Express Notes

ExPedite Notes
ACCA F3 Financial Accounting
Chapter 1
Financial Statements
START The Big Picture

Financial statements (more colloquially called accounts) are a crucial part of managing a business and reporting to shareholders. A set of financial statements will need to be produced at least annually for presentation to external stakeholders, but generally much more frequently for management control within the business. Frequent and accurate financial statements can add a great deal to the efficient running of a business. A set of financial statements is produced periodically (often once a year for smaller businesses but as frequently as the users want them). A full set of financial statements for a limited company comprises a number of statements: x A statement of financial position, generally called a balance sheet. This lists all the assets and liabilities of the business plus the equity of the business (which explains where the assets and liabilities came from). The statement of financial position is a snapshot of the assets and liabilities of a business at a moment in time. A statement of comprehensive income, often referred to as profit and loss account. This shows all the gains and losses that the business has experienced in the period. The statement of comprehensive income is a record of what happened over a period to the net assets of a business.
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A statement of cash flows, which shows where the cash and shortterm assets very similar to cash came from and went do during the period. Income isnt always the same as cash, as well see later. Notes to the financial statements, which give further detail to readers who want to know more than the summary story.
Statement of financial position of Sole Trader X at 30 June 20x1 ASSETS Noncurrent assets Licence to operate Land and buildings Office equipment Motor vehicles Fixtures and fittings Current assets Inventory Trade receivables Less: allowance for doubtful receivables Prepayments Cash at bank Cash in hand Total assets EQUITY AND LIABILITIES Capital Initial capital introduced Total cumulative comprehensive income at 1 July 20x0 Less: Cumulative withdrawals at 1 July 20x0 Total equity at 1 July 20x0 Total comprehensive income in the current period Withdrawals in the current year Total equity at 30 July 20x1 Noncurrent liabilities Bank loans Current liabilities Bank overdraft Trade payables Accruals Total liabilities Total equity and liabilities
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$ 10,000 35,000 20,000 30,000 10,000 105,000 20,000
13,000 (1,000) 12,000 4,000 3,000 2,000 146,000
30,000 85,700 (24,000) 91,700 16,000 (8,000) 99,700
32,000
3,300 8,000 3,000 46,300 146,000
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ExPedite Notes
Principal features of the statement of financial position: x x x It balances, with the total assets equalling equity (ie owners interest) plus liabilities Each section is conventionally written in terms of increasing liquidity Noncurrent assets and liabilities are ones that are expected to remain on the SOFP next year. Current assets and liabilities are expected to be used up or paid within the coming year.
A SOFP may be rearranged into a number of ways. IAS 1 shows a SOFP as given above: Total assets = Equity + total liabilities. Equally validly therefore: Total assets total liabilities = Equity Given that equity = capital + cumulative profit cumulative withdrawals, then the equation could be written in any number of ways such as: Total assets total liabilities = Capital + cumulative profit cumulative withdrawals Or Cumulative profit = Total assets total liabilities capital + cumulative withdrawals. This is sometimes called the accounting equation and often comes up in the F3 exam. The task is to drop in the figures that you know and find the missing figure, whatever it might be.
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ExPedite Notes
Statement of comprehensive income for the year ended 30 June 20x1 $ Sales revenue Cost of sales Opening inventory Purchases of inventory Delivery costs inwards Closing inventory Gross profit Sundry income Discounts received $ 152,000
30,000 80,000 10,000 (20,000) (100,000) 52,000 3,000 2,000 57,000
Less: Expenses Delivery costs outwards Depreciation Discounts allowed to customers Electricity Irrecoverable and doubtful debts Mobile phones Motor expenses Rent Telephone and internet Wages and salaries Profit for the period before tax Other comprehensive income: Revaluation gain on property Total comprehensive income in the period 2,000 16,000 3,000 6,000 1,000 4,000 2,500 500 2,500 9,000 1,500 12,000 (42,000) 14,000
You may be required in the exam to calculate revenue, cost of sales, gross profit and total comprehensive income from given data.
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ExPedite Notes
REVIEW AND SELFTEST 1

Using the financial statements above, calculate the following ratios: x x x Gross profit % Net profit % Total comprehensive income %
Unusual items Sometimes, it is necessary for oneoff items to be disclosed separately in the financial statements if they are very large or arise from an unusual, often nonrecurring, source. Typical examples might be writeoff of an unusually large debt as irrecoverable, or business relocation costs. Disclosing it separately allows readers of the accounts a more indepth understanding of what the business is doing.
KEY KNOWLEDGE Elements of financial statements

There are five elements of financial statements, from which all financial statements are produced. These definitions are very useful throughout your ACCA studies and could easily be part of a question in paper F3. Elements of the statement of financial position: x An asset is a resource that is controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity is the residual interest in the assets of the entity after deducting all its liabilities. Depending on the type of business, this may be called just capital (sole trader), partners current account (partnership) or share capital and reserves (for a limited company). For a limited company, reserves show the net cumulative gains above cumulative losses, less all
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ExPedite Notes
dividends paid. This therefore explains the difference between what the net assets were when the share capital was originally paid in and what the net assets are at the reporting date.
Elements of the statement of comprehensive income: x Income is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. An expense is a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Note that income and expenditure are defined effectively as the reason that a change in net assets happened.
KEY KNOWLEDGE Relationship between the statements: the business equation

An increase in net assets of a business will come from a mixture of these sources: x x x Total comprehensive income made in the period (a profit will increase net assets) New capital introduced by the owner (will always increase net assets) Withdrawals made in the period (will always reduce net assets).
This is sometimes called the accounting equation or the business equation. It is a frequent exam question and can be summarised: Closing net assets = Opening net assets + total comprehensive income in the period + new capital introduced in the period withdrawals in the period.
This is also a frequent exam question, with some figures given and the others having to be deduced. Remember that net assets = equity + liabilities, by definition. So net assets may be given in a question separately as equity and liabilities.
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ExPedite Notes
Separate accounting entity Even with a sole trader (a person who runs a business on their own, but the business has never been set up formally to be a separate legal identity), there is a distinction between personal income/ expenses and business income/ expenses. The accounts will largely be maintained so that the sole trader can report business profits to the tax authority. Personal expenditure such as personal holidays is not deductible against tax! The accountant will therefore only record transactions that are considered to be legitimate business transactions; personal transactions will be ignored. In smaller businesses, one of the first steps when producing accounting records for clients is to separate the business transactions from the personal, as the latter will not be recorded anywhere. Sole traders, partnership and limited companies Well look at these in more detail in each chapter, but heres a summary: Sole trader Partnership Limited company Number of investors 1 (the sole trader!) Normally limited to about 20 Can be between 1 and an unlimited large number Yes
Must produce accounts for the tax authority Must produce accounts to file with the commercial register Business name
Yes
Yes
No
Maybe, normally not
Yes
Normally just the name of the owner trading as the name of the business No
Often the names of the original partners. Few legal formalities
Can offer shares to the public? Equity part of the SOFP
No
Must end Ltd (if private limited company) or plc (if public limited company) Yes, if a plc. No if Ltd.
x x x
Initial capital Cumulative profit Cumulative withdrawals
x x
Each partners capital account Each partners current account (ie cumulative share of profit less cumulative withdrawals)
x x
Share capital Reserves: (revaluation reserve, retained earnings, etc).
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ExPedite Notes
Solution to review and selftest 1 Gross profit % = 52/152 = 34.2% Net profit % = 14/ 152 = 9.2% Total comprehensive income % = 16/152 = 10.5%
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Chapter 2
Objectives of financial reporting

Financial reporting is the business of collecting financial information, analysing, summarising it and presenting it in a useful form to a wide range of different users. Different users will have different objectives and therefore slightly different needs. Financial statements are aimed at giving useful information to a wide range of different users, though the investor is the most significant user.

