ETHIOPIAN TVET-SYSTEM

Occupational Standard: Accounts and Budget Support

MODULE HANDOUT

Level III: Unit of Competency

Prepare Financial Reports

Unit Code:BUF ACB3 12 0812

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Fixed Assets
1. Identify fixed assets account from organization chart of account
 Nature Of plant assets
-Plant assets are fixed assets are those assets of a company that are changeable used in business operations
over a long period of time and not held for sale under normal course of business. Assets acquired for resale in
the normal course of business con not be characterized as plant asset.
 The assets most often included:-
Equipment, Buildings, Machinery, Furniture, Tools, Land and land Improvement etc.
2. Handel the acquisition and Valuation of fixed assets
 Initial cost of plant Assets(acquisition)
-The initial (acquisition) cost of plant asset includes all expenditures necessary expanses.
Machinery and Equipment
Cost of machinery and equipment includes its purchase price (Less any discount), plus transportation charges,
Insurance while in transit sales and others taxes purchase commission installation and testing cast repair
(Purchase of use equipment) There after installation ,taxes, and maintenance cost are recorded as expense.
Building
The cost of constructing a building includes architecture fees, building permits, contractor changes, payment
for material labor and over head, insurance costs include during construction, interesting money borrowed to
France construction.
Land and land Improvements
The cost of land in clouds its purchase price, brokerage commission, serves any legal fees, permits from
government ageneses, Titles fee, Razing or removing un wanted building the cost of land is not deprecated.
- The cost of land does not include fencing, paving, sprinkle system and lighting. These separate plant asset
called land improvementaresubjectto depreciated.
Land and improvements are two entirely separate asset account. Land improvement includes lighting, signs,
fences, paving, sprinkler system and land scoping. These cost are debited to the land improvements account
and then depreciated over their useful life

Example
Consider the following cost in relation to particular equipment purchased by the company purchase prices of
equipment Br 120,000 for cash.
Additional cost:- -Transportation change 5,000
-Value added tax (Vat) 18,000
-Assembling costs 3,000
-Installation and testing cost 2,000
In additional to the above, cost Br 500 was incurred to reinstall the equipment b/c an error was made the
mechanic the initial installation.
Required:-determine the original cost of the equipment and show Journal entry necessary to record its
acquisition.
Original cost of equipment
Purchase price of equipment ----------------Br 120,000
Add: Related cost.
Transportation change ---------------------------5,000
Value added tax (VAT) -------------------------18,000
Assembling costs ---------------------------------3,000
Installation and testing cost----------------------2,000
Total original /acquisition\ cost of equipment Br 148,000
Journal Entry
Equipment -----------Br 148,000
Cash --------------------------148,000
To record acquisition of equipment
Operating expense --------------500

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 Cash ------------------------------500
To record expenses of the period

Measuring plant asset Depreciation

The allocation of plant assets costs to expense over the assets useful life is called depreciation.
Measuring Depreciation
Depreciation of plant assets is based upon the assets
1. Cost 2. Estimated useful life 3. Estimated residual value
1. Cost is known amount the other two factors must be estimated
2. Estimated Useful Life:-is the length of the service period from the asset useful life may be expressed in
years, units of out put, miles, or other measure.
3. Estimated residual value:-also called scrap valueorsalvagevalueis the expected cash value of an asset at
the end of its use full life.
Depreciation Method
The four most commonly used depreciation method is:-
1. Straight Line Method: - In the straight line (SL) method an equipment amount of depreciation is
assigned to each year of asset use.
Formula: Straight line Method

DC Rate DE A.D BV
OC-SV 100/Eul DC-SV/EUL or Same of Dep. OC - AD
DC x Rate

2. Unit of Production Method: - The unit of production method yields, a depreciation charge that varies with
the amount of assets usage to apply this method the length of the life of an asset is expressed in terms of
production capacity such as hours, miles or number of operation.
Formula: Unit of production method

Depreciable Rate Depreciation Accumulated Book

Cost Expense Depreciation Value
OC-SV DC-SV______ DC X Rate Same of OC-AD
Total production Dep.
Capacity
3. Decline balance method: - The double declining balance method yields, declining periodic depreciation
charge over the estimated life of the asset.
The double decline balance method deferens from the other method in two ways
 The assets residual value is ignored at the start in the first year, depreciation is computed on
the assets full cost.
 The final year’s depreciation is the amount needed to bring the assets carrying amount needed
to bring the assets carrying amount to residual asset book value to the residual value.

