How to prepare final accounts in Financial Reporting
Student conundrum: I’m making the step up to Financial Reporting, how should I prepare final accounts?
Students who are moving up from Financial Accounting (FA) to Financial Reporting (FR) often ask about preparing final accounts as this is not a skill they get the chance to develop at Test of Competence level.
Create an extended trial balance
You are correct to think that we expect you to prepare fairly detailed financial statements in FR. The best way to do this is using an extended trial balance (ETB). This method was briefly introduced during the FA course.
You will be provided with a trial balance or draft accounts to start you off. A scenario will be provided which will give rise to a number of adjustments that you have to prepare. When making these adjustments, we expect you to write journal entries. In fact, journals will normally be set out as a requirement in the question.
It is good practice to reference each of these journals, for example as 1, 2, 3 or a, b, c, as this helps you to ensure you process all journals through the ETB and allows the marker to follow through consequential errors.
Accurate Journal entries
Writing journals is one of the most important skills every student should work on before they come to FR. You need to be able to produce accurate journal entries in an efficient manner.
When you have journal entries written, you now need to process these journals against the original trial balance given in the question. Some students prefer to process after each journal is written, others will write all journals first then process all at the same time.
We recommend the second approach, as this will earn marks more quickly. However, we would always suggest that you follow the approach that works best for you. You need to practice to find out which you would rather use.
The spreadsheet format
The preferred way to process journals is to use a spreadsheet format - start with the original trial balance and have a debit column and a credit column. Create a further two columns in the spreadsheet - one debit and one credit – then process the journal entries into these columns.
You should remember to write in the journal reference when processing so that it is possible to cross-reference the numbers in the ETB back to the journals. Being methodical will ensure no journals are omitted.
Finally, create a final debit and final credit column and, working down the line items in the trial balance; add the columns together, remembering that 'debit' plus 'debit' gives a bigger 'debit', while 'debit' plus 'credit' gives a smaller 'debit' (or maybe a credit depending on the size of the balance).
In some FR questions, the final column of the ETB will be acceptable for the final financial statements as long as it is reasonably neat and easy to follow.
In other questions, you will be asked for IAS1 format financial statements, in which case, full accounts need to be headed up and written out separately. You don't need to memorise IAS1 formats as proforma are provided in the IFRS textbook.
And remember, practice makes perfect!