how to gain uk practical accountancy work...

How to gain UK Practical Accountancy Work Experience User Guide

How to prepare financial statements and reports: Income statement, Balance sheet & statement of stockholders/Owners equity.

Prepayments, Accruals and Depreciation.

How to perform a year end procedure on Sage Line 50 Accounts

How to close a financial year and prepare for the next one

Financial Ratio analysis and interpretation

How to perform credit control

TD&A

Compiled by Sterling Libs ACCA TD&A Accountancy & Financial Services

www.tdanda.co.uk

Preparing Financial Statements A Practical Guide.

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Executive Summary

Accountants are professional individuals who are academically trained and who are able to correctly apply

accounting theory and procedures in a practical way in order to properly complete the entire accounting

process.

The operations of a business can be quite complex, involving marketing, finance, production, research and

development and a complex flow of resources into and out of the business.

Your role as accountant hinges on your understanding of the accounting standards and procedures and

applying them in the key processess of the accounting cycle in dealing with daily operations of the business.

The accounting cycle is more or less the same in every industry and every business. The principles remain the

same regardless of business sector.

The accounting cycle can be divided into 3 simple yet distinct stages:

1. The Analysis Stage

2. The Processing stage

3. The Communicaion stage

In each of this stages, there are key fundamental activities that are performed by the accounts personnel to

ensure that the financial statements are up to date and that they reflect a true and fair view of the financial

position of the entity/organisation.

Stage 1: Analysis stage

Here documents from business operations are classified, valued and the timing of their occurance correctly

noted and recorded .

Key step(s) of this stage are:

- Classify documents, i.e. identify what items are increased or decreased in the accounting

equation (Assets = Liabilities + Owners Equity) because of an event/business process.

- Ascertain whether the values showing on the documents are correct, particularly be keen to

crosscheck invoices with GRN, LPO, signed acknowledgements etc.

- Make sure that you allocate the documents to the right period - timing ( Accrual accounting)

During your training at TD&A, we will walk you step by step on how the whole process is performed on a

computerised system (Sage line 50 Accounts software) and also manually.

Stage 2: Processing stage

Two steps are performed at this stage:

Recording:

- Depending on whether you are doing it the process manually or using accounting software, it is

important that the documents are correctly coded with the right nominal code before it is

recorded. Recording means formally entering the transaction data into the accounting books

and records.


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Summarisation:

- At regular intervals, the data from transactions with other accumulated data is totaled and

reorganised using bookkeeping methods

The processing stage is usaully referred to as Bookkeeping.

Stage 3: Communication stage

At this stage, you will be preparing the financial reports and interpreting them. The summarised data in the

books and records of the company is the source of most of the information presented on the financial reports.

At this stage, you will perform the year end procedure, prepare a post closing trial balance, get ready to begin

the cycle again for the next accounting period.

At this stage also, you will be able to do ratio analysis, vertical financial statement analysis and, you would as

well have with you the information you will require to prepare accounts to submit to HMRC.

The temporary accounts (Profit & Loss accounts) should have zero balances at this stage.

Have a great time Preparing financial statements!

- Sterling Geoff Libs ACCA

Executive Director, TD&A Accountancy & Financial Services


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Table of Contents

How to prepare Financial Reports

(Key points & practical steps in the process)

Financial Statements

Fiscal Years (Understanding Accounting periods)

Analysis of Documents (Practical steps in performing

Classification, Valuation & timing)

Adjusting Entries (Practical steps in dealing with

prepayments, accruals & depreciation)

Completing the Accounting Cycle

Five steps in preparing a worksheet

Using a completed worksheet

Preparing closing entries

How to run the year end procedure and close a

financial year using sage Line 50 Accounts

A theoretical understanding of what happens

when you run a year end option on Sage Line

50 Accounts

Page

5

10

10

11

12

14

14

16

17

18

23


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How to prepare financial reports

Key points and practical steps in the process.

The daily operations of a business can be quite complex, involving marketing, finance, production, research

and development and a complex flow of resources into and out of the business. The result of all these

activities is always depicted in a final result as follows:

Assets = Liabilities +Owners Equity (Assets and the claims on those assets) – This is the accounting

equation and it depicts the fundamental condition of a business.

This means that no more than the two providers of resources i.e. the creditors and (or) owner(s) claim the

total Sterling value of the assets - This is a very powerful idea and it applies to any business.

You will need to have a thorough understanding of what an asset, Liability and, Owners Equity mean if you

want to fully master the accounting process and procedure.

Asset

- An asset is a resource controlled by the entity as a result of past events and from which future

economic benefits are expected to flow to the entity

Liability:

- In financial accounting, a liability is defined as an obligation of an entity arising from past

transactions or events, the settlement of which may result in the transfer or use of assets,

provision of services or other yielding of economic benefits in the future.

Stockholders/Owners Equity

- Owners' equity represents the leftover interest in the assets of an entity after all liabilities are

covered, spread over the individual stockholders. When the owners of a business are

stockholders, this is referred to as stockholders' equity.

