FBT - Class Notes - F3

ACCA F3
FINANCIAL
ACCOUNTING
International Stream
TUITION
CLASS NOTES
FBT PUBLISHING
ACCA F3 Financial Accounting
Page 1
Appendix
The following notes are suitable for both the international and UK streams.
There will some terminology differences between the two streams. These
are summarised below:
International
UK
Statement of comprehensive
income
Profit and loss account
Statement of financial position
Balance sheet
Non-current assets
Fixed assets
Inventory
Stock
Trade receivables
Debtors
Non-current liabilities
Long term liabilities
Trade payables
Creditors
Irrecoverable debts
Bad debts
FBT PUBLISHING
Page 2
Contents
Paper background
Session 1
Introduction to accounting
Session 2
Financial statements
Session 3
Double entry book keeping
Session 4
Non-current assets
Session 5
Inventory
Session 6
Irrecoverable Debts
Session 7
Control Accounts
Session 8
Bank Reconciliations
Session 9
Accruals and prepayments
Session 10 Limited Company accounts

Session 11 Statements of cash flow
Session 12 Incomplete records
Session 13 Partnerships
FBT PUBLISHING
Page 3
Paper background
Aim
The aim of this paper is to develop knowledge and understanding of the
underlying principles and concepts relating to financial accounting and technical
proficiency in the use of double-entry accounting techniques including the
preparation of basic financial statements.
Main capabilities
On completion of this paper, you should be able to:
Explain the context and purpose of financial reporting
Define the qualitative characteristics of financial information and the
fundamental bases of accounting
Demonstrate the use of double-entry and accounting systems
Record transactions and events
Prepare a trial balance (including identifying and correcting errors)
Prepare basic financial statements for incorporated and unincorporated entities
The assessment
The exam can be sat either written or computer based, both methods are 2
hours long.
Written
40 x 2 mark questions
Multiple choice A / B / C / D
10 X 1 mark questions
Multiple choice A / B or A / B / C
Computer based
Questions can be multiple choice, multiple response,
matching or number entry
right answers)
Multiple response (correctly identify two from three
The pass mark is 50%
FBT PUBLISHING
Page 4
SESSION 1
INTRODUCTION TO ACCOUNTING
Learning outcomes
Understand the purpose of accounting

Identify the different types of businesses
Indentify the users of accounts
Explain the qualitative characteristics of financial statements
Understand the underlying assumptions of financial statements
Introduction
WHAT IS ACCOUNTING?
Accounting is made up of two elements:
I.
II.
Recording business transactions - Book keeping

Presenting the information
WHAT IS A BUSINESS?
A business is a commercial organisation which exists with a view to making a
profit. There are different types of businesses which will fall into 3 categories:
Sole Trader
This is a business that is owned and operated by one person
Partnership
This type of business is owned by several individuals, some of which will actively
be involved in the business
Companies
This type of business is owned by shareholders and is operated on their behalf by
a nominated board of directors. Companies will be covered in greater detail in
later sessions
FBT PUBLISHING
Page 5
Users of accounts
The users of accounts will depend on the type of accounts that are produced.
There are two main types of accounts:
Management accounts
Financial accounts
Management accounts
These are produced as often as a business wants them (usually monthly). They
are produced for internal use and will not, usually be seen by external people.
Management accounts can be prepared using the companys own internal
policies.
Financial accounts
These accounts are usually produced annually. They are based on historical
information and are rarely used internally. Financial accounts are used by
external users for several reasons:
Investors
Lenders
Employees
Government
Public
FBT PUBLISHING
Page 6
SESSION 2
FINANCIAL STATEMENTS
Learning outcomes
After completing this chapter, you should be able to:
Identify the layout of a Statement of Financial Position for a sole trader and
a company
Identify the layout of a Statement of Comprehensive income for a sole
trader and a company
Understand the principles and layout for a Statement of Changes in Equity
Introduction
There are four key financial statements:
Statement of Financial Position
This financial statement lists the assets and liabilities of a business at a point in
time. It is a snapshot of the companys position AS AT A POINT IN TIME
Statement of Comprehensive Income
This statement is a summary of the income and expenditure of the business for a
PERIOD OF TIME.
Statement of Changes in Equity
This statement links the statements of comprehensive income and financial
position.
Statement of Cash Flow
The statement of cash flow reports the cash generation and cash absorption for a
PERIOD OF TIME.
The starting point in the preparation of the financial statements is to produce a

TRIAL BALANCE. The trial balance is basically a list of ledger balances. A
business will use a trial balance as an INDICATION that all accounting entries
have been recorded and all entries are correct.
A trial balance MUST balance. If there is an imbalance, this indicates an error in
the initial entries. In this case a suspense account is created until the errors can
be detected.
FBT PUBLISHING
Page 7
Proforma set of financial statements for a sole trader.

Statement of Financial Position as at 31 December 2007
Non current assets
Buildings
Fixtures and fittings
Motor vehicles
Cost
Depn
NBV
150,000
45,000
26,000
(12,000)
(11,250)
(13,260)
138,000
33,750
12,740
221,000
(36,510)
184,490
13,777
12,775
2,800
3,400
32,752
Current assets
Inventory
Trade receivables
Prepayments
Cash
Total assets
217,242
Opening capital
Profit
Drawings
152,465
51,787
(35,900)
168,352
Non current liabilities

Loan
20,000
Current liabilities
Trade payables
Accrued Loan interest
Other accruals
12,445
1,000
15,445
Total liabilities
FBT PUBLISHING
28,890
217,242
Page 8
Statement of Comprehensive Income for the year ended 31 December

2007
Revenue
233,000
Less: Cost of sales

Opening inventory
Purchases
Carriage inwards
12,332
119,098
1,009
132,439
(13,777)
Closing inventory
GROSS PROFIT
118,662
114,338
Discounts received
5,111
Other income
4,000
123,449
Less: Expenses
Discounts allowed
Depreciation
Gas and electricity
Irrecoverable debts
Loan interest
Carriage outwards
Water rates
Advertising
Other expenses
3,444
10,710
14,122
7,134
4,000
5,666
8,444
15,000
3,142
NET PROFIT
FBT PUBLISHING
71,662
51,787
Page 9
Proforma set of financial statements for a limited company or Plc

Statement of financial position as at 31 December 2007
Non current assets
Note
6
7
Intangible assets
Tangible assets
200,000
187,999
Current assets
Inventory
Trade receivables
Cash
8
9
88,432
97,455
13,400
Total assets
199,287
587,286
Equity and liabilities

Share capital
Retained earnings
Revaluation reserve
100,000
220,497
38,000
358,497

Interest bearing borrowings
10
100,000
Current liabilities
Trade payables
Taxation
Total liabilities
FBT PUBLISHING
77,789
51,000
128,789
587,286
Page 10
Statement of comprehensive income for the year ended 31 December

2007
Note
Revenue (Sales)
385,000
Cost of sales
188,000
GROSS PROFIT
197,000
Distribution costs
38,500
Administration expenses
37,700
PROFIT FROM OPERATIONS
120,800
Finance costs
8,000
PROFIT BEFORE TAX
112,800
Income tax
53,000
PROFIT FOR THE PERIOD
59,800
Statement Of Changes In Equity for the year ended 31 December 2007

(SOCIE)
Share
Capital
Balance as at 1 Jan 2007
100,000
Profit for the period
Revalua
tion
Reserve
188,697
40,000
59,800
Surplus depreciation (not impt for

F 3)
2,000
Dividend paid
Closing balance
Retaine
d
Earning
s
220,497
328,697
59,800
(2,000)
(30,000)
100,000
Total
(30,000)
38,000
358,497
The format for company accounts is laid down in I.A.S. 1 Presentation of

Financial Statements. This structured format aids comparability and makes
information more useful.
FBT PUBLISHING
Page 11
Notes detailing the balances in the financial statements are provided giving a
detailed breakdown of the balance.
FBT PUBLISHING
Page 12
SESSION 3
DOUBLE ENTRY BOOK KEEPING
Learning outcomes
When you have completed this chapter, you should be able to:
Understand the principles of double entry bookkeeping

Apply double entry bookkeeping to a list of transactions
Prepare financial statements for a sole trader
Introduction
Bookkeeping is the recording of monetary transactions of a business.
Double entry bookkeeping

Double entry bookkeeping is the fundamental concept underlying accountancy.
All accounting transactions should be recorded using the double entry system.
There are some basic rules that we MUST follow:
1. Every debit must have a credit
2. A debit entry is an ASSET in the STATEMENT OF FINANCIAL POSITION or an
EXPENSE in the STATEMENT OF COMPREHENSIVE INCOME
3. A credit entry is a LIABILITY in the STATEMENT OF FINANCIAL POSITION or
an INCOME in the STATEMENT OF COMPREHENSIVE INCOME
T accounts
In order to assist us with the preparation of the financial statements we use T
accounts for simplicity. The principles of T accounts are:
Every debit entry has a credit entry

Every T account will belong to the statement of financial position or the
statement of comprehensive income
The closing balance of a T account at the end of the period is entered into
a trial balance
FBT PUBLISHING
Page 13
EXAMPLE 1
George commences business on 1 April 2006. The following transactions take
place in his first two weeks of trading.
1 AprilHe invests $50,000 in to a business

1 AprilHe purchases $5,000 worth of goods on credit
2 AprilHe sells half of the inventory for $6,000 cash
5 AprilHe issues a cheque to pay for the goods he received on credit
4 AprilPays his rent for April of $450 by cheque
7 AprilHe sells his remaining stock for $6,000 on credit
10 April Purchased goods on credit for $7,000
14 April He purchases a delivery van for $7,000 cash
Required
For the first two weeks of trading prepare:
The
The
The
The
T accounts for George (State if the account is Position or Income)

trial balance
FBT PUBLISHING
Page 14
EXAMPLE 2
Tina starts her business on 1 January 2007. The following transactions take
place in her first month of trading:
1 Jan She invests $65,000 in to the business