For each of the different stakeholders below, state what their principal interest will be in a business and then suggest which information within a set of financial statements will principally interest them.
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1. 2. 3. 4. 5. 6. 7. 8.
Investors Bank lender Government statistical office Tax authority Employees Suppliers Customers Management
For internal users such as management, the accounting system may be used to produce management accounts. These are produced much more frequently than the accounts sent to shareholders and contain much more detailed information. The accounting system may be used to monitor lots of things, such as profitability of different products and services and thus add a lot to the efficient running of the business. For financial information to be useful, it must exhibit a number of characteristics. Its important to understand what these are because you may be asked for a definition of them in the exam.
Qualitative characteristic Fair presentation
Our definition Items are described in accordance with their true nature. For example, loans repayable within six months are classified as current rather than noncurrent. The business is expected to trade into the foreseeable future. This means that assets will not have to be sold in a hurry, which would be likely to result in significant impairments in value. A key concept covered in chapter [x]. It means recording transactions in the period when they happened; not necessarily when the cash was settled. It also means matching costs and associated revenues. Items should be reported the same way between periods, so that its possible to make meaningful comparisons between years. Similar transactions must be reported the same way within the same accounting period. Materiality means large enough to influence the users opinion on the financial statements. Immaterial information should not be disclosed, as its a distraction. Material information must be presented accurately and fairly. Irrelevant information is a distraction and should not be presented.
Going concern
Accruals
Consistency
Materiality
Relevance
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ExPedite Notes
Reliability
Information is useless if its not considered to be reliable. Eg an external valuation of property is more reliable than a biased directors valuation. Items should be described in accordance with their true nature. Eg an expense for repairs should not be classified as research costs, even though research costs are more favourably viewed by investors. Items should be reported in accordance with their commercial substance, rather than their legal form. Eg if a sale is made on credit but legal title remains with the seller until the goods are paid for, it should still be recorded as a sale/ purchase at the time of the transaction, since this is when the obligation arises. Unbiased neither excessively optimistic nor excessively prudent. Conservatism. This is no longer a core concept in IFRS accounting, but broadly losses should be recognised more readily than gains. All information that needs to be presented in order to give a full picture has been presented. Financial statements this period should be presented using similar principles to previous years, so that valid comparisons may be made. Company accounts should be comparable with each other. This means that if a company changes its accounting policy, it must restate its previous years accounts using the new accounting policy, in order to facilitate comparison between years. Information should be presented in a way that users can understand. Excessive complication reduces usefulness. See chapter 1. Even if there is no separate legal entity, as with a sole trader, the business is still considered to be separate to its owners for accounting purposes.
Faithful representation
Substance over form
Neutrality Prudence
Completeness
Comparability
Understandability
Business entity concept
Sometimes, its not possible to deliver all of these desirable characteristics. For example, an investor is principally interested in future profits, so this is what is relevant to them. However, estimates of future profit are unreliable, so historical information is given, even though it is less relevant.
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ExPedite Notes
KEY KNOWLEDGE Historical accounting

Accounting is derived from recording information about transactions that have happened. This means that assets are recorded at their historical cost; ie what the business paid for them. This has the advantage of being objective and relatively easy, but has a number of disadvantages, including: x x x x It can give out of date asset valuations for longlived assets This can result in an unrealistically low depreciation charge Profit trends can be misleading (eg a profit growth of 10% per year isnt so impressive as it first seems if inflation is 12% per year!) Where theres significant inflation and inventory is held for a long time, profit can be reported simply by matching todays revenues with yesterdays costs.
There are some large advantages of historical cost accounting, however; principally the fact that people understand it and it is objective. During periods of modest inflation, the weaknesses of historical cost accounting are generally outweighed by its advantages. There are alternative systems of accounting, such as replacement cost accounting. Replacement cost accounting records inventories in the SOFP and at the point of sale at the cost that would be incurred to replace them today. This has many advantages but is complicated to apply so is not common in practice. You will only have to apply historical cost accounting in the paper F3 exam.
KEY KNOWLEDGE Regulation of financial reporting

Some entities have to report under regulated accounting standards. Different countries may have their own systems of GAAP (generally accepted accounting practice) or may follow International Financial Reporting Standards (IFRS) or IFRS for SMEs (SME means smaller and medium sized enterprises). It is a matter of national regulation which financial reporting standards an entity must use when producing their financial reports. Large plcs will have to report under a much more extensive financial reporting framework than sole traders.
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ExPedite Notes
There are a number of bodies that you need to be aware of for the Paper F3 exam. Their roles are given below.
IASCF: the International Accounting Standards
This has recently been renamed the IFRS Foundation. The Foundation is made up of trustees, who appoint the members of the bodies below. The IASB issues International Financial Reporting Standards and the IFRS for SMEs. It employs a permanent staff to draft new accounting standards and amendments considered necessary to extant accounting standards. This has recently been renamed the IFRS Advisory Council. It is made up of a cross section of advisors from different user groups. It advises the IASB on the IASBs work programme. This has recently been renamed the IFRS Interpretations Committee. This body is designed to respond quickly where there are significant differences in interpretation of an extant IFRS. For example, it issued guidance on how to account for loyalty programmes, where users were uncertain to follow the extant accounting standard on revenue recognition, or provisions.
IASB: International Accounting Standards Board
SAC: Standards Advisory Council
IFRIC: International Financial Reporting Interpretations Committee
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ExPedite Notes
Solution to review and selftest 1 For each of the different stakeholders below, state what their principal interest will be in a business and then suggest which information within a set of financial statements will principally interest them. 1. Investors will be interested in what profit they can expect to get from a business, what the cash flow health of the business is (ie what risk of failure) and how much of a premium equity investors are getting over providers of secured finance, such as secured loans. They will be interested in growth of profit that is expected, as this will most probably be the primary influence on the value of shares in the company. They will therefore be interested in all the financial statements, in some detail. 2. Bank lenders will be interested in whether the company is generating enough profit and cash flow to pay interest on the loans and be able to repay the loans as they fall due for repayment. They will primarily be interested in the statement of comprehensive income and statement of cash flows. 3. Government statistical office will be interested in collecting statistics for gross domestic product, etc. They will primarily be interested in statement of comprehensive income. 4. Tax authority will be interested in taxable profit, which will be an amended form of reported profit to investors. They will primarily be interested in the SOCI as the basis for the tax return. 5. Employees will be interested in job security and whether the company is doing very well. If its doing very well, they are likely to be in a stronger position to push for pay rises. They are likely to be primarily interested in SOCI and certain notes to the accounts, such as directors pay. 6. Suppliers will want to know that the company is a stable customer and good for credit risk. Their focus will be very similar to that of a bank lender. 7. Customers will wish to see security of supply and will not be primarily interested in profit. They will have similar interests to a bank. 8. Management will be interested in a great deal of detail, as this is likely to help them in managing the business. They will be interested in cash flow primarily day by day, but also all other aspects of the companys performance and position. It is likely that special management accounts will be produced, frequently and in greater detail than the accounts provided to investors.
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ExPedite Notes
Chapter 3
Sources of financial information