The financial information from business operations/events, will go through 3 distinct stages to determine

what effect it has on the condition of the business – how the assets, liabilities & owners equity will change!

The process begins with the analysis of a business event (stage 1). This analysis identifies whether that event

is a transaction (a transaction is any event or operation that causes a change in the accounting equation).

There are six basic types of transaction parterns:

Type 1: Transactions between Assets and liabilities

Examples:

- Borrowing money

- Buying on credit

- Paying off debts

Type 2: Transactions between Assets and Owners equity

Examples:

- Owner(s’) investment

- Revenue: sales of goods and services

- Owner drawing/salaries

- Expenses: using up assets in operations


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Type 3: Transactions within Assets

Examples:

- Using up cash to purchase another asset

- Collecting an account receivable

-

Type 4: Transactions between liabilities and Owners equity

Examples:

- Expenses: debts incurred while consuming services in operations

- Revenue: reducing debts as aresult of selling goods and services

Type 5: Transactions within Liabilities

Examples:

- Incurring new debts to pay off old debts. The old debt decreases, but a new debt takes its place.

Type 6: Transactions within Owners Equity

Examples:

- Closing entries

- Certain transactions in corporations and partnerships

Stage 1; Analyse the event (Transaction analysis)

Transaction analysis should happen in 3 steps by asking the following questions:

Step 1 – Are Assets affected?

Step 2 – Are Liabilities affected?

Step 3 – Is owner’s equity affected?

If the event qualifies as a transaction, the data concerning that event will also pass through stage 2 and 3 as

illustrated below:

Stage 1

Analyse event/process

“Transaction analysis”

Test event/process: Is

there a change in

accounting equation

Identify:

Classification

Valuation

Timing

If yes, go to stage 2. If no

Stop.

Stage 2

Process data

(“Bookkeeping”)

Record transaction if:

Reliable data

Relevant

data

Summarise results

Stage 3

Communicate

information

(“Reporting”)

Prepare financial

reports and interpret

them


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Stage 1: Analyse event/process

When you are doing the analysis, use the accounting equation ( Assets = Liabilities + Owners Equity) or the six

basic types of transaction parterns to visualise the change in condition of the business.

Any possible change in the Accounting equation must be identified in three ways: By classification, by value,

and by time (date) of occurance.

Classification means identifying what items are increased or decreased in the accounting equation because

of an event/operation. Is it the assets, liabilities, or owners equity?

Valuation means determining the sterling values (economic values) to use for items in the equation.

Valuation is also called measurement.

Valuation is determined in two phases. First, an original transaction value is recorded when transaction

occures.

Second, values of some of the recorded items may change at a later time. These changes can be caused by loss

of future benefits, by price changes and other events. In many situations, these later value changes must also

be recorded.

Timing means identifying the correct date on which an event caused a change in the accounting equation.

Event timing is especially important for correctly determining the net income or net loss for a business

Event analysis is extremely important! Proper classification, valuation, and timing make up the heart of good

accounting. You can remember these 3 steps easily by memorising “clavati”

Stage 2 : Processing Data

The processing stage is usaully referred to as bookkeeping. Bookkeeping consists primarily of recording and

summarising functions. Recording means formally entering the transaction data into the accounting books

and records. Recording is also referred to as recognition. Recording (recognition) places the transaction data

into the accounting system consistent with the results of the analysis from stage 1.

Two requirments must be met for recording to take place:

The recorded data must be reliable. This means that the transaction data can be verified as

nauthentic and that the data is unbiased.

The data must be relevant. This means that the data will provide information that is useful and

significant – it is not irrelevant or imaterial. Reliable and relevant data will ultimately result in

relaible and relevant information in financial reports.

As we will be using Sage line 50 Accounts as the accounting software, every identified transaction will

recorded in the books using the right nominal code. A list of the Nominal codes will be provided during the

training.

Recording transactions – Use of Accounts (Accounting system)

The financial condition of every business is described by the accounting equation A = L + OE, and there are

only two possible ways that the items in the equation can change: either increase or decrease. An accounting

system therefore is simply a way of recording increases and decreases.


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The means of keeping a record of all increases and decreases of each item in the accounting equation is the “

“account”. The simplest form of an account is called T account. It shows only the most basic information:

name, increases, decreases and balance.

The essential concept behind all the rules for recording increases and decreses in the accounts is:

We agree that one side of the an account will be the positive side. This is called “normal” or “natural

side” of the account, and is used for increases.

Therefore, the other side of the account will be the negative side – for recording decreases.

Over many years, accountants have agreed the following about the positive sides:

For accounts in the left side accounting equation (assets), the left side of an account shall be the

positive side. (“left goes with left”)

For accounts in the right side accounting equation (liabilities and owner’s capital), the right side of

an account shall be the positive side. (“Right goes with right”)

“Debit” and “Credit” – What do they really mean?

The words “debit” and “credit” refer only to location. Debit means left and credit means right. Thats all there

is really to it about debits and credits- “left and right”.

