Rs. (000) Rs. (000)
Total equity ,406
Non-current Liabilities 3,000
Current Liabilities:
Bank overdraft
Trade and other payables
Accruals
Income tax ,986
Total Equity & Liabilities ,392

19. Simple Ltd Co. Statement of changes in equity For the year ended on 31st August 2005
Share Share Debenture Retained Total
capital premium redemption earnings
reserve
(Rs.000) (Rs.000) (Rs.000) (Rs.000) (Rs.000)
Opening ,132 1,882
Profit for the year ,424
Dividend payment (600)
Transfer to reserves (900) (900)
Closing ,056 3,406