The accounting system must naturally be fed with raw source data. This data is then analysed, categorised and recorded in the accounting system itself, which may be a fully manual (paper based) system or may be maintained using software. Both use the same system of double entry bookkeeping that we will see later on. For an accounting system to work well, it must be simple to operate and be capable of being fed by nonspecialist staff. A key step is therefore ensuring that the right stationery and documentation is in place. The F3 syllabus requires you to be able to define the following: Document Quotation Purpose To give a potential customer an indication of what a product or service would be likely to cost. It may be a binding quote or just an indicative quote. Often feeds the accounting information on.... Nowhere. At this stage, there has been no transaction to record; its still at the state of being a prospective transaction.
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Sales order
Purchase order Goods received note
Goods despatched note
To record an order from a customer. Signing a booking form for an ExP classroom course is a sales order that ExP will then process. To record an order placed with a supplier. It may require preauthorisation to be valid. To record that an order for inventory for resale has been received. It will normally only be produced once the goods have been inspected at the point of delivery to ensure that they are correct in description and quality. To record that an order from a customer has been sent out.
Sales (revenue).
Purchases, normally of inventory for resale. Purchases of inventory for resale and payables.
Invoice Statement
A request for payment from a supplier. Sent by the supplier to the customer. A summary of transactions recorded by a supplier with a customer, including amounts received from the customer. Sent by the supplier to the customer.
Sales (revenue) and possibly also inventory management, depending on how the accounting system is set up. Payables. Does not generally instigate any recording of a transaction, since all transactions on the statement will have been recorded when goods were ordered. But useful for cross checking our records with the suppliers records. Payables.
Credit note
Debit note
Remittance advice
Receipt
Acknowledgement from a supplier that the customer has overpaid and is entitled either to a refund or free goods/ services in the future. To cancel a credit note that previously existed, eg if goods were ordered, paid for and then returned there would initially be a credit note. The refund made would be accompanied with a debit note. Normally included with an invoice. A document that is included with the payment (eg if paid by cheque) with details that will allow the recipient of the funds to match the payment to the customers account. Issued by the supplier for goods, to acknowledge payment of a debt.
Receivables.
Receivables.
Receivables, payables and purchases.
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ExPedite Notes
KEY KNOWLEDGE Data sources / data capture

When a business transaction happens, it is essential that the source data is captured immediately. This does not necessarily mean immediately writing up the books, but it does involve some record being made of the transaction happening. In very simple accounting systems for sole traders (eg a selfemployed builder) it may involve the proprietor keeping pocket books to record things like quotes given and a shoe box used to collect receipts for business expenses. From this source data, the accounting records can then be produced each period. The accountant is often not physically present at the time that transactions happen, so it is essential that there are simple and fool proof systems to ensure a complete and accurate record of business transactions.
KEY KNOWLEDGE Books of original entry

Alternatively called books of prime entry, these will be the bridge between the raw data (eg receipt for cash purchase of some building materials and the accounting system. They may be written up by the accountant, or by a semitrained member of staff within the clients business. The most commonly used books of original entry are:
Book of original entry: Cash in book
Used to record data on:
Data typically used to feed:
Cash received into the business bank account.
All sorts of things! Anything that may generate cash for the business. All sorts of things! Anything that results in cash being paid out of the business. Typically, small expenses (eg Friday cakes for staff!) and sundry income.
Cash payments book
Cash paid from the business bank account.
Petty cash book
Cash in and out of the balance of cash held in notes and coins by the business (normally small). This is often controlled using the imprest system (see later).
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ExPedite Notes
Sales day book
Sales on credit. Note that sales immediately settled in cash will be recorded in either the cash book (if paid directly into the bank account) or petty cash book (if received in notes and coins). Purchases of inventory for resale on credit. Note that purchases settled immediately in cash will be recorded immediately in the cash payments book or petty cash book. Anything not covered by any of the other books of original entry.
Sales revenue.
Purchases day book
Purchases of inventory for resale.
Journal book
Often, this is the book maintained by the accountant, in which period 13 adjustments like depreciation and bad debts are recorded.
Books of original entry may be recorded in paper form, or using a spreadsheet. They will all follow similar forms.
EXAMPLE
Example cash receipts book Date Amount Reason for amount received Cash sale 05/03/2010 10,000.00 06/03/2010 3,322.00 3,322.00 From petty cash From other account 10,000.00
The total column records the cash received and the same amount is then recorded in the columns to explain where the cash came from, ie the reason for the increase in cash. If all is recorded properly, the totals will crosscast.
Month totals
13,322.00
3,322.00
10,000.00
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ExPedite Notes
Example cash payments book Date Amount Reason for amount paid Inventory Electricity for resale 4,500.00 1,200.00 876.00 The total column records the cash paid and the same amount is then recorded in the columns to explain where the cash went to, ie the reason for the decrease in cash. If all is recorded properly, the totals will crosscast.
Rent 12/03/2010 4,500.00 13/03/2010 1,200.00 31/03/2010 876.00
Month totals
6,576.00
2,076.00
4,500.00
Note: These are only extracts. In practice, it is likely that there would be considerably more columns than this, in order to analyse each type of payment into the different types of payment/ receipt that the business encounters and wishes to monitor. Example sales day book List of credit sales Date Customer Amount Credit (days)
04/03/2010 08/03/2010 18/03/2010 27/03/2010
F. Bruce H. Edwards S. Rayworth M. Baker
800.00 560.00 330.00 120.00
30 15 60 30
These amounts will be used to maintain individual customer records and credit control.
Month total
1,810.00
This total will be used to update the main double entry system (see later).
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ExPedite Notes
KEY KNOWLEDGE Computerised systems

