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Notes

ACCA Paper F3
Financial Accounting
For exams in 2010

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ExPress Notes

ACCA F3 Financial Accounting

Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Financial statements Objectives of financial reporting Sources of financial information Double entry bookkeeping: the debits and credits Tangible non-current assets Intangible non-current assets Inventory and purchases Receivables and payables Bank reconciliations Long term finance Accruals and prepayments Provisions and contingencies Sales tax Trial balances and correction of errors Suspense accounts Incomplete records Limited companies Statements of cash flow Partnership accounting Events after reporting date, errors and estimates

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ExPress Notes

ACCA F3 Financial Accounting

START About ExPress Notes


We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. Its a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

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ExPress Notes

ACCA F3 Financial Accounting

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ExPress Notes

Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand. ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it! ACCA online past exams ACCA F3 Financial Accounting

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ExPress Notes
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ACCA F3 Financial Accounting

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ExPress Notes
Chapter1
ACCA F3 Financial Accounting

FinancialStatements

START The Big Picture


Financialstatements(morecolloquiallycalledaccounts)areacrucialpartofmanagingabusiness andreportingtoshareholders.Asetoffinancialstatementswillneedtobeproducedatleast annuallyforpresentationtoexternalstakeholders,butgenerallymuchmorefrequentlyfor managementcontrolwithinthebusiness. Frequentandaccuratefinancialstatementscanaddagreatdealtotheefficientrunningofa business. Asetoffinancialstatementsisproducedperiodically(oftenonceayearforsmallerbusinessesbutas frequentlyastheuserswantthem).Afullsetoffinancialstatementsforalimitedcompany comprisesanumberofstatements: Astatementoffinancialposition,generallycalledabalancesheet.Thislistsalltheassets andliabilitiesofthebusinessplustheequityofthebusiness(whichexplainswherethe assetsandliabilitiescamefrom).Thestatementoffinancialpositionisasnapshotofthe assetsandliabilitiesofabusinessatamomentintime. Astatementofcomprehensiveincome,oftenreferredtoasprofitandlossaccount.This showsallthegainsandlossesthatthebusinesshasexperiencedintheperiod.The statementofcomprehensiveincomeisarecordofwhathappenedoveraperiodtothenet assetsofabusiness.

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ExPress Notes
Astatementofcashflows,whichshowswherethecashandshorttermassetsverysimilar tocashcamefromandwentdoduringtheperiod.Incomeisntalwaysthesameascash,as wellseelater. Notestothefinancialstatements,whichgivefurtherdetailtoreaderswhowanttoknow morethanthesummarystory.
ACCA F3 Financial Accounting

StatementoffinancialpositionofSoleTraderXat30June20x1 ASSETS $ $ Noncurrentassets Licencetooperate 10,000 Landandbuildings 35,000 Officeequipment 20,000 Motorvehicles 30,000 Fixturesandfittings 10,000 105,000 Currentassets Inventory 20,000 Tradereceivables 13,000 Less:allowancefordoubtfulreceivables (1,000) 12,000 Prepayments 4,000 Cashatbank 3,000 Cashinhand 2,000 Totalassets 146,000 EQUITYANDLIABILITIES Capital Initialcapitalintroduced 30,000 Totalcumulativecomprehensiveincomeat1July20x0 85,700 Less:Cumulativewithdrawalsat1July20x0 (24,000) Totalequityat1July20x0 91,700 Totalcomprehensiveincomeinthecurrentperiod 16,000 Withdrawalsinthecurrentyear (8,000) Totalequityat30July20x1 99,700 Noncurrentliabilities Bankloans 32,000 Currentliabilities Bankoverdraft 3,300 Tradepayables 8,000 Accruals 3,000 Totalliabilities 46,300 Totalequityandliabilities 146,000
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ExPress Notes

ACCA F3 Financial Accounting

Principalfeaturesofthestatementoffinancialposition: Itbalances,withthetotalassetsequallingequity(ieownersinterest)plusliabilities Eachsectionisconventionallywrittenintermsofincreasingliquidity NoncurrentassetsandliabilitiesareonesthatareexpectedtoremainontheSOFPnext year.Currentassetsandliabilitiesareexpectedtobeuseduporpaidwithinthecoming year. ASOFPmayberearrangedintoanumberofways.IAS1showsaSOFPasgivenabove: Totalassets=Equity+totalliabilities. Equallyvalidlytherefore: Totalassetstotalliabilities=Equity Giventhatequity=capital+cumulativeprofitcumulativewithdrawals,thentheequationcouldbe writteninanynumberofwayssuchas: Totalassetstotalliabilities=Capital+cumulativeprofitcumulativewithdrawals Or Cumulativeprofit=Totalassetstotalliabilitiescapital+cumulativewithdrawals. ThisissometimescalledtheaccountingequationandoftencomesupintheF3exam.Thetaskis todropinthefiguresthatyouknowandfindthemissingfigure,whateveritmightbe.
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ExPress Notes

ACCA F3 Financial Accounting

Statementofcomprehensiveincomefortheyearended30June20x1 $ $ Salesrevenue 152,000 Costofsales Openinginventory 30,000 Purchasesofinventory 80,000 Deliverycostsinwards 10,000 Closinginventory (20,000) (100,000) Grossprofit 52,000 Sundryincome 3,000 Discountsreceived 2,000 57,000 Less:Expenses Deliverycostsoutwards 3,000 Depreciation 6,000 Discountsallowedtocustomers 1,000 Electricity 4,000 Irrecoverableanddoubtfuldebts 2,500 Mobilephones 500 Motorexpenses 2,500 Rent 9,000 Telephoneandinternet 1,500 Wagesandsalaries 12,000 (42,000) Profitfortheperiodbeforetax 14,000 Othercomprehensiveincome: Revaluationgainonproperty 2,000 Totalcomprehensiveincomeintheperiod 16,000 Youmayberequiredintheexamtocalculaterevenue,costofsales,grossprofitandtotal comprehensiveincomefromgivendata.
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ExPress Notes

ACCA F3 Financial Accounting

Unusualitems Sometimes,itisnecessaryforoneoffitemstobedisclosedseparatelyinthefinancialstatementsif theyareverylargeorarisefromanunusual,oftennonrecurring,source.Typicalexamplesmightbe writeoffofanunusuallylargedebtasirrecoverable,orbusinessrelocationcosts.Disclosingit separatelyallowsreadersoftheaccountsamoreindepthunderstandingofwhatthebusinessis doing.

KEYKNOWLEDGE Elementsoffinancialstatements

Therearefiveelementsoffinancialstatements,fromwhichallfinancialstatementsareproduced. ThesedefinitionsareveryusefulthroughoutyourACCAstudiesandcouldeasilybepartofa questioninpaperF3. Elementsofthestatementoffinancialposition: Anassetisaresourcethatiscontrolledbyanentityasaresultofpasteventsandfrom whichfutureeconomicbenefitsareexpectedtoflowtotheentity. Aliabilityisapresentobligationoftheentityarisingfrompastevents,thesettlementof whichisexpectedtoresultinanoutflowfromtheentityofresourcesembodyingeconomic benefits. Equityistheresidualinterestintheassetsoftheentityafterdeductingallitsliabilities. Dependingonthetypeofbusiness,thismaybecalledjustcapital(soletrader),partners currentaccount(partnership)orsharecapitalandreserves(foralimitedcompany).Fora limitedcompany,reservesshowthenetcumulativegainsabovecumulativelosses,lessall dividendspaid.Thisthereforeexplainsthedifferencebetweenwhatthenetassetswere whenthesharecapitalwasoriginallypaidinandwhatthenetassetsareatthereporting date. Elementsofthestatementofcomprehensiveincome: Incomeisanincreaseineconomicbenefitsduringtheaccountingperiodintheformof inflowsorenhancementsofassetsordecreasesofliabilitiesthatresultinincreasesin equity,otherthanthoserelatingtocontributionsfromequityparticipants.
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ExPress Notes
Anexpenseisadecreaseineconomicbenefitsduringtheaccountingperiodintheformof outflowsordepletionsofassetsorincurrenceofliabilitiesthatresultindecreasesinequity, otherthanthoserelatingtodistributionstoequityparticipants.
ACCA F3 Financial Accounting

Notethatincomeandexpenditurearedefinedeffectivelyasthereasonthatachangeinnetassets happened.

KEYKNOWLEDGE Relationshipbetweenthestatements:thebusiness equation

Anincreaseinnetassetsofabusinesswillcomefromamixtureofthesesources: Totalcomprehensiveincomemadeintheperiod(aprofitwillincreasenetassets) Newcapitalintroducedbytheowner(willalwaysincreasenetassets) Withdrawalsmadeintheperiod(willalwaysreducenetassets). Thisissometimescalledtheaccountingequationorthebusinessequation.Itisafrequentexam questionandcanbesummarised: Closingnetassets= Openingnetassets+totalcomprehensiveincomeintheperiod+new capitalintroducedintheperiodwithdrawalsintheperiod. Thisisalsoafrequentexamquestion,withsomefiguresgivenandtheothershavingtobededuced. Rememberthatnetassets=equity+liabilities,bydefinition.Sonetassetsmaybegivenina questionseparatelyasequityandliabilities.

Separateaccountingentity Evenwithasoletrader(apersonwhorunsabusinessontheirown,butthebusinesshasneverbeen setupformallytobeaseparatelegalidentity),thereisadistinctionbetweenpersonalincome/ expensesandbusinessincome/expenses.Theaccountswilllargelybemaintainedsothatthesole tradercanreportbusinessprofitstothetaxauthority.Personalexpendituresuchaspersonal holidaysisnotdeductibleagainsttax!Theaccountantwillthereforeonlyrecordtransactionsthat areconsideredtobelegitimatebusinesstransactions;personaltransactionswillbeignored.In smallerbusinesses,oneofthefirststepswhenproducingaccountingrecordsforclientsisto separatethebusinesstransactionsfromthepersonal,asthelatterwillnotberecordedanywhere.


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ExPress Notes

ACCA F3 Financial Accounting

Soletraders,partnershipandlimitedcompaniesWelllookattheseinmoredetailineachchapter, butheresasummary: Soletrader Partnership Limitedcompany Numberofinvestors 1(thesoletrader!) Normallylimitedto Canbebetween1and about20 anunlimitedlarge number Mustproduce Yes Yes Yes accountsforthetax authority No Maybe,normallynot Yes Mustproduce accountstofilewith thecommercial register Oftenthenamesofthe MustendLtd(if Businessname Normallyjustthe originalpartners.Few privatelimited nameoftheowner tradingasthename legalformalities company)orplc(if ofthebusiness publiclimited company) Canoffersharestothe No No Yes,ifaplc.NoifLtd. public? EquitypartoftheSOFP Initialcapital Eachpartners Sharecapital capitalaccount Cumulative Reserves: Eachpartners profit (revaluation current reserve, Cumulative account(ie retained withdrawals earnings,etc). cumulative shareofprofit lesscumulative withdrawals)

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ExPress Notes
Chapter2
ACCA F3 Financial Accounting

Objectivesoffinancialreporting

START The Big Picture


Financialreportingisthebusinessofcollectingfinancialinformation,analysing,summarisingitand presentingitinausefulformtoawiderangeofdifferentusers.Differentuserswillhavedifferent objectivesandthereforeslightlydifferentneeds.Financialstatementsareaimedatgivinguseful informationtoawiderangeofdifferentusers,thoughtheinvestoristhemostsignificantuser. Forfinancialinformationtobeuseful,itmustexhibitanumberofcharacteristics.Itsimportantto understandwhatthesearebecauseyoumaybeaskedforadefinitionofthemintheexam. Qualitativecharacteristic Ourdefinition Fairpresentation Itemsaredescribedinaccordancewiththeirtruenature.Forexample, loansrepayablewithinsixmonthsareclassifiedascurrentratherthan noncurrent. Thebusinessisexpectedtotradeintotheforeseeablefuture.This meansthatassetswillnothavetobesoldinahurry,whichwouldbe likelytoresultinsignificantimpairmentsinvalue. Akeyconceptcoveredinchapter[x].Itmeansrecordingtransactionsin theperiodwhentheyhappened;notnecessarilywhenthecashwas

