IAL AS Accounting General Theory

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Rajibul Haque Shumon: April 2017: Issue 4
Accounting: Accounting is the art/process of identifying, recording, classifying, measuring, summarising, reporting
and interpreting of business transaction in a significant manner and in monetary term, to permit informed judgments
and decisions by users of the information.
Not all of the above is discussed below, just few to give you a fair idea what we mean by recording, summarising etc.
Recording: Transactions must be recorded as they occur in order to provide up-to-date information for management.
Reporting: After recording all the records are put together and reported chronologically and orderly fashion for
internal and external interested parties.
Summarising: The transactions for a period are summarised in order to provide information about the company to
interested parties.
Interpreting: These summarised information is than interpret by the management using various ratios to make
decision. Also by third parties to make decision about the business e.g. Bank, tax authorities etc.
Accounting can be divided into several areas of activity: Financial Accounting, Management Accounting, Auditing,
Tax Accounting, Fund Accounting and Forensic Accounting.
Financial accounting: Financial accounting is concerned with the production of financial statements for external
users.
Management accounting: Management accounting emphasizes the preparation and analysis of accounting
information within the organization. Management accounting includes designing and evaluating business processes,
budgeting and forecasting, implementing and monitoring internal controls, and analysing, synthesizing and
aggregating information in order to plan for the future.
Auditing: Auditing is the examination and verification of company accounts and the firm's system of internal control.
There is both external and internal auditing. External auditors are independent firms that inspect the accounts of an
entity and render an opinion on whether its statements conform to GAAP, IFRLS, IAS, IAS etc. (whichever the
country most widely accept) and present fairly the financial position of the company and the results of operations.
Others is not given as only up to management is require.
Users of accounting information: Accounting information is being used by various level of users and some of them
are listed below:
1. Managers of the company
2. Shareholders of the company
3. Trade contact
4. Providers of finance to the company
5. The taxation authorities
6. Employees of the company
7. Financial analysts and advisers
8. Government and their agencies
9. The public
International Advanced Level in Accounting: Issue 4: General Format and theory – March 20177 43
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Disclaimer: If used, shared, distributed etc. for study purpose please reference to the original writer. It is against writer’s will that you use this for profit making or any other source(s) of income. Can be used or distributed for non-profit purpose.
Accounting concepts and conventions: Accounting Concepts and Principles are a set of broad conventions that
have been devised to provide a basic framework for financial reporting. As financial reporting involves significant
professional judgments by accountants, these concepts and principles ensure that the users of financial information
are not mislead by the adoption of accounting policies and practices that go against the spirit of the accountancy
profession. Accountants must therefore actively consider whether the accounting treatments adopted are consistent
with the accounting concepts and principles.
These principles are prepared for national or international uses of accounting by some boards or organizations like:
GAAP: Generally Accepted Accounting Principle
IASB: Internal Accounting Standard Board
AAA: American Accounting Association
IFAC: International Federation of Accountants
IFRS: International Financial Reporting Standards
FRS: Financial Reporting Standards (apply in UK)
IFRS: International Financial Reporting Standards
BFRS: Bangladesh Financial Reporting Standards
BAS: Bangladesh Accounting Standards
Note: Above is for just knowledge base, you are not required to remember for As.
Consistency concept: According to this convention, accounting practice should remain unchanged from one period
to another. (Required in As)
If the organisation constantly changes its methods, it would mislead the profit calculated and an inaccurate analysis
will be made for the organisation. However, this does not mean the company cannot changes its method. If any
changes made, based on good reasons, each changes is declared in the notes to the financial statements with reasons
and how it effects the profit calculation.
(IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors)
Example: A business that decides to make a provision for depreciation on machinery at 10% per annum using the
straight-line method, should continue to use that percentage and method for future financial statements for the asset.
Prudence concept: This concept ensure that profit is not shown as being too high, not that assets are shown at too
high a value and that the financial statements are neutral: that is, that neither gains nor losses are understated or
overstated. (Required in As)
This is the inclusion of a degree of caution in the exercise of the judgement needed in making the estimates required
under conditions of uncertainty (e.g. decisions relating to bad debts and allowance for doubtful debts), such that