Formula: Double decline balance method

Depreciable Rate Depreciation Accumulated Book

Cost Expense Depreciation Value
OC-SV 100/EUL x 2 Beg BV X Rate Same of Dep. OC-AD

4. Formula: Sum of year digit method

Depreciable Rate Depreciation Accumulated Book

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Cost Page 3
Expense Depreciation Value
OC-SV Remaining useful life DC X Rate Same of Dep. OC-AD
n ( n+ 1 )
2
Example: RTE Company purchased plastic laminating equipment on Jan5, 2006, for $24,000.The equipment
was expected to have a useful life of five years, or 11,100 operating hours, and a residual value of $2,000. The
equipment was used for 1,600 hours during 2006, 3,800 hours in 2007, 3,400 hours in 2008, 1,240 hours in
2009 and, 1060 hours in 2010.

1. Straight Line Method

The annual depreciation is computed as follows:
$24,000 cost - $2,000 estimated residual value _ = $4,400 annual depreciation
5 years estimated life

2. Unit- of- production method

The annual depreciation is computed as follows

$24,000 cost - $2,000 estimated residual value = $2 hourly depreciation
11,100 estimated hours

The machine was in operation for 1,600 hours during a year, the depreciation for that year would be $ 3171.2
($1.98 * 1,600 hours)

3. Double- Declining-Balance Method

Double-Declining-Balance Rate = Straight-Line Rate x 2
= (1/5) x 2 = 20% x 2 = 40%

Date Asset depreciation for the year Accumulated Ending

Cost Beginning Rate Depreciation depreciation Book value
book value expense
Jan. 5 $24,000 - - - - $24,000

Disposal of Fixed Assets

-Plant assets that are no longer useful for the company. may be discarded sold or applied to want the purchase
of other similar plant assets the details of the entry to record a disposal will vary but in all cases it is necessary
to remove the book value of the asset from the accounts.
Disposal of plant asset three ways:-
1. Discarding plant assets
2. Sales of plant assets
3. Exchange of plants
-Exchange of similar plant assets
- Exchange of dissimilar plant assets.

Recordgeneral journal entries for balance day adjustments

 Types of balance day adjustments
1. Prepaid expense - Expenses paid but not yet incurred
2. Revenue in advance -Revenue received but not yet earned
3. Accrued expenses -Expenses incurred but not yet paid

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 4. Accrued revenue - Revenue earned but not yet received
 Other balance day entries
 Closing inventories
 Bad and doubtful debts
 Depreciation
1. Prepaid expenses /Deferred expenses

- Record the adjustment is made to transfer the used portion from asset to an expense.
- Prepaid expense include such items as prepaid insurance, prepaid rent, prepaid
advertising, and prepaid interest, various kinds of suppliers and even the cost of long
term assets.
Relationship with prepayments and Adjusting entries

Prepaid expense

Asset Expense

UN adjusted credit Debit

Balance Adjusting Adjusting
Entry (-) Entry (+)
Example:- Insurance premiums where acquired on January 1 , 1990 for birr 18,000 Insurance premiums
expired during the year amount to birr 12000 and un expired insurance of the end of the year amount of Br
6,000 respectively
Payment inventory recorded as an asset
1990 payment
Jan1prepaid insurance ………18000
Cash ----------------------------- 18000
1990 Adjusting entry
Dec 31, Insurance expense ---------12000
Prepaid insurance -------------12000

2. Revenue in advance /Deferred Revenue/un earned Revenue /

Deferred Revenue (revenue received in advance) could be recorded in journal as revenues or liabilities.Revenue
received during a particular period may be only partly earned by the end of the period. Items of revenue that
are received in advance represent a liability that may be termed unearned revenue.
May include advance such as collection from delivery services, tickets, magazine, and news paper
subscriptions.

Unearned Revenue Revenue

Liability credit
Debit UN adjusted Adjusting
Adjusting Balance Entry (+)
Entry (-)

Example Assume that on Nov 1 , 1994 a business rented its building for a period of one year and received Br
12,000 representing payment for the next 12 months where the fiscal period ends on Dec 31.
Advance collection initially recorded as liability
1994
Nov 1 cash ----------------------------12,000
Un earned rent------------------------12,000
Adjusting entry for earned amount of the two months (November and December)
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ie 2/12 x 12000 = 2000)
1994
Dec 1 unearned rent -------------------2000
Rent income ---------------------2000
3. Accrued expense
An accord expense is an expense incurred but that has been paid Accrued expenses are also called accrued
liability. Because to the extent of the expense accumulated there will be an obligation to pay the company for
example interest payable, taxes payable and salaries payable can be accrued expense.