Computerised systems are common and can be cheap. They still require rigorous systems for data capture at the point when transactions happen, as the maxim garbage in, garbage out very much applies! Input to a computerised system will not look like a book of original entry, but will require the same data. Software may be more user friendly, for example asking how much cash was spent? and what was this for?, whilst then offering a drop down menu of choices. The software will still prepare records using the same methodology as the manual recording systems above. Advantages of using a computerised system include: x Back ups can be made easily x Makes producing periodic frequent accounts much less laborious than a manual system x Can be userfriendly x Analyses sales taxes more easily than manual systems (see later) x Can be used to quickly produce lots of reports such as VAT returns and interim management accounts. Disadvantages of a computerised system include: x Cost x May not be tailored very well to the business own needs x Still requires effective data capture and maintenance of the underlying records.
KEY KNOWLEDGE Journal book

The journal book is the book of original entry that captures transactions not covered by other books of original entry. Often, it includes adjustments and correction of errors and omissions in the other books of original entry. In a computerised system, there are often restrictions on who can access the journal book. The journal book records double entry records (see later), with an explanation of the reason. Well see an example of it after tackling double entry bookkeeping.
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ExPedite Notes
KEY KNOWLEDGE Credit control and memorandum accounts

In parallel with (and thus duplication of) the main accounting system, it is likely that an accounting system will maintain separate records of individual records of customer and supplier balances. This duplicates effort and increases costs, but provides useful information for credit control and a check on the accuracy of data input. Each supplier or customer will have a supplier or customer code and individual record of transactions with them. This is outside the general ledger (ie double entry system) and in a simple accounting system may be kept using a simple card index box.
EXAMPLE
Example memorandum customer record INDIVIDUAL CUSTOMER BALANCE RECORD Customer: Limit: Date M. Damon 5,000.00 Invoice number or remittance advice Sold Cash in Balance Customer code: DAM032
03/01/2010 30/01/2010 14/02/2010 27/02/2010 13/03/2010
INV 3322 INV 3421 RA 4122 INV 3987 INV 4121
3,200.32 1,008.00 3,200 450.00 870.00
3,200.32 4,208.32 1,008.00 1,458.00 2,328.00
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ExPedite Notes
Similar (but opposite!) records will be kept for balances with individual suppliers. The purpose of a credit limit is to reduce credit risk to within tolerable limits. New customers are likely to be given standard low credit limits and will need to build up a record of prompt payment before larger credit is extended to them. Sales staff should be required to check that any proposed sale will not exceed the current credit limit before committing the company to making the sale (or requesting that the credit controller increase the credit limit). This information will also allow for preparation of an aged debtors analysis, which is an important piece of information in deciding an appropriate figure for an allowance for doubtful debts, since the longer a debt goes unpaid, the greater the chance that it will not be recoverable in full. Offering credit to customers increases risk of nonpayment and may put a companys cash flows under strain, but it is also likely to generate more sales than a business that refuses credit sales. If suppliers provide supplier statements, then it will be possible for accounts staff to reconcile the balance on the supplier statement with the balance on the memorandum supplier account. This gives further comfort that the accounting system contains accurate information. Statements may be sent to customers from the memorandum ledgers, which may prompt customers into paying more quickly in the event that they have forgotten a payment to be made.
KEY KNOWLEDGE Controlling petty cash the imprest system

Cash balances are prone to error, theft and poor record keeping. A way to ensure that any cash payments out of the petty cash box are recorded is to use the imprest system. The imprest system has these features: The cash box has a preset limit of maximum cash that it ever contains, eg $1,000 x Before any cash is taken out of the cash box (which should be guarded by a very diligent and ideally slightly frightening person), the person claiming the cash must provide a receipt and complete an expense voucher. x As an expense record is submitted, the same amount of cash is taken out of the box. x Under no circumstances is anybody ever allowed to take money out of the tin without completing a petty cash voucher.
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ExPedite Notes
The result of this is that at any point in time, the sum of cash plus the expense vouchers will always equal the preset limit of $1,000. When cash reaches a low level, more cash is withdrawn from the bank to replenish the sum up to the $1,000 limit. The expense vouchers are then exchanged for the replenishment cash. These movements in petty cash can then be summarised in a petty cash book each period, which will look like this:
PETTY CASH BOOK Reason for cash movement 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 Cash in/ out 1,000.00 (21.12) (20.00) (430.00) (32.00) (43.12) 453.76 546.24 1,000.00 Voucher # Opening balance 332; Supermarket 333; Taxi for MD 334; Stationery shop 335; Flowers for new baby 336; Supermarket Subtotal Replenish Subtotals 546.24 546.24 (64.24) (20.00) (430.00) (32.00) (43.12) (21.12) (20.00) (430.00) (32.00) From bank Staff food & drink Travel Stationery Other
Note that any time the cash is replenished, the expense vouchers are taken out of the petty cash box and stored somewhere safe, probably with the accounts department. The accounts department will then use the totals to record the totals in the accounting system each period.
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ExPedite Notes
Chapter 4
Double entry bookkeeping: the debits and credits

The starting point for double entry bookkeeping is to think about assets and liabilities, ie net assets. If there is a change in an asset, there must be an explanation for why it changed. x x x If you win the lottery, you have more cash because you have lottery income. If you buy lunch, you have less cash because you spent money on lunch (ie more expenditure). If you decide that the home you own is worth more, you have more assets because youve recognised a revaluation gain.
Many textbooks explain double entry bookkeeping in the framework of double entry meaning that for each transaction, there is an equal and opposite transaction. We think that this is needlessly confusing. The key word in double entry is because.
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ExPedite Notes
KEY KNOWLEDGE So why debits and credits?

Imagine that we call assets debits, only so that people who speak different languages can communicate more effectively with each other. If we now say that we have an asset, or more of an asset because youve been paid your salary. This would be recorded as recognise new or increased asset of cash. Its shorter just to say debit cash. There must be a reason for this increase in cash. The reason is that theres been some income. This cant be a debit, as what were trying to do is explain where the debit came from. The explanation is arbitrarily called a credit. You may have encountered the words debit and credit in the context of your bank statement. This brings danger, since the bank statement is a record from their own records. This means that its upside down. This can cause confusion, so its best for the moment if you try to unlearn everything youve ever come to think of debits and credits as being. The truth is the opposite way round to the way that lay people use the terms.
KEY KNOWLEDGE Building up the rules

