Preparation of Financial Statements
Domain 3 tests the final accounts of a sole trader, with adjustments, and the distinction between receipts and payments and income and expenditure for not-for-profit organisations. Marks are lost less from format than from the placement of adjustments.
Trading and profit and loss
Cost of goods sold = opening stock + purchases + direct expenses − closing stock. Gross profit = sales − cost of goods sold. Net profit = gross profit + other income − indirect expenses.
Balance sheet
Assets, liabilities and capital. Closing capital = opening capital + profit − drawings. Closing stock appears as a credit in the trading account and a current asset in the balance sheet.
Adjustments
Outstanding expense: add to expense, show liability. Prepaid expense: deduct, show asset. Depreciation: charge to profit and loss, reduce asset. Bad debts: write off; provision is calculated on remaining debtors. For an NPO, subscriptions outstanding are accrued income, and the capital fund is a liability-side balance.
Worked example: sales Rs. 100,000; opening stock Rs. 10,000; purchases Rs. 55,000; closing stock Rs. 12,000; wages Rs. 5,000. COGS = 10,000 + 55,000 + 5,000 − 12,000 = Rs. 58,000, so gross profit is Rs. 42,000. Indirect expenses paid Rs. 15,000, plus outstanding Rs. 2,000, less prepaid Rs. 1,000 = Rs. 16,000. Net profit = Rs. 26,000. The balance sheet carries outstanding Rs. 2,000 as a liability, prepaid Rs. 1,000 and closing stock Rs. 12,000 as assets.
Traps: deducting closing stock twice; treating drawings as an expense; depreciating an asset sold during the year without time apportionment; ignoring outstanding subscriptions; crediting life membership wholly to one year's income; mixing receipts and payments with income and expenditure.