2 Jan She purchases $8,000 worth of goods on credit
2 Jan She sells a quarter of the inventory for $4,000 cash
3 Jan Issues a cheque to pay for half of the goods she received on credit
14 Jan Pays her insurance for January by issuing a cheque for $75
15 Jan She sells the remaining inventory for $12,000 on credit
16 Jan Purchases inventory at a cost of $10,000 on credit
18 Jan Purchases some office equipment for $3,000 cash
20 Jan Pays her rent for January by cheque $150
21 Jan Sells half her inventory for $10,000 cash
25 Jan Withdraws $100 for petty cash
31 Jan Purchases office supplies worth $30 from petty cash
Required
For the first month of trading prepare:
The
The
The
The
T accounts for Tina (state if the account is Position or Income)

trial balance
FBT PUBLISHING
Page 15
ANSWER TO EXAMPLE 1
GEORGE
Bank Account
Dr
Cr
1 April
Capital
2 April
Sales
50,000 5 April
6,000 4 April
14 April
Trade Payables
Rent
Delivery Van
Carried Forward
56,000
Bought Forward
5,000
450
7,000
43,550
56,000
43,550
Capital Account
Dr
Cr
1 April
Bank
50,000
Purchases
Dr
Cr
1 April
Trade Payables
5,000
10 April
Trade Payables
7,000
Carried Forward
12,000
FBT PUBLISHING
12,000
12,000
Page 16
Bought Forward
12,000
Trade Payables
Dr
5 April
Cr
Bank
5,000 1 April
Purchases
5,000
Carried Forward
7,000 10 April
Purchases
7,000
12,000
12,000
Bought Forward
7,000
Sales
Dr
Cr
2 April
Carried Forward
12,000 7 April
Cash
6,000
Trade
Receivables
6,000
12,000
12,000
Bought Forward
12,000
Rent
Dr
4 April
Cr
Bank
FBT PUBLISHING
450
Page 17
Trade Receivables
Dr
7 April
Cr
Sales
6,000
Delivery Van
Dr
14 April
Cr
Bank
FBT PUBLISHING
7,000
Page 18
George
Trial Balance
Statem
ent
Dr
Cr
Bank Account
FP
Capital Account
FP
Purchases
CI
Trade Payables
FP
7,000
Sales
CI
12,000
Rent
CI
450
Trade Receivables
FP
6,000
Delivery Van
FP
7,000
Total
FBT PUBLISHING
43,550
50,000
12,000
69,000
Page 19
69,000
George
2 Week Period Ended 14 April 2007
Sales
12,000
Cost of sales
Opening inventory
Purchases
12,000
12,000
Closing inventory
(7,000)
5,000
GROSS PROFIT
7,000
Less expenses
Rent
450
NET PROFIT
FBT PUBLISHING
6,550
Page 20
George
as at 14 April 2007
Non Current Assets
Delivery Van
7,000
Current Assets
Inventory
Trade Receivables
Bank Account
7,000
6,000
43,550
56,550
TOTAL ASSETS
63,550
Capital
Profit
50,000
6,550
56,550
Non Current Liabilities
Current Liabilities
Trade Payables
7,000
63,550
FBT PUBLISHING
Page 21
ANSWER TO EXAMPLE 2
TINA
Bank Account
Dr
1 Jan
2 Jan
21 Jan
Capital
Sales
Sales
65,000 3 Jan
4,000 14 Jan
10,000 18 Jan
20 Jan
25 Jan
Trade Payables
Insurance
Office Equipment
Rent
Petty Cash
c/f
79,000
b/f
Cr
4,000
75
3,000
150
100
71,675
79,000
71,675
Capital Account
Dr
1 Jan
Bank
Cr
65,000
Purchases
Dr
2 Jan
16 Jan
Cr
Trade Payables
Trade Payables
8,000
10,000
c/f
18,000
b/f
18,000
18,000
18,000
Trade Payables
Dr
3 Jan
Bank
c/f
4,000 2 Jan
14,000 16 Jan
Purchases
Purchases
18,000
Cr
8,000
10,000
18,000
b/f
14,000
Sales
Dr
FBT PUBLISHING
Cr
Page 22
2 Jan
15 Jan
c/f
26,000 21 Jan
Bank
Trade
Receivables
Bank
26,000
4,000
12,000
10,000
26,000
b/f
26,000
Insurance
Dr
14 Jan
Cr
Bank
75
Trade Receivables
Dr
15 Jan
Cr
Sales
12,000
Office Equipment
Dr
18 Jan
Cr
Bank
3,000
Rent
Dr
20 Jan
Cr
Bank
FBT PUBLISHING
150
Page 23
Petty Cash
Dr
25 Jan
Cr
Bank
100 31 Jan
Office Supplies
c/f
100
b/f
30
70
100
70
Office Supplies
Dr
31 Jan
Cr
Petty Cash
FBT PUBLISHING
30
Page 24
Tina Trial Balance

Statem
ent
Dr
Cr
Bank Account
FP
Capital Account
FP
Purchases
CI
Trade Payables
FP
14,000
Sales
CI
26,000
Insurance
CI
75
Trade Receivables
FP
12,000
Office Equipment
FP
3,000
Rent
CI
150
Petty Cash
FP
70
Office Supplies
CI
30
Totals
FBT PUBLISHING
71,675
65,000
18,000
105,000
Page 25
105,000
Tina
For January 2007
Revenue
26,000
Cost of sales
Opening inventory
Purchases
18,000
18,000
Closing inventory
(5,000)
GROSS PROFIT
13,000
Less expenses:
Insurance
75
Rent
150
Office supplies
30
255
NET PROFIT
FBT PUBLISHING
12,745
Page 26
Tina
as at 31 January 2007
Non Current Assets
Office Equipment
3,000
Current Assets
Inventory
Trade Receivables
Bank Account
Petty Cash
5,000
12,000
71,675
70
88,745
TOTAL ASSETS
91,745
Capital
Profit
65,000
12,745
77,745
Non Current Liabilities
Current Liabilities
Trade Payables
14,000
91,745
FBT PUBLISHING
Page 27
SESSION 4
NON CURRENT ASSETS
Learning outcomes
Define a non current asset

Distinguish between tangible and intangible non-current assets
Explain the differences between capital and revenue expenditure
Understand the concepts of I.A.S. 16 Accounting for non-current assets
Compile a non current asset register
Calculate and account for depreciation
Record the accounting entries for disposals of non-current assets
Introduction
A non-current asset is intended for continued use in a business. This would
generally mean for more than one accounting period. Non-currents assets can
be either TANGIBLE or INTANGIBLE. ACCA F3 concentrates on tangible noncurrent assets, however a knowledge of intangible non current assets is needed.
Tangible non-current assets
These are assets that have physical substance. Examples of tangible noncurrent assets would be:
Land and buildings
Plant and equipment
Motor vehicles
Computers
Fixtures and fittings
Intangible non-current assets
These assets have no physical substance. An example of an intangible noncurrent asset would be:
Goodwill
Development
FBT PUBLISHING
Page 28
Non-current assets are normally of substantial value and their accounting can
have a material impact on the financial statements. As a result of this there are
large numbers of accounting standards that help the preparers of financial
statements to account for them.
The key accounting standard relevant at this level is I.A.S. 16 Non-Current Assets
Non-current asset register
The majority of companies will own a number of non-current assets, and it is
imperative that effective control is kept over them. In order to ensure
management are aware exactly where each item is located and that they are
adequately maintained and serviced, a non current asset register is maintained.
A non-current asset register is generally maintained in the finance department.
Companies can purchase specifically designed packages or a register can simply
be maintained on an Excel spreadsheet.
A register would include the following information:
Item code
Date of purchase
Item description
Cost
Estimated useful life
Residual value (if any)
Depreciation method
Location
Disposal details
FBT PUBLISHING
Page 29
Capital and revenue expenditure

One of the key areas of accounting for non-current assets is deciding whether
expenditure incurred is CAPITAL or REVENUE expenditure.
If it is capital expenditure it will be capitalised in the statement of financial
position and then depreciated over the useful economic life of the asset. If it is
revenue expenditure it will be expensed through the statement of
comprehensive income.
We need to classify expenditure incurred as either capital or revenue in order to
ensure appropriate accounting entries are made.
Capital expenditure is expenditure likely to increase the future earning capacity
of the organisation whereas revenue expenditure is regarded as maintaining the
organisations present earning capacity.
Per I.A.S. 16 the following costs may be capitalised on acquisition of a noncurrent asset:
Initial cost
Delivery costs
Non-refundable import taxes
Installation costs
Any costs incurred in bringing the asset into intended use
Initial training costs
Subsequent expenditure that ENHANCES the performance of the asset
Costs that are regarded as revenue expenditure and may not be capitalised per
I.A.S. 16 are:
Insurance costs
Repairs
Maintenance
EXAMPLE 1
Capital
Revenue
Purchase of a motor
vehicle
Purchase of a tax disc
Fuel
Insurance
C D player
Alloy wheels
New tyre
Early settlement discount
FBT PUBLISHING
Page 30
Depreciation
Depreciation is the charge to the statement of comprehensive income to reflect
the consumption of an asset in a period.
By applying depreciation charges, we are consistent with the ACCRUALS /
MATCHING CONCEPT i.e. applying the cost of using the asset to the statement of
comprehensive income for the same period.
All tangible non-current assets should be depreciated on a systematic basis per
I.A.S. 16, with the exception of land. This is because land is seen to appreciate in
value.
Intangible non-current assets are amortised over their useful economic life (this
is just another term for depreciation).
Depreciation policies
Calculating depreciation in a given period are common questions in this paper.
The main methods of calculating depreciation are:
Straight line
Reducing balance
Straight line depreciation

Depreciation is charged on a straight line basis over the life of the non-current
asset. Thus an equal amount is charged in every accounting period over the life
of the asset.
To calculate the depreciation charge the following formula is used:
Depreciation per
annum
FBT PUBLISHING
Original cost estimated

residual value
Estimated useful Life
Page 31
EXAMPLE 2
Company A purchased a non-current asset on 31st July for $150,000. The asset
has an expected useful life of 5 years and a residual value of $20,000.
Calculate the depreciation charges for the year ended 31 st December on the
basis:
i.
ii.
A full years charge is made in the year of acquisition and none in the year
of disposal.
The companys policy is to time-apportion depreciation charges.
EXAMPLE 3
Company B purchases a machine for $23,000. They expect to use it for four
years and then sell it for $3,000.
What is the annual depreciation charge?
Reducing balance
This method of depreciation is generally used for assets which tend to lose more
value in the initial years and require greater maintenance in the later years. A
good example would be a brand new motor vehicle. Motor vehicles tend to
depreciate rapidly in the earlier years and require very little maintenance.
A fixed percentage is charged to the net book value on an annual basis. Hence,
as the book value of an asset reduces, the depreciation charge reduces
accordingly.
EXAMPLE 4
Company C purchases a motor vehicle for $25,000 and will depreciate it at a rate
of 25%.
Calculate the depreciation for the first three years.
Once the depreciation charge has been calculated it should be entered into the
accounts via a journal.
The journal for depreciation is:
Dr
Depreciation expense
(Statement of comprehensive income)
Cr
Accumulated Depreciation
(Statement of financial position)
FBT PUBLISHING
Page 32
Revaluations
When a non-current asset is purchased we record them at their initial cost.
However, over time these values may materially differ from their market value.
For example, if a company purchased a property 20 years ago and therefore
subsequently charged depreciation for 20 years, it would be safe to assume that
the book value of the asset would be significantly different from todays market
value.
In order to overcome this issue I.A.S. 16 permits companies to reflect the market
value in the statement of financial position. This policy may be adopted, and if
so the following rules must be applied per the standard:
i.
ii.
iii.
iv.
If a company chooses to revalue an asset they must revalue all assets in

that category
Revaluations must be regular
Subsequent depreciation must be based on the revalued amounts
Gains from revaluations are not taken to the statement of comprehensive
income, as no gain as been realised. This is covered by the PRUDENCE
concept.
EXAMPLE 5
Company X purchased a building for $45,000 15 year ago, and charges
depreciation of 2% on a straight line basis.
The property has been valued by a qualified person at $150,000 during the
current financial year. The directors would like to encompass these figures in the
financial statements.
Required:
Complete the necessary journals to account for the revaluation.
FBT PUBLISHING
Page 33
Disposal of a non-current asset

