3.4.

Inventory Adjustment
The adjusting entry for inventory is made at the end of an accounting period to bring
the inventory account balance up-to-date and accurately reflect the actual amount of
inventory on hand. If the perpetual inventory system is used, the adjusting entry is
typically not needed, as the inventory account balance is updated continuously by the
automated system throughout the period with every purchase, sale, or another event
that affects the company‘s inventory. However, if the periodic inventory system is
used, an adjusting entry is necessary to adjust the inventory account balance to its
correct ending balance.
The adjusting entry for inventory typically involves two accounts; inventory and Cost
of Goods Sold (COGS). If the physical inventory count at the end of the period reveals
that the actual inventory on hand is less than the amount recorded in the accounting
system, the adjusting entry for inventory would be a debit to COGS and a credit to
inventory. This entry reduces the Inventory account to its actual ending balance and
increases the cost of goods sold account to reflect the cost of the inventory that was
sold but not yet recorded. The adjusting entry for inventory reduction will be as
follows:
DD/MM/YYYY Cost of Goods Sold (COGS) ------------------**
Inventory--------------------------------**
(Adjusting journal entry for a decrease in inventory)
Conversely, if the physical inventory count at the end of the period reveals that the actual
inventory on hand is more than the amount recorded in the accounting system, the
adjusting entry for inventory would be a debit to inventory and a credit to the cost of
goods sold. This entry increases the Inventory account to its actual ending balance and
reduces the Cost of Goods Sold account to reflect the cost of the inventory that was not
sold but was already recorded. This adjusting entry for inventory will be as follows:
DD/MM/YYYY Inventory------------------------------**
COGS----------------------------------**
(Adjusting journal entry for an increase in inventory)
IAS 2 provides guidance for determining the cost of inventories and the subsequent
recognition of the cost as an expense, including any write-down to net realizable value. It
also provides guidance on the cost formulas that are used to assign costs to inventories.
Inventories are measured at the lower of cost and net realizable value. Net realizable
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 value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.
The cost of inventories includes all costs of purchase, costs of conversion (direct labor
and production overhead) and other costs incurred in bringing the inventories to their
present location and condition. The cost of inventories is assigned by:
 specific identification of cost for items of inventory that are not ordinarily
interchangeable; and
 The first-in, first-out or weighted average cost formula for items that are
ordinarily interchangeable (generally large quantities of individually insignificant
items).
When inventories are sold, the carrying amount of those inventories is recognized as an
expense in the period in which the related revenue is recognized. The amount of any
write-down of inventories to net realizable value and all losses of inventories are
recognized as an expense in the period the write-down or loss occurs.
To record the ending inventory in an adjusting entry, you need to calculate the value of
the inventory first. The value of the ending inventory can be calculated using different
inventory valuation methods, such as First-In, First-Out (FIFO), Last-In, First-Out
(LIFO) this method is not applicable under IFRS, or weighted average cost. The ending
inventory is the value of inventory items that a company has on hand at the end of an
accounting period. The adjusting entry can then be made by either debiting cost of goods
sold and crediting inventory or debiting the inventory and crediting the cost of goods
sold depending on whether there was a decrease or an increase in inventory respectively.

Illustration
Assuming a dog food retailer has the following information as of March 22, 2023:
Beginning inventory = $10,000
Purchases during the period = $20,000
Sales during the period = $25,000
Assume that this retailer uses the First-In, First-Out (FIFO) inventory valuation method
where the first inventory gets sold first and the last inventory gets sold last. To determine
the amount that would be recorded in the adjusting entry for inventory, we have to first
calculate the ending inventory. To calculate the ending inventory, we need to assume
that the most recent inventory items purchased are still on hand, and the oldest items