The rules for increasing and decreasing accounts are:

Increases:

- Any account that is a left-side account in the accounting equation (assets) is increased with a left-side

entry (debit). Any account that is a right-side account in the accounting equation (liabilities and

owner’s capital) is increased with a right-side entry (credit)

Decreases:

- Decreases are then recorded on the opposite side from increases. (So, assets are decreased with

credits, and liabilities and owner’s capital are decreased with debits)

Charging an account:

To charge an account means to debit it. There is no alternative word for credit.

Summarising means accumulating and organising data in ways that make the recorded data more

understandable and useful. Proper summarising makes it possible to present and analyse data in financial

reports. When summarisisation happens, the data can be transformed into useful and usable information.

One example of summarised data is a Trial balance – A list of balances of the ledger accounts

Here is how to get a trial balance, Income statement & balance sheet from a computerised accounting system

(Sage Line 50 Accounts):

a. Click on company on the home page in Sage line 50, then on links section, click on Financials, on the

financials page, click on the trial balance icon . Then follow the onscreen prompts.

Print & Check the trial balance for any errors, mispostings etc and effectively correct them through journals. The Trial balance you get before adjustments is called the unadjusted Trial balance. This report shows the current debit or credit balance for all nominal accounts that show a value - that is, unused nominal accounts are not listed. The report also shows the total value of all your debit entries and credit entries. Because Sage 50 Accounts controls the double-entry postings for you, these values will balance.


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Record adjusting entries and post to the accounts; a. Click on Company, then norminal ledger. On the norminal ledger page, click on journals.

b. On entering adjusting entries onto the journal, use suitable references and correct posting dates and

the correct norminal accounts affected by the adjustments. The most common adjustments at this

stage are Prepayments, Accruals and Depreciation. (you can manually record the adjusting entries on

a worksheet).

c. Post the Journals to the accounts (Click on Save on the open norminal ledger window)

Prepare the adjusted Trial balance;

d. After step above, repeat step a and b above. The Trial balance you get at this stage is called the

adjusted Trial balance and is more relaible. (When using the manual process, the adjusted trial balance

is part of the worksheet)

Stage 3: Communicate Information

The entire accounting process takes place with the ultimate goal of creating and presenting useful financial

information about a business.

Useful financial information is most often presented in the form of financial reports. Usally, at least four types

of financial reports are prepared: Income statement, balnace sheet, statement of owners/stakeholders equity,

cash flow statement.

Prepare Financial reports (For the purpose of this course we will prepare only 2)

Income statement

The report shows the balances of each of your income and expenditure accounts grouped into categories and sub-totalled to show Sales, Purchases, Direct Expenses and Overheads. Your Gross Profit and Net Profit figures are also shown.

Balance sheet

The Balance Sheet details what your business owns - your assets,and what it owes - your liabilities. The difference between the assets and liabilities - that is, your net assets or net worth, also appears on the report. The Balance Sheet report is cumulative, and shows both the current year’s figures and any values brought forward from the previous financial year.

e. On sage Line 50, Click on company, then financials. On the financial page, there are icons for P&L

and Balance sheet , click on each of them and follow the on screen prompts.

You will be able to get the P&L and the balance sheet after the key stages above .

Generally, you will prepare the Profit and Loss and Balance Sheet reports together because in a way they are twin reports. The Profit and Loss report shows what happened within your business over a certain period of time, and the Balance Sheet shows the resulting condition of the business at the end of that period. If you look at copies of the Profit and Loss and Balance Sheet reports you produce from Sage 50 Accounts for the same period, you can see that the Net Profit that appears at the bottom of the Profit and Loss report is the same as the Reserves value that appears in the Financed by section of the Balance Sheet. This is the link that ties the Profit and Loss to the Balance Sheet and shows the effects of that period’s trading on the overall position of the business.


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Financial statements

The only time you can be certain of the profit or loss of a business is when the business is sold or ceases to

exist. Only then, when all the debts are paid, can you compare the value of the assets left over plus what you

withdraw along the way to the cost of everything you invested

The truth though is, no one is going to wait the entire life of abusiness to find out how well a business has

performed! Owners, managers, investors, lenders, taxing authorities, and many other stake holders in a

business need to evaluate the progress of a business frequently and regularly.

Therefore, a business prepares financial statements at frequent regular intervals in order to ascertain the

profit or loss of the business.

Even though business operations are a continous process, accountants assume that the life of a business is

divided into regular, fixed time intervals. This assumption is called the periodicity assumption or time-

period assumption. Financial statements are prepared at the end of each time period. This is the only way

that the financial changes can be measured at regular intervals

Net income can only be calculated for a period of time. Dividing the life of a business in to equal, fixed time

periods such as years, quaters, or months make it possible to analyse the business performance over shorter

periods that ultimately are part of the entire life of a business. When the information is available like this, it

has the quality of timeliness. Timeliness is a quality that makes financial information more relevant and

useful. Timeliness is especially important to the owners and managers of a business. It is also very usefull for

comparative analysis of business performance.

The fixed time intervals into which a business life is divided are called accounting periods.