assets and income are not overstated and liabilities and expenses are not understated.
To summarise: Profits not being overstated, Losses being provided/accounted for as soon as they are recognised,
Revenue is not anticipated before it has been realised.
(IAS 39 — Financial Instruments: Recognition and Measurement)
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Accruals concept/Matching concept: The concept that profit is the difference between revenue and the expenses
incurred in generating that revenue for the period rather than cash received or paid. (Required in As)
Examples: 1. Opening and closing adjustments in the statement of comprehensive income (Income statement); 2.
Owing and prepaid for expenditures; 3. Provision for doubtful debts; 4. Provision for depreciation; 5. Bad debts;
6. Debtors and creditors.
(IAS 1 — Presentation of Financial Statements)
Materiality concept: This concept dictate that something should only be included in the financial statements if it
would be of interest to the stakeholders, i.e. to those people who make use of financial accounting statements.
(Required in As)
Example: The purchase of a cheap metal ashtray be charged as an expense in the period, when it was bought
because it is not a material item, even though it may in fact last for twenty years.
Money measurement concept: The concept that accounting is concerned only with facts measurable in monetary
term, and for which purpose measurements can be used that obtain general agreement as to their suitability.
(Required in As)
Transactions related to the business, and having money value are recorded in the books of accounts. Events or
transactions which cannot be expressed in term of money do not find a place in the books of accounts.
Example: whether the business has a skilled worker or not, whether customers are leaving for different company etc.
(IAS 38 — Intangible Assets)
Business entity concept: Assumption that only transactions that affect the firm, and not the owner’s privet
transactions, will be recorded. (Required in As)
This states that the business is an entity or body separate from its owner. It means the affairs of a business are to be
treated as being quit separate from the personal activities of the owner of the business. The only time that the
personal resources of the owner(s) affect the business’s accounting records is when owner introduce new capital into
the business or take drawings.
(FRS 18: Accounting policies)
Going concern concept: The assumption that a business is to continue for the foreseeable future. (Required in As)
It is assumed that the business will continue to trade for a long period of time and there are no plans to cease trading
or liquidate the business.
Not applicable: if the business is going to close down in the near future, where shortage of cash makes it almost
certain that the business will have to cease trading and where a large part of the business will almost certainly have
to be closed down because of a shortage of cash.
Dual aspect concept: The concept of dealing with both aspects of a transaction.
This concept is related to double entry system. The opportunity of a transaction is called the debit party and the
opportunity giver is the credit party. For every debit, there is a credit entry of an equal amount.
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Historical cost concept: Assets are normally shown at cost price. (Required in As)
Non-current assets are recorded at their cost in accounts, except for land which can be revalued due to application.
(IAS 16 — Property, Plant and Equipment and IAS 38 — Intangible Assets)
Time interval concept: Financial statements are prepared at regular intervals.
Final accounts are prepared at the end of the accounting period i.e. one year. Internal accounts can be prepared
monthly.
Realisation concept: Only profits and gains realised at the financial statements date should be included in the
income statement. For a gain to be realised, it must be possible to be reasonably certain that it exists and that it can
be measured with sufficient reliability. (Required in As)
Revenue is recognised when goods are sold, either cash or credit i.e. the debtor accept the goods or services, and the
responsibility to pay for them.
(IAS 18 — Revenue)
Other aspects covered by IAS but not required in As:
IAS 1 – Presentation of Financial Statements
IAS 2 – Inventories
IAS 4 – Depreciation Accounting (withdrawn in 1999)
IAS 7 – Statement of Cash Flows
IAS 13 – Presentation of Current Assets and Current Liabilities (replaced by IAS1)
IAS 16 – Property, Plant and Equipment
IAS 17 – Lease
IAS 18 – Revenue
IAS 31 – Financial Instruments: Presentation
IAS 36 – Impairment of Assets
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
IAS 38 – Intangible Assets
IAS 40 – Investment Property
Note: you don’t need to remember any of these as they are covered in easy way with each of the chapter we have
studied and some of them will be covered in A2. You will not be asked to provide any sort of information regarding
these IAS other than what you have learned. No need to indulge into details of these yet as you have covered them
and there will be more to add on future. There are total of 41 IAS while writing this note, which might get replaced,
changed or completely removed as new ones comes out. Other bodies has not been covered here as this is alone a
broad area of expertise and discussion required.
Q: Necessity of accounting concept? (Evaluate the use of accounting concepts or conventions)