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 have been sold. Therefore, the ending inventory will consist of the cost of the oldest
items in stock.
Using the FIFO method, we can calculate the cost of the ending inventory as Ending
inventory = Beginning inventory + Purchases during the period – Sales during the period
Ending inventory = $10,000 + $20,000 – $25,000 = $5,000
To record the ending inventory for this adjusting entry, we would credit the inventory
account for $5,000 and debit the cost of goods sold for $5,000 based on the accounting
debit and credit rules. By making this entry, we are adjusting the inventory and COGS
accounts to reflect the value of the ending inventory and the related cost of goods sold
for the period. When recorded in the company‘s journal, the entry would look like this:
23/3/2023 Cost of Goods Sold (COGS) --------5000
Inventory ---------------------------------5000

3.5. Final General Ledger Preparation

A general ledger is an accounting record that compiles every financial transaction of a
firm to provide accurate entries for financial statements. The double-entry bookkeeping
requires the balance sheet to ensure that the sum of its debit side is equal to the credit side
total. A general ledger helps to achieve this goal by compiling journal entries and
allowing accounting calculations.
General Ledger is a process of summarizing all the financial transaction of an account for
a given period in a prescribed format with the objective to ascertain the closing balance at
the end of the given period.
For mat of ledger
The general ledger can be organized and presented in either T-account format or
columnar format. Both formats aim to provide a clear representation of financial
transactions and their impact on various accounts. Let's explore each format:
I. T-Account Format
T-accounts are a visual representation of individual ledger accounts.
Each T-account resembles the letter 'T,' with the vertical line representing the account
title and the horizontal line dividing the account into two sides: the left side (debit) and
the right side (credit).
Debits are recorded on the left side, and credits are recorded on the right side.

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 The account balance is calculated by taking the difference between the total debits and
credits.

Example: Cash account

500 100

300 300

200 200

Balance
400

II. Columnar Format:

Columnar format involves organizing accounts in columns to record and calculate
transaction details. Columns include date, description, reference, debit amount, credit
amount, and balance.
Each transaction is recorded in a row, with debits in the debit column and credits in the
credit column.
The balance column is updated after each transaction.
Example:
Date Description Reference Debit (ETB) Credit Balance
(ETB) (ETB)
01/01/2023 Example ABC123 500 500
01/15/2023 Example INV-001 200 300
01/20/2023 Example XYZ456 700 1000
01/31/2023 Example INV-021 100 900

Both formats serve the purpose of providing a visual representation of financial

transactions, and the choice between them depends on the preference of the accountant or
the organization's accounting system. Columnar formats are often used in computerized
accounting systems for ease of data entry and analysis.

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 Figure 3. 1 columnar form of ledger

Explanation:
i. Each ledger account is divided into two parts. The left hand side is known as the
debit side and the right hand side is known as the credit side.
ii. The name of the account is mentioned in the top (middle) of the account.
iii. The date of the transaction is recorded in the date column.
iv. The word ‗To‘ is used before the accounts which appear on the debit side of an
account in the particulars column. Similarly, the word ‗By‘ is used before the
accounts which appear on the credit side of an account in the particulars column.
v. The name of the other account which is affected by the transaction is written
either in the debit side or credit side in the particulars column.
vi. The page number of the Journal or Subsidiary Book from where that particular
entry is transferred is entered in the Journal Folio (J.F) column.
vii. The amount pertaining to this account is entered in the amount column.
Process of general ledger preparation
In preparation of final general ledger there are two main processes
A. Posting
B. Balancing an account:
A. Posting
The process of transferring the entries recorded in the journal or subsidiary books to the
respective accounts opened in the ledger is called Posting. In other words, posting means
grouping of all the transactions related to a particular account at one place. It is necessary
to post all the journal entries into various accounts in the ledger because posting helps us
to know the net effect of various transactions during a given period on a particular
account.