Accrued expense
Expense liability
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)

Example:- Assume that Yalew Company salary to be paid in January 5, 1999Br 15,000 for employeeswho
worked on December 30, 1998.
Hence the following adjustment shall be mad1998
Dec 31 Salary Expense --------------15000
Salary payable -----------------------15000
The journal entry to record the payment will be as follows
1999
Jan 5 Salary Payable ---------15,000
Cash --------------------------------15,000
(To record the payment of salary)
. Accrued Revenue
Accrued revenues are revenues earned but that have not yet been received examples of accrued revenues
include interest revenue to be received with the note receivables, fees receivable on professionally service etc.
Accrued Revenue
Asset Revenue
Debit Credit
Adjusting Adjusting
Entry (+) Entry(+)

Example: - assume that peachewAudit firm records fees revenue when collecting cash from costumers after
performing from customers. During the current year cash of Br 39,000 has been collected from customers and
on December 31, 1992, fees of birr 10,000 are earned but not collected. The Adjustment to be recorded is 1992
Dec 31 fees receivable --------------------10,000
Fees earned ----------------------10,000
Assume that on January 25, 1993 cash of Birr 10, 000has been collected from clients
1993
Jan 25 Cash -------------------10,000
Fees income -------------------10,000
(To record collection fees earned)
Other balance day entries

1. Bad and doubtful debts

When goods or service sold without immediate receipts of cash a part of the claim against customers usually
proves to be uncollectable. This will result in an operating expense called uncollectable accounts expense or
bad debts expense or doubtful accounts expense.
E.g. Assume that ABC Co. that started operations in the current year has ending balance of A/R of Br 25000 as
of Dec. 31, 1990. Careful analysis of customer accounts indicated that receivables of Br 3000 are expected to
be uncollectable. The entry to record the adjustment for this is as follows.
Dec. 31 uncollectable account expense ----------------3000

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Allowance for doubtful account ------------------------3000
 Uncollectable account expense is generally reported on the income statement or general administrative
expense.
 Allowance for doubtful account is reported on the balance sheet the amount to be deducted from A/R
to determine the expected realizable value from receivable.
Prepare end of period financial reports
Financial statement
Financial statement classified in to three
1. Income statement(Profit and Loss Statement)
2. Owners equities
3. Balance sheet
Business organization based on operation (activity) classified into three
1. Service Giving Organization
-A service company uses its employees to provide a service for the customer. it is type of business provides
intangible products (products with no physical form). Service type firms offer professional skills, expertise,
advice, and other similar products.
Examples of service businesses are: schools, repair shops, hair salons, banks, accounting firms, and law firms.
2. Merchandise Business Organization
-A merchandising company purchases inventory items to resell to customers. This type of business buys
products at wholesale price and sells the same at retail price. They are known as "buy and sell" businesses.
They make profit by selling the products at prices higher than their purchase costs. A merchandising business
sells a product without changing its form.
Examples are: grocery stores, convenience stores, distributors, and other resellers.
3. Manufacturing Business Organization
- A manufacturing business buys products with the intention of using them as materials in making a new
product. Thus, there is a transformation of the products purchased.
A manufacturing business combines raw materials, labor, and factory overhead in its production process. The
manufactured goods will then be sold to customers.
1. Service giving organization
a. Income Statement
The income statement is the first component of our financial statements. It is also known as the profit and
loss statement.shows an entity's results of operations for a particular period.
It presents an entity's income and expenses, and the resulting net income or net loss.
The income statement is a report showing the profit (net income) or loss or a business during a certain period,
as well as the incomes and expenses that resulted in this overall profit or loss. The amount of the profit or loss
for a business during a certain period indicates the financial performance of the business.
Income Statement Example
Here is a sample income statement of a service type sole proprietorship business. Let us name the company
Strauss Printing Services. All amounts are assumed and simplified for illustration purposes.
Strauss Printing Services
Income Statement
For the Year Ended December 31, 2014
       

