Financial Accounting: from trial balance to IFRS-based statements
This domain tests whether you can convert a trial balance into a full set of statements and justify every measurement you make. Expect year-end adjustments, depreciation, inventory valuation, receivables provisioning and IAS 1 presentation rules.
Double entry first, standards second
- Every adjustment has two effects; write both before you compute a figure.
- Accruals and prepayments restate an expense to the amount relating to the period, not the amount paid.
- Irrecoverable debts are written off against receivables; an allowance is a valuation adjustment charged to profit or loss.
Measurement rules the examiner expects you to quote
- IAS 16: cost includes purchase price, non-refundable duties and directly attributable costs of bringing the asset to location and condition; depreciation starts when the asset is available for use.
- IAS 2: lower of cost and net realisable value, applied item by item or by groups of similar items.
- IAS 36: recoverable amount is the higher of fair value less costs of disposal and value in use; write down if carrying amount exceeds it.
- IFRS 15: identify the contract, identify performance obligations, determine the transaction price, allocate it, recognise revenue when each obligation is satisfied.
Worked example
A machine is bought on 1 April for €120,000, residual value €20,000, useful life 5 years, straight line, year end 31 December. Depreciable amount = 120,000 − 20,000 = €100,000. Annual charge = €20,000; nine months used gives €15,000 charged and a carrying amount of €105,000. If the machine were revalued upwards, the surplus goes to other comprehensive income as a revaluation surplus; only a reversal of a previous deficit above the original cost passes through profit or loss.
Traps that cost marks
- Charging a full year in the year of acquisition.
- Depreciating the residual value.
- Writing inventory down in aggregate rather than item by item.
- Running a revaluation surplus through profit or loss.