In Module 1, we defined financial reporting as the process of recording, classifying, summarising, reporting, and analysing financial information. By this point, you should be able to:

• explain how business transactions occur
• record transactions in the relevant general ledger accounts
• balance off ledger accounts
• extract a trial balance after correcting errors

These skills cover the recording, classifying, and summarising stages of financial reporting. This module focuses on the next stage: reporting the summarised information by preparing financial statements.

This chapter is designed to help you revise and recall earlier topics that are essential for preparing financial statements.

Relevant previous knowledge

Refer to Module 1: The financial statement and its elements and revise the chapter before you proceed.

Recap questions

Provide answers to the following questions to refresh the key ideas.

1. List the components of the financial statements.

2. Explain the purpose of the statement of financial position

3. Explain the purpose of the statement of profit or loss and other comprehensive income

4. Explain the purpose of the statement of changes in equity

5. Explain the purpose of the statement of cashflow

6. Explain the purpose of the notes to the financial statements

7. List the elements of the financial statements

8. Which of the elements of the financial statements are used for the preparation of the statement of profit or loss and other comprehensive income?

9. Which of the elements of the financial statements are used for the preparation of the statement of financial position?

IFRS accounting standards

The preparation of financial statements is governed by IFRS 18, which replaces the previous standard IAS 1. However, the statement of cash flows is guided by a separate standard, IAS 7. IFRS 18 sets requirements for the presentation and disclosure of information in general-purpose financial statements, helping users compare financial statements across different entities and across time.

The chapters in this module follow the requirements of IFRS 18.

Note that not all IFRS requirements are examinable within the FA exams. Refer to ACCA technical write-up by a member of the FA examination team on IFRS 18.

Adjustment to the financial statement

Adjustments are corrections made to accounting records before preparing the final financial statements. Their purpose is to make sure income and expenses are recorded in the correct accounting period, in line with the accrual basis of accounting.

Adjustments are a key link between the trial balance and accurate financial statements. If adjustments are missing or incorrect, the statement of financial position and the statement of profit or loss will also be incorrect.

Major adjustments typically required include:

• Accrued expenses - expenses incurred but not yet paid (e.g., salaries, utilities)
• Prepaid expenses - payments made in advance that need allocation across periods
• Accrued income - revenue earned but not yet received
• Deferred income - payments received in advance for services not yet rendered
• Depreciation - systematic allocation of asset costs over their useful lives
• Bad debts and allowance for doubtful debts - writing off uncollectible receivables
• Inventory adjustments - corrections for damaged, obsolete, or missing stock
• Interest expenses - interest payments required on debt capital

Each of these adjustments ensures that transactions are recorded in the correct accounting period following the accruals concept and matching principle. Many students underestimate the importance of adjustments and struggle significantly when preparing the final accounts. Don’t let this be you. Practice these adjustments repeatedly until they become second nature. Your ability to prepare the Statement of Financial Position and Statement of Profit or Loss depends entirely on your mastery of adjustments.

Refer to ACCA technical write-up by a member of the FA examination team on adjustments to the financial statements.