Here are the core concepts that you need to be happy with: x x x An asset, or an increase in an asset, is a debit. The opposite of an asset is a liability. The opposite of a debit is a credit. So a liability is a credit. If you have more assets (debit assets), the explanation will be to credit income.
So you may have started to think debits good, credits bad or even the other way round. Thats not the way to look at it. Neither is good or bad. A debit can be an asset, but it can also be an expense. So its not correct to think of one being good and the other bad. Its simpler than that. Heres a table to summarise the rules. Review this and then try to produce is yourself, using the logic of explaining movements in net assets and things being opposites (eg a liability is a credit because an asset is a debit).
Ch 4 | 2
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ExPedite Notes
It will take a while to become familiar with this system, just the way that it takes a while to become familiar with riding a bicycle. Dont panic it comes and dont feel pressured to rush it. Theres not much intrinsically to actually understand here its just a task and a system that becomes really easy with repetition.
Debits mean What happens to net assets: An increase in assets An increase in liabilities
Credits mean
A decrease in assets An increase in liabilities
And the reason for that increase in net assets: An item of expenditure An item of income
If youre asked to record a transaction, the first step is to identify what assets and/ or liabilities are in question. Decide one of these first (its often easiest at first to start with cash if its a cash transaction) and decide if this is a debit or a credit. Then work out the explanation why. If you think that theres a new liability, that must be a credit to liabilities. That means that the explanation must be a debit, which could be either an asset (eg if youve just got some cash in your hand because you borrowed it), or an expense (eg if you just bought dinner on your credit card).

Determine what the debits and credits would be in these situations: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. You receive your net salary of $2,000 into your bank account. You withdraw $100 at an ATM. You spend $10 on lunch. You give $2 to a beggar in the street. You find that you had the other $8 taken from your pocket stolen. You go online and buy a HD camcorder for $800 using your credit card. You find the $8 that you thought youd lost in another pocket in your jacket. Your brother repays you the $120 that he borrowed from you interest free last week. You borrow $100,000 from a bank to buy your home. You pay the $100,000 to buy your home; $99,000 to the seller and $1,000 to the lawyer who administered the transaction for you.
Ch 4 | 3
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ExPedite Notes
In practical terms, most accounting systems group together similar items, be it assets, liabilities or explanations of where income and expenditure came from. This limits the number of ledger accounts that they maintain. If a transaction happens that involves a new type of asset, liability or explanation for movements in assets or liabilities (ie income and expenditure) that has not been seen before, a new ledger account will be opened. Theres no limit to the number of ledger accounts that an accounting system can have, though most entities try to keep the number as low as they can in order to keep the list of account balances (see later) a manageable size.
Conventional notation Keeping track of debits and credits in a ledger account when writing them down on paper is normally done using a two column approach, with a heading to denote what that ledger records. This physically resembles a letter T so is called a T account. Its normal to write an explanation of where the other side of that entry came from or went to. This allows for easy following through of any errors or adjustments that need to be done. By convention, the debits in any T account are written on the left hand side and the credits on the right hand side. Theres no intrinsic logic to this, but its thankfully fairly universal around the world, unlike driving on the left or right!
EXAMPLE
A company opens a new bank account on 1 March. It records a number of receipts and a number of payments in its paperbased accounting system. Each one is recorded in date sequence on the debit or the credit side. At the end of the month, the ledger account for the new bank account looks like this: DEBITS Bank account number 00876544 CREDITS 1 March Opening balance 0 12 March Purchases of inventory 4,500 5 March Transfer in from account 10,000 13 March Rent 1,200 00987743 6 March Cash in hand deposited 3,322 31 March Electricity 876
At the end of the month, the balance on the account is obviously $3,756, since more has come into the account than has gone out and there was no opening balance. In other words, the debit side (which shows increases in the balance) is greater than the credit side by $3,756.
Ch 4 | 4
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ExPedite Notes
Conventional notation for finding net balances At any point in time, its likely that management of the entity will want to know the total balance on each account, rather than the story of how that balance arose. This is done by totalling up the debits and credits and working out the difference. With large accounts with lots of transactions, its not obvious which side is bigger at first, so its normal to add up each side and make a note of the total. Bank account number 00876544 Opening balance 0 12 March Purchases of inventory Transfer in from 10,000 13 March Rent account 00987743 Cash in hand deposited 3,322 31 March Electricity 31 March 31 March 1 April (Max balance) Balance b/d 10,322 3,746 31 March Balance c/d (Max balance)
1 March 5 March 6 March
4,500 1,200 876 3,746 10,322
The max balance just means the bigger balance of the two sides (which is $10,322 total of entries on the debit side and $6,576 total of entries on the credit side). The larger of these two figures is $10,322. Note this on both sides initially and then find the size of the hole on the credit side. This is the amount by which the debits exceed the credits. Its normal to omit the date and notation in italics above, but weve included it here just to hopefully make what were doing clearer. The c/d and b/d notation often bothers people: dont worry. C/d simply means carried down and is the hole in the smaller side that would be necessary for the smaller side to equal the larger side. In other words, the amount by which the larger side exceeds the smaller side. Once this is found, it is then expressed on its correct side as b/d, meaning brought down. This may seem a little strange at first, but its very logical and its certainly best to use this notation rather than any notation of your own that you might initially find easier. As international accountants, its important that we use similar notations to each other so that we can work together effectively and understand each others work. Even if it seems to be a bit long winded at first, its really worth persisting with this T account notation and convention about how to find balances.
Ch 4 | 5
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ExPedite Notes