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  The following steps show procedure of posting for an Account which has been
debited in the journal entry.
 Step 1. Locate in the ledger, the account to be debited and enter the date of the
transaction in the date column on the debit side.
 Step 2. Record the name of the account credited in the Journal in the particulars
column on the debit side as ―To..... (Name of the account credited)‖.
 Step 3. Record the page number of the Journal in the J.F column on the debit side
and in the Journal, write the page number of the ledger on which a particular
account appears in the L.F. column.
 Step 4. Enter the relevant amount in the amount column on the debit side.
 The following steps show procedure of posting for an Account which has been
CREDITED in the journal entry.
 Step 1. Locate in the ledger the account to be credited and enter the date of the
transaction in the date column on the credit side.
 Step 2. Record the name of the account debited in the Journal in the particulars
column on the credit side as ―By...... (Name of the account debited)‖
 Step 3. Record the page number of the Journal in the J.F column on the credit
side and in the Journal, write the page number of the ledger on which a
particular account appears in the L.F. column.
 Step 4. Enter the relevant amount in the amount column on the credit side.
Posting the Opening Entry
The opening entry is passed to open the books of accounts for the new financial year. The
debit or credit balance of an account what we get at the end of the accounting period is
known as closing balance of that account. This closing balance becomes the opening
balance in the next accounting year. The procedure of posting an opening entry is same as
in the case of an ordinary journal entry. An account which has a debit balance, the words
‗To balance b/d‘ are recorded on the debit side in the particulars column. An account
which has a credit balance, the words ―By balance b/d‖ are recorded in the particulars
column on the credit side. In fact, opening entry is not actually posted but the accounts
are merely incorporated in the ledger, if the ledger is a new one or old.

B. Balancing an account:

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 Balance is the difference between the total debits and the total credits of an account.
When posting is done, many accounts may have entries on their debit side as well as
credit side. The net result of such debits and credits in an account is the balance.
Balancing means the writing of the difference between the amount columns of the two
sides in the lighter (smaller total) side, so that the grand totals of the two sides become
equal.
Significance of balancing
There are three possibilities while balancing an account during a given period. It may be a
debit balance or a credit balance or a nil balance depending upon the debit total and the
credit total.
Procedure for Balancing
While balancing an account, the following steps are involved:
Step 1. Total the amount column of the debit side and the credit side separately and then
ascertain the difference of both the columns.
Step 2. If the debit side total exceeds the credit side total, put such difference on the
amount column of the credit side, write the date on which balancing is being done in the
date column and the words ―By Balance c/d‖ (c/d means carried down) in the particulars
column. Or
If the credit side total exceeds the debit side total, put such difference on the amount
column of the debit side, write the date on which balancing is being done in the date
column and the words ―To Balance c/d‖ in the particulars column.
Step 3 Total again both the amount columns, put the total on both the sides and draw a
line above and a line below the totals.
Step 4 Enter the date of the beginning of the next period in the date column and bring
down the debit balance on the debit side along with the words ―To Balance b/d‖ (b/d
means brought down) in the particulars column and the credit balance on the credit side
along with the words ―By balance b/d‖ in the particulars column.

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 Unit Four: End of Period Financial Reports Preparation
This unit is developed to provide you the necessary information regarding the
following content coverage and topics:
 Adjusted Trial Balance
 Revenue statement
 Balance sheet
 Closing entries
 Post-closing Trial balance
 Accounting errors
This guide will also assist you to attain the learning outcomes stated in the cover
page.
Specifically, upon completion of this learning guide, you will be able to:
 Prepare adjusted trial balance
 Prepare revenue statement
 Prepare balance sheet
 Record closing entries
 Prepare post closing trial balance
 Identify and correct errors

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 4.1. Adjusted Trial Balance

The adjusted trial balance is a financial statement that lists all the general ledger accounts
and their balances after adjusting entries have been made at the end of an accounting
period. Adjusting entries are necessary to ensure that the financial statements accurately
reflect the company's financial position and performance by accounting for items such as
accruals, deferrals, depreciation, and other adjustments.
In adjusted trial balance accounts are recorded as follow
 Assets (Debits): Cash, Accounts Receivable, Supplies, Prepaid Insurance, Equipment
 Liabilities (Credits): Accounts Payable, unearned revenue, salary payable, tax payable
 Equity (Credits): No direct equity account is shown, but it would include items like
owner's equity or retained earnings.
 Expenses (Credits): Salaries Expense, Rent Expense, Interest Expense, Utilities
Expense, Depreciation Expense, Insurance Expense
 Revenues ( credit): sales revenue, service revenue, rental income