Pros:
 Provides a framework of consistency in preparing all financial statements.
 True and fair view.
 Meets legal requirement.
 Profit can be relied upon.
Cons:
 Concept can be contradictory.
 Open to wide interpretation.
 Many non-financial aspects are ignored e.g. quality of management.
 Require professional skill to apply.
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Q: Evaluate the use of accounting concepts in the preparation of financial statements.

Positive:
• Provides a framework for preparing financial statements
• Readers can rely upon the accuracy of the financial statements
• Can be relied upon globally
• Provides a true and fair view
• Meets legal requirements
• Enables comparisons to be made.
Negative:
• Many concepts are open to interpretation
• Concepts can contradict each other
• Many non-financial aspects of a business are not considered by accounting concepts
• Need for specialist knowledge to implement which has cost implications
Q. Evaluate the use of International Accounting Standards (IAS) in the preparation of financial statements.
For:
 Provides a common international standard which can be applied across the world
 Stakeholders can rely upon the validity of figures in the statements
 Great accuracy of reporting in statements prepared in the same format
 Enables comparisons to be made
Against:
 Only legally applies to corporate bodies
 Requires trained accounting staff to apply
 Cost of implementation will be higher and time consuming.
 Non-financial factors are not included in IAS accounting
 Standards can be contradictory
Q. Evaluate use of information and communication technology (ICT) accounting software packages.
Advantage of an ICT accounting software:

 Error should be reduced because the software package determines and carries out the double entry for a
given transaction
 It will be quicker
 Less storage space required
 Standard reports can be extracted
Disadvantage of an ICT accounting software:
 the cost of the hardware and software

 training of staff to use the software will be required
 security issues
 risk of losing data
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Capital Expenditure: Capital expenditure occurs when a business spend money either to buy fixed asset or add to
the value of existing fixed asset. In terms of accounting expense is considered to be capital expenditure when the
asset is newly purchase or an investment that improves the useful life of an existing capital asset. Ex. Purchase of
motor van, extension to building.
Revenue Expenditure: Revenue expenditure is an expenditure that does not increase the value of fixed asset but
incurred in the day to day running expense of the business. Expenditure will be treated as revenue expenditure if it is
utilized for the following purpose:
 Expenditure for purchasing floating asset e.g. those asset which meant for resale at profit
 If expenditure is for the maintenance of asset e.g. repairs of plant and machinery, building etc.
 Expenditure incurred in meeting day to day expenses for carrying of a business or running of a business e.g.
rent salaries etc.
If capital expenditure is treated as revenue expenditure the affect are:
 Gross profit – no change

 Net profit – understated
 Fixed asset – understated
 Capital – understated
If revenue expenditure is treated as capital expenditure:
 Gross profit – no change

 Net profit – overstated
 Fixed asset – overstated
 Capital – overstated
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Advantages and Disadvantages of Double-entry Bookkeeping

Advantages:
 Maintain a complete record of every transaction.

 Allows companies to prepare financial statements easily.
 It provides checks and balances, which prevents frauds and misappropriations as complete information about
assets and liabilities are recorded.
 Complete information for purposes of control permitting accounts to be maintained in as much detail as
necessary.
Disadvantages:
 Double-entry bookkeeping system is complex and harder to understand.

 The overall cost of maintaining the double-entry system can be high.
 Significant amount of time is required to be spent on recording and maintaining double-entry books of
accounts, as every entry needs to be entered twice and cross-checked.
 In case an entire financial transaction is not recorded in the books of accounts, the error of omission cannot
be detected and the trail balance will still tally despite the mistake.
Q: Evaluate owner’s decision not to maintain a formal set of accounting records?
Arguments for maintaining a set of books:
 Financial statements can be easily prepared.
 Records of individual accounts will make referencing easier.
 Management decisions can be made with the support of information.
 Preparing tax returns.
Arguments against maintaining a set of books:

 Time consuming using time which could be used on trading.
 More costly to prepare.
 Requires expertise.
 Training and updating software.
 Security issues.
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Q: Evaluate the decision of not to write off any bad debts.

Benefits of writing off bad debts:
 Debtor’s level is high.

 A significant time has passed increasing probability that not all debts will be collected.
 Not all debts will be collectable and therefore significant provision should be made.
 Prudence concept applied.
 Will lead to reduced profits in the future if bad debts occur.
 Debtors will be accurate in the accounts.
Disadvantages of accounting for bad debts:
 Income/Bad debts may still be recovered

 Need to chase debts to establish whether they are collectable.
Q: Evaluate the use of provision for doubtful debts.
Pros:
 Ensures that profit is not overstated.