When a business disposes of an asset it is unlikely that the sale proceeds will
agree with the net book value. Therefore, a gain or loss will arise from the sale.
EXAMPLE 6
Company C has a motor vehicle with a book value of $6,000 (cost $22,000) and
disposes of it for $8,000.
We can establish that there is a gain of $2,000 (proceeds book value).
The accounting entries will need to follow three steps
1. Clear the cost from the cost account
2. Clear the depreciation from the accumulated depreciation account
3. Enter the proceeds
The entries are therefore:
Dr
Disposal Account
$22,000
Cr
Motor vehicle cost account
Dr
Accumulated depreciation $16,000
Cr
Disposal Account
Dr
Bank
Cr
Disposal Account
$22,000
$16,000
$8,000
$8,000
ANSWERS TO EXAMPLE 1
FBT PUBLISHING
Page 34
Capital
Purchase of a motor
vehicle
Purchase of a tax disc
Fuel
Insurance
C D player
Alloy wheels
New tyre
Early settlement discount
Revenue
ANSWER TO EXAMPLE 2
i
150,000
20,000
26,000
5
12
10,833
5,000
Ii
26,000
ANSWER TO EXAMPLE 3
23,000
3,000
ANSWER TO EXAMPLE 4
Year 1
Year 2
Year 3
25,000
25,000
25,000
FBT PUBLISHING
x
-
25%
6,250
6,250
x
-
25%
4,688
25%
Page 35
=
=
=
6,250
4,688
3,516
ANSWER TO EXAMPLE 5
Building
Cost
Account
Pre Revaluation
Accumulat Net Book
ed
Value
Depreciati
on
45,000
13,500
31,500
Post Revaluation
Building
Accumulat
Net Book
Cost
ed
Value
Account
Depreciati
on
150,000
4,286
Accumulated depreciation pre revaluation

45,000
2%
15
Years
13,500
Accumulated depreciation post revaluation

150,000
35
Years
4,286
pa
Journals Required
Dr
Dr
Buildings Cost
Accumulated
Depreciation
105,000
Cr
Revaluation Reserve
118,500
Dr
Cr
Depreciation
Accumulated
Depreciation
FBT PUBLISHING
13,500
4,286
4,286
Page 36
145,714
SESSION 5
INVENTORY
Learning Outcomes
When you have completed this chapter you should be able to:
Explain the principles of I.A.S. 2 Inventories

Explain and apply the different methods of inventory valuation including
F.I.F.O., A.V.C.O. and L.I.F.O.
Understand and apply the double entry for inventory
Introduction
Inventory is the product we purchase and sell in a business.
In a business it is unlikely that all of the inventory will be sold at the end of an
accounting period, therefore there will be an adjustment needed in the financial
statements for the value of the closing inventory.
Opening and closing inventory needs to be included in the statement of
comprehensive income in order to calculate the cost of the goods sold with-in a
given period. The statement of financial position will show the value of the
inventory at the end of the accounting period (the closing inventory).
I.A.S. 2 is the accounting standard that gives us detailed guidance on how to
value our closing inventory.
RULE: Closing inventory should be valued at the lower of cost and net realisable
value (N.R.V.)
By applying the I.A.S. 2 rule we ensure our inventory is never overstated in the
statement of financial position, hence the PRUDENCE concept.
Valuation of closing inventory
We will cover three methods of valuing the closing inventory:
F.I.F.O. First In First Out
The closing inventory consists of items purchased at the latest dates, as we
assume the items that were purchased first were the items sold first.
In times of rising prices, closing inventory will have a higher cost and therefore
profit will be higher.
FBT PUBLISHING
Page 37
Weighted average cost (AVCO)

Under this method we assume:
All units are issued at the current weighted average cost per unit
A new average cost is calculated whenever more items are purchased
L.I.F.O. Last In First Out

The closing inventory consists of items purchased at the earliest date, as we
assume the last item purchased is the first item to be sold.
In times of rising prices the closing inventory will have a lower value and
therefore profit will be lower.
From a practical perspective it is unlikely last items purchased will be sold first,
and as a result of this I.A.S. 2 does not permit L.I.F.O. method of stock valuation.
W.I.P. Work in progress
In some cases, where a company has modified its inventory it is necessary to
take the cost of that modification into account when valuing closing inventory.
Net realisable value
Net realisable value is the amount we can get from selling inventory less any
further costs to be incurred.
Accounting Entries
The double entry to account for closing stock is:
Dr
Inventory
Cr
Inventory
Statement of comprehensive income
FBT PUBLISHING
Page 38
EXAMPLE 1
Navigator Office Supplies made the following purchases and sales in January:
Purchases
3rd
12th
16th
22nd
31st
500
500
400
700
900
pens
pens
pens
pens
pens
@
@
@
@
@
4.00
4.60
4.75
5.25
5.40
=
=
=
=
=
3,00
0
2,000
2,300
1,900
3,675
4,860
14,735
Sales
7th
13th
17th
29nd
300
400
300
700
pens
pens
pens
pens
@
@
@
@
10.00
10.00
10.00
10.00
=
=
=
=
1,70
0
3,000
4,000
3,000
7,000
17,000
Required
Assuming there is no opening inventories prepare the statement of
comprehensive income using the following:
LIFO
FIFO
AVCO
FBT PUBLISHING
Page 39
ANSWER TO EXAMPLE 1
L.I.FO.
IN
OUT
Date
No.
Cost
Total
03/01
500
4.00
2000.
00
07/01
12/01
300
500
4.60
400
400
4.75
300
700
5.25
700
900
5.40
No.
4.60
4.75
5.25
4860.
00
200
800.0
0
700
3100.
00
300
1260.
00
700
3160.
00
400
1735.
00
1100
5410.
00
400
1735.
00
1300
6595.
00
1840.
00
1425.
00
3675.
00
3,000 pens
Total Sales
1,700 pens
Closing inventory
1,300 pens
Valuation
900 @ $5.40 each $4,860
FBT PUBLISHING
Total
2000.
00
F.I.F.O
Total Purchases
Cost
500
1200.
00
3675.
00
29/01
31/01
4.00
Total
1900.
00
17/01
22/01
Cost
2300.
00
13/01
16/01
No.
BALANCE
Page 40
400 @ $5.25 each $2,100

= $6,960
FBT PUBLISHING
Page 41
AVCO
IN
OUT
Date
No.
Cost
Total
03/01
500
4.00
2000.
00
No.
07/01
12/01
300
500
4.60
400
400
4.75
300
700
5.25
700
900
5.40
4.00
No.
3100
divide
d by
700
200
800.0
0
700
3100.
00
300
1329.
00
700
3229.
00
400
1845.
00
1100
5520.
00
400
2007.
00
1300
6867.
00
1384.
00
5520
divide
d by
1100
3513.
00
4860.
00
Total
2000.
00
1771.
00
3229
divide
d by
700
Cost
500
1200.
00
3675.
00
29/01
31/01
Total
1900.
00
17/01
22/01
Cost
2300.
00
13/01
16/01
BALANCE
Therefore Income Statement is as follows:

All $
L.I.F.O.
Revenue
F.I.F.O.
17,000
AVCO
17,000
17,000
Cost of sales
Opening inventory
Purchases
FBT PUBLISHING
0
14,735
0
14,735
0
14,735
Page 42
Closing inventory
FBT PUBLISHING
-6,595
-6,960
-6,867
8,140
7,775
7,868
8,860
9,225
9,132
Page 43
EXAMPLE 2
Radiance Kitchenware has the following items in their financial statements for
the year ended 31st December 2007:
Inventory @ 01/01/07
Purchases
$45,678
$98,000
Inventory @ 31/12/07
$42,800
Closing inventory includes the following damaged items:
A table was purchased for $500. Due to fire damage the maximum it can
be sold for is $200 after a wax product costing $50 has been applied.
Four chairs costing $100 each were also damaged in the fire. They can be
sold for $20.
Required
Calculate the cost of sales for 2007.
ANSWER TO EXAMPLE 2
Stock Valuation
Closing valuation
42,800
Less
Damaged inventory
Table
Chairs
500
400
900
Table (200 50)

Chairs
150
80
230
Add NRV
42,130
Cost of Sales
Opening inventory
Purchases
Closing inventory
45,678
98,000
-42,130
101,548
FBT PUBLISHING
Page 44
SESSION 6
IRRECOVERABLE DEBTS AND PROVISION
FOR DOUBTFUL DEBTS
Learning Outcomes
Explain the difference between a irrecoverable debt and a doubtful debt

Compute the double entries required for irrecoverable debts and the
provision for doubtful debts
Introduction
The majority of companies sell their product on credit. The length of credit will
vary between companies, but the most common length of credit is 30 days.
If however, someone fails to pay we need to be able to account for this is our
ledgers. It would not be prudent to hold a receivable in our statement of
financial position if we were aware that they are unlikely to pay.
There are 2 types of debts that we need to consider:
Irrecoverable debt (bad debt)

Doubtful debt
There is a clear distinction between irrecoverable and doubtful debts:

Irrecoverable Debt
This is a debt that you consider to be uncollectable. Circumstances where this
would occur are if the company has been fraudulent, gone bankrupt or
disappeared. Thus it is unlikely that we will receive the money due to us.
If this is the case we should not have this balance in our receivables, and would
therefore write the debt off.
The double entry would be:
Dr
Irrecoverable debtsStatement of comprehensive income
Cr
Trade receivables
EXAMPLE 1
FBT PUBLISHING
Page 45
George has a small antiques business and at the end of the financial year ended
30th April 2007 has a receivables balance of $42,500. Included in the year end
balance is $4,000 that is owed by Zippy Traders. George has heard that they
have been closed down due to financial irregularities and that all the directors
have disappeared.
Also included in the amount is $500 owed by Bungle who is Georges brother-inlaw. Bungle has left Georges sister and George is not sure if he will pay his debt
which is due in 2 weeks time.
Required
How should George account for these items?
Recovering debts written off

If a debt that has been written off is later recovered, we will need to adjust the
ledgers to reflect this. The entry required would be:
Dr
Bank
Cr
Irrecoverable debts
Doubtful debt
A doubtful debt is a debt that is owed to a business, but they are dubious about
its collectability. The distinguishing factor is that this debt could be collected as
it is doubtful not bad. We therefore, make a provision for this amount.
Dr
Irrecoverable debts
Cr
Provision for doubtful debts
This type of provision is called a specific allowance as we know exactly which

debts the provision is for. As you can see the debt remains in the receivables
ledger, as a result the company can still actively chase the debt. If or when the
company pays the debt the double entry would be the normal entry for a receipt
i.e.
Dr
Bank
Cr
Trade receivables
We would then reverse the provision we had for this debt.