4.2. Revenue Statement

Financial statements are comprehensive records of a company's financial activities and
position. They provide a summary of the company's financial performance and financial
position over a specific period, offering insights into its ability to generate profits and
manage its resources. The primary financial statements include the balance sheet, income
statement, cash flow statement, and statement of changes in equity.
Importance of Financial Statements:
a. Performance Evaluation: Financial statements help assess a company's profitability
and operational efficiency.
b. Investor Decision-Making: Investors use financial statements to make informed
investment decisions.
c. Creditworthiness: Lenders and creditors use financial statements to evaluate a
company's ability to repay debts.
d. Management's Assessment: Company management relies on financial statements to
gauge the effectiveness of business strategies.

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 In summary, financial statements are crucial tools for understanding a company's
financial health, performance, and overall viability. They play a vital role in decision-
making for investors, creditors, and company management.
An income statement also known as a profit and loss is one of the financial statement that
shows the income and expenses of a company for a specified time. Investors and business
managers use the income statement to determine the company‘s financial health.
Preparing a revenue statement under International Financial Reporting Standards (IFRS)
for small and medium-sized entities (SMEs) involves recognizing and reporting revenue
earned by the entity during a particular accounting period. The revenue statement is also
referred to as the income statement or profit and loss statement.

Format of Income statement

International Financial Reporting Standards (IFRS) provide a globally recognized
framework for financial reporting. The format of an income statement under IFRS is quite
similar to the general structure, with some specific terminology and classifications
adhering to IFRS principles.

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 XYZ Company
Profit loss statement
Dec31, 2023
Revenue
Sales revenue --------------------------------------------------------------------------------**
Service revenue ------------------------------------------------------------------------------**
Other operating revenue --------------------------------------------------------------------**
Total revenue ---------------------------------------------------------------------------------**
Cost of sales ---------------------------------------------- (**)
Gross profit -----------------------------------------------------------------------------------**
Operating expenses
Selling expenses -----------------------------------------**
General and administrative expenses------------------**
Research and development expenses------------------**
Other operating expense --------------------------------**
Total operating expenses------------------------------ (**)
Operating Profit/Loss-------------------------------------------------------------------------**
Finance cost -------------------------------------------- (**)
Operating Profit/Loss Before tax-----------------------------------------------------------**
Income tax expenses-------------------------------------- (**)
Operating Profit/Loss for the period -------------------------------------------------------**
Earnings per share
Basic Earnings per share --------------------------------------------------------------------**
Diluted Earnings per share -------------------------------------------------------------------**

Explanation:
Revenue: Recognizes income generated from primary business activities.
Cost of Sales: Represents direct costs attributable to the production of goods or services
sold.
Gross Profit: Calculated as total revenue minus cost of sales.
Operating Expenses: Includes selling expenses, general and administrative expenses,
research and development expenses, and other operating expenses.

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 Operating Profit (Loss): Obtained by subtracting total operating expenses from gross
profit.
Finance Costs: Reflects interest and other costs related to borrowing.
Profit (Loss) Before Tax: The result after deducting finance costs from operating profit.
Income Tax Expense: Represents the tax payable based on applicable tax rates.
Profit (Loss) for the Period: Net income or loss after accounting for taxes.
Earnings per Share (EPS): Indicates the portion of profit attributable to each
outstanding share of common stock.

