Suggested Study Notes

ACCA F3 Paper
Suggested Study Notes for F3 ACCA Examinations

REVIEW OF SOME KEY FUNDALMENTALS

1 Accounting Matrix

Debit Trial Balance Credit

Assets A Liabilities L
(+Capital) C

Expenses E Gains G

$ < totals must equal > $

Comparing assets and liabilities, this statement is called the balance sheet.

Comparing expenses and gains, this statement is called the profit & loss account.

Follow the rule of double entry on any transaction.

Buy a car for cash: Debt asset / credit bank

Buy stationary on credit: Debit expense (stationary) and credit creditor (name of supplier)
When you pay the supplier, you debit creditor account and credit bank account.

Pay wages: Debit wages and credit bank.

Make a sale on credit: Debit debtor (customer) and credit sales.

Make a cash sale : Debit bank and credit sales.

2 Know all accounting concepts and fundamentals terminology. E.G.

Going concern Normal assumptions that entity will continue for next 12mths. If not, then
assets would then need to reviewed, show at "breakup value".

Materiality Include all material items. If excluded, this could influence the decision
on the users viewpoint of the financial statements

Accruals Entries to reflect when they are incurred as opposed recorded or paid.
Financial statement then report costs/revenues in the correct period.
Supports the matching concept.

Prudence Exercise caution. Ensure all costs and liabilities are correctly stated.
If loss foreseen, it should be accounted for and provision made.

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2 Typical entries

Ensure you know if A, E, L, G, C for each ledger account. This determines the accounting
treatment and where the ledger account is shown and disclosed.

Company XP Limited
Trial Balance
Year ending 31 December 20xx KEY
Debit $ Credit $

Sales 190000 G
Discounts Received 200 G
Discounts Allowed 50 E
Opening Stock p&l 5000 E <used for cost of sales
Closing Stock p&l 6000 G <used for cost of sales
Purchases 60000 E <used for cost of sales
Carriage Inwards 2000 E <used for cost of sales
Carriage Outwards 4000 E
Salaries 40000 E Net total = p&l figure
Rent 10000 E = $65,350 profit
Rates 1000 E credits > debits
Insurance 3000 E
Selling commission 3800 E
Bad Debts 3000 E
Bad Debts recovered 1000 G
Sundry Income 3000 G
Depreciation of equipment 3000 E
Equipment - cost 30000 A
Accumulated Depreciation - Equipment 6000 L < PROVISION
Investments 10000 A
Stock 6000 A
Debtors 15000 A
Bad Debts Provision 1500 L < PROVISION
Bank Deposit 5000 A
Bank overdraft 15000 L
Creditors 3000 L
Bank Loan 37000 L
Preference Shares 100000 C
Ordinary Share Capital 100 C
Reserves - Opening 161950 C Loss b/f

362800 362800

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ACCA F3 Paper
4 Be familiar of entries in a sales & purchase account

Sales Account
Bank - cash sales 30000
Debtor - T Murphy 2000
(credit note issued) Debtor - T Murphy 100000
Debtor - J Smith 62000

Profit & Loss a/c 190000

192000 192000

Purchases Account

Creditor - S Pierce 35000 Creditor - S Pierce 300

Creditor - B Hoey 20000 (credit note received)
Bank - cash purchase 5300

Profit & Loss A/c 60000

60300 60300

5 The system for looking after petty cash is also known as an imprest system.

Keep a pre-determined float and use vouchers to track costs and analysis.
The expense total is refunded later to reinstate the float or imprest amount.

6 Understand sales tax or VAT (value added tax)

Assume all cash transactions:

DR CR

Sell $1000 goods + 23% VAT

Sales 1000
Bank 1230
VAT 230

Purchase $600 goods inclusive of 23% VAT

Purchases 488
Bank 600
VAT 488 x 23% 112

Therefore the net VAT due is $118 (230-112). When paid the entry will be:

VAT 118
Bank 118

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7 Learn the gross profit / (Loss) statement

Sales 190,000

Less: Cost of Sales

Opening Stock 5,000

Purchases 60,000
Carriage Inwards 2,000
Less: Closing Stock (6,000) (61,000)

Gross Profit 129,000

Questions can be given to work out the missing entry. Follow the format to solve.