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Service Revenue $ 160,000
Less: Expenses    
  Salaries Expense $ 40,000  
  Supplies Expense 26,100  
  Rent Expense 20,500  
  Utilities Expense 11,300  
  Depreciation Expense 5,000 102,900
Net Income $   57,100
Explanation and Pointers
1. The income statement is drawn up from the figures in the trial balance.
2. An income statement shows the net income or net loss of a business. This is achieved
by deducting all expenses from all income.
3. A typical income statement starts with a heading which consists of three lines. The
first line presents the name of the company; the second describes the title of the report;
and the third states the period covered in the report.
4. Notice that the third line is worded "For the Year ended..." This means that the income
statement presents information for a specific span of time. In the above example, the period covers 1 year
that ends on December 31, 2014. Hence, the amounts presented in the report are income and expenses from
January 1, 2014 to December 31, 2014.
5. Income accounts are presented before expenses. In the above statement, the income account is Service
Revenue. Other income accounts for service type businesses include Professional Fees, Rent Income, Tuition
Fees, etc
Expenses are presented after the income accounts. It is a good practice to arrange expenses according to
amount (largest to smallest). Some users who are interested in the company's expenses are concerned about the
size of each expense. Arranging the expenses from largest to smallest results in a more useful and organized
report. Nonetheless, Miscellaneous Expense or Sundry Expense is presented last.
6. If income exceeds expenses, there is a net income. If expenses exceed income, there is a net loss. Notice
how computations are presented. A single line is drawn every time an amount is computed. The resulting
amount is double-ruled when it is no longer followed by any operation. For example, $57,100 (the net income).
8. The income statement complies with the accrual basis of accounting. Income is recognized when earned
regardless of when collected. Expenses are recognized when incurred regardless of when paid.
This means that income and expenses presented in the income statement have been earned and incurred,
respectively. Nonetheless, it does not mean that they have all been collected or paid.
b. Statement of Owner's Equity
This lesson presents the Statement of Owner's Equity (or Statement of Changes in Owner's Equity) along with
important points you need to know in preparing and understanding this report.
Capital is affected by four elements.
Capital is increased by owner contributions and income, and decreased by withdrawals and expenses.
Statement of Owner's Equity Example
Here is a sample Statement of Owner's Equity of a service type sole proprietorship business, Strauss Printing
Services. All amounts are assumed and simplified for illustration purposes.
Assume that the company started the year 2014 with $100,000 capital. During the year, the owner made
$10,000 additional contributions and $20,000 total withdrawals. The Statement of Owner's Equity would look
like this:
Strauss Printing Services

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Statement of Owner's Equity
For the Year Ended December 31, 2014
Strauss, Capital $   100,000
Add: Additional Contributions   10,000
  Net Income   57,100
Sub Total $   167,100
Less: Strauss, Drawings   20,000
Strauss, Capital (Dec. 31, 2014) $   147,100
C. Balance Sheet
A balance sheet shows the financial position or condition of a company as of a certain date. It is also called
Statement of Financial Position.
Financial position pertains to the resources owned and controlled by the company (assets), and the claims
against them (liabilities and capital).
Hence, if you have a report that presents a company's assets, liabilities and capital, then you are probably
looking at a company's balance sheet.
Balance Sheet Example
A sample balance sheet for Strauss Printing Services, a service type sole proprietorship business. All amounts
are assumed and simplified for illustration purposes.

Strauss Printing Services

Balance Sheet
As of December 31, 2014
 
Assets
Current Assets:
 Cash $  21,000  
 Accounts Receivable 16,000  
 Prepaid Expenses 4,500 $    41,500
Non-current Assets:
 Property, Plant and Equipment   145,000
Total Assets $  186,500
 
Liabilities And Owner's Equity
Current Liabilities:
 Accounts Payable $   8,400  
 Rent Payable 8,000 $    16,400
Non-current Liability:
 Loans Payable   23,000
Strauss, Capital 147,100

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Total Liabilities and Owner's Equity $   186,500