General allowance
FBT PUBLISHING
Page 46
In order to apply the prudence concept we need to review our receivables at the
end of the financial year and take a view of collectables. A large number of
companies have a constant provision for receivables. This would be calculated
as a percentage of the receivables balance.
EXAMPLE 2
For the year ended 31st December 2005 a companys receivables balance was
$150,000. They had a general allowance of 5%. At the year ended 31 st
December 2006 the companys receivables are $135,000 the company would
like to maintain a 5% general allowance.
Required
What is the impact on the statement of comprehensive income and how will the
receivables be presented in the statement of financial position?
FBT PUBLISHING
Page 47
ANSWER TO EXAMPLE 1
Zippy Traders
This debt should be treated as an irrecoverable debt. Therefore the entry
needed would be:
Dr
Irrecoverable debts
$4,000
Cr
Trade receivables
$4,000
Bungle
This debt is neither an irrecoverable or doubtful debt at this stage. This is
because the debt is not yet due and we know where Bungle lives. We also have
no reason to suspect that Bungle cannot afford to repay the debt.
ANSWER TO EXAMPLE 2
31ST December 2005
General provision 5% x $150,000 = $7,500
Double entry
Dr
Irrecoverable debts
7,500
Cr
Allowance for receivables
7,500
Extract from statement of financial position:

Current assets
Receivables
General Allowance
150,000
-7,500
142,500
FBT PUBLISHING
Page 48
31st December 2006

General Provision 5% x $135,000
$6,750
Provision bought forward
$7,500
Therefore overprovision
$750 (7,500 6,750)
Double entry
Cr
Irrecoverable debts
750
Dr
Allowance for receivables
750
Current assets
Receivables
General Allowance
135,000
-6,750
128,250
FBT PUBLISHING
Page 49
SESSION 7
ERRORS
CONTROL ACCOUNTS AND CORRECTION OF
Learning outcomes
Understand the principles of control accounts

Prepare the control accounts for trade receivables and trade payables
Explain the function of a suspense account
Prepare nominal ledger accounts
Prepare journal entries
Introduction
In session 3 we prepared financial statements from T accounts. The number of
transactions was limited, and therefore the process was simple to follow. If an
error had been made it would have been easy to detect.
However, in the real world of business the number of transactions is large, and to
help us detect errors we use control accounts. Therefore, daily entries are
normally made in a number of Prime Entry books and then a summary total is
transferred to the nominal ledger periodically. This could be done daily, weekly
or even monthly.
The following have a large volume of transactions on a daily basis and are used
as prime entries:
Sales day book

Purchase day book
Sale returns day book
Purchase returns day book
Cash book
Petty cash book
Journal entries
The transactions are recorded in the prime entry books. They are then
transferred to the nominal (general) ledger and we then extract a trial balance in
order to prepare our financial statements.
FBT PUBLISHING
Page 50
Sales day book

This book records all the sales we make on credit. Sales should be recorded net
of trade discount but before cash (settlement) discount.
Purchase day book
This book of prime entry records all purchases we make on credit.
If a credit customer returns goods, this will be recorded in the sales returns day
book.
Purchase returns day book
This book will record all the credit purchases that we return to suppliers.
Cash book
This book will record all the money that we will pay into the bank account, and
any payments we make from the bank account. This will also record any cash
(settlement) discounts we allow or receive.
Petty cash book
This records all the small sundry transactions occurring in a business on a day to
day basis.
Journal entries
These are used for ad hoc entries that do not fall into any of the above
categories. They are also used to correct errors, both temporary and permanent.
FBT PUBLISHING
Page 51
EXAMPLE 1
L & M had the following transactions during the first week in December 2007.
1st December 2007
Purchased goods on credit from A Ltd for $595 receiving a trade discount
of 9.5%
Purchased goods on credit for $795 from KP Ltd
Sold goods on credit to JK Ltd for $999
3rd December
Returned KP Ltd goods as they were defective

Sold goods on credit to A Jones for $995
5th December
Sold goods on credit to A Jones for $795

Purchased goods on credit from A Ltd for $995, again with a 9.5% trade
discount
NB
Sales tax is 17.5%
SOLUTION
SALES DAY BOOK
DATE
INV
NO.
01/12
03/12
05/12
100555
100556
100557
CUSTOMER
J K Limited
A Jones
A Jones
NET
999.00
995.00
795.00
SALES
TAX
@17.5%
174.82
174.12
139.12
TOTAL
1173.82
1169.12
934.12
2789.00
488.06
3277.06
PURCHASE DAY BOOK

DATE
INV
NO.
01/12
01/12
05/12
999241
867544
999242
FBT PUBLISHING
SUPPLIER
A Limited
K P Limited
A Limited
NET
538.47
795.00
900.47
SALES
TAX
@17.5%
94.23
139.12
157.58
632.70
934.12
1058.05
2233.94
390.93
2624.87
Page 52
TOTAL
PURCHASE RETURNS DAY BOOK

DATE
INV
NO.
03/12
867544
FBT PUBLISHING
SUPPLIER
K P Limited
VALUE
SALES
TAX
TOTAL
795.00
139.12
934.12
795.00
139.12
934.12
Page 53
EXAMPLE 2
The following are the balances on Explorers ledger accounts in the month of
January
Opening receivables balance
22,500
Sales day book
88,650
Cash sales
23,950
5,555
Refunds to customers
3,325
Discounts allowed
6,786
Irrecoverable debts
4,455
Increase in provision
500
Purchase ledger contra
1,200
Required
Calculate total cash received from customers in January
Solution
RECEIVABLES CONTROL ACCOUNT
Dr
All Jan
Cr
All Jan
Opening balance
Sales day book
Refunds
22,500
88,650
3,325
Returns book
Discounts
allowed
Irrecoverable
debts
Contra
Closing balance
Receipts (bal fig)
114,475
Feb
Opening balance
FBT PUBLISHING
4,455
1,200
18,650
77,829
114,475
18,650
5,555
6,786
Page 54
EXAMPLE 3
The following are the balances on a companys ledger accounts in the month of
March:
Opening payables balance
12,785
Purchase day book
44,999
Returns outwards daybook
3,950
Returns inwards day book
2,300
Cheques paid to suppliers
37,500
Discounts received
1,400
Sales ledger contras
900
Required
Calculate the closing balance for the payables account at the end of March.
Solution
PAYABLES CONTROL ACCOUNT
Dr
All
March
Cr
All
March
Returns outwards
Payments
Discounts
received
Contra
Closing bal (bal
fig)
3,950
37,500
Opening balance
Purchase day
book
44,999
1,400
900
14,034
57,784
57,784
April
Opening balance
Reconciling the control accounts

FBT PUBLISHING
12,785
Page 55
14,034
Normally at the end of each month we check to ensure our control accounts
reconcile to the individual balances on our ledger accounts. We do this by:
Checking our list of individual balances tie into the control account balance. If
there is an imbalance then it must be investigated. The main discrepancies are
due to:
Casting error in the day books

Posting error
A one sided contra
An entry that has been made in the individual account but not in the
control accounts
An entry being omitted from the control account
EXAMPLE 4
At the financial year end 31 December 2007 Explorer Rain Wear had a balance
on the payables control account of $22,550. The balance on their purchase
ledgers was $20,650. The management accountant found the following
discrepancies:
1.
2.
3.
4.
5.
An invoice of $1,200 had been omitted from the control account

The purchase day book total was overstated by $1,000
Goods returned of $1,590 had not been recorded in the control account
Discounts received of $10 had not been posted
Contra entries of $500 need to be recorded in the control account
After these adjustments are made, the control account should balance.
Solution
Until a full knowledge of double entry is known, the easiest way to tackle this
question is to identify where the error has occurred and amend accordingly. In
this case:
Error No.
1
2
3
4
5
Location of Error
Control
Control
Control
Control
Control
Amend
Account
Account
Account
Account
Account
Control
Control
Control
Control
Control

FBT PUBLISHING
Page 56
Account
Account
Account
Account
Account
Dr
All Dec
Cr
All Dec
Error 2
Error 3
Error 4
Error 5
Amended
balance
1,000
1,590
10
500
20,650
Original balance
Error 1
23,750
22,550
1,200
23,750
Jan
Opening balance
Balancer per list
20,650
20,650
EXAMPLE 5
Hippo Manufacturing had the following balances on their payables / receivables
for the financial year ended 30 June 2006.
Credit sales
Cash sales
Credit purchases
Cash purchases
Returns inwards
Returns outwards
Discounts allowed
Discounts received
Irrecoverable debts
Payments made to payables
Cash received from receivables
Contras
450,000
22,000
300,000
4,500
17,000
14,000
11,000
12,000
2,500
263,100
438,580
17,500
Balance at 1 July 2005:

Payables
Receivables
Provision for doubtful debts
53,500
51,500
3,400
Bad debt provision is to be maintained @ 1.5% of credit sales
Required:
Compute the receivables and payables control account and extract the closing
balances for the financial year end.
FBT PUBLISHING
Page 57
SOLUTION
This is a common CBA question. It is designed to ensure you know exactly what
should go into control accounts and also your knowledge of double entry. Again
until you are comfortable with debits and credits it is easier to write exactly
where things will go before attempting to balance the accounts. In this case:
Receivables / Payables
Debit / Credit
Receivables
Neither
Payables
Neither
Receivables
Payables
Receivables
Payables
Receivables
Payables
Receivables
Receivables / Payables
Debit
n/a
Credit
n/a
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Credit / Debit
Credit sales
Cash sales
Credit purchases
Cash purchases
Returns inwards
Returns outwards
Discounts allowed
Discounts received
Irrecoverable debts
Payments made
Cash Received
Contra