Note that carriage outwards (freight costs for selling and shipping goods out to customers)
is not part of this format. Carriage inwards is the freight cost for buying goods for resale, so
part of cost of sales.

8 Stock valuation

IAS2 states that inventory should be valued at the lower of cost and net realisable value (NRV)

In stock cost sales value NRV Stock Value

item 1 30 50 45 30
item 2 20 18 17 17
item 3 10 20 9 9

60 88 71 56 = Ans.

$56 is the answer and follows the rule.

So if accounts are prepared using the wrong valuation, the auditor must adjust
and ensure a provision is made to reflect the stock value per IAS2.

Important to know the methods of stock valuation.

FIFO first in first out (latest prices will value stock)

LIFO last in last out (older prices will value stock)

Weighted Average weighted average based on the stock inventory balance

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ACCA F3 Paper
9 Depreciation

Method of writing off the cost of tangible fixed assets (or non current assets) to the
profit and loss account.

Example:
Motor car purchased for 30,000
Expected life 3 yrs
Residual value expected in year 3 is 3,000

What is the depreciation charge?

Ans:

30,000 less 3000 = 27,000. Divide by 3 = 9000 per annum

If at end of year 2 the car was sold for 10,200, what is the profit / (loss) on disposal ?

Disposal A/c - Motor Car

Motor - cost 30000 Bank 10200

Accum. Deprec. 18000 9k x 2
Profit & Loss a/c 1800 loss to P&L

30000 30000

Note: Net book value (NBV) of car in yr 2 is 12,000 (30k less 18k)

Check Ans: 10,200 less 12,000 = 1,800 loss.

Extract Trial Balance:

Debit Credit

Disposal of Motor Vehicle 1800

Review period of accounting and dates. If purchased or sold mid year, then you will need
to time apportion values.

Ensure you know different methods:

Straight line
Reducing balance

If an asset is revalued, depreciation is calculated on the revalued amount. (IAS 16)

Depreciation is a non cash item. Relevant to cash flow statement, where always added back.

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ACCA F3 Paper
10 Accruals

You use electricity for your business. You know the cost will be about 500 per year. You never
got a bill until year 3 for 1600. Show the entries and p&l and balance sheet extracts.
(assume all entries happen at end of year)

Debit Credit

yr1 Light & Heat 500

Accruals 500

yr2 Light & Heat 500

Accruals 500

yr3 Light & Heat 1600 Pay

Bank 1600 bill

Accruals 1000 reverse

Light & Heat 1000 accrual

P&L Extracts:

Yr 1 Light & Heat 500

Yr 2 Light & Heat 500
Yr 3 Light & Heat 600 i.e. 1600 less 1500

Balance Sheets Extracts:

Yr 1 Accruals 500
yr 2 Accruals 1000
Yr 3 Accruals 0

Ensure you know accounting for prepaids also.

Prepaids are an asset and shown under current assets.

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11 Know the entries for bad debts

Bad Debts Account shown in the P&L A/c

Increase in bad debts prov. 500

Profit & Loss 3000
Debtors 2500
(bad debts written off)

3000 3000

Bad Debts Provision (BDP) shown in B/S, under debtors

Bal b/f 1000

Bad Debts Increase 500

Bal c/f 1500

1500 1500
Bal b/f 1500

Bad Debts Recovered shown in the P&L A/c

Bank 1000

Profit & Loss Account 1000

1000 1000

Where a trade debtor will not pay or you assume the debt is doubtful to be received, you can
1) clear the account be writing off the ledger balance or 2) leave the ledger balance put make
a provision in another account - called BDP above. The BDP a/c can be general say 10% of
the debtors total or specific to individual debtors. Any movement in the BDP a/c is shown in
the bad debts account in the P&L account.

Where a debt was written off (ledger balance = 0) and later received. We setup a new
account called bad debts recovered. The entry goes straight there and shown separately in the
p&l. This account highlights the fact that it was recovered after a decision was made to
write off.