The table below summarises why accounting periods are needed.

Condition Measurement (balance sheet)

The condition of a business needs to be checkedat regular intervals.

Income measurement (income statement)

Net income or loss can only be determined for a specified period of time.

Timeliness Financial information is needed frequently and regularly

Comparability By making time periods equal, financial reports can be compared to analyse changes

Fiscal years

All companies prepare financial statements at the end of an accounting period of one year, called a fiscal

year.

When you first think about it, dividing the life of a business into regular time periods does not seem like a big

deal. You would think that it should not be especially dificult to calculate a company’s progress one year at a


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time (or quaterly, monthly, etc.). Simple as it looks, dividing the life of abusiness into regular time periods

actually brings complications.

The possibility of error and fraud becomes much greater.

The important issues that result from dividing the life of a usiness into time periods are

What is the best way to measure the progress of a business each period?

What elements are needed to measure progress (revenues & expenses)?

When should a revenue or expense be recorded?

How can we be sure that all revenues and expenses really do get recorded in proper periods?

To mitigate the above issues, accountants use Accrual Accounting Principles.

Under Generally Accepted Accounting Principles (GAAP), two rules tell us the correct time to record

(“recognise”) revenues and expenses. These principles are:

The revenue recognition principle for Revenues (also called the revenue principle): A revenue

must be recorded in the same accounting period in which it was earned.

The matching principle for Expenses : An expense must be recorded in the accounting period in

which it helped to create revenue.

Accountants use many different techniques to make sure that the principles above are put into effect.

Together, all the techniques for implementing the revenue and matching principles are called accrual basis

accounting. Accrual basis accounting records all revenue and expenses transactions in the correct accounting

periods.

Accrual accounting is the most accurate kind of accounting, and it is required by GAAP and it is the one we

will be using in perparing our financial statements and reports.

We shall now look at the key procecedures performed in preparing finacial statements from

the time business documents get into the finance department to the time they are filed and

the accounting period declared clossed and preparing for the next period starts. And the

cycle continues and continues for the life of the business

1. Analysis of documents: Classification, valuation and timing

Steps:

i. For every document that comes to your desk; check which component(s) of the accounting equation

relate to it (asset, liability, owners equity). Note which one of these will particularly be affected

(increased/decreased)

ii. Check the sterling value shown in the document and verify it with responsible budget holder or with

any supporting documents (GRN, LPO etc)

iii. Check the date of the document and especially check to find out the date upon which the transaction

is meant to cause a change in the accounting equation/financial condition of the business.

2. Process the document(Bookkeeping): Purchase ledger/sales ledger, bank reconciliation

procedures


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The Double-Entry System

The basic principle of double-entry bookkeeping is simple. Every time a transaction takes place - whether it’s a sale, purchase or other type of transaction - it consists of two sides. There is the entry on the account that 'gives' the money and the corresponding entry on the account that receives' it. Say your business takes a loan from the bank for £10,000. Remember the Accounting Equation introduced earlier: Assets = Liabilities + Owner’s Equity. You have borrowed the £10,000 from the bank and owe this amount back to the bank, so the loan is a liability to your company. In addition, now that your company has the £10,000, the money is an asset to the business. In a double-entry accounting system, every transaction affects at least two of your accounts, so you make at least two entries – hence the name. One entry is called a debit entry and the other is called a credit entry. Remember, Sage 50 Accounts makes this process easy and takes care of the double-entry automatically for you.

Adjusting entries

Adjusting entries are journal entries that are made at the end of an accounting period to make sure that:

- All revenue that belongs in that period, is recorded in that period, and

- All expensesthat belongs in that period is recorded in that period

Adjusting entries are needed because at the end of an accounting period, significant revenues and expenses

are often unrecorded for various reasons. Adjusting entries ensure that correct revenues and expenses

are recorded in the correct accounting periods.

The common qualities of adjusting entries are:

Adjusting entries:

Record previously unrecorded revenues and expenses

Are recorded together at the end of an accounting period

Are actually calculated after an accounting period is over

Affect at least one income statement and one balance sheet account

Do not affect the cash account

There are five basic types of adjusting entries. The table below gives you a summary of the five types of

transactions that cause the five basic types of adjustments. What all the transaction types have in common is

that they are sources of unrecorded revenues and expenses resulting from operations.

Event Transaction Type

Prepaid Expenses: Cash payments for future expenses that are

recorded as assets at the time of payment and used later

Unearned revenues: Cash receipts for future revenues that are

recorded as liabilities at the time of receipt and earned later

Depreciation: Using up of plant and equipment assets

Prepayments

(also called deferrals)

Accruals

Accrued revenues: Revenues earned but cash not yet received Accrued expenses: Expenses incurred but cash not yet paid


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Tip:

For prepayments (deferrals): Cash flows first, revenue or expense recorded later

For accruals: Revenue or expenses recorded first, cash flows later

A prepaid expense is an advance payment for future expense that is recorded as an asset at time of payment.