Dr
Cr
Returns outwards
Discounts
received
Payments
Contra
Closing bal (bal
fig)
14,000
12,000
Opening balance
Credit purchases
263,100
17,500
46,900
353,500
FBT PUBLISHING
53,500
300,000
353,500
Page 58
RECEIVABLES CONTROL ACCOUNT

Dr
Cr
Opening balance
Credit sales
51,500
450,000
Returns inwards
Discounts
allowed
Irrecoverable
debts
Cash received
Contra
Closing bal (bal
fig)
501,500
17,000
11,000
2,500
438,580
17,500
14,920
501,500
Correction of errors
At the end of an accounting period we extract a trial balance, and use this as a
basis for preparing the financial statements.
The following are the main purposes of a trial balance:
Account balances are reviewed to check for obscurities

Reconcile all control account balances with the individual ledgers
Ensure debits equal the credits.
If there is an imbalance a SUSPENSE ACCOUNT will be created. Therefore, a

suspense account may have a debit or credit balance.
Errors that will cause a difference in the trial balance are:
Transposition error Entering figures the wrong way round

Single entries Only one side of the transaction has been posted
Both entries entered on the same side of the ledger account
Casting error An account has been incorrectly added
Although extracting a trial balance proves the above, there are certain errors
that a trial balance will not identify. These are:
Error of principle An entry has been entered in the wrong financial

statement.
Errors of omission A transaction has been missed out.
Errors of commission Entering an amount in the wrong account, but in
the correct financial statement.
Compensating errors Where two or more errors cancel each other. This
is extremely rare.
FBT PUBLISHING
Page 59
Journals
Journals are used for several reasons:
Post unique, one off transactions

Transfer items between accounts
Adjust balances that are incorrect
Correct items that have been incorrectly posted
Journals should have a unique number and should be clearly labelled.

Example 6
Correct the following errors using journals:
1. A sales day book has been under cast by $1,000.
2. Inventory purchased for $1,000 has been posted to stationery
3. A non-current asset has been purchased for $7,000 on credit, but has not
been recorded.
Solution
Account Name
Description
Sales Revenue
Trade Receivables
SDB under cast
Stationery
Purchases
Incorrectly coded
Non-current asset
Other payables
Capital purchased
FBT PUBLISHING
Debit
Credit
1,000
1,000
1,000
1,000
7,000
7,000
Page 60
Example 7
Peter has the following balances on its trial balance at the end of the financial
year:
Debit
$213,852
Credit
$212,390
A suspense account has been created for the difference.

The following errors have been identified by the accountant; after these errors
have been corrected the balance on the suspense account should be removed.
1. A payment for stationery for $440 was debited to stationery as $780.
2. Discounts allowed of $1,310 have been recorded as a credit.
3. Other income of $3,742 has only been recorded in the cash book.
Required
Correct the entries and clear the suspense account.
Solution
Account Name
Description
Debit
Suspense
Stationery
Incorrect total posted
Discounts allowed
Suspense
Posting to incorrect side
Suspense
Other income
One sided entry
Credit
340
340
2,620
2,620
3,742
3,742
Suspense Account
Journal 1
340
Journal 3
3,742
Opening
Balance
Journal 2
4,082
FBT PUBLISHING
1,462
2,620
4,082
Page 61
SESSION 8
BANK RECONCILIATIONS
Learning Outcomes
Prepare cash and bank accounts

Prepare a bank reconciliation
Introduction
Within the ledger account is a bank account ledger, and it is important that the
balance in the ledger reconciles to the balance on the actual bank statement.
We call this exercise a bank reconciliation.
Dependant on the size of the company, this can be done on a weekly or monthly
basis, and in some larger companies even daily.
Preparing a bank reconciliation has many advantages. They include:
Provides a check on accuracy of recordings in the cash book

Highlights any errors
Assists in the day to day cash management
Any differences can be identified quickly
Debits and Credits

On a bank statement the balances will be from the perspective of the bank not
that of the business. Therefore, if a bank statement shows a credit balance, the
bank has a creditor. In other words the bank owes the business money and is
therefore in a positive position.
If the bank statement shows a debit balance this indicates the business is
overdrawn. i.e. it is an asset from the banks point of view.
Reconciling Items
FBT PUBLISHING
Page 62
It is extremely unlikely that the balance on the ledger account and the balance
on the bank statement will agree. This can be due to the following reasons:
Cheques issued by the company are immediately entered into the cash
book, but they will not appear on the bank statement until they are
presented to the bank. These are called unpresented cheques.
Receipts by the business are immediately entered in the cash book and
then banked. This can take a number of days to clear.
There may be items in the bank statement that have not been processed
through the cash book e.g. BACS transfer, standing orders, direct debits,
dishonoured cheques and bank charges.
Proforma bank reconciliation

Balance per bank statement
65,455
Less : Unpresented cheques
(1,950)
Add: Outstanding lodgements
1,700
Balance per cash book
65,205
Preparing a bank reconciliation

1. Compare the cash book and bank statement and tick matching items
2. Post corrections to the cash book i.e. items on the bank statement that
have not been processed through the ledger
3. Put in items that are in the cash book that have yet to be presented to the
bank as a reconciling item.
UNLESS OTHERWISE TOLD, ASSUME FIGURES ON THE BANK STATEMENT ARE
CORRECT.
FBT PUBLISHING
Page 63
Example 1
Cash Book
01/04/0
7
03/04/0
7
05/04/0
7
12/04/0
7
29/04/0
7
b/d
14,500 01/04/0
7
3,650 01/04/0
7
1,200 01/04/0
7
1,100 01/04/0
7
3,000 12/04/0
7
12/04/0
7
27/04/0
7
27/04/0
7
27/04/0
7
30/04/0
7
27
28
29
30
1437
450
1438
600
1439
750
1440
150
1441
250
1442
350
1443
395
1444
165
1445
245
c/d
20,095
23,450
30/04/0
7
b/d
20,095
Bank Statement
Details
Payme
nt
Date
01/04/0
7
04/04/0
7
05/04/0
7
08/04/0
7
10/04/0
7
11/04/0
7
12/04/0
7
14/04/0
7
17/04/0
7
23,450
Receip
t
Opening balance
Balanc
e
14,500
1437
450
14,050
1438
600
13,450
27
3,650
17,100
28
1,200
18,300
Standing Order P.S.L.
750
17,550
1439
750
16,800
Direct Debit Direct Line
750
16,050
1441
250
15,800
FBT PUBLISHING
Page 64
17/04/0
7
18/04/0
7
20/04/0
7
24/04/0
7
BACS (Bank Automated

Clearance System) Transfer
1442
29
Bank Charges
FBT PUBLISHING
3,500
19,300
18,950
1,100
20,050
350
500
Page 65
19,550
Solution
Cash Book
30/04/0
7
17/04/0
7
b/d
20,095 11/04/0
7
3,500 14/04/0
7
24/04/0
7
30/04/0
7
BACS
Standing Order
750
Direct Debit
750
Bank Charges
500
c/d
21,595
23,595
30/04/0
7
b/d
23,595
21,595
Bank Reconciliation
Less: unpresented cheques
Add: Outstanding lodgements
19,550
1440
1443
1444
1445
150
395
165
245
30
(955)
3,000
21,595
FBT PUBLISHING
Page 66
Example 2
The assistant accountant of Rainbow is trying to prepare a bank reconciliation as
at 30th November 2007. The cash book has a credit balance of $2,400 and the
bank statement at that date has an overdrawn balance of $1,550.
As his manager he has asked you for help with the following items:
1. He has discovered cheque number 100678 has been entered into the cash
book twice for $459.
2. A direct debit of $225 has been taken from the account and not been
entered into the cash book
3. There are unpresented cheques totalling $5,840.
4. There are outstanding lodgements of $8,390.
5. A cheque receipt for $1,450 has been dishonoured by the bank.
6. Bank charges of $1,400 have been charged by the bank.
7. A BACS transfer of $6,196 has been received by the bank and not been
accounted for in the cash book.
8. He has entered cheque payment number 100600 into the cash book as
$1,680, when the correct amount is $1,860.
Required:
Correct the cash book with the above and prepare a bank reconciliation.
FBT PUBLISHING
Page 67
Solution:
Cash Book
30/11/0
7
30/11/0
7
Chq 100678 (1)
459 30/11/0
7
6,196 30/11/0
7
30/11/0
7
30/11/0
7
30/11/0
7
30/11/0
7
BACS
b/d
2,400
Direct Debit (2)

Dishonoured
Cheque (5)
Bank Charges
(6)
Chq 100600 (8)
c/d
b/d
1,450
1,400
180
1,000
6,655
30/11/0
7
225
6,655
1,000
Bank Reconciliation
(1,550)
Less : Unpresented cheques (3)
(5,840)
Add: Outstanding lodgements (4)
8,3
90
1,000
FBT PUBLISHING
Page 68
SESSION 9
ACCRUALS AND PREPAYMENTS
Learning Outcomes
Explain why adjustments are necessary when preparing financial

statements
Compute the adjustments needed
Introduction
The matching concepts states that income and expenses incurred in the period
should be accounted for in that period, regardless of when invoices are raised or
received.
The fundamental rule is that income and expenditure are recognised as they are
earned or incurred, not as money is received or paid.
In order to ensure income and expenditure is recorded in the correct period, it is
often necessary to adjust the financial statements.
Example 1 - Accruals
A sole trader receives his business gas bill quarterly in arrears. In the year
ended 31st December 2007 the following bills were received and paid on the
dates indicated.
30/04/07
31/07/07
31/10/07
$300
$310
$300
When preparing the accounts for the year end the accountant must adjust the
Gas ledger account to reflect that not all charges have been recorded. In this
case charges for November and December need to be included.
Accruals and prepayments will be the estimate of the adjustment needed. The
adjustment is calculated using the most up to date information available. In the
example above this will be the 31/10/07 bill. Therefore the adjustment needed
would be 2/3 x $300.
The entry needed would be:
Dr
Gas account $200
Cr
Accruals
FBT PUBLISHING
$200
Page 69
The ledger account would therefore look like this:

Gas Account
30/04/0
7
31/07/0
7
31/10/0
7
31/12/0
7
Cash
300
Cash
310
Cash
300
Accrual
200 31/12/0
7
Inc Statement
1,110
1,110
1.110
01/01/0
8
Accrual b/d
200
It is important to remember to carry forward any accrual or prepayment

to the next accounting period.
(Assumption: business began on 1. 2. 07)
FBT PUBLISHING
Page 70
Example 2 - Prepayments
Julie starts her business on 1st August 2007, and pays her business insurance for
the year to 31st July 2008 totalling $1,800. Her year end is 31 st December each
year.
What charges for insurance would be stated in the income statement for the
period ended 31st December 2007?
Insurance Account
01/08/0
7
Cash
1,800 31/12/0
7
31/12/0
7
Prepayment
(7/12)
Inc Statement
1,800
01/01/0
8
Prepayment b/d
1,050
750
1.800
1,050
Assuming the insurance charge remains the same for the year ended 31 st July
2009, the ledger account would look like this:
Insurance Account
01/08/0
7
Cash
1,800 31/12/0
7
31/12/0
7
Prepayment
(7/12)
Inc Statement
1,800
01/01/0
8
01/08/0
8
Prepayment b/d
1,050
Cash
1,800 31/12/0
8
31/12/0
8
Prepayment b/d
FBT PUBLISHING
750
1.800
Prepayment
(7/12
Inc Statement
2,850
01/01/0
9
1,050
1,800
2,850
1,050
1,050
Page 71
SESSION 10
LIMITED COMPANY ACCOUNTS
Learning outcomes
Prepare a statement of comprehensive income

Prepare a statement of changes in equity
Prepare a statement of financial position
Introduction
Many businesses are constituted in the form of limited companies. The owners
of limited companies are referred to as shareholders and are often different from
the people that run the company.
The shareholders have very little, if any involvement in the day to day running of
the business and employ directors to run it on their behalf.
Limited company financial statements have very strict requirements which must
be followed by all companies. These are governed by:
Companies Act 2006 (or local country legislation)

The International Accounting Standards Board
FBT PUBLISHING
Page 72
The format to be adhered to per I.A.S. must be the format we adopt in our
studies. The proforma financial statements for limited companies were given in
session 2, however a copy is given below for reference:
Proforma set of financial statements for a limited company or Plc
Statement of financial position as at 31 December 2007
Non current assets
Note
6
7
Intangible assets
Tangible assets
200,000
187,999
Current assets
Inventory
Trade receivables
Cash
8
9
88,432
97,455
13,400
Total assets
199,287
587,286

Share capital
Retained earnings
Revaluation reserve
100,000
220,497
38,000
358,497

Interest bearing borrowings
10
100,000
Current liabilities
Trade payables
Taxation
Total liabilities
FBT PUBLISHING
77,789
51,000
128,789
587,286
Page 73
Statement of comprehensive income for the year ended 31 December

2007
Note
Revenue
385,000
Cost of sales
188,000
GROSS PROFIT
197,000
Distribution costs
38,500
37,700
120,800
Finance costs
8,000
PROFIT BEFORE TAX
112,800
Income tax
53,000
59,800
Statement Of changes in equity for the year ended 31 December 2007

Share
Capital
Balance as at 1 Jan 2007
100,000
Retaine
d
Earning
s
Revalua
tion
Reserve
188,697
40,000
Profit for the period
59,800
Excess depreciation
2,000
Dividend paid
Closing balance
220,497
328,697
59,800
(2,000)
(30,000)
100,000
Total
(30,000)
38,000
358,497
A limited company must file their statutory accounts with companies house. A
full set of statutory accounts will include:
FBT PUBLISHING
Page 74
1.
2.
3.
4.

Statement of changes in equity
Cash flow statement
These statements are supported by notes explaining the balances in the financial
statements.
One of the key differences between a company and a sole trader is that a
company is classed as a separate legal entity. This means that a company is
deemed to be a person in its own right. Therefore, a company can sue
individuals and can also be sued. The name limited company comes from the
fact that the shareholders have limited liability, in other words their liability is
restricted to the amount they have paid for their shares.
Profits of a company are distributed by way of dividend payments. These
payments are at the directors discretion.
Example 1
Freedom Limited has 100,000 ordinary shares in issue. The nominal value (par
value) is $1.00 and the directors decide to pay a dividend of 75c per share.
If this is the case the company would pay $75,000 (100,000 x 0.75) in dividends
Preference shares
This type of share is known as a non-equity share, and gets a fixed return on the
value of the share. Preference share holders will receive their dividend every
year providing the company has distributable profit.
Ordinary share holders will receive a dividend if the directors decide to pay one.
FBT PUBLISHING
Page 75
Example 2
The following information relates to Voyager Limited
Year ended 31st December 2007
Share capital (25c shares)
100,000
6% Preference shares
50,000
The directors propose an ordinary dividend of 75c per share.

Required:
Calculate the dividend payable.
Solution
Ordinary shares
100,000 / 0.25 = 400,000 shares in issue
400,000 x 0.75
300,000
Preference shares
50,000 x 6%
3,000
Total dividends paid
FBT PUBLISHING
303,000
Page 76
Share premium
If a company issues shares after the initial incorporation, it is unlikely they will
issue them at a nominal/par value. As the company has established itself, the
net worth of the company would increase. This would be reflected in the share
price.
Example 3
The following relates to Radiance Limited
Capital and reserves
Share capital ($1.00)
200,000
Retained earnings
233,456
Revaluation reserve
125,000
Say the market value price per share is $3.85 and the directors wish to issue a
further 50,000 shares for cash injection purposes.
Cr
Share Capital (50,000 x $1.00)
50,000
Cr
Share Premium (50,000 x $2.85)
142,500
Dr
Bank (50,000 x $3.85)
192,500
The Capital and reserves would now be:

Share capital ($1.00)
250,000
Share premium
142,500
Retained earnings
233,456
Revaluation reserve
125,000
FBT PUBLISHING
Page 77
Capital reserve
The share premium account is classed as a Capital reserve. This means that the
account cannot be used to pay out dividends. The use of capital reserves is very
limited. The key use of the reserve would be to finance a bonus issue of shares.
This is when the directors distribute free shares to existing shareholders.
The accounting entry for this would be:
Cr
Share capital
Dr
Share premium
Dividends
As we have seen previously in this chapter, dividend payments are used to
distribute profit to shareholders. In order that a dividend can be paid, the
company must have reserves that are distributable i.e. they cannot be paid out
of any reserve that is not realised (Revaluation reserve).
Final dividends are paid after the year end; once the financial statements have
been completed, and the directors have decided the dividend amount.
An interim dividend can also be paid mid way through the year.
Example 4
Share capital (50c)
200,000
10% Preference shares
25,000
An interim dividend of 8c per share was paid during the year and the directors
would like to propose a final dividend of 9c per share.
Required:
Calculate the total dividend payable for the year ended 31 st May 2007.
FBT PUBLISHING
Page 78
Solution
Ordinary shares
$200,000 /$ 0.50 = 400,000 shares in issue
Interim dividend (400,000 x 8c)
32,000
Final dividend (400,000 x 9c)
36,000
Preference shares
10% x $25,000
2,500
70,500
Taxation
All companies have to pay tax on the taxable profits. The tax charge is normally
estimated at the end of the financial year and charged to the statement of
comprehensive income, and is paid in the following year.
The accounting entry for taxation would be:
Dr
Taxation
Comprehensive income
Cr
Taxation liability
Financial position
FBT PUBLISHING
Page 79
Example 5
The trial balance of Jewel Limited as at 31st March 2007 was as follows:
Dr
Share capital (50c)
6% Preference shares ($1.00)
Retained earnings at 01/04/06
Debenture 10%
Inventory at 01/04/06
Trade receivables
Receivables provision
Trade payables
Cash
Building cost account
Plant and machinery at net book value
Debenture interest
Administrative expenses
Distribution expenses
Profit on disposals
Purchases
Revenue
Cr
100,000
50,000
234,666
100,000
32,000
45,987
5.987
39,945
73,958
150,000
422,987
5,000
48,000
49,000
1,000
69,666
365,000
896,598
896,598
Notes
1. Depreciation on building is to be charged at 2%
2. Depreciation on plant and machinery is to be charged at 10% reducing
balance
3. Closing inventory was valued at $28,990
4. A provision of 5% of receivables is to be maintained
5. Tax charge is estimated at $25,000
6. A final dividend of 15c per share has been proposed before the year end.
Required
Prepare the statement of comprehensive income, statement of changes in equity
and the statement of financial position for Jewel Limited for the year ended 31 st
March 2007.
FBT PUBLISHING
Page 80
Solution
Journals
Dr
1.
2.
3.
4.
5.
6.
7.
8.
Dr
Cr
Dr
Depreciation charge (150,000 x 2%)

Accumulated depreciation Buildings
Cr
3,000
3,000
42,299
Cr
Depreciation charge (422,987 x

10%)
Accumulated depreciation P & M
Dr
Cr
Closing inventory (comp income)

Closing inventory (financial position)
28,990
Dr
Receivables provision account
Cr
Dr
Cr
Taxation
Taxation liability
Dr
Cr
Pref Dividends
Proposed Div (prefs)
Dr
Cr
Dividends in SOCIE (100,000 / 0.5 x

15c)
Proposed dividends
Dr
Cr
Debenture interest (10,000 5,000)

Debenture interest accrual
42,299
28,990
Work
1
3,688
3,688
25,000
25,000
3,000
3,000
30,000
30,000
5,000
5,000
Working 1
Receivables Provision Account
01/04/0
6
31/03/0
7
31/03/0
7
Admin
expenses
(written back to
I/S)
c/d (45,987 x
5%)
b/d
5,987
3,688
2,299
5,987
FBT PUBLISHING
5,987
Page 81
FBT PUBLISHING
Page 82
Jewel Limited
Year ended 31st March 2007
Revenue
365,000
Cost of sales (32,000 + 69666 28990)
(72,676
)
GROSS PROFIT
292,324
Distribution costs
(49,000
)
Administration expenses (48,000 + 3000 + 42,299

3688 + 1000)
(88,611
)
154,713
Finance costs
(10,000
)
PROFIT BEFORE TAX
144,713
Income tax
(25,000
)
119,713
FBT PUBLISHING
Page 83
Jewel Limited
As at 31st March 2007
Non current assets
Tangible assets (150,000 + 422,987 3,000
42,299)
527,688
Current assets
Inventory
Trade receivables (45,987 2,299)
Cash
28,990
43,688
73,958
146,636
674,324
Total assets
Ordinary share capital
Preference share capital
Retained earnings (234,666 + 119,713
30,000 3,000 Pref Div)
100,000
50,000
321,379
471,379