Vic started a new business on 1 October 20x7. The transactions he undertook were as follows: 1 October: Introduced personal cash of $15,000 3 October: Purchased 100 suitcases for resale on credit from Bob at a cost of $3,000 5 October: Sold 50 of the suitcases for cash of $2,900 14 October: Paid Angelo the Saturday assistant cash of $50 17 October: Bought a delivery bicycle on credit at a price of $540 22 October: Paid telephone and broadband charges of $60 27 October: Sold a further 20 suitcases to Alex on credit for a total price of $1,240 28 October: Paid $150 from the business bank account to pay a personal expense 31 October: Made a part payment of $1,500 to Bob. There were 30 suitcases left in inventory at the end of the month. Required: x x x x Determine what the appropriate journal entries would be for each of the above transactions. Post these transactions to appropriate T accounts (do not prepare any ledger accounts for inventory asset treat all inventory purchases as cost of sales) Balance off the T accounts at the end of the period List all the balances on each T account, with all the debit balances in one column and all the credit balances in another column.
What to do from here Imagine a series of transactions that you undertake, including ones that involve people owing you money or you. Ideally, do this with a study buddy who is also doing this paper. Then see if you agree what the double entries are. If you think that youre getting the hang of it, its time to move onto the next chapter. The remaining chapters are all based around double entry bookkeeping, so your skills will build up with applied practice in the next chapters. So dont dwell on trying to become perfect; as soon as you think you have a clue whats going on, move on!
Ch 4 | 6
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ExPedite Notes
Solution to review and selftest 1 1. Dr Bank $2,000; Cr Salaries income $2,000 2. Dr Cash (notes and coins) $100; Cr Bank $100 3. Dr Lunch expense $10; Cr Cash $10 4. Dr Charity donations expense $2; Cr Cash $2 5. Dr Theft expense $8; Cr Cash $8 6. Dr Camcorder (tangible noncurrent asset) $800; Cr Credit card payables $800 7. Dr Cash $8, Cr Sundry income (or theft expense) $8 8. Dr Cash $120, Cr Receivables $120 9. Dr Bank $100,000; Cr Loan liability $100,000 10. Dr Home (Tangible noncurrent asset) $99,000; Dr Legal expenses $1,000; Cr Bank $100,000. Solution to review and selftest 2
Cash 1.10 Capital 5.10 Sales 15,000 2,900 14.10 Staff 22.10 Tel & BB 28.10 Withdrawals 31.10 Payables c/d 50 60 150 1,500 16,140 17,900 c/d 15,000 15,000 Capital 1.10 Cash 15,000 15,000 15,000
1.10 b/d
b/d
17,900 16,140
3.10 Payables
Purchases 3,000 31.10 Cash
Payables 3.10 Purchases 1,500 17.10 NCA
3,000 540
c/d
2.040 3.540 b/d
3.540 2.040
Sales 5.10 Cash 27.10 Receivables c/d 4,140 4,140 b/d
Staff costs 2,900 1,240 14.10 Cash 50
4,140 4,140
17.10 Cash
Noncurrent assets 540
24.10 Cash
Telephone and broadband 60
27.10 Cash
Receivables 1,240
Withdrawals 28.10 Cash 150
Ch 4 | 7
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ExPedite Notes
Chapter 5
Tangible noncurrent assets

An asset is a resource controlled by an entity that is expected to give inflow of benefits. Many assets will have a period of expected benefit over more than one period. These are noncurrent assets.

Suggest four examples of tangible noncurrent assets and four examples of current assets that you would expect to find in a business.
Ch 5 | 1
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ExPedite Notes
KEY KNOWLEDGE Capital and revenue expenditure

In slang terms, capital expenditure means any cash paid to acquire assets that will result in the acquisition of a new asset, or an increase in the earning capacity of an existing asset. Revenue expenditure means money paid to maintain the existing earning capacity of an existing asset. The terminology is very confusing here, since it has nothing to do with share capital/ equity or sales revenue! They are commonly used terms, however inaccurately.

Classify each of the transactions below as capital or revenue expenditure and explain your choice of classification. Capital expenditure Buying a new van Paying the annual road tax to be able to use the van Installing air conditioning in a bar Replacing the existing strip lighting in a restaurant with romantic soft lighting Installing new partitioning within an office Fixing a hole in the roof Buying a new 25 tea spoon for the staff kitchen Revenue expenditure
KEY KNOWLEDGE Acquisition of a noncurrent asset

The cost of a noncurrent asset that will initially be recognised will be all the costs necessarily incurred in bringing the asset into its initial working condition, as long as those costs are expected to last more than a year. Any recoverable taxes will be excluded.
Ch 5 | 2
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ExPedite Notes

LaLa acquires a new item of machinery called a NuNu on 1 July 20x3. The NuNu is a large piece of equipment that requires installation. The following costs are paid by LaLa. $ Cost to reinforce floor for NuNu installation 14,000 Paid to supplier (including recoverable sales tax of $10,000) 213,000 Installation costs 2,000 Delivery costs 3,400 Costs to train staff in using the NuNu 1,500 Irrecoverable import duty paid 3,800 Cost of testing before production is possible 1,750 What will be the initial recognised value of the NuNu in LaLas accounting records at 1 July 20x3?
Leger accounting The acquisition of a new noncurrent asset, or cost of improving the performance of a noncurrent asset above its original level of performance will be recorded in the ledger system as: Dr Property, plant and equipment Cr Cash or payables $x $x
KEY KNOWLEDGE Depreciation

All assets, with the sole exception of freehold land, wear out over time. This means that the total cost of ownership of the asset must be matched to the revenue stream that the asset generates, or supports. This is done by making an allowance for depreciation and charging depreciation. The aim of depreciation is to match the cost of using the asset to the income stream that it generates. It is not aimed at anything else such as showing the asset at its current market value in the SOFP.
Ch 5 | 3
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ExPedite Notes
The depreciation method chosen for an asset should be the method that most closely matches the cost of the asset to the pattern of revenue that it generates. The SOFP will show the asset at its net book value (NBV). NBV is original cost less cumulative allowance for depreciation. Method Straight line Annual depreciation calculated as (Cost estimated residual value)/ expected useful life. Example where suitable estimate of revenue generated Office furniture, or anything that does not produce materially greater income when its new. This is the most commonly used method of depreciation. Motor vehicles used by a taxi company. Older cars generate less net revenue as they break down more than new cars and require more maintenance. Where an item of machinery has an estimated maximum useful life.
Reducing balance (also known as diminishing balance)
NBV at start of the period x annual depreciation %
Machine hour method
(Cost estimated residual value) x (Machine hours this period/ estimated total useable hours)
Ledger accounting Depreciation is charged each year by creating an expense and an allowance for depreciation account. The allowance for depreciation is maintained as a separate account rather than crediting the asset account itself. This is because the original historical cost of assets often needs to be extracted quickly to allow for preparation of noncurrent asset disclosure notes (see below). Dr Depreciation expense (SOCI) Cr Allowance for depreciation (SOFP) $x $x

Gerard acquired a new air conditioning system on 1 January 20x1. It cost a total of $80,000 to install and is expected to have a useful life of ten years with a scrap value at the end of its life of $5,000.
Ch 5 | 4
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ExPedite Notes
What will be the depreciation charge, allowance for depreciation and net book value in the years ended 31 December 20x1, 20x2 and 20x3 if Gerard uses depreciation method of: x x Straight line Diminishing balance, at an annual rate of 25%?
Show the double entries required to record the annual depreciation and allowance for depreciation for the straight line figures.
Changing method of depreciation It is possible to change the method of depreciation if it becomes evident that the current method used does not accurately reflect either the pattern of benefit that the asset generates, or its useful life. This is a change in accounting estimates, rather than a change in accounting policy, since the accounting policy is still to depreciate the depreciable amount (ie the amount of value that will be worn out through use) over the useful life of the asset. It is only the estimates of depreciable amount or useful life that have changed. The new methodology is applied prospectively, ie there is no restatement of previous year charges and opening balances.
EXAMPLE 1
Turnbull bought a machine on 1 April 20x2 at an initial cost of $18,000. It estimated that the asset would generate more income in the earlier years of its life, so had determined a depreciation policy for the asset of 20% reducing balance. On 1 April 20x5, it became evident that there was no significant pattern of greater benefit in the earlier years. Consequently, the company changed its accounting policy to straight line depreciation. The total useful life was determined to be 8 years, with an estimated residual value of $2,000.
Ch 5 | 5
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ExPedite Notes
The depreciation charges, allowance for depreciation and NBV would be: Depreciation expense 31.3.x3 31.3.x4 31.3.x5 3,600 2,880 2,304 Allowance for depreciation 3,600 6,480 8,784 NBV 14,400 11,520 9,216
This remaining useful life is therefore 5 years (8 year total life less 3 years already expired). The annual depreciation charge will be: 9,216 2,000 5 = 1,443.20