Goingconcern

Accruals
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ExPress Notes
settled.Italsomeansmatchingcostsandassociatedrevenues. Consistency Itemsshouldbereportedthesamewaybetweenperiods,sothatits possibletomakemeaningfulcomparisonsbetweenyears.Similar transactionsmustbereportedthesamewaywithinthesame accountingperiod. Materialitymeanslargeenoughtoinfluencetheusersopiniononthe financialstatements.Immaterialinformationshouldnotbedisclosed,as itsadistraction.Materialinformationmustbepresentedaccurately andfairly. Irrelevantinformationisadistractionandshouldnotbepresented. Informationisuselessifitsnotconsideredtobereliable.Eganexternal valuationofpropertyismorereliablethanabiaseddirectorsvaluation. Itemsshouldbedescribedinaccordancewiththeirtruenature.Egan expenseforrepairsshouldnotbeclassifiedasresearchcosts,even thoughresearchcostsaremorefavourablyviewedbyinvestors. Itemsshouldbereportedinaccordancewiththeircommercial substance,ratherthantheirlegalform.Egifasaleismadeoncreditbut legaltitleremainswiththeselleruntilthegoodsarepaidfor,itshould stillberecordedasasale/purchaseatthetimeofthetransaction,since thisiswhentheobligationarises. Unbiasedneitherexcessivelyoptimisticnorexcessivelyprudent. Conservatism.ThisisnolongeracoreconceptinIFRSaccounting,but broadlylossesshouldberecognisedmorereadilythangains. Allinformationthatneedstobepresentedinordertogiveafullpicture hasbeenpresented. Financialstatementsthisperiodshouldbepresentedusingsimilar principlestopreviousyears,sothatvalidcomparisonsmaybemade. Companyaccountsshouldbecomparablewitheachother.Thismeans thatifacompanychangesitsaccountingpolicy,itmustrestateits previousyearsaccountsusingthenewaccountingpolicy,inorderto facilitatecomparisonbetweenyears. Informationshouldbepresentedinawaythatuserscanunderstand. Excessivecomplicationreducesusefulness. Seechapter1.Evenifthereisnoseparatelegalentity,aswithasole trader,thebusinessisstillconsideredtobeseparatetoitsownersfor accountingpurposes.
ACCA F3 Financial Accounting

Materiality

Relevance Reliability

Faithfulrepresentation

Substanceoverform

Neutrality Prudence

Completeness

Comparability

Understandability

Businessentityconcept

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ExPress Notes

ACCA F3 Financial Accounting

Sometimes,itsnotpossibletodeliverallofthesedesirablecharacteristics.Forexample,aninvestor isprincipallyinterestedinfutureprofits,sothisiswhatisrelevanttothem.However,estimatesof futureprofitareunreliable,sohistoricalinformationisgiven,eventhoughitislessrelevant.

KEYKNOWLEDGE Historicalaccounting

Accountingisderivedfromrecordinginformationabouttransactionsthathavehappened.This meansthatassetsarerecordedattheirhistoricalcost;iewhatthebusinesspaidforthem.Thishas theadvantageofbeingobjectiveandrelativelyeasy,buthasanumberofdisadvantages,including: Itcangiveoutofdateassetvaluationsforlonglivedassets Thiscanresultinanunrealisticallylowdepreciationcharge Profittrendscanbemisleading(egaprofitgrowthof10%peryearisntsoimpressiveasit firstseemsifinflationis12%peryear!) Wheretheressignificantinflationandinventoryisheldforalongtime,profitcanbe reportedsimplybymatchingtodaysrevenueswithyesterdayscosts. Therearesomelargeadvantagesofhistoricalcostaccounting,however;principallythefactthat peopleunderstanditanditisobjective. Duringperiodsofmodestinflation,theweaknessesofhistoricalcostaccountingaregenerally outweighedbyitsadvantages. Therearealternativesystemsofaccounting,suchasreplacementcostaccounting.Replacement costaccountingrecordsinventoriesintheSOFPandatthepointofsaleatthecostthatwouldbe incurredtoreplacethemtoday.Thishasmanyadvantagesbutiscomplicatedtoapplysoisnot commoninpractice.YouwillonlyhavetoapplyhistoricalcostaccountinginthepaperF3exam.

KEYKNOWLEDGE Regulationoffinancialreporting

Someentitieshavetoreportunderregulatedaccountingstandards.Differentcountriesmayhave theirownsystemsofGAAP(generallyacceptedaccountingpractice)ormayfollowInternational FinancialReportingStandards(IFRS)orIFRSforSMEs(SMEmeanssmallerandmediumsized enterprises).


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ExPress Notes

ACCA F3 Financial Accounting

Itisamatterofnationalregulationwhichfinancialreportingstandardsanentitymustusewhen producingtheirfinancialreports.Largeplcswillhavetoreportunderamuchmoreextensive financialreportingframeworkthansoletraders. ThereareanumberofbodiesthatyouneedtobeawareofforthePaperF3exam.Theirrolesare givenbelow. IASCF:theInternationalAccounting Standards ThishasrecentlybeenrenamedtheIFRSFoundation.The Foundationismadeupoftrustees,whoappointthe membersofthebodiesbelow. TheIASBissuesInternationalFinancialReportingStandards andtheIFRSforSMEs.Itemploysapermanentstaffto draftnewaccountingstandardsandamendments considerednecessarytoextantaccountingstandards. ThishasrecentlybeenrenamedtheIFRSAdvisoryCouncil. Itismadeupofacrosssectionofadvisorsfromdifferent usergroups.ItadvisestheIASBontheIASBswork programme. ThishasrecentlybeenrenamedtheIFRSInterpretations Committee.Thisbodyisdesignedtorespondquicklywhere therearesignificantdifferencesininterpretationofan extantIFRS.Forexample,itissuedguidanceonhowto accountforloyaltyprogrammes,whereuserswere uncertaintofollowtheextantaccountingstandardon revenuerecognition,orprovisions.

IASB:InternationalAccounting StandardsBoard

SAC:StandardsAdvisoryCouncil

IFRIC:InternationalFinancial ReportingInterpretationsCommittee

Ch 2 | 4

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter3
ACCA F3 Financial Accounting

Sourcesoffinancialinformation

START The Big Picture


Theaccountingsystemmustnaturallybefedwithrawsourcedata.Thisdataisthenanalysed, categorisedandrecordedintheaccountingsystemitself,whichmaybeafullymanual(paperbased) systemormaybemaintainedusingsoftware.Bothusethesamesystemofdoubleentry bookkeepingthatwewillseelateron. Foranaccountingsystemtoworkwell,itmustbesimpletooperateandbecapableofbeingfedby nonspecialiststaff.Akeystepisthereforeensuringthattherightstationeryanddocumentationis inplace. TheF3syllabusrequiresyoutobeabletodefinethefollowing: Document Purpose Oftenfeedstheaccounting informationon.... Quotation Togiveapotentialcustomeranindicationof Nowhere.Atthisstage,there whataproductorservicewouldbelikelyto hasbeennotransactionto record;itsstillatthestateof cost.Itmaybeabindingquoteorjustan beingaprospectivetransaction. indicativequote.
Ch 3 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Salesorder Torecordanorderfromacustomer. SigningabookingformforanExPclassroom courseisasalesorderthatExPwillthen process. Torecordanorderplacedwithasupplier.It mayrequirepreauthorisationtobevalid. Torecordthatanorderforinventoryfor resalehasbeenreceived.Itwillnormally onlybeproducedoncethegoodshavebeen inspectedatthepointofdeliverytoensure thattheyarecorrectindescriptionand quality. Torecordthatanorderfromacustomerhas beensentout.
ACCA F3 Financial Accounting

Sales(revenue).

Purchaseorder Goodsreceived note

Purchases,normallyof inventoryforresale. Purchasesofinventoryfor resaleandpayables.

Goodsdespatched note

Invoice Statement

Creditnote

Debitnote

Remittanceadvice

Receipt

Sales(revenue)andpossibly alsoinventorymanagement, dependingonhowthe accountingsystemissetup. Arequestforpaymentfromasupplier.Sent Payables. bythesuppliertothecustomer. Doesnotgenerallyinstigateany Asummaryoftransactionsrecordedbya supplierwithacustomer,includingamounts recordingofatransaction, sincealltransactionsonthe receivedfromthecustomer.Sentbythe statementwillhavebeen suppliertothecustomer. recordedwhengoodswere ordered.Butusefulforcross checkingourrecordswiththe suppliersrecords. Acknowledgementfromasupplierthatthe Payables. customerhasoverpaidandisentitledeither toarefundorfreegoods/servicesinthe future. Receivables. Tocancelacreditnotethatpreviously existed,egifgoodswereordered,paidfor andthenreturnedtherewouldinitiallybea creditnote.Therefundmadewouldbe accompaniedwithadebitnote. Receivables. Normallyincludedwithaninvoice.A documentthatisincludedwiththepayment (egifpaidbycheque)withdetailsthatwill allowtherecipientofthefundstomatch thepaymenttothecustomersaccount. Issuedbythesupplierforgoods,to Receivables,payablesand acknowledgepaymentofadebt. purchases.

Ch 3 | 2

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Datasources/datacapture

Whenabusinesstransactionhappens,itisessentialthatthesourcedataiscapturedimmediately. Thisdoesnotnecessarilymeanimmediatelywritingupthebooks,butitdoesinvolvesomerecord beingmadeofthetransactionhappening. Inverysimpleaccountingsystemsforsoletraders(egaselfemployedbuilder)itmayinvolvethe proprietorkeepingpocketbookstorecordthingslikequotesgivenandashoeboxusedtocollect receiptsforbusinessexpenses.Fromthissourcedata,theaccountingrecordscanthenbeproduced eachperiod.Theaccountantisoftennotphysicallypresentatthetimethattransactionshappen,so itisessentialthattherearesimpleandfoolproofsystemstoensureacompleteandaccuraterecord ofbusinesstransactions.

KEYKNOWLEDGE Booksoforiginalentry

Alternativelycalledbooksofprimeentry,thesewillbethebridgebetweentherawdata(egreceipt forcashpurchaseofsomebuildingmaterialsandtheaccountingsystem.Theymaybewrittenupby theaccountant,orbyasemitrainedmemberofstaffwithintheclientsbusiness. Themostcommonlyusedbooksoforiginalentryare: Bookoforiginal entry: Cashinbook Usedtorecorddataon: Datatypicallyusedtofeed:

Cashreceivedintothebusinessbankaccount.

Allsortsofthings!Anything thatmaygeneratecashforthe business. Allsortsofthings!Anything thatresultsincashbeingpaid outofthebusiness. Typically,smallexpenses(eg Fridaycakesforstaff!)and sundryincome.

Cashpayments book

Cashpaidfromthebusinessbankaccount.

Pettycashbook

Cashinandoutofthebalanceofcashheldin notesandcoinsbythebusiness(normally small).Thisisoftencontrolledusingthe imprestsystem(seelater).

Ch 3 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Salesdaybook Salesoncredit.Notethatsalesimmediately settledincashwillberecordedineitherthe cashbook(ifpaiddirectlyintothebank account)orpettycashbook(ifreceivedin notesandcoins). Purchasesofinventoryforresaleoncredit. Notethatpurchasessettledimmediatelyin cashwillberecordedimmediatelyinthecash paymentsbookorpettycashbook. Anythingnotcoveredbyanyoftheother booksoforiginalentry. Salesrevenue.
ACCA F3 Financial Accounting

Purchasesday book

Purchasesofinventoryfor resale.

Journalbook

Often,thisisthebook maintainedbytheaccountant, inwhichperiod13 adjustmentslikedepreciation andbaddebtsarerecorded.

Booksoforiginalentrymayberecordedinpaperform,orusingaspreadsheet.