(Debit prepaid expense, credit cash) When the asset is used up later – usually within a year – an expense is

recorded

If you ever see the word “prepaid” in front of the word “expense,” the item is an asset. Do not be fooled

because the word “expense” is in the term “prepaid expense”. A prepaid expense is always an asset because it

will provide future benefits when some amount of the asset is later used up

Examples:

- Prepaid Insurance Expense

- Prepaid Rent expense

- Prepaid Interest Expense

How does a prepayment become an expense

Any amount of a prepaid item that has been used up becomes an expense. The expense is recorded by

making an adjustment entry at the end of the accounting period when you know how much of the asset has

been used. Sometimes, the use of a prepaid item occurs over one, two, or more accounting periods. At the end

of each accounting period, before the financial statements are prepared, the adjustment is recorded for the

amount of the asset used up (Debit the Expense with the adjustment, Credit the prepaid asset)

An Unearned Revenue is an advance payment received froma customer for future revenue that is recorded

as a liability at the time the cash is received (Debit cash, credit unearned revenue). An earned revenue

becomes a revenue later, when the goods or services are provided - usually within a year

An unearned revenue is always a liability.

How the unearned revenue becomes revenue

Whenever unearned revenue (a liability) has been earned, it must be reduced and recorded as revenue. The

revenue is recorded by making an adjustment entry at the end of the accounting period, when you know how

much of the unearned revenue has been earned (Debit liability – unearned revenue, credit Revenue with the

adjustment)

Depreciation is the process of allocating the cost of plant and equipment assets into expense, during their

estimated useful lives, in a systematic and rational way.

Prepaid

Expense

Unearned

Revenue

Depreciation Accrued

Revenue

Accrued

Expense


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In accounting, depreciation means a process of matching the expense against revenues. The purpose is to

record how much of the original cost of the asset is being used up each period as the asset helps the business

to generate revenue. This has nothing to do with whatever value an asset could be sold for.

Making the adjusting entry:

Just like other expense adjustments, depreciation expense is a noncash adjustment (Debit dereciation

expense – income statement, credit accumulated depreciation – balance sheet)

Accrued Revenues and Accrued expenses:

The word a accrual means a transaction in which:

- A revenue is earned but no cash has been received – Accrued revenue (an asset), or

- An expense is incurred, but no cash has been paid – Accrued expense (a liability).

Accrued revenues always create a need to record a new receivable (Debit accounts receivable, credit

revenue/sales)

For accrued expenses – Debit Expense, credit Accopunts Payable

a. Completing the Accounting Cycle

The end of an accounting period involves several additional tasks, which together have the ultimate

objectives of:

Providing timely and accurate financial statements, and

Making the accounting records correct and ready for the next period.

The objectives above are accomplished by preparation of adjusting entries as shown in the preceeding

sections, and by use of a worksheet (working trial balance)

A worksheet is a document that is used to organise information from accounting records, usually for the

purpose of simplifying the preparation of financial statements. It’s mostly used internally by accountants.

The worksheet and all other calculations used by accountants to prepare financial statements are called

working papers. These documents are kept available in files so that an accountant can always explain and

support all numbers on the financial statements.

Five steps in preparing a work sheet

Step 1. Prepare the trial balance on the worksheet

The worksheet always begins with a trial balance

Step 2: Calculate adjustments and enter them in Adjustments Column

When a worksheet is used, all the adjustments are first entered in the adjustments colums of the worksheet

before ever being jounalised. This allows the adjusting entries to be calculated, reviewed, and approved

before being entered into the permanent accounting records.


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The table below shows you the procedure for entering the adjusting entries on a worksheet.

Step 3: Enter Account Balances in the Adjusted Trial balance column

Procedure

1. On each line, to determine the amount that should go into the adjusted trial balance columns,

combine the amount in the trial balance columns with the amount in the adjustments column

2. When you are through, be sure that the total debits equal the total credits in the adjusted trial

balance column

Step 4: Extend the adjusted trial balance amounts into the financial statements columns

In this step, you identify and then separate the income statement accounts from the balance sheet

accounts. You place all the income statement accounts into the income statement and all the balance

sheet accounts into the balance sheet columns

If an item has a debit balance in the adjusted trial balance column, it is always extended to another

debit column. If an item has acredit balance in the adjusted trial balance column, it is always

extended to another credit column

Step 5: Total the financial statement columns and compute the net income or net loss

Step Action

1 Calculate an adjusting entry

2 Enter the debits and credits of the adjusting entry in

the adjustments column on the same lines as the

same lines as the name of the accounts that are of

the accounts that are affected. (you may add new

accounts as needed

3 Identify the debit and credit amounts of an

adjustment by writing the same letter “key” next to

each debit and credit

In real life, the calculations that support

each adjustment are in the same file as the

work sheet, and these calculations are on

pages that can be indexed by the same

letter. For example, if you wanted to know

all the calculations supporting adjustment

“(a),” you could find them on adjustments

page “(a),” following the worksheet.