Debenture
100,000
Current liabilities
Trade payables
Debenture accrual
Proposed dividend
Taxation
39,945
5,000
33,000
25,000
102,945
Total liabilities
FBT PUBLISHING
674,324
Page 84
Balance @
01/04/06
Ordinary
Shares
Preferen
ce
Shares
100,000
50,000
Revaluat
ion
Reserve
Retained
Earnings
Total
234,666
384,666
Profit for the year
119,713
119,713
Dividends: ord
pref
Shares issued
(30,000)
(3,000)
(30,000)
(3,000)
321,379
471,379
Revaluation
Balance @
31/03/07
FBT PUBLISHING
100,000
50,000
Page 85
SESSION 11
STATEMENTS OF CASH FLOW
Learning outcomes
Explain the purpose of producing a cash flow statement
Discuss the advantages of a cash flow statement
Explain the principles of I.A.S. 7
Produce a cash flow statement
Introduction
The cash flow statement is a primary financial statement and provides
fundamental information to the user of accounts. It highlights the key areas
where a business has generated and spent physical cash.
Good cash management ensures a business has sufficient cash to run its day to
day operations.
Prior to this session we have focused on profit, but cash is equally vital for the
success of a business, especially in the short term. If a business has limited cash
funds available it will struggle to survive in the short term.
Advantages
Cash flow balances are a matter of fact and are not distorted by
accounting policies
Cash flow balances are objective, unlike profit which is subjective
Users of financial statements can establish exactly the cash generation of

a business
Users can identify exactly how this cash has been utilised
Users can assess the liquidity of a business and assess its ability to repay
debts as they fall due
Loans repaid and received are clearly listed in the cash flow statement
Users can assess management attitude to capital expenditure
Interest payments are highlighted in the cash flow
FBT PUBLISHING
Page 86
I.A.S. 7
I.A.S. 7 lays down the requirements of a cash flow statement. It gives us a
detailed proforma and certain definitions:
Cash
Cash that is available on demand. An example would be cash in the bank less
any overdraft.
Cash equivalents
Short term, highly liquid investments (will be stated as current assets in
Statement of Financial Position)
I.A.S. 7 has three main headings. Students should familiarise the layout of a
cash flow as questions in the exam will test this area.
The three main headings are:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
FBT PUBLISHING
Page 87
Proforma
Statement of Cash Flow for year to .
$

Profit before tax
Adjustments for:
Interest payable
Depreciation
(Profit) / loss on the disposal of a non current asset

Operating profit before working capital changes
(X) X
X
Working capital changes

(Increase) / Decrease in inventories
(X) X
(Increase) / Decrease in receivables
(X) X
Increase / (Decrease) in payables
X (X)
Cash generated from operations
Interest paid
(X)
Taxation paid
(X)
NET CASH FROM OPERATING ACTIVITIES
FBT PUBLISHING
Page 88
Proforma continued
$
$
X
Cash flow from investing activities

Purchase of a non-current asset
(X)
Disposal of a non-current asset
Interest received
Dividends received
CASH FLOW FROM INVESTING ACTIVITIES
Cash flow from financing activities

Proceeds from the issue of shares
Receipt of loans
Repayment of loans
(X)
Dividends paid
(X)
CASH FLOW FROM FINANCING ACTIVITIES
NET CASH FLOW
Cash and cash equivalents at the beginning of the

period
Cash and cash equivalents at the end of the period
FBT PUBLISHING
Page 89
Example 1
Radiance Limited
As at 31 December 2007
2006
2007
Cost
180
220
Accumulated depreciation
(78)
(92)
102
128
12
17
10
10
10
16
129
181
Share capital
45
65
Share premium
10
12
Accumulated profits
24
68
30
20
19
13
129
181
Non-current assets
Current assets
Inventory
Trade receivables
Bonds
Cash
Capital and reserves
Non-current liabilities
Loan
Current liabilities
Payables
Tax
Notes
The tax charge in the statement of comprehensive income is $6,000.
Loan was repaid at the end of the financial year.
Required
Prepare the cash flow statement for the year ended 31 st December 2007.
FBT PUBLISHING
Page 90
Solution
$

Profit before tax (68 24) + 6
50
Adjustments for:
Interest payable
Depreciation (92 78)
14
(Profit) / loss on the disposal of a non current asset
Operating profit before working capital changes
64
Working capital changes

(Increase) in inventory (17 12)
(5)
(Increase) in receivables (10 2)
(8)
(Decrease) in payables (19 13)
(6)
Cash generated from operations
45
Interest paid
Taxation paid (working 1)
(4)
41
FBT PUBLISHING
Page 91
$
$
41
Cash flow from investing activities

Purchase of a non-current asset (220 180)
(40)
Disposal of a non-current assets
Interest received
Dividends received
NET CASH USED IN INVESTING ACTIVITIES
(40)
Cash flow from financing activities

Proceeds from the issue of shares (65 45) + (12
10)
Receipt of loans
22
-
Repayment of loans
(10)
Dividends paid
CASH FLOW FROM FINANCING ACTIVITIES
12
NET CASH FLOW
13
Cash and cash equivalents at the beginning of the

period (10+3)
13
Cash and cash equivalents at the end of the period

(10+3)
26
FBT PUBLISHING
Page 92
Working 1
Taxation Liability
31/12/0
7
Cash paid (Bal

Fig)
c/d
01/01/0
7
31/12/0
7
b/d
Charge for year
7
01/01/0
8
b/d
Direct Method
The direct method involves adding together the cash inflows and deducting the
cash outflows.
Example 2
The following information relates to Empress Limited:
Cash sales
55,000
Cash received from customers
44,000
Cash purchases
33,000
Cash paid to suppliers
12,000
Cash expenses
11,000
Cash wages and salaries
20,000
Required:
Calculate the cash generation for Empress Limited
FBT PUBLISHING
Page 93
Solution
Cash sales
55,000
Cash received from customers
44,000
Total cash received
99,000
Cash purchases
33,000
Cash paid to suppliers
12,000
Cash expenses
11,000
Cash wages and salaries
20,000
Total cash paid
76,000
Cash generated
23,000
FBT PUBLISHING
Page 94
SESSION 12
INCOMPLETE RECORDS
Introduction
As the name suggests, incomplete records are any form of accounting records
other than the full double entry system.
In reality, accountants come across incomplete records almost daily. This is
because their clients are not likely to fully understand the double en try system.
We still however, need to prepare a set of financial statements for the client.
During the exam, students will often come across incomplete records. The main
reason is often due to a flood or fire at the business premises.
Calculating profit
If a business has very little information about its transactions, it may only be
possible to calculate its net profit for the year. This can be done by using the
accounting equation (this is very important). The accounting equation can be
written as:
Net Assets = Capital + Profit - Drawings
Or
Change in net assets = Capital introduced + Profit Drawings
You may realise that this is very similar to the statement of financial position.
Example 1
A sole traders statement of financial position at 31 st December 2006 shows that
the business has net assets of $5,000. The statement of financial position at 31 st
December 2007 shows that the business has net assets of $8,000. The owners
drawings for the year amounted to $2,500 and he didnt introduce any further
capital in the year
Required
Calculate the profit for the year ended 31st December 2007.
FBT PUBLISHING
Page 95
Solution:
Change
in net
assets
3,000
Capital
introdu
ced
=
Profit
for the
year
Drawin
g in
period
2,500
2,500
Profit
This can be written as:

3,000
Profit
5,500
As you can see it is impossible to know the make-up of the net profit figure due
to lack of information.
Preparing financial statements from incomplete records
In the majority of cases a small business will keep limited amount of records.
In these types of questions you will be given information regarding the opening
and closing balances of assets and liabilities of the business. You will also be
given information about certain transactions during the period; this is usually a
summary of the cash book.
There are two main techniques used in incomplete records:
1. Balancing figures in ledger accounts
2. Ratios for mark-up (based on cost) or margin (based on selling price)
Balancing figures
The balancing figure approach is commonly used the following way:
Ledger Account
Missing Figure
Accounts receivable
Accounts payable
Sales
Money received from

accounts receivable
Purchases
Cash at bank
Cash in hand
Money paid to accounts

payable
Drawings
Money stolen
Cash sales
Cash stolen
Example 2
FBT PUBLISHING
Page 96
Suppose that the opening balance on the accounts receivables ledger was
$50,000, there had been receipts from account receivables in the year of
$45,000, irrecoverable debts have been written off worth $5,000 and the closing
balance was $55,000.
Required:
What were the credit sales for the year?
Account Receivables
Opening b/d
50,000
Receipts
Sales (Bal Fig)
55,000
Bad debts
Closing c/d
105,000
45,000
5,000
55,000
105,000
Example 3
Suppose that the opening accounts receivables balance was $30,000, there have
been total receipts from customers of $55,000 of which $15,000 relates to cash
sales and $40,000 relates to receipts from accounts receivables. Discounts
allowed in the year totalled $3,000 and the closing balance was $37,000.
Required:
What are the total sales for the year?
Due to the information given in the question we can approach this in 2 different
ways. We can calculate credit sales as above and then add on cash sales, or we
can use the ledger account to calculate total sales. Both methods are shown
below:
Solution 1 - Total sales
Account Receivables (Total Sales a/c)
01/01/0
7
31/12/0
7
b/d
30,000
Total sales (Bal

fig)
65,000
31/12/0
7
31/12/0
7
31/12/0
7
Total receipts
Discounts
allowed
c/d
95,000
3,000
37,000
95,000
Solution 2 - Separate sales