KEYKNOWLEDGE Computerisedsystems

Computerisedsystemsarecommonandcanbecheap.Theystillrequirerigoroussystemsfordata captureatthepointwhentransactionshappen,asthemaximgarbagein,garbageoutverymuch applies!Inputtoacomputerisedsystemwillnotlooklikeabookoforiginalentry,butwillrequire thesamedata.Softwaremaybemoreuserfriendly,forexampleaskinghowmuchcashwas spent?andwhatwasthisfor?,whilstthenofferingadropdownmenuofchoices.Thesoftware willstillpreparerecordsusingthesamemethodologyasthemanualrecordingsystemsabove. Advantagesofusingacomputerisedsysteminclude: Backupscanbemadeeasily Makesproducingperiodicfrequentaccountsmuchlesslaboriousthanamanualsystem Canbeuserfriendly Analysessalestaxesmoreeasilythanmanualsystems(seelater) CanbeusedtoquicklyproducelotsofreportssuchasVATreturnsandinterimmanagement accounts. Disadvantagesofacomputerisedsysteminclude: Cost Maynotbetailoredverywelltothebusinessownneeds Stillrequireseffectivedatacaptureandmaintenanceoftheunderlyingrecords.
Ch 3 | 4
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Journalbook

Thejournalbookisthebookoforiginalentrythatcapturestransactionsnotcoveredbyotherbooks oforiginalentry.Often,itincludesadjustmentsandcorrectionoferrorsandomissionsintheother booksoforiginalentry.Inacomputerisedsystem,thereareoftenrestrictionsonwhocanaccess thejournalbook. Thejournalbookrecordsdoubleentryrecords(seelater),withanexplanationofthereason.Well seeanexampleofitaftertacklingdoubleentrybookkeeping.

KEYKNOWLEDGE Creditcontrolandmemorandumaccounts

Inparallelwith(andthusduplicationof)themainaccountingsystem,itislikelythatanaccounting systemwillmaintainseparaterecordsofindividualrecordsofcustomerandsupplierbalances.This duplicateseffortandincreasescosts,butprovidesusefulinformationforcreditcontrolandacheck ontheaccuracyofdatainput. Eachsupplierorcustomerwillhaveasupplierorcustomercodeandindividualrecordof transactionswiththem.Thisisoutsidethegeneralledger(iedoubleentrysystem)andinasimple accountingsystemmaybekeptusingasimplecardindexbox.

KEYKNOWLEDGE Controllingpettycashtheimprestsystem

Cashbalancesarepronetoerror,theftandpoorrecordkeeping.Awaytoensurethatanycash paymentsoutofthepettycashboxarerecordedistousetheimprestsystem.Theimprestsystem hasthesefeatures: Thecashboxhasapresetlimitofmaximumcashthatitevercontains,eg$1,000

Ch 3 | 5

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Beforeanycashistakenoutofthecashbox(whichshouldbeguardedbyaverydiligentand ideallyslightlyfrighteningperson),thepersonclaimingthecashmustprovideareceiptand completeanexpensevoucher. Asanexpenserecordissubmitted,thesameamountofcashistakenoutofthebox. Undernocircumstancesisanybodyeverallowedtotakemoneyoutofthetinwithout completingapettycashvoucher.
ACCA F3 Financial Accounting

Theresultofthisisthatatanypointintime,thesumofcashplustheexpensevoucherswillalways equalthepresetlimitof$1,000.Whencashreachesalowlevel,morecashiswithdrawnfromthe banktoreplenishthesumuptothe$1,000limit.Theexpensevouchersarethenexchangedforthe replenishmentcash. Thesemovementsinpettycashcanthenbesummarisedinapettycashbookeachperiod,whichwill looklikethis:


PETTYCASHBOOK Reasonforcashmovement Date 01/03/2010 03/03/2010 12/03/2010 23/03/2010 25/03/2010 27/03/2010 31/03/2010 31/03/2010 Cashin/ out Voucher# From bank Stafffood &drink Travel Stationery Other

1,000.00 Openingbalance (21.12) 332;Supermarket (20.00) 333;TaxiforMD (430.00) 334;Stationeryshop (32.00) 335;Flowersfornewbaby (43.12) 336;Supermarket 453.76 Subtotal 546.24 Replenish 1,000.00 Subtotals 546.24 546.24 (64.24) (20.00) (430.00) (32.00) (43.12) (21.12) (20.00) (430.00) (32.00)

Notethatanytimethecashisreplenished,theexpensevouchersaretakenoutofthepettycashbox andstoredsomewheresafe,probablywiththeaccountsdepartment.Theaccountsdepartmentwill thenusethetotalstorecordthetotalsintheaccountingsystemeachperiod.

Ch 3 | 6

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter4
ACCA F3 Financial Accounting

Doubleentrybookkeeping:thedebits andcredits

START The Big Picture


Thestartingpointfordoubleentrybookkeepingistothinkaboutassetsandliabilities,ienetassets. Ifthereisachangeinanasset,theremustbeanexplanationforwhyitchanged. Ifyouwinthelottery,youhavemorecashbecauseyouhavelotteryincome. Ifyoubuylunch,youhavelesscashbecauseyouspentmoneyonlunch(iemore expenditure). Ifyoudecidethatthehomeyouownisworthmore,youhavemoreassetsbecauseyouve recognisedarevaluationgain. Manytextbooksexplaindoubleentrybookkeepingintheframeworkofdoubleentrymeaningthat foreachtransaction,thereisanequalandoppositetransaction.Wethinkthatthisisneedlessly confusing.Thekeywordindoubleentryisbecause.
Ch 4 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Sowhydebitsandcredits?

Imaginethatwecallassetsdebits,onlysothatpeoplewhospeakdifferentlanguagescan communicatemoreeffectivelywitheachother.Ifwenowsaythatwehaveanasset,ormoreofan assetbecauseyouvebeenpaidyoursalary.Thiswouldberecordedasrecogniseneworincreased assetofcash.Itsshorterjusttosaydebitcash. Theremustbeareasonforthisincreaseincash.Thereasonisthattheresbeensomeincome.This cantbeadebit,aswhatweretryingtodoisexplainwherethedebitcamefrom.Theexplanationis arbitrarilycalledacredit. Youmayhaveencounteredthewordsdebitandcreditinthecontextofyourbankstatement.This bringsdanger,sincethebankstatementisarecordfromtheirownrecords.Thismeansthatits upsidedown.Thiscancauseconfusion,soitsbestforthemomentifyoutrytounlearneverything youveevercometothinkofdebitsandcreditsasbeing.Thetruthistheoppositewayroundtothe waythatlaypeopleusetheterms.

KEYKNOWLEDGE Buildinguptherules

Herearethecoreconceptsthatyouneedtobehappywith: Anasset,oranincreaseinanasset,isadebit. Theoppositeofanassetisaliability.Theoppositeofadebitisacredit.Soaliabilityisa credit. Ifyouhavemoreassets(debitassets),theexplanationwillbetocreditincome. Soyoumayhavestartedtothinkdebitsgood,creditsbadoreventheotherwayround.Thatsnot thewaytolookatit.Neitherisgoodorbad.Adebitcanbeanasset,butitcanalsobeanexpense. Soitsnotcorrecttothinkofonebeinggoodandtheotherbad.Itssimplerthanthat. Heresatabletosummarisetherules.Reviewthisandthentrytoproduceisyourself,usingthe logicofexplainingmovementsinnetassetsandthingsbeingopposites(egaliabilityisacredit becauseanassetisadebit).

Ch 4 | 2

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Itwilltakeawhiletobecomefamiliarwiththissystem,justthewaythatittakesawhiletobecome familiarwithridingabicycle.Dontpanicitcomesanddontfeelpressuredtorushit.Theresnot muchintrinsicallytoactuallyunderstandhereitsjustataskandasystemthatbecomesreallyeasy withrepetition. Debitsmean Whathappenstonetassets: Anincreaseinassets Anincreaseinliabilities Andthereasonforthatincreaseinnetassets: Anitemofexpenditure Anitemofincome Ifyoureaskedtorecordatransaction,thefirststepistoidentifywhatassetsand/orliabilitiesarein question.Decideoneofthesefirst(itsofteneasiestatfirsttostartwithcashifitsacash transaction)anddecideifthisisadebitoracredit.Thenworkouttheexplanationwhy.Ifyouthink thattheresanewliability,thatmustbeacredittoliabilities.Thatmeansthattheexplanationmust beadebit,whichcouldbeeitheranasset(egifyouvejustgotsomecashinyourhandbecauseyou borrowedit),oranexpense(egifyoujustboughtdinneronyourcreditcard). Adecreaseinassets Anincreaseinliabilities Creditsmean

Ch 4 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter5
ACCA F3 Financial Accounting

Tangiblenoncurrentassets

START The Big Picture


Anassetisaresourcecontrolledbyanentitythatisexpectedtogiveinflowofbenefits.Manyassets willhaveaperiodofexpectedbenefitovermorethanoneperiod.Thesearenoncurrentassets.

KEYKNOWLEDGE Capitalandrevenueexpenditure

Inslangterms,capitalexpendituremeansanycashpaidtoacquireassetsthatwillresultinthe acquisitionofanewasset,oranincreaseintheearningcapacityofanexistingasset.Revenue expendituremeansmoneypaidtomaintaintheexistingearningcapacityofanexistingasset. Theterminologyisveryconfusinghere,sinceithasnothingtodowithsharecapital/equityorsales revenue!Theyarecommonlyusedterms,howeverinaccurately.

Ch 5 | 1

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Acquisitionofanoncurrentasset

Thecostofanoncurrentassetthatwillinitiallyberecognisedwillbeallthecostsnecessarily incurredinbringingtheassetintoitsinitialworkingcondition,aslongasthosecostsareexpectedto lastmorethanayear.Anyrecoverabletaxeswillbeexcluded.

KEYKNOWLEDGE Depreciation

Allassets,withthesoleexceptionoffreeholdland,wearoutovertime.Thismeansthatthetotal costofownershipoftheassetmustbematchedtotherevenuestreamthattheassetgenerates,or supports.Thisisdonebymakinganallowancefordepreciationandchargingdepreciation. Theaimofdepreciationistomatchthecostofusingtheassettotheincomestreamthatit generates.Itisnotaimedatanythingelsesuchasshowingtheassetatitscurrentmarketvaluein theSOFP. Thedepreciationmethodchosenforanassetshouldbethemethodthatmostcloselymatchesthe costoftheassettothepatternofrevenuethatitgenerates. TheSOFPwillshowtheassetatitsnetbookvalue(NBV).NBVisoriginalcostlesscumulative allowancefordepreciation. Method Annualdepreciationcalculated Examplewheresuitable as estimateofrevenuegenerated Straightline (Costestimatedresidual Officefurniture,oranything value)/expectedusefullife. thatdoesnotproduce materiallygreaterincomewhen itsnew.Thisisthemost commonlyusedmethodof depreciation. Reducingbalance(alsoknown NBVatstartoftheperiodx Motorvehiclesusedbyataxi asdiminishingbalance) annualdepreciation% company.Oldercarsgenerate lessnetrevenueastheybreak downmorethannewcarsand requiremoremaintenance. Whereanitemofmachinery Machinehourmethod (Costestimatedresidual hasanestimatedmaximum value)x(Machinehoursthis period/estimatedtotaluseable usefullife. hours)
Ch 5 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Ledgeraccounting Depreciationischargedeachyearbycreatinganexpenseandanallowancefordepreciation account.Theallowancefordepreciationismaintainedasaseparateaccountratherthancrediting theassetaccountitself.Thisisbecausetheoriginalhistoricalcostofassetsoftenneedstobe extractedquicklytoallowforpreparationofnoncurrentassetdisclosurenotes(seebelow). DrDepreciationexpense(SOCI) $x CrAllowancefordepreciation(SOFP) $x

KEYKNOWLEDGE Disposal

Whenanassetiseventuallydisposed,itwillgenerallybesoldforsomecash.Thismeansthatanew assetwillberecognisedintheSOFP(thecash)andanotherwillbederecognised(theNBVofthe asset). Againorlosswillariseonthissimultaneousrecognitionandderecognition. Ifsalesproceeds>NBVthenaprofitondisposalwillberecognised Ifsalesproceeds<NBVthenalossondisposalwillberecognised. Ineffect,aprofitorlossondisposalisacorrectiontotheestimatedfigureseachyearfor depreciation.Thismeansthatthisisreportedinprofitorloss,justasdepreciationis.