Figure 4. 1Preparation of financial statement manually and digitally

4.3. Balance Sheet

According to IFRS a Balance sheet is referred to as Statement of Financial position. This
brings out more clearly the role played by the statement. Financial position is a
systematic report consisting of assets, liabilities and capital of the company for a certain
period.
The purpose of a balance sheet is to show the financial position of a company over a
period, usually at the end of a fiscal year or calendar year.
The balance sheet in financial statements provides a useful basis for:
 Calculating the rate of return
 Assess the company's capital structure
 Establish liquidity and financial flexibility

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 Financial position contains three main parents
I. Assets
II. Debt/Liabilities
III. Capital
I. Assets are can be tangible and intangible assets owned, including expenses that have
not been allocated or costs that will be allocated in the future, and are divided into:
a. Current assets are cash and other assets that can be liquidated or sold within one
year.
b. Fixed assets are assets that are physically visible (concrete) and are used in
operations, are permanent and cannot be used up in one cycle of activity or one year.
c. Intangible fixed assets are assets that are not physically visible, but have value and
are used in company activities.
d. Other assets
II. Debt is the company's obligations to other parties related to unfulfilled finances
originating from creditors. Debts or liabilities can be divided into:
a. Current liabilities/short term debts are financial obligations which are repaid within
one year from the balance sheet date.
b. Long-term debt is a financial obligation whose repayment period exceeds one year.
III. Capital is the right or property of the owner of the company which is allocated for
the sustainability of the company.
As per IFRS/IAS 1 requires that in case of a loan liability, if any condition of the loan
agreement which was classified as non -current is breached on or before the reporting
date, such loan liability should be classified as current, even if the breach is rectified after
the balance sheet date.
Statement of Financial position Format
Based on how the statement of financial position components presented Statement of
Financial position is presented in two main formats.
I. Vertical Format
II. Horizontal Format

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 4.4. Closing Entries
All temporary accounts such as Revenues, expenses and drawing /dividend account are
used to accumulate effects of some transaction on owner‘s equity account for a specific
period. At the end of the accounting period the balances of revenue and expense accounts
are summarized in one another temporary account called the income summary. The
balance in the income summary is transferred/closed to the capital (owner‘s equity)
account. The balance on the drawing /divided account is directly closed to the capital
(retained earnings account).

The process of transferring balances of temporary accounts to the capital account is called
closing entry; and these entries should be posted to the respective ledgers after
journalizing. This closing of accounts is used to transfer net income or net loss and
drawing /dividend to capital/retained earnings, account. Moreover; it is used to reduce the
balance of temporary accounts to zero so that they will be ready for the next accounting
period.

To illustrate assume a shopping service named by ABG-shopping service, the closing

entries are journalized on the journal and posted to the respective ledgers. The entries to
close the temporary accounts are summarized as follows:

Income summary…………………………………..xxxx

Expenses (all by name/list) …………………………..xxxxx

This is to close the expenses accounts

Revenue ……………………………………………… xxxx

Income summary……….…………………………………xxxx

This is to close the revenue account

Capital ………………………………………………. xxxxxxx

Drawing ………………………………………………..xxxxxx

This is to close the drawing account

Finally, the balance on the income summary account will be closed to the capital account
either as debit or credit it depending on its balance.

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 4.5. Post-closing trial balance:
The post-closing trial balance is a financial statement that lists all the general ledger
accounts and their balances after the closing entries have been made. Closing entries are
necessary at the end of an accounting period to reset the temporary accounts (revenue,
expense, and dividend accounts) to zero and transfer their balances to the permanent
accounts (asset, liability, and equity accounts).
The post-closing trial balance reflects only the permanent accounts, as the temporary
accounts have been closed out. The closing entries transfer the balances from revenue and
expense accounts to Retained Earnings, and these temporary accounts are then reset to
zero.
The post-closing trial balance provides a starting point for the next accounting period,
with all temporary accounts set to zero and only permanent accounts carrying forward
their balances. It ensures that the accounting equation (Assets = Liabilities + Equity)
remains in balance.
Post closing trial balance Format
The post-closing trial balance sheet includes a header that lists the company name, name
of the trial balance and the dates of the reporting period as well as columns that may
include:
 Account numbers
 Account names/descriptions
 Debits and Credits

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 Figure 4. 4 Post closing trial balance format