4 Repeat STEPS 1-3 with every adjusting entry that is

needed

5 Total the adjustments column, and verify that total

debits equal total credits


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In this step, you calculate the totals of income statement columns and the balance sheet columns. You

should see the same difference between the totals of each type of column. This difference is the net

income or net loss.

The table below shows you the procedure for completing the worksheet by adding the financial

statements columns

3. Using the completed worksheet

At least three clear and useful results occur when period-end information is organised on a worksheet.

These three results are:

A source of finacial statements

A source of the adjusting journal entries

A source of the closing journal entries

The formal finacial statements are really the most important results of a period-end worksheet. After the

worksheet is completed, financial statements preparation is easy. The financial statement numbers are

simply copied from the income statement and balance sheet columns of the worksheet and transfered onto a

properly formatted and titled income statement and balance sheet. That’s all there is to it!

Step Action

1 Calculate the totals of the income statement debit and

credit columns, and of the balance sheet debit and credit

columns

IF.....

Step

THEN..... AND....

The income

statement

credit total is

greater than

the debit

total ...

Enter the

difference,

which is the net

income, on the

next line under

the debit

column total,

Enter the same

number on the

same line into

the credit side

of the balance

sheet column

The income

statement

debit total is

greater than

the credit

total ...

Enter the

difference, which

is the net loss,

on the next line

under the credit

column total,

enter the same

number on the

same line into

the debit side

of the balance

sheet

2 Calculate new totals for the income statement columns.

The two columns for income statement must have the

same total.

3 Calculate new totals for the balance sheet columns. The

two columns for the balance sheet must have the same

total.


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4. Preparing closing entries

The Concept of Closing

Closing the accounts refers to a procedure that occurs at the end of an accounting period in which the total of

current period changes in owners equity is transfered (“closed”) into the owners capital account. This is done

by specialised journal entries

In closing the accounts, it is important that you understand what temporary and permanent accounts are.

Temporary Accounts:

These are accounts that record the current period changes in owners equity. They are called temporary

accounts because they are accounts that are closed into the owner’s capital. They are also sometimes called

nominal accounts. These accounts are the revenue, expense and drawings accounts.

Permanent Accounts:

Asset, Liability, and capital accounts are called permanent accounts because they are never closed. These

accounts maintain continous balances. They are also called real accounts.

When are closing entries done?

Closing entries are made only after all other transactions and adjustments have been recorded. Closing

entries are the very last entries in an accounting period.

The purpose of closing accounts is to accomplish the three objectives below

Transfer the net income or net loss (revenues – expenses) of the current period into the capital

account

Transfer the balance of the owners drawings in the current period into the capital account.

Make sure that all the temporary accounts begin each new period with zero balances. This prevents

items of one period being confused with items of a different period.

The closing procedure

The closing procedure can be completed in the following four steps (manually)

Step 1: The balances of all the revenue accounts are totaled and entered into the credit side of the income

summary account

Step 2: The balances of all the expenses accounts are totaled and entered into the debit side of the income

summary account

Step 3: Transfer net income or net loss from income summary account to owners capital account [ if total

revenues are greater than total expenses in the income summary account, then it is a net income and it

is transfered to the credit side of the owners capital account. If total of revenues is less than total of

expenses in the income summary account, then it is a net loss and it is transfered to the debit side of the

owners capital account]

Step 4: The amount in owners drawings (salary, dividends, bonuses) account is transfered directly to the

debit side of the owner’s capital account.

The account entries ivolved in this procedure are called closing entries.


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The income summary account:

This account is used only during the closing process. You could say that it is the “most temporary” of the temporary

accounts because it has a balance only during the brief period while the accounts are being closed. Sometimes it is

called income and expense summary.

Finding Account balances for closing;

Three good sources:

The revenue, expense, and drawings account balances in the ledger after the adjustments have been posted

OR

The revenue, expenses, and drawing account balances in the adjusted trial balance. OR

Using the worksheet is the easiest way because all the temporary accounts, except the drawings account, are

listed on the worksheet in one easy location – in the icome statement column.

When closing the accounts manually, any account with a debit balance in the worksheet income statement column is

closd wih a credit. Any account with a credit balance in the income statement column is closed with a debit. The

drawing account is in the balance sheet debit column, and you close it with a credit.

Computerised accounting system

If you use a computerised accounting system, the computer will automatically do a closing procedure whenever you

wish [This is the month end or year end procedure in Sage Line 50 for example].

You do not need to look for any account balances, however, you must still understand what the computer is

supposed to be doing, so you can check the results – the analysis is your reposnsibilty not the computer’s!

How to run the year end in Sage Line 50 Accounts

To prepare to run the Year End option- Mandatory Procedures

1. Run Check Data

The Year End option calculates balances based on your transactions and the information held in your software records. It is therefore essential that your data is error free. Before running the Year End option, you should use the Check Data option to check the validity of your data files and, if necessary, correct any data corruption.

Note: If you have a multi-user licence, this is an exclusive program request area. This means that you must log all other users out before you can access this option.