KEYKNOWLEDGE Revaluation

Sometimes,revaluationsaremadetoassetsthathaveincreasedinvalue.Thisisnotrequired,butis possible.Onceanassethasbeenrevalued,allsimilarassetsmustberevaluedandthevaluations mustbekeptuptodate.Depreciationmustalsobebasedonthenew,revaluedamount.

Ch 5 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Depreciationofrevaluedasset

Arevaluedassetwillstillneedtobedepreciated.Thedepreciationchargedmustbeonthehigher, revaluedamount(arevaluationdownwardsisanimpairment,whichisunlikelytofeatureintheF3 exam). Depreciationexpenseandallowancefordepreciationwillthereforeincrease.

KEYKNOWLEDGE Disposalofrevaluedasset

Ondisposalofarevaluedasset,againorlosswillariseasnormal.Thegainorlosswillbethe differencebetweenthenewrevaluedamountandthenetbookvalueimmediatelypriortothe revaluation. Ifthereisanyremainingrevaluationsurplusinrevaluationrelatingtothedisposedasset,itisnormal totransferthisfromrevaluationreservetoretainedearnings,asabove.

KEYKNOWLEDGE Disclosureofnoncurrentassets

NoncurrentassetsaregenerallydisclosedonthefaceoftheSOFPattheirnetbookvalue,butwitha breakdowninthenotestothefinancialstatementsthatprovidedetailsofcostandallowancefor depreciation.

Ch 5 | 4

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter6
ACCA F3 Financial Accounting

Intangiblenoncurrentassets

START The Big Picture


Anintangibleassetisanassetwithnophysicalsubstance.Oftenthisisintellectualpropertyrightsor alicencetoundertakesomeactivity.Aswithtangibleassets,itisnecessarytoprovethatthereis sufficientcertaintyofafutureinflowofbenefitstocategorisethisasanassetratherthanan expense.Coststhatresultinsomethingthattheentitycannotbereasonablysureofcontrollinginto thefuturemustbewrittenoffasanexpense.

KEYKNOWLEDGE Researchanddevelopmentcosts

Anassetisaresourcecontrolledbyanentitythatisexpectedtogenerateaninflowofbenefittothe entity.Thekeyissuesinrecognitionofanintangiblenoncurrentassetthereforetendtobewhether theassetistrulycontrolledbytheentityandwhetheritislikelytogenerateaninflowofbenefit. Mostresearchanddevelopmentfailstoproduceacommerciallyviableproduct.Itisalsodifficultto patent(ierestrictcommercialuseof)knowledgeuntilithasreachedarelativelyadvancedstage.


Ch 6 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Researchcostsarecostsincurredintheearlystagesofadevelopmentproject.ItisdefinedinIAS38 asisoriginalandplannedinvestigationundertakenwiththeprospectofgainingnewscientificor technicalknowledgeandunderstanding.Thekeyissuehereisthatitisnotreasonablycertainthat expenditurewillgenerateaviableincomestreaminthefuture. Theaccountingtreatmentrequiredforresearchcostsistowritethemoffimmediatelyinprofitor loss.

KEYKNOWLEDGE Developmentcosts

DevelopmentisdefinedinIAS38astheapplicationofresearchfindingsorotherknowledgetoa planordesignfortheproductionofneworsubstantiallyimprovedmaterials,devices,products, processes,systemsorservicesbeforethestartofcommercialproductionoruse. Theaccountingtreatmentofdevelopmentcostsistorecognisethemasanintangiblenoncurrent assetiftheymeetthecriteriathatsuggestthattheywillbelikelytogenerateaprofitableincome streaminthefutureandcanbereliablyseparatelyidentifiedusingthemnemonicRATPIE: Resourcesareadequatetocompletetheproject Abilitytocomplete Technicallyfeasible Probableeconomicbenefit(ieexpectedtobeprofitable) Intendtocompletetheproject Expenditureontheprojectcanbeseparatelyrecorded. Adevelopmentcostassetcanincludethedepreciationonmachineryusedinthedevelopment project.Insteadofdepreciationbeingwrittenoffagainstprofit,itisassettothecostofthe qualifyingdevelopmentcostasset.

KEYKNOWLEDGE Writeoffperiod

Intangibleassetsarewrittenoffovertheperiodduringwhichtheygeneratebenefits.Aswith tangiblenoncurrentassets,theaimistomatchthepatternofcosttothepatternofbenefitthatthe intangibleassetgenerates. Developmentprojectssuchasdrugspatentstendtogeneratetheirgreatestrevenuesintheearly yearsoftheircommerciallife.Forthisreason,amortisationisoftenchosentobebythereducing balancemethodofamortisationratherthanstraightline.


Ch 6 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter7
ACCA F3 Financial Accounting

Inventoryandpurchases

START The Big Picture


Formostbusinesses,inventorywillbeaveryshortlivedasset,whichisexpectedtobesold(or possiblythrownawayorstolen!)bytheendoftheaccountingperiod. Wheninventoryispurchased,itcreatesanasset,sincetheinventoryisexpectedtogiveaninflowof benefittotheentityandtheentitycontrolsit.Strictlyspeakingthereforethecorrectaccounting treatmentforinventorywouldbe,usingillustrativenumbers: Step1:Inventoryispurchased: DrInventoryasset(SOFP) $10,000 CrCash/payables $10,000 Step2:Inventoryissold: DrCostofsales(SOCI) $12 $12 CrInventoryasset(SOFP) Foraretailer,thiscouldcreatepracticalproblems,sinceeachtimeanitemofinventoryissoldit wouldbenecessarytoidentifythehistoricalcostofthatspecificitemofinventoryandchargeitto costofsales(step2above).Iftheretailerdealswithfastmovingconsumergoods,orperishable
Ch 7 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

goods,thenonlyaverysmallproportionofinventorypurchasedduringtheyearwouldremainin inventoryattheyearend.Inpracticalterms,journalstep2abovecouldberepeatedmany thousandsoftimesaseachindividualsalehappened. Tosimplifymatters,mostaccountingsystems(andallaccountingsystemsthatyoucanexpectto encounterintheF3exam)taketheshortcutofwritinginventorypurchasesoffimmediatelytocost ofsalesintheSOCI,thus: Singlestep:Inventoryispurchasedandtreatedasanexpense: DrCostofsales(purchasesexpense) $10,000 CrCash/payables $10,000 Attheendoftheperiod,anyinventorythatremainsinstockisthenvaluedinaccordancewithIAS2 (seebelow)andthisisliftedoutofcostofsalesandtreatedasanassetthatwillprobablybeusedup inthenextperiod: DrInventoryasset(SOFP) $800 CrCostofsales(closinginventory)(SOCI) $800 Atthestartofthenextperiod,thisinventoryassetisthentreatedasanexpense,sinceitsexpected thatitwillbeusedup(egbybeingsoldorscrapped)bytheendofthatperiodandsobecomingan expenseofthatperiod: DrCostofsales(openinginventory)(SOCI) $800 CrInventoryasset(SOFP) $800 Theeffectofthesejournalsistocreatethehopefullyfamiliarworkingforcalculatingcostofsales: Openinginventory 0 ExpenseinSOCI Add:Purchasesintheperiod 10,000 ExpenseinSOCI (800) ReductioninexpenseinSOCI Less:Closinginventory Costofsalesmade 9,200
Ch 7 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Valuinginventory

Thepurchasepriceofinventoryisnormallyfairlysimple.Itwillincludecostsnecessaryinorderto bringtheinventoryintosaleablecondition,soincluding: Costpaidtothesupplier Irrecoverabletaxes(egimportduties) Costsofdeliveryinwards(sometimescalledcarriageinwards). Whereinventoryisworkinprogressinamanufacturingprocessitwillalsoincludefaircostsof conversion(eglabourcosts,productionoverheadcosts). Recoverablesalestaxes,nonproductionadministrativecostsandoneoffcoststhatdonotadd anythingtotheinventorysvalue(egcostsofdeliverytothewronglocationandcostofbringingto therightlocation)wouldbeexcludedfromcostofsales,sincetheyareunnecessarytobringingthe inventorytosaleablecondition. Bywritinginventoryoffimmediatelytocostofsales,itispossibletokeepinventoryoutsidethe accountingsystem.Thissimplifiesmattersconsiderably.However,itdoesmeanthatattheendof eachperiod,inventorymustbephysicallycountedandvalued,inordertomakethenecessary adjustmentstoliftunsoldinventoryoutofcostofsales. Maximumvalue:lowerofcostandNRV Anassetisonlyanassetifitisexpectedtogenerateaninflowofbenefits.Thismeansthatif inventoryisexpectedtosellfornetproceedsbelowcost,themaximumvaluationofthatitemof inventoryintheSOFPwillbethenetamountthatitssaleisexpectedtogenerate(calleditsnet realisablevalueorNRV). Anycostsincurreduptothedateoftheaccountsmightbeincludedwithinthe determinationofcost. Anyrevenuesandfuturecoststobeincurredtoenablesalewillbeincludedwithinthe determinationofNRV. ThefinalvaluationforeachitemofinventorywillbethelowerofcostandNRV.Thishastobe estimatedonastocklinebystocklinebasis,sothatrealisedlossesonsomestockdonotmask unrealisedexpectedgainsonothers.

Ch 7 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter8
ACCA F3 Financial Accounting

Receivablesandpayables

START The Big Picture


Wehavealreadylookedathowcreditsalesareoftenmadetoencouragesales.Theproblemwith extendingcreditisthatnotallreceivableswillpay.Thismeansthatsomewillbecomeirrecoverable. Beforebeingwrittenoffasirrecoverable,somewillalsolookliketheymaynotpay(perhapsby beingamonthoverdueforpayment).Thesearedoubtfuldebts. Rememberthatanassetisaresourcethatisexpectedtogiveaninflowofbenefits.Logically thereforeifareceivableisnotexpectedtopay,itcannotbeshownasanasset.TheSOFPofthe receivablescannotexceedtheneutralestimateofhowmuchcashisactuallyexpectedtobe received.

Ch 8 | 1

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Irrecoverabledebts

Ifadebtisnotgoingtopay,forexampleifapersonhasdiedbankrupt,thenitmustbewrittenout oftheaccountingrecordsasthereceivableisnolongeranasset.Removinganassetreducesnet assetsandsogeneratesanexpense,whichisnormallycalledirrecoverabledebtsexpense,hence: DrIrrecoverabledebtsexpense $x CrReceivables $x

KEYKNOWLEDGE Recoveryofdebtswrittenoff

Ifadebtisunexpectedlypaidhavingpreviouslybeenwrittenoff,itislikelythatthecashreceived willinitiallyberecordedinthecashreceivedbookasareceiptfromadebtor.Thismeansthatthe journaltorecordthecashwillbeautomaticallygeneratedthus: DrBank $800 CrReceivables $800 However,thebalanceisnolongerinreceivables,asitwaswrittenoff.Inorderforthejournalto work,itisthennecessarytoreinstatethebalancethatwaspreviouslywrittenoff.Thisisachangein accountingestimates,sincetheestimatelastperiodwastherewasnorealisticchanceofthedebt beingrecovered: DrReceivables $800 CrIrrecoverabledebtexpense $800. Thereisnoattempttochangethepreviousyearsfigures,whichincludeanexpenseforthewriteoff ofthedebt,sincethiswasafairestimateatthetime.Therewillbeanexpenserecordedforthe writeoffintheyearwhenitwaswrittenoffandacredittoprofitorlosswhenthecashwas received. Dependingonhowtheinitialcashreceipthasbeenrecorded,itmaybepossibletosimplifythe abovetwojournals,becausethereisadebitandcreditofthesameamounttoreceivables,thus: DrBank $800 CrIrrecoverabledebtexpense $800.
Ch 8 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Doubtfuldebts

Itislikelythatsomereceivableswillnotpay,eveniftheyhavenotyetbeenwrittenoff.The businesswillcontinuetochasethereceivablesforfullpaymentandmayeventuallyevensueforthe fullbalance.Theamountcannotbewrittenoutofdebtors,ascreditcontrolwillneedtherecordsof thedebtinfulltoknowhowmuchtochaseforpayment. However,ifitsestimatedthatthereisa20%chancethatadebtwillnotpay,itwouldfailtogivea trueandfairviewonthefaceoftheSOFPtoshowthefullamountasanasset.Thesolutionisto createanallowanceaccount,whichreducesthevalueofnetreceivablesonthefaceoftheSOFP withoutcorruptingtherecordsoftheactualdebtorbalancethatwillbeneededtotrytoobtain payment. Creating,orincreasing,anallowancewillreducenetassets.Thisthereforecreatesanexpense.The allowanceaccountitselfisaSOFPaccount,sojustlikeassetsandliabilitiesitwillremainonthe balancesheetuntilitisremoved.

