The preparation of financial statements

What the topic requires

These are the requirements for this topic, paraphrased from the official specification.

• Prepare income statements to show gross profit and profit for the year, and statements of financial position to show assets, liabilities and equity.
• Understand partnerships and the nature of a limited liability partnership. Apply Section 24 of the Partnership Act 1890 for salaries, profit sharing and interest. Prepare appropriation accounts, current accounts, capital accounts and the statement of financial position.
• Calculate profit from the change in equity, find revenue and purchases using control accounts, and prepare statements from incomplete records.
• Explain profitability and liquidity. Calculate and interpret gross profit percentage, profit for the year as a percentage of revenue and ROCE. Calculate and interpret the current ratio and liquid (acid test) ratio.
• Distinguish raw materials, work-in-progress and finished goods inventories and prepare manufacturing accounts showing prime cost, production cost and total cost.

How it is examined

This topic is assessed in Paper 2, which lasts 1 hour 15 minutes and carries 50 marks. It builds on topics 1 to 3 as well, so the earlier papers' skills are used here too.

Sources: Pearson Edexcel International GCSE in Accounting (4AC1) specification (FT Sept 2017) (Issue 1, October 2016), pages 7, 25. See all sources.

Slips our teachers see most in this topic

These come from marking student work in lessons, not from the board.

• Dividing profit by the profit-sharing ratio before applying salaries and interest.
• Mixing up gross profit percentage and profit for the year as a percentage of revenue.
• Leaving the commentary until the last minute.

If these slips look familiar, a teacher can go through your child's answers on the preparation of financial statements and fix the habit behind each one. Book a trial class.

A teacher's note

Topic 4 is Paper 2 territory: two multi-part questions that ask students to prepare, analyse or evaluate statements. Our teachers practise it as a pair of timed tasks, each with a layout, a set of adjustments and a short commentary. The absence of limited company and club statements from the content list lets us spend that time on getting partnerships and incomplete records secure.

Where this sits on the other boards

Our teachers' map of the same ideas in the other documents (an editorial mapping, with the official reference shown):

• Sole trader financial statements: Cambridge 5.1 (p. 15); OxfordAQA 3.4 (p. 15).
• Partnership financial statements: Cambridge 5.2 (p. 16); OxfordAQA 3.4 (p. 16).
• Manufacturing accounts: Cambridge 5.4 (p. 17); OxfordAQA 3.4 (p. 17).
• Incomplete records: Cambridge 5.6 (p. 17); OxfordAQA 3.4 (p. 17).
• Accounting ratios: Cambridge 6.1 and 6.2 (p. 18); OxfordAQA 3.5 (p. 18).

Keep going

• All Edexcel 4AC1 topics

Official reference: Pearson Edexcel International GCSE in Accounting (4AC1) specification (FT Sept 2017) (Issue 1, October 2016), page 21. See all sources.