2. Check your Chart of Accounts

During the Year End procedure Sage Accounts uses all layouts in the Chart of Accounts to establish which are the profit and loss nominal codes. The balances from the profit and loss nominal codes are then transferred to the Profit and Loss nominal code which is by default 3200.

To ensure that all profit and loss codes are represented it is important to check your Chart of Accounts, otherwise their balance is not cleared at the year end. and correct errors in your Chart of Accounts.


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3. Take two backups

Before running the Year End option, you should take two backups of your data and keep these in a safe place. Once the year end is run, the only way to go back to a pre year end position is to restore from one of these backups. You may need to do this to run reports, check accounts, or even run the Year End option again. We advise taking two backups as a precaution against loss or damage to your pre year end backup.

Optional Procedures:

a. Run the Month End

If you usually run the Month End option, before running the Year End option, you should run the month 12 month end. Open the Tools menu, choose Period End then choose month End. The month End window appears. Follow instructions on window(s) which will be displayed

b. Change Program Date

The Year End option posts journals to clear the balances on your profit and loss nominal codes. These journals must be dated on the last day of your financial year. Sage Accounts stores this date and automatically enters it in the Year End window. You can run either the Year End option with your program date set to the current date, or change the program date to be the last day of the financial year.

If you run the Year End option with the program date set to a date beyond the year end, the following message appears:

‘The current program date is outside your financial year. If you continue it may cause discrepancies in your accounts. Do you want to continue?’

To run the Year End option, click Yes, or to exit without running the Year End option, click No.

This message is a warning against running certain year end routines to the wrong date, for example running the clear audit trail into the new year or running the month end for month 12 with the wrong date.

If you run the Year End option with the program date set to be the last day of the financial year the following message appears:

‘You are about to process a Year End whilst in your current financial year. Are you sure you wish to continue?’

To run the Year End option, click Yes, or to exit without running the Year End option, click No.

This message is aimed at preventing you from running your Year End before you are ready.

Print Reports – If required, print the following reports:

Trial Balance Profit and Loss Balance Sheet Aged analysis reports for debtors and creditors Statements for customers and banks Bank Report, un-reconciled Day Books for customers, suppliers, banks and nominal Activity reports on all ledgers


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Audit trail Budget Analysis report Prior Year Analysis report

Note: If you are unsure which reports to print, please check with your Accountant.

To run the Year End option – Key steps to follow

1. Open the Tools menu, choose Period End then choose Year End.

The Year End window appears.

2. Complete the Year End window as follows:

Year End Date – Displays the last day in the current financial year. Current Date – Displays the current program date. Transfer Actuals to Budgets / Copy Current Actuals – To automatically set budgets based on income

and expenditure during the year for profit and loss nominal codes, select this option. These values are transferred as monthly figures.

Percentage Increase – If you want to set a target for the following year, enter the percentage increase you want to apply to your budgets here.

Year End Journals – Automatically displays the year end date. This is the date Sage Accounts uses to post the journals which clear your profit and loss nominal codes. Note: This date must be within the year you are about to complete, otherwise there will be discrepancies on your Profit and Loss report in the new financial year.

Output to – Displays the output options for the Year End report. This report details the journals automatically posted at the year end. You can choose one of the following:

Print – Select this option to output the report direct to your printer. File – Select this option to file the report to print later.

Tip: If you need to run this report again, you can run the Day Book: Nominal Ledger report as this report only picks up journals. Simply enter the appropriate transaction number range.

Sage Line 50 v9.xx and above, including Sage 50 Accounts – Archive Company Data before Year End – This option allows you to take a copy of your data at the pre year end point. You can then refer back to the archived data, either to run reports or analyse your previous year’s data.

Note: Archived data is read only and cannot be amended in any way.

1. To run the Year End option, click OK. Tip: If required, to cancel the routine, click Cancel.

When the year-end postings have been made, the software desktop appears.

The Year End option is now complete and you are ready to prepare for your new financial year.

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To prepare for the new financial year – Mandatory Procedures

To check the financial year start date

1. Open the Settings menu then choose Financial Year.

The Financial Year window appears and you should check that the date shown is the new financial year start date.

If the financial year start date is a year in advance, you have either run the Year End option twice, or have used the incorrect financial year start date during the previous year. To check this, you must restore from a backup taken before you ran the Year End option and check the financial year start date.

To check that the profit and loss nominal codes have cleared correctly

To produce a Trial Balance report for the brought forward period and ensure that there are no profit and loss nominal codes included, please refer to the steps below.

Open the Company module, from the Links pane click Financials then click Trial.

For Sage Accounts v11.xx and below – Open the Financials module then click Trial.

The Trial Balance window appears.

Complete the Criteria as follows: o In the Print Output window, select Printer o From the Period drop-down list, choose Brought Forward.

To print the report, click OK, then complete the Print window as required.

A trial balance prints displaying any nominal codes with a brought forward balance.