KEYKNOWLEDGE Controlaccountreconciliations

Itispossiblethatanaccountingsystemwillmaintainmemorandumledgerswithindividualcustomer balancesoutsidethemainaccountingsystem.Thiscreatesduplicationofeffortandrecordkeeping, butprovidesacheckonaccuracyofthefigures.Thereceivablesaccountinthedoubleentrysystem isoftencalledthecontrolaccount,sinceitcontainsonlysummaryfiguresoflotsoftransactions, ratherthanlotsofdetailofindividualtransactions.Itmayalternativelybecalledthegeneralledger, ornominalledger.Thememorandumledgercardsareconfusingsometimesreferredtoasthe ledgers. Thedoubleentrysystemwillbekeptassimpleaspossible,withasfewfigurespostedtotheledger accounts(Taccounts)aspossible,sincethefewertransactionsthereare,thelessthechanceoferror andthelessinformationtoseekthroughinordertofinderrorswhentheyoccur.Forthisreason, theledgeraccountsarenormallyupdatedusingthetotalsfromthesalesdaybookandcashreceipts book,ratherthandetailsofindividualsales.

Ch 8 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Othercommonitemswithreceivables

Interestonoverduedebts Ifasaleagreementwithacustomerprovidesforarighttochargepenaltyinterestonanoverdue debt,thiswillincreasetheamountreceivable.Increasingareceivableincreasesnetassets,which thereforegeneratesasourceofincome.Itwillnormallyberecordedas: $x DrReceivables CrSundryincome(orperhapsfinanceincome) $x Discounts Therearetwotypesofdiscountthatyoumayencounter:tradediscountsandsettlementdiscounts. Tradediscountsarethosegiventocustomersatthepointofsale,perhapsbecausethecustomer buysinlargevolumesorisamemberofstaff.Thesediscountsarenotsubjecttoanyuncertaintyat thetimeofsaleitisknownforsurethatthecustomerwillneverpaythelistpriceofthegoodsor services. Theaccountingisthereforeverysimple:theyaresimplyignored.Thesaleisrecordedattheamount netofthetradediscount. Settlementdiscounts Asettlementdiscountisanincentiveforcustomerstopayyouearlierthantheyotherwisenaturally would.Forexample,adiscountof5%maybeofferedontheinvoicesenttocustomersifpaymentis receivedwithinsevendaysoftheinvoicebeingsent.Ifpaymentisnotreceivedwithinthatperiod, theofferofthediscountlapses. Settlementdiscountsareuncertainatthepointofsale.Theactualamountofthedebtisgrossof thesettlementdiscount,iebeforeitsdeduction,sincethisistheamountthatthecustomerwill eventuallybechasedforiftheydontpayearly. Ifthesettlementdiscountisallowedtothecustomer,thisissimilartothetreatmentofirrecoverable debts.Itissimplyadebtthatwearevoluntarilychoosingtowriteoffaspartiallyirrecoverable becauseofthecashflowadvantageofreceivingthecashquickly.Settlementdiscountsare sometimesalsocalledcashdiscountsforthisreason. Theterminologycanbeconfusinghere.
Ch 8 | 4
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Discountsallowedaresettlementdiscountsthatweallowtocustomers.Theyarethereforepartial writeoffofdebtsreceivablebyus.Theyarethereforeanexpenseinourbooks. Discountsreceivedaresettlementdiscountsthatoursuppliersallowtous.Theyaretherefore partialforgivenessofdebtsthatweowetootherpeople.Theyarethereforeasourceofincomein ourbooks.

Ch 8 | 5

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

theexpgroup.com

ExPress Notes
Chapter9
ACCA F3 Financial Accounting

Bankreconciliations

START The Big Picture


Thecashbookwillrecordpaymentsinandoutofthebankaccount.Banks,ofcourse,providebank statementsthatrecordallthetransactionsthattheyhaverecordedinthesamebankaccount.This independentrecordkeepingisapowerfulcheckontheaccuracyofabusinesssaccountingrecords. Inasmallcompanyscenario,itislikelythateachtransactiononthebankstatementswillbe manuallycomparedtothetransactionsonthecashbook,tickingoffmatchingtransactions.Thiswill thenleaveonlyitemsthatdontagree.Inlargerbusinessesthatuseacomputerisedaccounting system,itislikelythatthebankstransactionswillbedownloadedinarawdatafile(suchasa.csv file)andwillthenberunthroughtheaccountingsoftware.Theaccountingsoftwarewillthenmatch transactionsandrunoffareportofdifferences. Itisagoodaccountingpracticetoreconcilethebankaccountsfrequently.Insomeregulated scenarios,suchasaccountsthatareusedtoholdclientmoney,itisaprofessionalrequirementto reconciletheaccountingrecordstothebankstatementsatleastonceamonth. Toreconcileistosatisfactorilyexplainadifferencebetweentwonumbersorrecords.
Ch 9 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

theexpgroup.com

ExPress Notes

Reasonsfordifferences betweenbank accountandcashbook

ACCA F3 Financial Accounting

Errors/omissions (requirecorrection)

Timingdifferences (noactionneeded)

Errors/omissionsby thecompanyitself

Errors/omissions bythebank

Errorscanbealmostinfinitelyvariedandcanbemadebyeitherthebankorthecompany.Iferrors aremadebythebank,thecompanywillneedtonotifythem,sothatthebankcancorrecttheir records.Iferrorsaremadebythecompany,thecompanywillneedtoamenditsownrecords,using thejournalbook. Typicalerrors/omissionsmadebythecompany: Mispostingofamounts,egrecordingacashpaymentof$45as$54 Omissionofcashpaymentsorreceipts Omissionofstandingordersprocessedbythebank(ieautomaticpaymentsofnonvariable amounts) Omissionofdirectdebitpaymentsprocessedbythebank(ieautomaticpaymentsof variableamounts) Omissionofbankcharges Processingerrors,egmiscastingmanuallymaintainedaccounts. Typicalerrors/omissionsmadebythebank(typicallymuchrarerthanthecompany): Incorrectcharges Processingpaymentsorreceiptsincorrectly.
Ch 9 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Typicaltimingdifferences: Paymentsmadeintothebanknotyetprocessed(unclearedlodgements) Chequesdrawnoronlinepaymentsorderednotyetprocessedbythebank. Awarningaboutterminology! Abankstatementwillrecordpositivedepositswiththebank asacredit,wherethecashbookwillrecordthemasdebit. Botharecorrect,asadebitisanasset.Ifthebankholdssome ofyourmoney,thatmeansthatthebankowesyoumoney ieyouarealiabilityofthebank.Sothebankstatementswill listyourbalanceasacredit.Bankstatementsarerunofffrom therecordsofthebank,notoftheclient.Hence,ourdebit correctlyequalstheircreditandviceversa.

Ch 9 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

theexpgroup.com

ExPress Notes
Chapter10
ACCA F3 Financial Accounting

Longtermfinance

START The Big Picture


Longtermfinancemeanscashusedtooperatethebusinessoverthelongterm.Itmaybepaidinto thebusinessbyowners,orbyprovidersofloanfinance.Theformeriscapitalandthelatterisdebt. Capitalisnormallyonlyrepaidtoownersiftheownerschoosetoclosedownasolventbusiness.The businesshasnoobligationtopaybackordinarysharecapitalwhilethebusinessisagoingconcern.

KEYKNOWLEDGE Longtermdebt

Debtisaliability,meaningitsanobligationofthebusiness.Longtermdebtmaybefundsraised frombanks,orfromotherinvestorswhobuyloannotes(alsocalledbonds,securitiesorcommercial paper).Debtgenerallyincursaninterestchargeandmayberedeemable(meaningrepayable)over aperiodoftime,onafixeddateorexceptionallyirredeemabledebt.Thelastcategorysimply thereforepaysinterestintoperpetuitywithouteverrepayingtheloanprinciple.Itisonlyever issuedbygovernments,andthenonlyrarely.Loannotesareoftentradable,meaningthatthe originalbuyercangettheircashbackbeforeredemptionbysellingtheloannotetosomebodyelse foritsmarketvalueonthatday.


Ch 10 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Anyloanprincipaldueforrepaymentwithinthecurrentyearisacurrentliability;anydebtduefor repaymentaftermorethanoneyearisanoncurrentliability. Ontheissueofaloan,thecashreceivedwillbecreditedtoaloanliabilityaccount.Noliabilityis recordedforexpectedfutureinterest,astheobligationtopayinterestonlyarisesastimepasses.

KEYKNOWLEDGE Equity

Equityistheresidualinterestofallassetsafterdeductingallliabilities.Forasoletrader,equityis simplytermedproprietorsinterest.Inapartnership,itisthesumofeachpartnerscapitalaccount andeachpartnerscurrentaccount.Inthecaseofacompany,IFRSandnationalregulationoften requireagreateranalysisofeachcomponentofequity. Equityintotalisoftentermedshareholdersinterestorshareholdersfunds. Inalargelimitedliabilitycompany,equitymaycomprisethesumofthefollowing: Ordinarysharecapital Preferencesharecapital Reserves: o Sharepremiumaccount o Revaluationreserves o Otherreserves o Retainedearnings Companiesarerequiredtopresentanoteintheirfinancialstatementsthatreconcileeach componentofequityatthestartoftheyeartotheendoftheyear.Thisisanotherexpressionofthe accountingequationandbusinessequationfromchapter1.

Ch 10 | 2

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

theexpgroup.com

ExPress Notes
Chapter11
ACCA F3 Financial Accounting

Accrualsandprepayments

START The Big Picture


Oneofthefundamentalassumptionsofaccountingthatwesawinchapter1wastheaccruals concept.Therearetwoaspectstotheaccrualsconcept: Matchingcoststotheassociatedrevenues.Forexample,depreciationandthecostofsales workingbothdothis. Recognisingtransactionsastheyareincurred,notnecessarilywhenthecashispaid.This alsohastheeffectofensuringthataprofitcalculationforaperiodwillhopefullyshowa sustainableprofit,sinceallexpensesincurredintheperiodwillbematchedtoallrevenues earned,eveniftheexpensehasntyetbeenpaid. Accruals Whereanexpensehasbeenincurred,butits notyetbeenpaid.Often,aninvoicehasntyet beenreceived,soanestimateofexpense incurredbytheyearendwillneedtobemade. Thismeansthereisaliabilityattheperiodend. Examples: Estimatedwaterandelectricityused Estimatedtelephonechargesfora traditionallandlinetelephoneata monthend. Prepayments Whereanamounthasbeenpaidinadvance,but thatcashpaymentgivesarighttoreceive benefitsbeyondthecurrentperiodend.This meansthatthereisanassetattheperiodend, sincethereisarighttoreceivefuturebenefits. Examples: Insurancepaidinadvanceforayears insurancecover. Prepaidbalancesonpayasyougo mobiletelephones.