Sian bought a television camera on 1 January 20x4. It had an original cost of $8,000, with an expected useful life to Sian of 5 years and an estimated residual value of $500. The asset was expected to generate even benefits over its useful life. On 1 January 20x6, Sian changed the estimated useful life to a total of 8 years. What will be the depreciation charge in each year of the cameras useful life to Sian?
KEY KNOWLEDGE Disposal

When an asset is eventually disposed, it will generally be sold for some cash. This means that a new asset will be recognised in the SOFP (the cash) and another will be derecognised (the NBV of the asset). A gain or loss will arise on this simultaneous recognition and derecognition. If sales proceeds > NBV then a profit on disposal will be recognised If sales proceeds < NBV then a loss on disposal will be recognised.
Ch 5 | 6
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ExPedite Notes
In effect, a profit or loss on disposal is a correction to the estimated figures each year for depreciation. This means that this is reported in profit or loss, just as depreciation is.

PeterBlue bought a van on 1 October 20x3 for $12,000. The van was being depreciated straight line at 25% per annum. The van was disposed of for cash of $4,200 on 30 September 20x6. What was the profit or loss on disposal of the van? What might this indicate about PeterBlues depreciation policy?
Ledger accounts On derecognition of an asset thats been disposed of, its normal to open a temporary T account to calculate the profit or loss on disposal. The entries are: Derecognise the asset: Dr Profit or loss on disposal Cr Noncurrent asset $ NBV of asset $ NBV of asset
Recognise the sales proceeds received: Dr Cash Cr Profit or loss on disposal $ Sales proceeds $ Sales proceeds
Close off the profit or loss on disposal account to work out the profit or loss on disposal.
Part exchange A part exchange allowance is when an old asset is taken to a dealer and exchanged for a newer asset, with an additional payment to the dealer in cash. In reality, no cash is paid for the old asset, but it is equivalent to if cash were received and then that cash was immediately given back to the dealer, plus the extra cash payment. This gives a simplification.
Ch 5 | 7
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ExPedite Notes
EXAMPLE 2
Sarika owns a car, which has a net book value of $4,000. She takes it to a car dealer to buy a new car with a value of $10,000. She is given a part exchange allowance of $3,500 and pays a further $6,500. Step 1: Derecognise the old car, imaging receipt of a cash payment of $3,500. Cr Old car Dr Notional cash receipt = > Dr Loss on disposal $4,000 $3,500 $500
Step 2: Record the payment for the new car Dr New car Cr Cash Cr Notional cash $10,000 $6,500 3,500.
There wasnt actually a cash receipt at all, but this simplifies out anyway, as there is a Dr and Cr to the same account for the same amount. This leaves these journals: Cr Old car = > Dr Loss on disposal Dr New car Cr Cash $4,000 $500 $10,000 $6,500
KEY KNOWLEDGE Revaluation

Sometimes, revaluations are made to assets that have increased in value. This is not required, but is possible. Once an asset has been revalued, all similar assets must be revalued and the valuations must be kept up to date. Depreciation must also be based on the new, revalued amount.
Ch 5 | 8
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ExPedite Notes
EXAMPLE 3
Huw bought some shop leasehold premises 10 years ago at a cost of $80,000. The shop was being depreciated over the life of the lease, which was 40 years. At the end of the current year, the NBV was therefore $60,000. At the end of the current year, the building was revalued to a valuation of $86,000. This would show an increase in value of $86,000 $60,000 = $26,000. This increase in value is a gain. This gain is not considered to be totally certain, so it is customary to report this gain in other comprehensive income rather than profit. The stepbystep approach is: Step 1: Step 2: Step 3: Record gain as the difference in SOFP value Remove the allowance for depreciation as necessary If the allowance for depreciation on the asset is less that the revaluation gain, debit the remaining balance to the asset at cost/ value account. $26,000 $20,000 $6,000.
Cr Revaluation reserve Dr Allowance for depreciation = > Dr Asset at cost/ valuation
The increase in the revaluation reserve in the year is reported within the statement of comprehensive income as other comprehensive income. This is because the gain is not sufficiently certain to be shown as an item of profit or loss.

Peter acquired an asset some years ago at a cost of $130,000. By todays date it had been depreciated by $64,000. It has just been revalued to $122,000. No accounting entries have yet been made. Required x x
Ch 5 | 9
Record the double entry journals necessary to record this revaluation. Which book of original entry would this be recorded in?
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ExPedite Notes
KEY KNOWLEDGE Depreciation of revalued asset

A revalued asset will still need to be depreciated. The depreciation charged must be on the higher, revalued amount (a revaluation downwards is an impairment, which is unlikely to feature in the F3 exam). Depreciation expense and allowance for depreciation will therefore increase.
EXAMPLE 4
Look back at Huw, example 3 above. At the time of the revaluation, the SOFP would show a figure for the shop of $86,000 and a revaluation reserve of $26,000. There is 30 years remaining on the life of the lease, so the depreciation would now rise to become $2,867 ($86,000/ 30). Each year, this journal would be recorded: Dr Depreciation expense Cr Allowance for depreciation $2,867 $2,867.
Over the next 30 years, the depreciation expenses will reduce profit (retained earnings) by $86,000 but the journals have no effect on the revaluation reserve. So in 30 years, the asset will be shown at a value of zero but there will be a remaining revaluation reserve of $26,000. It is customary to eliminate part of the revaluation reserve each year as a movement within equity. This is not mandatory within IFRS, but it is common and best practice. Each year, the amount moved between reserves will be $867 ($26,000/ 30): Dr Revaluation reserve Cr Retained earnings $867 $867.
Note that this does not reduce the depreciation charge in profit or loss this must always be based on the new higher book value.
Ch 5 | 10
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ExPedite Notes
KEY KNOWLEDGE Disposal of revalued asset

On disposal of a revalued asset, a gain or loss will arise as normal. The gain or loss will be the difference between the new revalued amount and the net book value immediately prior to the revaluation. If there is any remaining revaluation surplus in revaluation relating to the disposed asset, it is normal to transfer this from revaluation reserve to retained earnings, as above.
KEY KNOWLEDGE Disclosure of noncurrent assets