Explanation and Pointers

1. A Balance Sheet shows the financial position or condition of the company; thus, it is also called
"Statement of Financial Position".
2. A typical balance sheet starts with a heading which consists of three lines. The first line presents the
name of the company; the second describes the title of the report; and the third states the date of the
report.
3. Notice that the third line is worded "As of..." Unlike the other components of the financial statements
which cover a span of time ("For the period ended.."), the balance sheet presents information as of a
certain date (at a specific point in time). In the above example, the contents of the balance sheet
pertain to the financial condition of the company on December 31, 2014.
4. A balance sheet summarizes the assets, liabilities, and capital of a company. Assets refer to properties
owned and controlled by the company. Liabilities are obligations to creditors, lenders, etc. And capital
represents the portion left for the owners of the business after all liabilities are paid. For detailed
lessons about assets, liabilities and capital, check out the Elements of Accounting.
5. Assets and liabilities are classified as either current or non-current. Current assets are properties that
will be converted into cash within 12 months or within the operating cycle of the business. Current
liabilities are due within 12 months or within the operating cycle. Non-current assets and non-current
liabilities are those that do not meet the above qualifications.
6. "Total assets" and "total liabilities and capital" should always be equal.
7. The capital amount, $147,100 for Strauss, Capital, was actually taken from the Statement of Owner's
Equity.
8. The balance sheet may be presented in two forms: account form and report form. In account form,
assets are presented on the left side while liabilities and capital are presented on the right. In report
form, assets are presented first and then followed by liabilities and capital. The example above is
presented using the report form.
9. Good accounting form suggests that a single line is drawn every time an amount is computed. It
signifies that a mathematical operation has been completed. The "total assets" and "total liabilities and
capital" amounts are double-ruled
2. Merchandising Business Organization
A. The income statement format for a trading business (merchandising
business)
We mentioned previously how a trading business differs from a service business: whereas a service business
provides a service, such as accounting, medical or repair work, a trading business trades in inventory (it buys
goods at a low price and sells it at a higher price).
A trading business will also differ from a service business in terms of its income and expenses – i.e. the way a
profit is made: whereas a service business renders services, a trading business makes sales.
The income statement for a trading business will thus look slightly different to the income statement of a
service business (check out the lesson on the income statement to review what it looks like for a service
business).
Here is the income statement
Income Statement for a trading business: Format:
Christopher Corporation 
Income Statement 
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 For the Month Ended September 30

Sales $600,000
Cost of Goods Sold 360,000
Gross Profit $240,000
Operating Expenses  
Supplies Expense $13,000
Wages Expense 131,000
insurance Expense 15,000
Rent Expense 24,000
Uncollectible Accounts Expense 12,000
Total Operating Expenses $195,000
Operating Income $45,000
Other Revenues and (Expenses) 1,000
Income Before Taxes $46,000
Income Taxes Expense 16,000
Net Income $30,000

Refer to the income statement example below.

• Gross Sales: Amount represents to amount of revenue generated by your business.
• Less: Sales Returns/Allowances: Amount represents product returns and /or sales discounts.
• Net Sales: Amount represents total sales less any product returns/allowances.
• Cost of Goods Sold: Amount represents costs directly associated with making or acquiring your products.
(Not all businesses will need this category).
• Gross Profit: (also called gross margin) Amount is determined by subtracting the cost of goods sold from
net sales. It does not include any operating expense or income taxes.
• Operating Expenses: Daily expenses incurred in the operation of your business. The order in which your
expenses are listed in the Profit and Loss Statement varies among businesses. One method is to list them in
order of size, beginning with the larger items. Miscellaneous expense is usually shown as the last item,
regardless of size.
• Total Expenses: Sum of all expenses incurred in operating your business.
• Net Operating Income: Represents the amount of income earned by your business before paying income
taxes.
• Other Income: Gain or loss on the sale of assets and/or interest income.
• Taxes: Some include this on their income statements. It is the amount of taxes you owe to the federal, state,
and if applicable, local government taxes.
• Net Income: The amount is basically the bottom line. If it is positive, you are in the “black” for the year. If
it is negative, you are in the “red”. This is the profit or loss your business has made after all its income and
all of its expenses have been taken into consideration
B. Statement of Owner's equity
Assume that the company started the year 2014 with $100,000 retained earnings. During the year, $20,000
total dividend. The Statement of retained earnings would look like this:
Christopher Corporation 
Statement of Retained Earnings
For the Year Ended September 30, 2014
Beg. Retained Earnings $   100,000
Add: Additional Contributions   0
  Net Income   30.000
Sub Total $   130.000
Less: dividend   20,000

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Ending Retained Earnings $   110.000
A. Balance sheet statement
Merchandise inventory is reported as a current asset on the balance sheet as follows.
Christopher Corporation 
Balance Sheet 
September 30
Assets
Current Assets
Cash and Cash Equivalents $10,000
Accounts Receivable $55,000 
Less: Allowance for Uncollectible Accounts 5,000 50,000
 Merchandise Inventory 270,000
Total Current Assets $330,000
Property, Plant, and Equipment  
Land $70,000
Buildings 220,000
Machinery and Equipment 340,000
Total Property, Plant, and Equipment $630,000
Other Assets 10,000
Total Assets $970,000

Liabilities and Stockholders' Equity

Liabilities
Current Liabilities  
Accounts Payable $135,000
Income Taxes Payable 25,000
Wages Payable   10,000
Total Current Liabilities   $170,000
Long-term Liabilities   340,000
Total Liabilities   $510,000
   
Stockholders' Equity    
Common Stock   $350,000
Retained Earnings   110,000
Total Stockholders' Equity   $460,000
Total Liabilities and Stockholders' Equity   $970,000

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