 Complies with the prudence concept
Cons:
 Actual bad debt may be significantly different from estimate.

 Only an estimate based upon historical experience
Note: Provision for bad debt is also an expense and is charged in the Profit & loss account and sub-treated from the
debtors in balance sheet. An increase in provision for bad debts is an expense for the business and the increase
amount is charged in the income statement. A reduction in provision for bad debts is our income and the decrease
amount is added with the gross profit.
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Definition: Depreciation is the part of the cost of the fixed asset consumed during its period of use by the business.
Reasons for depreciating fixed asset:
Physical deterioration:
 Wear & Tear: The regular usage of fixed asset in the business the cause decrease in value.
 Erosion, rust & decay: Erosion is subjected to asset like Land, rust causes to the asset like plant and
machinery, and decay is a process which will also be presented in elements of nature.
Economic factors:
 Obsolescence: A fall in the value of asset as a result of its age on use.

 Depletion: It is the using up of an asset. This is applicable to the wasting asset like mines, quarries & oil
wells.
 The time factor: The passage of time reducing the value of assets. This is applicable in the case of lease,
when the time ends lease worth nothing.
 Inadequacy: This arises when an asset is no longer used because of the growth and changes in the size of
firms.
Methods of depreciation:
Straight line method: A specific depreciation is charged upon the fixed asset evenly throughout its economic life.
The depreciation charged under this method remain the same, so the impact of profit remain same too.
Reducing balance method: A specific percentage of depreciation is charged upon the basis value of asset at every
year end. Under this method depreciation falls each year as the NBV decrease and the impact of profit is not constant
but increasing.
Difference between straight line & Reducing methods

Straight Line Reducing
A fixed amount of depreciation is charged. A fixed rate of depreciation is charged
The asset may have or may not have scrap value. The asset must have a significant scrap value.
Amount of depreciation per year is same. Amount of depreciation goes on reducing.
The rate of depreciation is the reciprocal life of the The rate of depreciation is ascertained by applying
asset. formulas.
At the end of life the book value of asset become zero. The book value never reduces to zero
Calculation based upon cost less residual value. Based upon % of outstanding book value.
Allows an even amount of depreciation each year. Allows more depreciation in early years.
Benefits of using straight line rather than reducing method:

Pros:
 Straight line is simpler to compute.

 Gives equal depreciation to equal benefit received in each year.
 Does not distract profit with higher levels of depreciation in years.
Cons:
 Machinery will lose more value early years of ownership than later years.
 Balance sheet values may not be in line with market value of machinery.
 Total cost of ownership will increase using straight line as maintenance costs rise as the asset become older.
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Benefits of using reducing balance method:

Pros:
 Greater depreciation written off in early years which may reflect the fact that some fixed asset loose more
value in early years
 May provide more realistic net book value if asset loose more value in early years. Eg. Motor vehicle.
 Profits will be lower in early years but higher in the later years.
 This method is suitable for income tax purposes.
Cons:
 Distorts profit calculation.

 Not consistent with previous practice.
 Not appropriate if the asset is used equally from year to year.
Concept applicable for depreciation:
 Consistency concept
 Accrual/Matching concept.
Q: Evaluate whether by charging annual depreciation owner will have sufficient cash to replace the asset at the end
of its economic life. (Common)
Ans: Supporting:
 Depreciation accrues a previous year capital expenditure over the life of the asset.
 Profit will increase cash flow.
 Profit will be reduced by depreciation which should result in retention of asset.
Against:
 It does not mean that the owner will have sufficient cash.
 The retention in profit may not be in cash.
 Depending on the process is time consuming.
Q: Why depreciation is an application of accrual concept?
Ans: Fixed asset will last for more than one accounting period and therefore give benefits to a number of accounting
period. It is therefore appropriate that the original cost of asset is apportioned or matched to the accounting periods
over the benefit is received.
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Importance of trial balance:
 A trial balance is a checking device which checks the arithmetical accuracy of all ledger accounts.
 It is used to summarize all the financial transaction of a business.
 It ensures that all the accounts are properly closed
 Trial balance is a report run at the end of an accounting period, listing the ending balance in each account.
The report is primarily used to ensure that total of all debits equals the total of all credits, which mean that
there are no unbalanced journal entries in the accounting system that would make it impossible to generate
accurate financial statements.
 Trial balance helps to indicate if there is any error in the book of original entry and ledger.
 It assumes that recording of financial statement is correct.
Errors affecting trial balance:
 Incorrect addition in the books of accounts.