To prepare for the new financial year – Optional Procedures

Clearing Stock

Sage 50 Accounts and Sage Instant Accounts Plus v8.2 and above, and Sage Line 50 Accountant Plus and Financial Controller v8.1 and below, allows you to clear stock transactions from your product activity up to a specified date. The In Stock quantity is unaffected by this procedure. All transactions up to the date specified are removed except the following transaction types which remain if there is a quantity unused:

AI Adjustment In

MI Movement In

GI Goods In

Note: Clearing stock transactions affects any transactional product reports.

Clear the audit trail

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Clearing the audit trail removes fully paid and fully reconciled transactions from your audit trail up to a specified date. This means that you have fewer transactions to work with, making tasks, for example, printing reports and taking a backup quicker. Fully paid and reconciled transactions appear on the audit trail with Y in the paid column and either – (not applicable) or R (reconciled) in the Bank and VAT columns. Transactions that do not meet this criterion are not removed from the audit trail.

When transactions are removed, Sage Accounts posts opening balance journals to the nominal codes which have been cleared to ensure that the balances on these accounts are the same before and after clearing the audit trail. The date used for these journals is the date up to which you selected to clear.

Note: Removing transactions may affect transactional reports and statements that are run either for the period prior to the clear audit trail date, or for the current period and include a balance brought forward from the previous period.

Remove Customer, Supplier, Nominal or Bank Records

After running the Year End option and clearing the audit trail, you may want to remove old, or unused, accounts from your Customers, Suppliers, Nominal or Bank Account modules. To be able to remove an account there must not be any transactions on the activity, including deleted transactions

Remove unwanted invoices, sales orders or purchase orders

After running the Year End option you may want to delete old invoices, or in the case of Sage 50 Accounts Professional, sales orders or purchase orders. After deletion, if the data is compressed you will regain disk space taken by this old data saving you time backing up and running reports.

Compress the data files

If you have deleted records from within Sage Accounts, the relevant data file is not reduced in size until the Compress option is run on the selected data file. For example, if you delete one record from your Customers list, the size of the Sales.dta file which stores the Customer Records is not reduced until the Sales Ledger file is compressed.

You have successfully completed the Year End procedure in Sage Accounts.


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Theoretical background to what happens when you run the Year End option in Sage Line 50 Accounts

Profit and loss balances are cleared

When the Year End option is run, Sage Accounts checks all of the Chart of Accounts to establish which nominal codes are profit and loss codes. The balances, up to the end of the current financial year, on these profit and loss nominal codes are transferred to the Profit and Loss Account nominal code. This is 3200 by default and is in the Capital and Reserves section of the Chart of Accounts.

Any balances remaining on profit and loss nominal codes relate to transactions posted for the new financial year. The balance on the Profit and Loss Account nominal code is adjusted by the profit or loss from the financial year you have just closed.

Note: The Profit and Loss Account nominal code is a control account. This means that the yearend postings are automatically sent to this account. To check the Control Accounts, open the Settings menu, and then choose Control Accounts. In the Control Accounts settings, the Profit and Loss Control Account is called Retained Earnings

Balance sheet balances are brought forward to the new financial year

The balance sheet nominal code balances are carried forward into the new financial year. These balances are transferred to the brought forward boxes on the Nominal Records, and are included in the Year To Date values on the Balance Sheet report when calculated for a date in the new financial year.

Audit trail updated

The journals posted to clear the balances from the profit and loss nominal codes are added to the audit trail. The Year End option creates a report that lists these journals and can be printed or output to file to be printed later.

Nominal Records updated

On the Nominal Record Details tab, the value of any future dated transactions is transferred from the future bucket to the relevant month on the Actual column. The Actual monthly balances for the financial year that you are closing are transferred to the Prior Year columns on the Nominal Record. This enables you to print comparison reports in the new financial year. If you select, in the Year End window, to Transfer / Copy Actuals to Budgets, the Actual monthly balances are also transferred as the Budget values for your profit and loss nominal codes for the new financial year. If specified, a percentage increase is applied. This is an optional feature of the year end.

Product Records

The Actual Sales Value and Actual Quantity Sold values in each Product Record are transferred to the Prior Year columns. Any future dated transactions are transferred to the relevant monthly field in each Product Record.

Customer and Supplier Records

The values in the YTD (Year To Date) turnover box in all Customer and Supplier Records are transferred to the Prior YTD field. Any future dated transactions are transferred to the relevant monthly field in each Customer / Supplier Record.

Financial Year Start Date

The financial year start date is incremented by one year. To check the financial year start date, open the Settings menu then choose Financial Year.


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Refferences: Adjusting Entries ………………………………………Basic Accounting (Concepts, Principles & Procedures) 2007- Gregory R Mostyn Analysis of Documents ………………………………………Basic Accounting (Concepts, Principles & Procedures) 2007- Gregory R Mostyn Completing the Accounting cycle………………………………………Basic Accounting (Concepts, Principles & Procedures) 2007- Gregory R Mostyn Financial Statements ………………………………………Basic Accounting (Concepts, Principles & Procedures) 2007- Gregory R Mostyn Performing the year end: http://www.sageexperts.net/how-to-run-year-in-sage-line-50/ on Wednesday the 25th October 2011

Sage Line 50 Accounts

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