Ch 11 | 1

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Accountingtreatmentattheyearend

Accruals Estimatethecostofgoodsorservicesusedby theyearendbutnotinvoiced.Thismightbe doneusingtypicallevelsofusage,ordoneafter theperiodendusinginvoicesthatcameinafter theperiodend,butbeforetheaccountsare prepared. Recognisethisasaliability,sincethereisan obligationtopaythischarge.Recognisingthe liabilityreducesnetassets,sogeneratesan associatedexpense: DrExpenseinSOCI(egelectricity) $x CrAccrualsinSOFP(liability) $x Prepayments Calculatetheamountoftheprepaymentfrom cashpaidbeforetheyearend.Determiningthe amountoftheprepaymentwillnormallybe easierthanestimatingtheamountofanaccrual, sincethereisanactualcashpaymentbeforethe periodendtobasethecalculationon. Recognisetheasset(therighttoreceivefuture benefits)attheperiodend.Doingthisincreases netassetssogeneratesasourceofincome.In reality,thissourceofincomewillbeareduction intheexpenserecognisedsofarfromposting cashpaymentsfromthecashbooktoexpenses. DrPrepaymentinSOFP(asset) $x

CrExpenseinSOCI(eginsurance) $x

KEYKNOWLEDGE Accountingtreatmentinthefollowingperiod

Inthefollowingperiod,itsreasonabletoassumeatthestartoftheperiodthattheprepayment assetwillbeusedup(egthebenefitofinsurancereceived)ortheliabilitywillbesettledbypayment ofcash.Itsthereforenormalatthestartoftheyeartoanticipatethisbyreversingtheaccrual liabilityorprepaymentassetthroughprofit.Thisisoftendoneatthebeginningofthefollowing period,butitcouldbedoneattheendoftheperiodinsomecompanies.Itsamanualadjustment throughthejournalbook,soitcanbedoneanytimethatthecompanylikes.Itmustbedone, however,asotherwiseredundantassetsandliabilitieswillbeshownontheSOFPforever!


Ch 11 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Accruals Recognisethedischargeoftheliabilityinthe followingperiod.Thisincreasesnetassets,so createsacredittoexpenses.Thismeansthatas cashispaidthefollowingperiod,notallofitwill berecognisedasanexpenseinthatperiod,since anamountequivalenttotheopeningaccrualwill alreadyhavebeenreportedasanexpensethe previousyear.Reversingtheaccrualremoves anychanceofaccidentaldoublerecognitionof theexpense. DrAccrualsinSOFP(liability) $x Prepayments Recognisetheconsumptionoftheassetinthe followingperiod.Thisderecognisestheasset thatnolongerexists.Derecognisingtheasset reducesnetassets,sogeneratesanexpense. Thiswillbeanexpenseinperiod2ofthecash paymentnotrecognisedasanexpenseinperiod 1. DrExpenseinSOCI(eginsurance) $x CrPrepaymentinSOFP(asset) $x
ACCA F3 Financial Accounting

CrExpenseinSOCI(egelectricity) $x

Ch 11 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter12
ACCA F3 Financial Accounting

Provisionsandcontingencies

START The Big Picture


AliabilityisdefinedinIFRSasbeing: Anobligationattheperiodend(iesomethingthatisimpossibletoavoidnotjustan intentiontodosomething),and Whereanoutflowofbenefitisexpectedtoarisefromthatobligation,and Areliable(whichinpracticemeansmeaningful)estimateoftheoutflowcanbemade. Aprovisionissimplyaliabilityofuncertaintimingoramount.Accrualsmaybeaformofprovision, ifthereisnofirmdataonwhichtobasetheestimateoftheamountexpectedtobepaid. Aprovisionisvaluedattheneutralbestestimateofwhatthebusinessexpectstopaytosettlethe obligation.Foraoneoffliability(eglawsuit)thiswillbethesinglemostprobableoutcome.Fora recurringseriesofsimilarliabilities(eglotsofgoodssoldunderwarranty)itwillbetheweighted averageofoutcomes.
Ch 12 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Contingentliabilities Acontingentliabilityexistsinoneoftwosituations,whichareeither: Itisbelievedthatthereisprobablynoobligatingevent(<50%probability)butthechancesofthere beinganobligatingeventaremorethanremote(>5%probability),or Anobligationprobablyexists,butitissodifficulttoobtainanestimateofwhattheoutflowislikely tobethatanyestimatewouldbenomorereliablethanzero.Thissecondsituationisveryrare. Contingentliabilitiesaredisclosedinthenotestothefinancialstatementsbutarenotshownwith anyvalueontheSOFP. Contingentassets Acontingentassetisonewhereitisuncertainiftheasset(ierighttosomething)evenexists. Examplesareinsuranceclaimswhereitsuncertainiftheitembeingclaimedforiscoveredbythe policyatalloralotteryticketbeforethelotterydraw. ContingentassetsarenotshownasassetsintheSOFP,nordisclosedinthenotestothefinancial statements. Movementinprovisions Aprovisionisaliability.AswithanyitemontheSOFP,itwillremainontheSOFPuntilitisremoved. Ifaprovisionisincreasedduringtheperiod,theeffectwillbetoreduceprofitandnetassets: DrExpense(egforlegalcosts) $Increaseinprovision CrProvision $Increaseinprovision TheprovisioniscategorisedontheSOFPwithincurrentliabilitiesornoncurrentliabilities, dependinguponwhetheritisexpectedtobesettledwithin12monthsofthereportingdateor longer. Ifaprovisionisnolongerneeded,itwillbereversed.Thiswillreducetheprofiteffectofthecash paymentintheperiod.

Ch 12 | 2

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter13
ACCA F3 Financial Accounting

Salestaxes

START The Big Picture


Salestaxes,suchasValueAddedTax(VAT)areacommonfeatureofbusiness.Therulesvary considerablybetweencountries,buttypicallybusinessesarerequiredtoregisterforsalestaxiftheir expectedturnoverexceedsacertainlimit. Businessesthatarenotregisteredforsalestaxsimplyrecordpurchasesandsalesatwhatevercash theypayorreceive. Businessesthatmustregisterforsalestaxhaveanadditionalcomplicationintheiraccounting system.Inordertocomplywiththelaw,theymustveryaccuratelymaintainrecordsofsalestaxes thattheyhavebeenrequiredtochargeontheirsales(theiroutputtax)andthetaxthattheyhave paidontheirpurchasesofgoodsandservices(theirinputtax). Aspeoplewhoarenotregisteredforsalestax,wemayoftenbeunawareofwhatsalestaxesweare suffering,thoughreceiptswillnormallyprovideabreakdownoftheamountinclusiveofthesalestax (gross),theamountofthesalestaxitselfandthustheamountexcludingthesalestax(net).

Ch 13 | 1

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Locallawsvaryonhowpricesmustbequoted.Inmostcountries,theconventionappearstobethat pricesmustincludesalestaxunlesstheyspecifyotherwise.IntheUSA,itisnormalforpricestobe quotednetofsalestaxandthenthesalestaxisaddedatthepointofpurchase.Inanexam question,itsfirstimportanttoknowwhichwaythepriceshavebeenquoted. Ifabusinessisnotregisteredforsalestax,itdoesnotneedtochargesalestaxonitsoutputs,butit cannotrecoversalestaxonitsinputs. Ifabusinessisregisteredforsalestax,itmustchargesalestaxonitsoutputswhichitmustthenpay overtothegovernmentperiodically.Itrecoverssalestaxonitsinputsbynettingitoffthesalestax payable. Ledgeraccounting Purchasesandpayableswouldberecordedas: DrPurchases(SOCI,sonet) $135,000 CrCash/payables(SOFP,sogross) $162,000 =>DrSalestaxcontrolaccount(SOFP) $27,000 Thesalestaxcontrolatanypointwillshowtheamountduetoorfromthetaxauthorityforsales taxes. Salesandreceivableswouldberecordedas: CrSalesrevenue(SOCI,sonet) $178,000 DrCash/receivables(SOFP,sogross) $213,600 =>CrSalestaxcontrolaccount(SOFP) $35,600 Thisleavesanetbalanceonsalestaxcontrolof$8,600. Recoverableorirrecoverable? Someitemswillincludesalestaxesthatunderlocallawarenotrecoverable,asamatterofpublic policy.Thesemightincludebusinessentertainingexpensesorsalestaxoncars.IntheUKfor example,salestaxonvansisrecoverableforaregisteredbusiness,butsalestaxonpurchaseofa companycarisnot. Ifanitemincludesirrecoverablesalestax,itisincludedwithintherecognisedvalueoftheassetor expense.
Ch 13 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPedite Notes
Chapter14
ACCA F3 Financial Accounting

Trialbalancesandcorrectionoferrors

START The Big Picture


Inchapter4,wepreparedsimplerecordsofasoletraderandlistedallthebalancesontheir accountsattheendoftheperiod.Thiswasapreliminarytrialbalance. Dr Cr Cash 16,140 Capital 15,000 Purchases 3,000 Payables 2,040 Salesincome 4,140 Staffcosts 50 540 Noncurrentassets Telephone 60 Receivables 1,240 Withdrawals 150 Totals 21,180 21,180
Ch 14 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPedite Notes

ACCA F3 Financial Accounting

Thefactthatthetotaldebitsequalthetotalofthecreditsgivesusaconsiderableamountofcomfort thatthebookkeepinghasbeendoneaccurately. Ifthetotaldebitsdoesnotequaltotalcredits,itimpliesthaterrorshavebeenmadeintherecording oftransactions,theaddingupoftheTaccountsortheextractionofbalancesfromtheTaccounts intothetrialbalanceitself. Itdoesnotmeanthatnoerrorshavetakenplace.Thesetypesoferrorswillnotbepickedupina trialbalance: Errorsofomissionhavingtotallyignoredatransactionornecessaryadjustment Compensatingerrorstwoerrorshappeningtocanceleachotherout Errorsofprincipletreatinganexpenseasanasset,incomeasliability,orviceversa Errorsofcommissionrecordingthecorrectjournal,butatthewrongamount.
Ch 14 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPedite Notes
Overviewofstagesinpreparationoffinancialstatements
Recordtransactionsusing booksoforiginalentry

ACCA F3 Financial Accounting

Periodicallytotalbooksof originalentryandpost totalstoledgeraccounts

Totalledgersandproduce preliminarytrialbalance

Usejournalbookfor correctionsand "period13"adjustments

Finaltrialbalance

Producefinancial statements

Resetincomeand expenditureaccountsto zerobytransferring balacnestoprofitandloss account

TransferprofitandlossT accounttoequity

Openingtrialbalancefor nextperiod


Ch 14 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPedite Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Correctionoferrors

Asprofessionalaccountants,muchtimeisspentdealingwithcorrectingerrorsfromdraftrecords preparedbylessexperiencedpeople.Knowinghowtocorrecterrorsisthereforeacriticalskillfora charteredcertifiedaccountant. Theeasiestapproachtotakeistotakethreestepsandresistthetemptationtotrytosimplifythem, asrushingintoasimplificationnormallyresultsinfurthercomplicationandapoortrailforanother persontoreviewtheworkthatyouvedone.Sotheapproachtotakeis: 1. Workoutwhathasbeendonetorecordatransactionandwritedownthejournalthathas beenrecorded,nomatterhowcrazyitmightbe. 2. Workoutwhatthejournalentryshouldhavebeen. 3. Comparetheresultsfromsteps1and2toworkoutacorrectingjournal.

Ch 14 | 4

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter15
ACCA F3 Financial Accounting

Suspenseaccounts

START The Big Picture


Wesawinpreviouschaptersthatifallisworkingwellwithanaccountingsystem,thetotalofthe debitswillequalthetotalofthecreditswhenatrialbalanceispresented. Errorsmayoccurthatwillresultintotaldebitsnotbeingequaltototalcredits.Thismayarisein manysituations,including: Onesidedjounral(egDrCash$100only) Postingbothsidesofajournalonthedebitorcreditside(egDrReceivables$80,DrSales $80) Recordingdifferentamountsonthedebitandcreditsides(egDrPayables$230,CrCash $320). Ifatrialbalanceisproducedfrequently,itwillbepossibletospottheseerrorswhiletheyarerecent enoughtohaveagoodchanceoffindingthem.

Ch 15 | 1

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Inordertohighlighttheproblem,asuspenseaccountiscreatedwhichwillfilltheholeinthetrial balance.Asuspenseaccountisanequityaccount,whichshouldbeeliminatedinfullbeforethe financialstatementsareproduced.Becauseasuspenseaccountmayariseduetomultipleerrors, someofwhichwillbeadebittosuspenseandsomeacredittosuspense,itreallyoughttobe eliminatedinfullandthisiswhatyoushouldexpecttohavetodointheexam.Inpractice,its normaltofindthatsuspenseaccountscanbecomeverysmall,whentheeffortinclearingthem becomesdisproportionatetothebenefit.Theyarethenoftenwrittenofftoprofitorlosstoclear themoncetheresidualfiguresbecometriviallysmall,asthechanceofadifferenceof$0.10being thenetoftwolargecompensatingerrorsisverysmall. Deliberatecreationofsuspenseaccounts Asuspenseaccountmaybeuseddeliberatelywhereatransactionhashappenedbutthebookkeeper isuncertainwhatitrelatesto.Byrecordingthetransactioninsuspense,itcanensurethatthe recordsareatleastpartiallycorrect,butcanthenbecorrectedfullywhentheinformationnecessary isknown.

