Accountants need to develop the knowledge and skills of amending Final Accounts such as Profit and Loss Account (P&L Account) and Balance Sheet.
Every time when new accounting transactions are recorded, or decisions to change asset values are made, amendments need to be made to Profit and Loss Account (P&L Account) and Balance Sheet.
Being able to amend company accounts following a change in a key variable, increases understanding of the fundamental concepts underlying the Final Accounts of a business. Accountants need to considers many important issues when preparing Final Accounts.
Amending Profit and Loss Account (P&L Account)
Accountants often have to adjust Profit and Loss Account (P&L Account) when new financial data regarding costs and revenues become available. Or, when one of these two key variables change.
It is important to remember these few basic rules when adapting Profit and Loss Account (P&L Account).
- Changes in production and sales. If a change to the number of units produced and sold occurs, this is most likely to going to lead to changes in Gross Profit.
- Changes in expenses. Some Fixed Costs might change with a variation in the level of sales, e.g. annual promotion or transport costs might be affected by variations in the number of units produced and sold.
SALES REVENUE:
Price:
Products were sold for higher prices. Sales Revenue increases. Gross Profit increases.
Products were sold for lower prices. Sales Revenue decreases. Gross Profit decreases.
Quantity:
More products were sold due to strong demand. Sales Revenue increases. Gross Profit increases.
Less products were sold due to weak demand. Sales Revenue decreases. Gross Profit decreases.
COST OF GOODS SOLD (COGS):
Raw materials:
Higher cost of raw materials increased the cost of each unit produced. Cost of Goods Sold (COGS) increases. Gross Profit decreases.
Lower cost of raw materials decreased the cost of each unit produced. Cost of Goods Sold (COGS) decreases. Gross Profit increases.
Wages for workers:
More production workers were needed this month. Cost of Goods Sold (COGS) increases. Gross Profit decreases.
Less production workers were needed this month. Cost of Goods Sold (COGS) decreases. Gross Profit increases.
Packaging:
New cheaper supplier of packages was found. Cost of Goods Sold (COGS) decreases. Gross Profit increases.
New more expensive supplier of packages was found. Cost of Goods Sold (COGS) increases. Gross Profit decreases.
EXPENSES:
Rent:
Overheads decreased due to lower rent. Expenses decrease. Net Profit Before Interest and TAX increases.
Overheads increased due to higher rent. Expenses increase. Net Profit Before Interest and TAX decreases.
Salaries for managers:
Managers earned lower year-end bonuses caused by lower level of sales. Expenses decrease. Net Profit Before Interest and TAX increases.
Managers earned higher year-end bonuses caused by higher level of sales. Expenses increase. Net Profit Before Interest and TAX decreases.
Administrative expenses:
Salaries for the administration staff decreased due to deflation. Expenses decrease. Net Profit Before Interest and TAX increases.
Salaries for the administration staff increased due to inflation. Expenses increase. Net Profit Before Interest and TAX decreases.
Utilities:
Less electricity was used due to mild temperatures in summer and winter. Expenses decrease. Net Profit Before Interest and TAX increases.
More electricity was used due to very high temperatures in summer and very low temperatures in winter. Expenses increase. Net Profit Before Interest and TAX decreases.
Interest:
Interest costs were reduced due to lower interest rates set by the central bank. Interest decreases. Net Profit After Interest and TAX increases.
Interest costs were higher due to higher interest rates set by the central bank. Interest increases. Net Profit After Interest and TAX decreases.
TAX:
Corporate TAX rates in the country fell after the decision by the government. TAX charges decrease. Net Profit After Interest and TAX increases.
Corporate TAX rates in the country rose after the decision by the government. TAX charges increase. Net Profit After Interest and TAX decreases.
Amending Balance Sheet
Accountants need to calculate financial position at the end of the current financial year. Hence relevant amendments can be made to Balance Sheet.
CURRENT ASSETS:
Cash:
Sale of ready goods for Cash. Value of Inventories decreases. Cash balance increases.
Debtors (Accounts Receivable):
Customers who were given Trade Credit are unable to pay at all causing bad debt. This irrecoverable debt needs to be written off. Value of Debtors decreases. Value of Retained Profit decreases.
Inventories:
Purchase of raw materials for Cash. Value of Inventories increases. Cash balance decreases.
FIXED ASSETS:
Premises (Land & Buildings):
Appreciation of company buildings over time. Value of Premises increases. Value of Shareholder’s Equity increases.
Equipment (Machinery):
Depreciation of machines as they get older. Value of Equipment decreases. Value of Shareholder’s Equity decreases. The company is now ‘worth less’ than before.
Vehicles:
New minivans were purchased to deliver products to customers. A long-term bank loan was used. Value of Vehicles increases. Value of Long-term Loan increases.
INTANGIBLE ASSETS:
Brand & Patents & Trademarks & Copyright & Goodwill:
The company generates more intellectual property. Value of Intangible Assets increases. Value of Shareholder’s Equity increases. The company is now ‘worth more’ than before.
CURRENT LIABILITIES:
Overdraft:
The bank asked for the overdraft to be paid in full by the end of the weak. Value of Overdraft decreases. Cash balance decreases.
Creditors (Accounts Payable):
Raw materials are bought using Trade Credit from suppliers. Value of Inventories increases. Value of Creditors increases.
Short-term Loan:
New equipment is bought using a credit card. Value of Short-term Loan increases. Value of Equipment increases.
TAX:
The government allowed the business to pay lower Corporate TAX this year to stimulate employment. TAX charges decrease. Value of Retain Profits increases.
Dividends:
The Board of Directors decided to pay out all Retained Profit as dividends. Value of Dividends increases. Value of Retained Profit decreases.
LONG-TERM LIABILITIES:
Mortgage:
A new parcel of land was bought using the bank mortgage. Value of Mortgage increases. Value of Premises increases.
Long-term Loan:
Delivery trucks were bought using a 10-year bank loan. Value of Vehicles increases. Value of Long-term Loans increases.
Debentures:
Additional bonds are issued to investors to raise capital for buying a building for the new company headquarters. Value of Debentures increases. Value of Premises increases.
EQUITY:
Share Capital:
The owner adds his own savings to the company. Value of Share Capital increases. Cash balance increases.
Retained Profit:
The business earned USD$500,000 last year and the Board of Directors decided not to pay out any dividends, but to keep the whole amount in the business. Value of Retain Profit increases. Cash balance increases.
The above examples are only some of the amendments that are possible in accounting. The double entry principle is always necessary to keep the account balanced. This is because new assets can only be bought using the business’s own money (equity) or someone else’s money (liabilities).
Remember to use the same format every year when presenting Profit and Loss Account (P&L Account) and Balance Sheet. Otherwise, it will be difficult for stakeholders to make comparisons.