FBT PUBLISHING
55,000
Page 97
Account Receivables
01/01/0
7
31/12/0
7
b/d
30,000
Credit sales
50,000
31/12/0
7
31/12/0
7
31/12/0
7
Credit receipts
Discounts
allowed
c/d
80,000
Credit sales
50,000
Cash sales
15,000
Total sales
65,000
40,000
3,000
37,000
80,000
Example 4
The opening balance on the accounts payable ledger was $30,000. Payments
made to account payables during the year were $33.000, discounts received are
$4,000 and the closing balance was $26,000.
Required:
What was the total purchases figure for the year?
Solution:
Payables Control a/c
31/12/0
7
31/12/0
7
31/12/0
7
Payments
33,000
Discounts
received
c/d
4,000
26,000
01/12/0
7
b/d
30,000
31/12/0
7
Purchases
33,000
63,000
FBT PUBLISHING
63,000
Page 98
Example 5
Suppose the opening accounts payable balance is $15,000, the total payments
made to suppliers was $14,000 of which $10,000 related to credit purchases.
Discounts received were $500 and the closing balance was 11,000.
Required:
What was the total purchases figure for the year?
Solution:
Total Purchases a/c (Account Payables)
31/12/0
7
31/12/0
7
31/12/0
7
Total payments
Discounts
received
c/d
14,000
01/12/0
7
b/d
15,000
31/12/0
7
Purchases
10,500
500
11,000
25,500
25,500
Example 6
The following information relates to the rent and rates for Susan for the year
ended 31st December 2007.
Opening balance
Cash paid during the
year
Closing balance
Rent prepaid
300
Rates accrued
500
Rent and rates
4,100
Rent prepaid
350
Rates accrued
450
Solution:
Rent and Rates
01/01/0
7
31/12/0
7
31/12/0
7
Rent b/d
(Prepaid)
Cash paid
Rates accrued
300
4,100
450
01/01/0
7
31/12/0
7
31/12/0
7
Rates b/d
(Accrued)
Charge (Bal Fig)
Rent prepaid
4,850
FBT PUBLISHING
500
4,000
350
4,850
Page 99
FBT PUBLISHING
Page 100
Example 7
On 1st January the bank is overdrawn by $1,367, payments in the year totalled
$8,536 and on 31st December the closing balance was a positive balance of
$2,227.
Required:
What is the total receipts figure for the year?
Solution:
Cash Book
31/12/0
7
Receipts
12,130
01/01/0
7
31/12/0
7
31/12/0
7
b/d
1,367
Payments
8,536
c/d
2,227
12,130
12,130
Example 8
Scott has a cash float at the beginning of the year of $900. During the year cash
of $10,000 was banked, $1,000 was paid out for drawings and wages of $2,000
was paid. Scott decided to increase the float to $1,000 at the end of the year.
Required:
How much cash was received from customers during the year?
Solution:
Cash Account
01/01/0
7
31/12/0
7
b/d
Receipts
900
13,100
31/12/0
7
31/12/0
7
31/12/0
7
31/12/0
7
Banked
Drawings
1,000
Wages
2,000
c/d
1,000
14,000
FBT PUBLISHING
10,000
14,000
Page 101
Ratios Mark-up and Margin

The gross profit of a company can be expressed as a percentage. This
percentage can be calculated based on the sales figure or the cost of sales
figure.
Gross Profit Mark-up
Gross Profit Margin
Based on Cost of Sales

Based on Sales
If we look at the following trading account:

Sales REvenue
5,000
Cost of sales
4,000
Gross profit
1,000
Gross profit mark-up
1,000 / 4,000 x 100 = 25%
Gross profit margin 1,000 / 5,000 x 100 = 20%
Example 9
Margin
25%
Sales
$1,000
Required:
What is the gross profit and cost of sales?
$
Sales
1,000
%
100%
Cost of sales (1,000 / 100 x 75) (Bal fig)
750
75%
Gross profit
250
25%
FBT PUBLISHING
Page 102
Example 10
Mark-up
25%
Cost of sales $600
Required:
What is gross profit and sales?
Sales (600 / 100 x 125)
750
125%
Cost of sales
600
100%
Gross profit
150
25%
Example 11
Mark-up
10%
Sales
$6,600
Opening inventory $300

Closing inventory
$500
Required:
Complete a trading account from the above information.
Sales
6,600
110%
6,000
100%
Cost of sales
Opening inventory
300
Purchases (Balancing Figure)
6,200
Closing inventory
(500)
Gross profit (6,600 / 110 x 10)
FBT PUBLISHING
600
Page 103
10%
Example 12
Margin
Purchases
5%
$2,840
Opening inventory $800

Closing inventory
$600
Required:
Sales (3,040 / 95 x 100)
3,200
100%
3,040
95%
Cost of sales
Opening inventory
800
Purchases
2,840
Closing inventory
(600)
Gross profit
160
5%
Cost of lost inventory

In incomplete record questions, it is likely that inventory has been lost due to the
infamous fire or flood.
Closing inventory that has not been lost is subtracted in cost of sales because by
definition, the inventory has not been sold in the year.
Lost inventory has also not been sold in the year and therefore also needs
subtracting within cost of sales.
Therefore, to work out the cost of lost inventory, complete the trading account
from the information given and then lost inventory can be calculated as a
balancing figure.
FBT PUBLISHING
Page 104
Example 13
Margin
20%
Sales
$100,000
Opening inventory
$10,000
Closing inventory (after fire)

Purchases
$3,000
$82,000
Required:
Sales
100,000
100%
Cost of sales
Opening inventory
10,000
Purchases
82,000
Closing inventory
(3,000)
Inventory lost in fire (balancing figure)
(9,000)
Gross profit (100,000 / 100 x 20)
FBT PUBLISHING
80,000
80%
20,000
20%
Page 105
SESSION 13
PARTNERSHIPS
Definition
The relationship which subsists between persons carrying on a business in
common with a view to profit
A partnership therefore has two or more partners or owners. In the same way as
for a sole trader, the profits of the business are owned by the partners. This
makes it necessary to share the profits of the business amongst the partners.
A partnership will usually have a Partnership Agreement which will state how
the profits are to be shared amongst other things.
THE SHARING STORY
A partnership has four partners Jason, Howard, Gary and Mark. In the year to
30th June 2007 the partnership has made profits totalling $106,250.
Jason is rich but stupid. He was made a partner because he could invest
$100,000 into the partnership. He withdrew $30,000 from the business on 1 st
July 2006.
Howard is poor but clever and could only invest $20,000 into the partnership.
Due to him being clever and completing work quicker than the other partners he
took responsibility for hiring and firing staff in the business. He withdrew
$30,000 on 30th June 2007.
Gary invested $50,000 into the partnership. He has a liking for designer clothes
and fast cars. Consequently he withdrew $25,000 on 1 st July 2006 and a further
$25,000 on 1st January 2007.
Mark also invested $50,000 and withdrew $30,000 on 1 st July 2006. Marks wife
has just had a baby and he would therefore like to have a guaranteed share of
the profits.
The partners have decided that profits should be distributed at a ratio of 2 : 1 :
3 : 4 (Jason : Howard : Gary : Mark)
How do you think the profits should be shared amongst the partners?
FBT PUBLISHING
Page 106
Interest on capital
To reward partners who have invested more into the business, the partnership
may allocate some of the profits based on the level of capital invested. This is
called interest on capital.
Salaries
To reward those partners who take on extra responsibilities with-in the business,
they may receive a salary. A partners salary is not a business expense like the
salary of an employee, but a way in which profits are allocated.
Interest on drawings
To penalise those partners who take out more drawings from the business, the
partnership may charge interest on drawings. Interest on drawings results in a
reduction in the amount of profit the partner is allocated.
Profit sharing ratio
This is the ratio in which any remaining profits should be shared amongst the
partners after they have been allocated interest on capital, salaries and interest
on drawings.
Guaranteed minimum profit share
A partner may be guaranteed a minimum share of the profits. If the partner has
not received this share after allocating profits in accordance to the above, the
shortfall should be given to the partner. The short fall is then taken from the
other partners in accordance with the profit sharing ratio.
Example 1
Using the amounts detailed in the sharing story, allocate the profits of the
business in accordance with the following partnership agreement:
a) Interest on capital is 5% per annum
b) Howard is to receive a salary of $5,000
c) Interest on drawings is 10% per annum
d) Profit sharing ratio is as stated 2 : 1 : 3 : 4
e) Mark has a guaranteed minimum profit share of $42,500
FBT PUBLISHING
Page 107
Appropriation of Profit Account

Jason
Howar
d
Gary
Mark
Total
Profit
106,250
Interest on capital
Salaries
Interest on drawings
5,000
1,000
2,500
2,500
5,000
(11,000
)
(5,000)
(3,000)
(3,750)
(3,000)
9,750
100,000
(100,00
0)
-
P.S.R. 2 : 1 : 3 : 4
20,000
10,000
30,000
40,000
Guaranteed share
22,000
(1,000)
16,000
(500)
28,750
(1,500)
39,500
3,000
21,000
15,500
27,250
42,500
Financial statements for a partnership

The format of the financial statements for a partnership will be the same as for a
sole trader except for the capital section of the statement of financial position.
Each partner will have a capital account and a current account.
Capital account
This will record the assets that have been introduced into the partnership. The
account will remain fixed unless more assets are introduced. The capital account
will have a credit balance.
Capital Accounts
A
Balance c/d
FBT PUBLISHING
Balance b/d
Bank
Page 108
Current account
The current account will record the partners share of profits and drawings. The
current account will usually have a credit balance but may have a debit balance
indicating that they have withdrawn more than the profits they are entitled to.
Current Accounts
A
Drawings
Balance c/d
Balance b/d
Share of
profits
Loan interest
The capital section of the statement of financial position will look like:
Capital Accounts
X
X
Current Accounts
X
X
FBT PUBLISHING
Page 109

FBT - Class Notes - F3

Uploaded by

Copyright:

Available Formats

FBT - Class Notes - F3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FBT - Class Notes - F3

Uploaded by

Copyright:

Available Formats

ACCA F3

ACCA F3 Financial Accounting

Profit and loss account

Statement of financial position

Long term liabilities

ACCA F3 Financial Accounting

Double entry book keeping

Accruals and prepayments

Session 10 Limited Company accounts

ACCA F3 Financial Accounting

Multiple response (correctly identify two from three

The pass mark is 50%

ACCA F3 Financial Accounting

Understand the purpose of accounting

Recording business transactions - Book keeping

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

The starting point in the preparation of the financial statements is to produce a

ACCA F3 Financial Accounting

Proforma set of financial statements for a sole trader.

Non current liabilities

ACCA F3 Financial Accounting

Statement of Comprehensive Income for the year ended 31 December

Less: Cost of sales

ACCA F3 Financial Accounting

Proforma set of financial statements for a limited company or Plc

Equity and liabilities

Non current liabilities

ACCA F3 Financial Accounting

Statement of comprehensive income for the year ended 31 December

PROFIT FROM OPERATIONS

PROFIT BEFORE TAX

PROFIT FOR THE PERIOD

Statement Of Changes In Equity for the year ended 31 December 2007

Profit for the period

Surplus depreciation (not impt for

The format for company accounts is laid down in I.A.S. 1 Presentation of

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

DOUBLE ENTRY BOOK KEEPING

Understand the principles of double entry bookkeeping

Double entry bookkeeping

Every debit entry has a credit entry

ACCA F3 Financial Accounting

1 AprilHe invests $50,000 in to a business

T accounts for George (State if the account is Position or Income)

ACCA F3 Financial Accounting

1 Jan She invests $65,000 in to the business

T accounts for Tina (state if the account is Position or Income)

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

Non Current Liabilities

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting

ACCA F3 Financial Accounting