Ch 15 | 2

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter16
ACCA F3 Financial Accounting

Incompleterecords

START The Big Picture


Itscommonforsmallerbusinessesnottomaintainperfectsystemsforcapturingdatathatcanthen beusedtoproducethefinancialstatements.Insomesituationsaswell,itscommontohaveto constructfinancialinformationtofindmissinginformationabouttransactionsthatdontget recordedinthesystembecauseoftheirnature,suchaslossesduetotheftofinventory. Thekeytechniquestoanswerexamquestionsonthisare: Coststructuresofmarkupandmargin UseofTaccountstofindmissingfigures Useoftheaccountingequation/businessequationtofindmissingfiguressuchasprofit(this wascoveredinchapter1).

KEYKNOWLEDGE Marginandmarkup

Thereisaterminologydistinctionherethatisimportant: Markupmeansthatyoustartwiththecostofasale,thenaddthemarkup%todeterminesales price. Marginmeansthatyoustartwiththesalesprice,ofwhichaspecified%willbegrossprofit.


Ch 16 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Markup Margin Salesrevenue 120% Salesrevenue 100% Costofsales 100% Costofsales 80% Grossprofit 20% Grossprofit 20% Withdrawalofinventoryforownuse Inasmallerbusiness,aproprietorislikelytowithdrawinventoryforhis/herownuse.Thisisa withdrawalfromthebusiness. Thepurchaseofinventorywillhavebeenwrittenofftopurchases,withincostofsales.However,if theinventoryistakenbytheproprietor,ithasnotbeensold.Acommonaccountingtreatmentand theonetouseinanyexamquestionisthereforetoremoveitfromcostofsales(atcost)anddebit towithdrawals.

Ch 16 | 2

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter17
ACCA F3 Financial Accounting

Limitedcompanies

START The Big Picture


Separatelegalidentity Asoletraderisadifferententitytohis/herbusinessasfarasaccountantsareconcerned,butnotas farasthelawisconcerned.Thebusinessdebtsofasoletraderareindistinguishablefromthethat personsgeneraldebtsintheeventthatthebusinessgoesinsolvent.Asoletrader,ortraditional unlimitedpartnership,isariskyformofenterpriseasifitgoesbankrupt,thetrusteeinbankruptcy canseektorecoverpersonalassetstomakeuptheshortfall. Thiscanbeadifferentstorywithacompany,sinceacompanyhasalegalidentityofitsown,being anartificiallegalperson. Notethatlimitedliabilitydoesnotmeanthattheliabilityofthecompanytoitscreditorsis limited!Itmeansthattheliabilityofthememberstothecompanyislimited.Thisisdevelopedin greaterdetailinpaperF4GLO.

Ch 17 | 1

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

The members...

....enjoy limited liability to....

...the limited company....

...which has unlimited liability to...

...its creditors.

Taxation Withasoletraderorpartnership,taxationexpensedoesnotappearintheSOCI.Thisisbecausethe soletradersorpartnerstaxliabilitydependsonlotsofotherthings,suchasanyothersourcesof incomethattheymayhaveortaxdeductiblepersonalexpenses.Thebusinessisnotthecomplete storyoftheownerswealth,sothetaxliabilityofthatpersonfrombusinessearningscannotbe known. Withacompany,thetaxpositionisknown,sincethecompanyitselfwillhavealiabilityforcorporate incometax.Thismeansthatitispossibletomakeanestimateofwhattaxwillbedueonprofitfor theperiod.Thistax: Islikelytobeanestimateattheyearendasthereareoftenadjustmentstoaccounting profittoagreewiththetaxauthority,clarificationtobeobtainedonwhethercertain expensesaredeductible,ifanytaxlossescanbeoffsetagainstcurrentyearprofit,etc,and Islikelytobepaidsometimeaftertheperiodend,soisaliabilityintheSOFPattheperiod end.

KEYKNOWLEDGE Equity

TheequitysectionoftheSOFPofalimitedcompanywilllookdifferenttothatofasoletrader.This wasoutlinedinchapter10.Companiesareregulatedinlawbywhatdividendtheycanpayand whichreservesdividendscanbepaidfrom.Basically,dividendscanonlybepaidoutofretained earnings.Retainedearningsarethecumulativeofrecognisedprofit(nottotalcomprehensive income)lesscumulativedividendspaid. Othercomprehensiveincome(egrevaluationgains)aretransferredtorevaluationreserve.Seethe statementofchangesinequityinchapter10foranexampleofthis.


Ch 17 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Componentof equity Ordinaryshare capital Whatitis Distributable?
ACCA F3 Financial Accounting

Recordsthenominalvalueofthesharesissuedtodate. Ordinarysharesgenerallyhaveonlyadiscretionary dividendandcomewithvotingrights.

No

Preferenceshare capital

Recordsthenominalvalueofpreferencesharesissuedto No date.Preferencesharesnormallycarryafixeddividend buthavenovotingrights. Recordstheexcessovernominalvalueofconsideration receivedontheissueofshares. Recordscumulativerevaluationgainsonprofitabove historicalcost.Movementsonrevaluationreservewill bereportedinothercomprehensiveincomewithinthe statementofcomprehensiveincome Recordscumulativerecognisedprofit,lesscumulative dividendsreceived. SomeIFRSrequiresomegainsandlossestobereported inotherequity.Sometimescompaniesmaychooseto maintainaseparatecomponentofretainedearnings,or nationallawrequiresit,egsomenationallawsrequire that5%ofprofiteachyearistransferredtoanon distributableotherreserve. No

Sharepremium account Revaluationreserve

No

Retainedearnings

Yes

Otherreserves

Partially.Wise totreatasnon distributable.

Notethatcurrentmarketpriceofsharesisnotrelevanttoaccounting.Onlythevaluationof consideration(normallycash)receivedbythecompanyforissueofsharesisrelevanttotheSOFP.

Ch 17 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

theexpgroup.com

ExPress Notes
Chapter18
ACCA F3 Financial Accounting

Statementsofcashflow

START The Big Picture


Purposeofastatementofcashflow Inadditiontoinformationaboutprofitandothercomprehensiveincome,itisusefultoprovide investorswithanalysedinformationaboutcashflows.Thisgivesthefollowingbenefits: UnderstandabilitySmallerinvestorsinparticulararelikelytofindcashflowseasiertounderstand thantotalcomprehensiveincome. Businessvaluationacommonmethodofvaluingbusinessesistoworkoutthenetpresentvalueof cashflows.ThisiscoveredinotherACCApapers,butforF3youneedtoknowthatcashflow informationfeedsintothiscommontypeofvaluation. Predictingliquidityproblemswhencompaniesrunoutofcash,theyareofteninserioustrouble andmaygooutofbusiness.Ifabusinessisreportingprofitsbutnotcollectingcash(egbymaking salesonexcessivelygenerouscreditterms)thenthisneedstobemadecleartoreaders.
Ch 18 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Whatiscash?

IAS7presentsastatementofcashflowsusingbothcashandcashequivalents.Acashequivalentis ashortterm,highlyliquidshortterminvestmentthatisreadilyconvertibleintoaknownamountof cashandissubjecttoinsignificantriskofchangesinvalue.Tosomeextent,thisisasubjective definition.Intheexam,itwillbemadeclear. Cashandcashequivalentswillinclude: Notesandcoins Demanddepositsatabank Foreigncurrencydeposits(willnotbeinpaperF3) Governmentbondsveryclosetomaturitydate(willnotbeinpaperF3). Cashandcashequivalentswillexclude: Sharesinothercompanies Longdatedbonds. Ifacompanyusescashtobuyacashequivalent,itwillnotbereportedinthestatementofcash flowsasacashmovement. Ifacompanyusescashorcashequivalentstobuyshares,itwillbereportedinthestatementofcash flowsasacashoutflowoninvestingactivities. Profitvcashflow Wehaveseenalreadythattherearemanyitemswithinastatementofcomprehensiveincomethat donotrepresentamovementofcash. Themethodusedbymostcompaniestopresentastatementofcashflowsreconcilesoperating profit(earningsbeforeinterestandtaxation)tocashgeneratedfromoperations(iecashflowfrom coreoperations,beforebuyingorsellingnoncurrentassetsorraisingnewfinance). Ifatransactionorjournaladjustmentaffectsearningsbeforeinterestandtax,butdoesnotaffect cashfromoperations,thenitisadifference.Thatdifferencewillbepartofthereconciliation. Anumberofmultiplechoiceitemsislikelytofocusonthispartofpreparationofastatementofcash flowsundertheindirectmethod,soitsworthbeingabletodoinfull;evenifthiscouldnotbe requiredintheexamitself.
Ch 18 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Directmethodorindirectmethod

ThecashgeneratedfromoperationsmaybepresentedunderIAS1usingtwoalternative presentations,bothofwhichreachthesamefigure,butbydifferentmeans. Thedirectmethodisshorterinpresentationbutoftenlongertocalculatethefiguresinanexam. $ $ 28,200 Cashreceivedfromcustomers Cashpaidtosuppliersandemployees (24,500) Cashgeneratedfromoperations 3,700 Interestpaid (140) Incometaxespaid (340) Netcashfromoperatingactivities 3,220 Cashflowsfrominvestingactivities Purchaseofproperty,plantandequipment (1,620) Proceedsfromsaleofequipment 120 Interestreceived 80 Dividendsreceived 190 Netcashusedininvestingactivities (1,230) Cashflowsfromfinancingactivities Proceedsfromissueofsharecapital 70 Proceedsfromlongtermborrowings 180 Dividendspaid (40) Netcashusedinfinancingactivities 210 Netincreaseincashandcashequivalents 2,200 Cashandcashequivalentsatthestartoftheperiod (1,450) Cashandcashequivalentsattheendoftheperiod 750
Ch 18 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Indirectmethod $ Profitbeforetax 3,105 Financecosts 150 Profitbeforeinterestandtax 2,995 Adjustmentsfor: Depreciation 370 Amortisation 100 Increaseininventories 65 Increaseinreceivables 330 Increaseinpayables (120) Cashgeneratedfromoperations Interestpaid Incometaxespaid Netcashfromoperatingactivities Cashflowsfrominvestingactivities (1,620) Purchaseofproperty,plantandequipment Proceedsfromsaleofequipment 120 Interestreceived 80 Dividendsreceived 190 Netcashusedininvestingactivities Cashflowsfromfinancingactivities Proceedsfromissueofsharecapital 70 Proceedsfromlongtermborrowings 180 Dividendspaid (40) Netcashusedinfinancingactivities Netincreaseincashandcashequivalents Cashandcashequivalentsatthestartoftheperiod Cashandcashequivalentsattheendoftheperiod
Ch 18 | 4

ACCA F3 Financial Accounting

3,700 (140) (340) 3,220

(1,230)

210 2,200 (1,450) 750

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Findingcashflowsusingdoubleentry AmultiplechoicequestionmayprovideyouwithinformationaboutitemsintheSOFPattheendof thisperiod,theendofthepreviousperiodandprovidefiguresfromtheSOCI.Youwouldthenbe requiredtofindthecashflowasthebalancingitem,usingTaccounts.Thisisexactlythesame techniqueasusedinincompleterecords. Techniquetouse Thetechniquehereisnothingnewtolearn;itisexactlythesameapproachasforincomplete records: Identifyanyasset/liabilityaccountsinthequestionwhereyouaregivenbothanopening andclosingbalance. WriteupaTaccountforthisaccount,includingallthedatathatyouaregiven. Balanceoffthisaccounttofindtheinformationthatyouarelookingfor,whichwillbethe cashpaidorreceivedrelatingtothatasset/liabilityintheperiod.