Noncurrent assets are generally disclosed on the face of the SOFP at their net book value, but with a breakdown in the notes to the financial statements that provide details of cost and allowance for depreciation.
EXAMPLE 5
Sample noncurrent asset disclosure note. Motor vehicles $ 10,000 2,000 (3,000) 9,000 Buildings $ 22,000 2,000 24,000 Other $ 8,000 1,400 (500) 8,900
Assets at cost At start of period Additions Disposals Revaluations At end of period Allowance for depreciation At the start of the period Charge for the year Disposals Revaluations At the end of the period Net book value At the start of the period At the end of the period
Ch 5 | 11
4,000 2,000 (3,000) 3,000
5,000 1,000 (6,000) 0
1,000 750 (200) 1,550
6,000 6,000
17,000 24,000
7,000 7,350
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ExPedite Notes
Noncurrent asset register Noncurrent assets are often high value. In order to reduce the chances that they will be lost or stolen, it is common to keep a separate memorandum record of details of noncurrent assets, including unique identifiers (eg a barcode on each asset), location of the asset, its useful life, cost, etc. The noncurrent asset register therefore includes a mixture of financial and nonfinancial information.
Ch 5 | 12
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ExPedite Notes
Solution to review and selftest 1 Tangible noncurrent assets could include: Premises Fixtures and fittings Vehicles Machinery Signage Computer hardware Air conditioning or other plant Etc Current assets could include: Cash Bank Receivables Prepayments Inventory Etc
Solution to review and selftest 2 Capital expenditure Yes Yes Yes Yes Yes Yes; too small to be recorded as a non current asset (the de minimis exception). Revenue expenditure Yes
Buying a new van Paying the annual road tax to be able to use the van Installing air conditioning in a bar Replacing the existing strip lighting in a restaurant with romantic soft lighting Installing new partitioning within an office Fixing a hole in the roof Buying a new 25 tea spoon for the staff kitchen
Solution to review and selftest 3 The costs that will be capitalised will be: Cost to reinforce floor for NuNu installation Paid to supplier (excluding recoverable sales tax of $10,000) Installation costs Delivery costs Costs to train staff in using the NuNu Irrecoverable import duty paid Cost of testing before production is possible Total recognised cost $ 14,000 203,000 2,000 3,400 0 3,800 1,750 227,950
Ch 5 | 13
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ExPedite Notes
Although staff training costs seem to be unavoidable, they can never be added to the cost of a non current asset, since a business does not have sufficient control of the staff they may all leave before the end of the year.
Solution to review and selftest 4 Straight line depreciation = $80,000 $5,000)/ 10 = $7,500 pa. Each year, this will be recorded using the same journal for the same amount: Dr Depreciation expense (SOCI) Cr Allowance for depreciation (SOCI) Diminishing balance: Period 31.12.x1 31.12.x2 31.12.x3 Depreciation expense $20,000 (25% x $80,000) $15,000 (25% x $60,000) $11,250 (25% x $45,000) Net book value of asset $60,000 $45,000 $33,750 $7,500 $7,500
Solution to review and selftest 5 Period 31.12.x4 31.12.x5 31.12.x6 onwards Depreciation expense ($8,000 $500) / 5 = $1,500 $1,500 ($5,000 $500) / (82) = $750 Net book value of asset $6,500 $5,000 $4,500
Solution to review and selftest 6 Period 30.9.x4 30.9.x5 30.9.x6

Ch 5 | 14
Depreciation expense 25% x $12,000 = $3,000 $3,000 $3,000
Net book value of asset $9,000 $6,000 $3,000
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ExPedite Notes
Gain or loss on disposal (ie increase or decrease in net assets) Asset recognised: Cash Asset derecognised: Van Increase in net assets = > profit on disposal $ 4,200 (3,000) 1,200
This suggests that PeterBlue is depreciating assets too quickly. This will be causing a mismatch of revenues generated (or supported) by the van against the depreciation charges matched to those revenues.
Solution to review and selftest 7 NBV prior to revaluation ($130,000 $64,000) New valuation Revaluation gain $66,000 $122,000 $56,000
Cr Revaluation reserve (other comprehensive income) $56,000 Dr Allowance for depreciation $56,000
Ch 5 | 15
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ExPedite Notes

ACCA F3 Financial Accounting

START The Big Picture

$ 10,000 35,000 20,000 30,000 10,000 105,000 20,000

13,000 (1,000) 12,000 4,000 3,000 2,000 146,000

30,000 85,700 (24,000) 91,700 16,000 (8,000) 99,700

3,300 8,000 3,000 46,300 146,000

30,000 80,000 10,000 (20,000) (100,000) 52,000 3,000 2,000 57,000

REVIEW AND SELFTEST 1

KEY KNOWLEDGE Elements of financial statements

KEY KNOWLEDGE Relationship between the statements: the business equation

Maybe, normally not

Often the names of the original partners. Few legal formalities

Can offer shares to the public? Equity part of the SOFP

Initial capital Cumulative profit Cumulative withdrawals

Share capital Reserves: (revaluation reserve, retained earnings, etc).

Objectives of financial reporting

START The Big Picture

REVIEW AND SELFTEST 1

Qualitative characteristic Fair presentation

Substance over form

Business entity concept

KEY KNOWLEDGE Historical accounting

KEY KNOWLEDGE Regulation of financial reporting

IASCF: the International Accounting Standards

IASB: International Accounting Standards Board

SAC: Standards Advisory Council

IFRIC: International Financial Reporting Interpretations Committee

Sources of financial information

START The Big Picture

Purchase order Goods received note

Goods despatched note

Receivables, payables and purchases.

KEY KNOWLEDGE Data sources / data capture

KEY KNOWLEDGE Books of original entry

Book of original entry: Cash in book

Used to record data on:

Data typically used to feed:

Cash received into the business bank account.

Cash payments book

Cash paid from the business bank account.

Petty cash book

Sales day book

Purchases day book

Purchases of inventory for resale.

Rent 12/03/2010 4,500.00 13/03/2010 1,200.00 31/03/2010 876.00

04/03/2010 08/03/2010 18/03/2010 27/03/2010

F. Bruce H. Edwards S. Rayworth M. Baker

800.00 560.00 330.00 120.00

KEY KNOWLEDGE Computerised systems

KEY KNOWLEDGE Journal book

KEY KNOWLEDGE Credit control and memorandum accounts

03/01/2010 30/01/2010 14/02/2010 27/02/2010 13/03/2010

INV 3322 INV 3421 RA 4122 INV 3987 INV 4121

3,200.32 1,008.00 3,200 450.00 870.00

3,200.32 4,208.32 1,008.00 1,458.00 2,328.00

KEY KNOWLEDGE Controlling petty cash the imprest system

Double entry bookkeeping: the debits and credits

START The Big Picture

KEY KNOWLEDGE So why debits and credits?

KEY KNOWLEDGE Building up the rules

A decrease in assets An increase in liabilities

REVIEW AND SELFTEST 1