4.6. Accounting Errors

An accounting error is an error in an accounting entry that was not intentional. When
spotted, the error or mistake is often immediately fixed. If there is no immediate
resolution, an investigation into the error is conducted. An accounting error should not be
confused with fraud, which is an intentional act to hide or alter entries for the benefit of
the firm. Although there are numerous types of errors, the most common accounting
errors are either clerical mistakes or errors of accounting principle.
4.6.1. Types of Accounting Errors
There are numerous types of accounting errors, and some of the most common mistakes
are listed below.
Error of Original Entry
An error of original entry is when the wrong amount is posted to an account. The error
posted for the wrong amount would also be reflected in any of the other accounts related
to the transaction. In other words, all of the accounts involved would be in balance but for
the wrong amounts.
Error of Duplication

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 Error of duplication is when an accounting entry is duplicated, meaning it's debited or
credited twice for the same entry. For example, an expense was debited twice for the
same amount would be an error of duplication.
Error of Omission
An error of omission is when an entry wasn't made even though a transaction had
occurred for the period. For example, an account payable, which is the short-term debts
that companies owe suppliers and vendors, is not credited when goods were purchased on
credit. This is common when there are many invoices from vendors that need to be
recorded, and the invoice gets lost or not recorded properly.
An error of omission could also include forgetting to record the sale of a product to a
client or revenue received from account receivable. Accounts receivables reflect the
money owed by customers to a company for products sold.
Error of Entry Reversal
Error of entry reversal is when the accounting entry is posted in the wrong direction,
meaning a debit was recorded as a credit or vice versa. For example, cost of goods sold,
which contains raw materials and inventory, is credited instead of debited and finished
inventory is debited instead of credited.
Error of Principle
Error of accounting principle occurs when an accounting principle is applied in error. For
example, an equipment purchase is posted as an operating expense. The operating
expenses are the day-to-day expenses and wouldn't include a fixed-asset purchase. Also,
asset purchases should be recorded on the balance sheet while operating expenses should
be recorded on the income statement.
Error of Commission
Error of commission is an error that occurs when a bookkeeper or accountant records a
debit or credit to the correct account but to the wrong subsidiary account or ledger. For
example, money that has been received from a customer is credited properly to the
accounts receivable account, but to the wrong customer. The error would show on
the accounts receivable subsidiary ledger, which contains all of the customers' invoices
and transactions.
A payment to a vendor that's recorded as an accounts payable, but to the wrong invoice or
vendor is also an error of commission. The error would show as posted to the wrong
vendor on the accounts payable subsidiary ledger.

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 Compensating Error
Compensating error is when one error has been compensated by an offsetting entry that's
also in error. For example, the wrong amount is recorded in inventory and is balanced out
by the same wrong amount being recorded in accounts payable to pay for that inventory.
How to Correct Accounting Errors

Often, adding a journal entry (known as a ―correcting entry‖) will fix an accounting error.
The journal entry adjusts the retained earnings (profit minus expenses) for a certain
accounting period. Correcting entries are part of the accrual accounting system, which uses
double-entry bookkeeping.
 For example, $1000 worth of salaries payable wasn‘t recorded (an error of omission).
To make the correction, a journal entry of $1000 must be added under
―salary expense‖ (debit) and $1000 added as ―salary payable‖ (credit).
Errors from the previous year can affect your current books. The way around this is to add
backdated correcting entries.
 For example, the mistake in the previous example was made in 2017. To make the
correction, add the $1000 debit and credit dated December 31, 2017.
Reconciliations will also reveal many types of errors. You should perform reconciliations on
a monthly and yearly basis, depending on the type of reconciliation. Bank reconciliations
can be done at month end while fixed asset reconciliations can be done at year end.
To do a bank reconciliation, you need to first balance your cash account—small businesses
typically record payments and receipts in a cash book. The debits and credits should balance.
Then compare them to your bank statement.
If your cash account and bank statement are showing different figures, it‘s time to check
each transaction on both sides. This way, you‘ll see whether the bank made a mistake or
recorded a transaction in a different month (and different monthly statement) than you did.
Or you‘ll realize there‘s an accounting error on your end.

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