Ch 18 | 5

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter19
ACCA F3 Financial Accounting

Partnershipaccounting

START The Big Picture


Inchapter1,welookedatthedifferencesbetweensoletraders,partnershipsandlimited companies.Apartnershipisbasicallyacollectionofsoletraderswhoworktogether.TheUK PartnershipAct1890,uponwhichpartnershipquestionsintheF3examarelikelytobebased definesaspartnershipastherelationwhichsubsistsbetweenpersonscarryingonabusinessin commonwithaviewofprofit.Youdontneedtoknowthisdefinitionfortheexam,butithelps appreciatewhatapartnershiparelationshipbetweenindividuals,ratherthannecessarilybeinga legalentityinitsownright. Theflowoftransactionsandpreparationofaccountsfromchapter14isslightlyamendedwhenit comestotheequitysectionoftheSOFP.Insteadoftransferringprofitasonefiguretocapital(or retainedearningsifitsalimitedcompany),theresanadditionalstepofanappropriationaccount. Theappropriationaccountisatemporaryaccountwiththesolepurposeofdistributingprofit betweenpartnersinaccordancewiththeagreementforprofitsharingbetweenthepartners,the operationoflocallaw,orsomecombinationofbothwhereapartnershipagreementisincomplete.

Ch 19 | 1

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Finaltrialbalance

Producefinancial statements

Resetincomeand expenditureaccountsto zerobytransferring balacnestoprofitandloss account

TransferprofitandlossT accounttoappropriation account

Shareprofitfrom appropriationaccountto partners'capitalfollowing partnershipagreement

Openingtrialbalanceof nextperiod

KEYKNOWLEDGE Principalissuestounderstandinpartnerships


Ch 19 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

Whatapartnershipis(seeabove) HowtheequitysectionoftheSOFPdiffersinapartnershipcomparedwithasoletraderand limitedcompany Howtodivideprofitbetweenthepartners Recordingwithdrawalsmadebypartners Recognisinggoodwillinthepartnershipaccountsandchangesinmembershipofthe partnership.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE PartnershipSOFPandequity

Theownershipofapartnershipissplitbetweeneachpartnerscapital,whichrecordseachpartners staticinvestmentinthefirmandisbasedontheirinitialcashintroducedandeachpartners currentaccount,whichrecordseachpartnersvariableinvestmentinthefirm.Intheory,each partnercouldwithdrawtheircurrentaccountinfullatanytime. Thismeansthatifthereare20partners,therewillbe40accountswithinequityinthegeneralledger andinthepresentationoftheSOFP.Intheexam,itslikelythatapartnershipwillcompriseonlytwo orthreepartners. $ $ Partnerscapitalaccounts MrRag 140,000 MrsTag 180,000 MissBobtail 26,000 Totalcapital 346,000 Partnerscurrentaccounts MrRag 90,000 MrsTag 72,000 MissBobtail (3,000) Totalcurrentaccounts 159,000 Totalequity 505,000 Legaltermsusedinpartnerships Therearecertainlegaltermsusedinpartnershipagreements.Inmostjurisdictions,thelawprovides defaulttermsofthepartnershipagreement.Generally,thepartnershipagreementvariestheterms ofthisagreementbutifthereisnospecificagreement,thelawsdefaultprovisionsapply. TheUKPartnershipAct1890isusedasanexemplarhere,butobviouslyfollowtheappropriate nationallaw!Intheexam,itislikelythatthetermsofapartnershipagreementwouldbecomplete.
Ch 19 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Term Whatitmeans PartnershipAct 1890defaultrule 5%annualsimple interestonloans.
ACCA F3 Financial Accounting

Interestonloans Anexpenseofthebusiness DrExpense(P/L)$x CrPartnerscurrenta/cs$x Salaries Anappropriationofprofit, ratherthananexpense DrAppropriationaccount$x CrPartnerscurrenta/cs$x Interestoncapital Anappropriationofprofit, ratherthananexpense DrAppropriationaccount$x CrPartnerscurrenta/cs$x Withdrawals/drawings Areductionininvestment. DrPartnerscurrentaccount$x CrCashorotherassettaken$x Interestonwithdrawals DrPartnerscurrentaccount$x CrAppropriationaccount$x
Ch 19 | 4

Partnersmaymakeshorttermloanstoa firmtotideitovershorttermworking capitalproblems.Thisisanexpensein profitratherthananappropriationof profit.

Afirstcallonprofitsofthefirm.Notethat thisisadifferentmeaningtosalariesfor staff,whichisanexpense.Salariesfor partnersareanappropriationofprofit ratherthananexpense.

Nosalariesawarded toanypartner.

Torewardpartnerswiththegreatest financialinvestmentinthefirm,afirst shareofprofitmaybegiventopartnerson theiropeningcapitalaccount.

Nointereston capital.

Resourcestakenoutofthefirmbyeach partner,thesameaswithdrawalsbyasole trader.

Onlyrestrictionis thebalanceoneach partnerscurrent account.

Afineoneachpartnerbythepartnership; normallyifwithdrawalsaretakenoutearly oraboveanapprovedlevel.

Nointereston withdrawals

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Profitsharingratio Anappropriationofprofit. DrAppropriationaccount$x CrPartnerscurrentaccount$x Afterallpriorcallsonprofitaremade,the residualprofitissharedintheresidual profitsharingratiobetweeneachpartner. Mostpartnershipagreementsgiveahigher shareofprofittothemoreseniorpartners. Apartnershipagreementmayalso guaranteeapartneraminimumshareof profit. Anassetrepresentingthevalueofthe firmsname,etc.Normallynotkeptonthe SOFP,butoftenintroducedatatimeofa partnershipchange(seebelow). Partnersshare residualprofitsand lossesequally, regardlessof balanceoncapital account,etc.
ACCA F3 Financial Accounting

Goodwill Anasset

NotontheSOFP, meaningthatitsan offbalancesheet asset.

Presentationofworkings Tosavetime,itsnormalforpartnershipaccountstobepresentedusingamulticolumnapproach thateffectivelycombineseachpartnerscapitalaccount,orcurrentaccount.

KEYKNOWLEDGE Guaranteedminimumprofitshare

Itspossiblethatapartnershipagreementmayguaranteeoneormoreofthepartnersaminimum profitshare.Thewaytodealwiththisis: Calculateprofitshareasnormal Checkthateachpartnersprofitshareisabovetheguaranteedminimum Ifthereisanyshortfallbetweenallocatedprofitshareandminimumprofitshare,transfer theshortfalltothepartnerwhoisguaranteedtheminimumprofitshare.Splitthe differencebetweentheotherpartnersintheprofitsharingratiobetweentheotherpartners whoseprofitshareisbeingreduced. Thereallocationbetweenpartnersisrecordedasatransferwithinthecurrentaccountsofeach partner.
Ch 19 | 5
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

KEYKNOWLEDGE Goodwill

Goodwillisthevalueofabusiness,otherthantheseparatevalueofitsindividualnetassets.Ina partnership,reputation,clientlist,motivatedstaffandbrandnamearealllikelytobepartof goodwill.Sincethesethingsariseasahappybyproductofsimplytrading,theydonothavean identifiableseparatecost(egnocashwaseverpaidspecificallytoacquirereputation). GoodwillgeneratedwithinabusinessisnotnormallyrecognisedasanassetontheSOFP,asits valuationistoosubjectivetobereliable.PartnershipsdontgenerallyhavetofollowIFRS,butIFRS prohibitsrecognitionofinternallygeneratedgoodwillonaSOFP.Mostpartnershipschooseto followthisrule. Calculationofgoodwill Therearemanywaystoestimategoodwill.Alargerpartnershipwilloftencontainprovisionsfor howgoodwillistobecalculated.Goodwillisthedifferencebetweenthebusinessasawholeand thevalueoftheidentifiableseparatenetassetsofthebusiness.Soitmaybecalculatedas: $000 Estimatedvalueofthebusinessasawhole 1,340 Less:Fairvalueofindividualnetasset (1,030) Valueofgoodwill 310 ThevalueofthebusinessasawholemaybeestimatedusingtheP/Eratioofsimilarbusinesses, oftenwithsomeadjustment.TheP/Eratioisameasureofconfidenceinabusiness,wherePisthe marketpriceofashareandEisthemostrecentearningspershare.AP/Eratioof12meansthatthe sharepriceiscurrently12timesthemostrecentearnings. Othermethodsmayexist,suchasthreetimesthemostrecentturnoverorsimilarmethods.Insome industries,thereareacceptedindustrybenchmarksforestimatinggoodwill.

Ch 19 | 6

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Chapter20
ACCA F3 Financial Accounting

Eventsafterreportingdate,errorsand estimates

KEYKNOWLEDGE Eventsafterthereportingdate

Eventsafterthereportingdateareonesthathappenbetweenthefinancialyearendandwhenthe financialstatementsareauthorisedforissue.Theyarecolloquiallyreferredtobymostpeopleas postbalancesheetevents. Allmaterialeventsafterthereportingdatemustbedisclosedandexplainedinthenotestothe financialstatements. Anadjustingeventisonethatgivesfurtherinformationonconditionsthatexistedatthereporting date.Thefiguresinthefinancialstatementsareamendedtoincorporatethelatestavailable information. ExamplesofadjustingeventsaccordingtoIAS10EventsAftertheReportingPeriodinclude:


Ch 20 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes
Bankruptcyofamajorreceivable,asthereceivablewouldbealmostcertaintohavebeenin troubleattheperiodend. Saleofinventoryaftertheperiodendataloss. Resolutionofamatterrequiringaprovisionatthereportingdate,suchasalitigationin progressattheperiodend. Anymatterwhichcausesthecompanytonolongerbeagoingconcernaftertheperiodend willbeanadjustingevent,evenifitwouldnormallybeanonadjustingevent. Discoveryorfraudorerrorinthepreparationofthefinancialstatements.
ACCA F3 Financial Accounting

Examplesofeventsthatwouldbenonadjusting,butwouldbedisclosedinthenotestotheaccounts onlyinclude: Issueofnewshares Declarationofadividendafterthereportingdate.

KEYKNOWLEDGE Errorsandestimates

IAS8AccountingPolicies,ChangesinAccountingEstimatesandErrors AccountingpoliciesarethedetailedapplicationsofIFRSthatacompanychoosestoapply. Examples: Howsimilartypesoftransactionsaregroupedandreportedtogether(egclassesofnon currentasset) Atwhatexactpointrevenueisrecognised Whatdeminimisfiguretousewhenrecognisingnoncurrentassets. Accountingestimatesarebestguessesnecessarilymadeinthepreparationofthefinancial statements,including: Expectedusefullivesofassets Residualvalueofassets Howmuchalawsuitislikelytocostthecompanytosettle Recoverablevalueofassetsforthepurposesofcalculatingimpairmentlosses Defaultratebyoverduereceivableswhendeterminingallowance. Accountingestimatesarebytheirnatureuncertainandunlikelytoprovetobeexactlywhat happens.
Ch 20 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ExPress Notes

ACCA F3 Financial Accounting

Correctionofaccountingestimatesisprospective.Thismeansthatanerrorinestimatein20x1is correctedin20x2,withnoattempttorestatethefiguresfor20x1. Accountingerrorsrelatetoerrorsinpreviousperiods.Theseareerrorsthatcouldreasonablyhave beenexpectedtohavebeencorrectedatthetimethatthepreviousperiodsfinancialstatements wereauthorisedforissue.Errorsdiscoveredbeforeissueofthecurrentyearsfinancialstatements willbecorrected,asallaccountingerrorsareadjustingeventsunderIAS10(seeabove). Correctionofaccountingerrorsisretrospective.Thismeansthatthepreviousyearsfinancial statementsarerestatedtothefiguresthattheyshouldhavebeen.Thecomparativefigureswillbe differenttowhatwaspreviouslyreportedsowillneedtobeheadedrestated.Anycumulative differencesatthestartoftheyearbetweenthepreviouslyreportedfiguresandtherestatedfigures willbetakentoequityatthestartofthecurrentperiod. Anycorrectionofanaccountingerrorwillonlybeiftheerrorismaterial(ielargeenoughto influenceusersopinions).Particulars,reasonandeffectofthecorrectionwillalsoneedtobegiven fullandfrankdisclosureinthenotestotheaccounts.

Ch 20 | 3

2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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