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ACCA F3 Paper
12 Bank Reconciliation Statement

Understand format and what are debit and credit balances for the ledger and the bank.

Balance per ledger (15,000) Cr credit balance

in ledger=overdraft
Less: bank charges not posted (100)
Incl adj needed to
our books
Revised ledger balance (15,100)

Balancer per bank statement at 31/12/xx (10,000) Dr If Cr bal. then no

brackets.
Add: outstanding lodgements 2,000
Any adj here are
Less: outstanding cheques normally timing.
(also called unpresented cheques) Delay in making
chq no. lodgement or
00501 2,100 payee going to bank
00502 1,000 an presenting the
00505 4,000 (7,100) cheque to their bank.

(15,100)

Typically the bank is normally right and our books would need to be adjusted for omissions etc.
Rarely will the bank be wrong, if so, you show the error under the bank statement line
noting it is an bank error and due to be reversed in the future.

NB:

Dr for bank statement = overdraft => Our books = Cr balance

Cr for bank statement = in funds, you have money => Our books = Dr balance

In any bank reconciliation, important to check if opening balances agree. If not you may need
to follow though this reconciliation first, so you can then finish the closing reconciliation.
Some entries may still be outstanding and so you will need to c/f again on your closing
reconciliation.

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ACCA F3 Paper
13 Share Capital - a few key points:

New shares Debit Bank and Credit Share capital

Issue of new shares

Rights Issue Asking existing shareholder for money in exchange

of some discount of the market value.

Share Premium Price paid over the par value of the shares

Receive $5 for 1 share of 50c each.

entry:
Debit bank $5
Credit share premium $4.5
Credit share capital $.50

Bonus Issue No cashflow involved.

Moving other reserves to share capital.

No dilution of existing shareholders.
Sometimes known as "free shares". However, as everyone
gets them on the same basis, the market value adjusts per
share to reflect the change.

Important to understand terminology and accounting entries.

14 Cashflow Statement

Understand format. To show cashflow movements only, thus explain the bank movement.

If you buy an asset this is a use or application of funds, so deduct.

Increase in debtors (an asset), is therefore deducted as a working capital adjustment.

An increase in creditors (a liability), gives you extra funds. You are getting more credit. So
you add to working capital adjustment.

The opposite is true for both debtors and creditors.

Depreciation and the disposal account is not a cashflow item, so you add back.
(if profit on disposal you deduct, if loss on disposal you deduct)
Do "T accounts" for the following balance sheet accounts to get the cash flow item for:

Purchase of fixed assets (non current assets) => Fixed Assets Account
Taxation paid => Taxation Account
Dividends paid => Dividends Account

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ACCA F3 Paper
15 Consolidation IAS27

Own over 50% or deemed to have control of an entity. You then consolidate results.

Understand the adjustments for the combined entity:

1) Inter-trading => Consol adj P&L

2) Inter-trade debts => Consol adj B/S
3) Remove unrealised profit from inter-trading => Consol adj P&L & B/S
and:
Calculation of goodwill
Calculation of non controlling interest (NCI)

Review acquisition date as you may need to apportion the profit figures in various
workings.

In a combined entity the holding company share capital is always stated in

the consolidated balance sheet.

Add 100% of the subsidiary P&L results, you then deal with the non controlling interest
share of profits at the end.

Important to understand mark-up and margin. As you may need to work out the unrealised
profit element for the stock adjustment.

Mark-up is on cost 500 over 1000 = 50% mark-up

Margin on sales 500 over 1500 = 33% margin

Note same profit figure so question can be phrased in may ways.

sales 1,500 100%

purchase (1,000) 67%
Profit 500 33%
33%

Note relationship of the profit between sales and purchase (cost).

Equity Accounting IAS 28

Investment in associate companies

Owing 20% or more and not more than 50% (i.e. control)

P&L: Add group share of profit and loss.

B/S: Cost of investment plus group share of profit (profit after tax)

If investment in a company is less than 20%, there is no consolidation of that company.

Show investment in the balance sheet at cost / fair value.

E.& O. E.

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ACCA F3 Paper

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