 One side entry.
 Wrong side of position e.g. writing debit entry in the credit side and vice versa.
 Errors in posting correct amounts in any of the accounts
 Wrong allocation of journal entries
Errors not affecting trial balance:
 Errors of omission – where a transaction is completely omitted from the books.

 Errors of commission – where a transaction is correctly recorded but in the wrong account.
 Errors of principle – where an item is entered in the wrong class of account.
 Compensating errors – where errors cancel each other out.
 Errors of original entry – where the original entry has been wrongly recorded in the day book.
 Complete reversal of entries – where the transaction is entered in correct account but in wrong side of the
account.
 Transposition errors – where the wrong sequence of the individual characters within a number was entered.
Advantage of trial balance:

It checks the arithmetical accuracy of the double entry book keeping

The trial balance can assist in locating errors

The trial balance is also convenient list from which to prepare final accounts.

It ensures that the transactions recorded in the books of account have identical debit and credit entry.

Errors which are found during the preparation of trial balance are rectified even before the preparation of
final account.
Disadvantage of trial balance:
 It does not prove that all transactions have been recorded

 It does not prove that the ledger is correct
 Numerous errors may exist even though the trial balance columns agree
 It cannot find the missing entry form the journal
 It cannot find the missing entry from the ledger
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Purpose of control account:

 A control account is a summary account in the general ledger. The details that support the balance in the
summary account are contained in a subsidiary ledger – A ledger outside of the general ledger. The purpose
of the control account is to keep the general ledger free of details, yet have the correct balance for the
financial statement. Eg. The account receivable account in the general ledger could be a control account. If it
were a control account, a company would merely update the account with a few amounts such as total
collection for the day, total sales on account for the day, total returns and allowance for the day. Other
purpose are to act as independent checks on the arithmetical accuracy of the aggregates of the balances in the
sales and purchase ledger.
 To provide total of debtors and creditors quickly when a trial balance is being prepared.
 To identify the ledger or ledgers in which errors have been made (if there is difference in trial balance).
 To act as an independent internal check.
Benefits of maintaining control account:
 Control account acts as a checking device.
 Acts as a protection against fraud.
 Control account are an independent checking mechanism checking arithmetical accuracy.
 Reveal errors such as incorrect addition.
 Control account helps to identify whether there is any error in a group of accounts.
 The debtors and creditors figures can be ascertained more speedily for the construction of the trial balance.
Disadvantages of control account:
 Control account helps to isolate errors but they don’t stop them from occurring.
 Control account can’t identify errors in individual accounts.
 Considerable extra work and therefore time consuming and costly to prepare control account.
 Errors not revealed by the trial balance will not be revealed by control account.
Set-offs (contra): A contra account, where by the same business is both a supplier and a customer and interindebtness
is set-off. A contra entry can arise when a customer is also a supplier of the business instead of the customer is also a
supplier of the business instead of the customer paying us for goods supplied, their balance is off-set against the for
goods supplied their balance is off-set against the amount owing to them for goods services supplied.
Significances of the balances on the contra account: The closing balances on the sales ledger control account should
be equal to the sum total of the closing balances on the individual debtors account in the sales ledger. It follow as
well that the closing balance on the purchase ledger control account should be equal to the sum total of the closing
balances on the individual creditors account in the purchase ledger. If the respective balances are not in agreement
then it would suggest some form of irregularity in the records which would need investigation.
Importance of control account in managing a business more effectively:
The use of control account can enable business to improve the management of their business as it can verify the
arithmetical accuracy of the ledger and also provide the management with a total figure of debtors and creditors,
which can help in the preparation of balance sheet. They can also assist in the prevention of fraud as they are
normally prepared independently of the sales and purchase ledger. However, the preparation of control accounts can
be time consuming and there may be some errors in the accounts which remain undetected.
Q: Evaluate the use of control accounts.

Ans: Advantage and disadvantage of control account.
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Benefit of forming a partnership business:

 More capital can be raised i.e. with additional partners.
 Additional partners bring a wide variety of skill and expertise that benefit the partnership.
 The experience or ability required to operate the business cannot always be provided by one person working
alone.
 The responsibility of management could be shared by additional partners.
 A partnership of family member can bring a stronger desire to succeed within a dependable environment.
 Partnership are ideal organization for professional practices such as medicines law and accounting.
Disadvantages:
 Partners have unlimited liabilities.
 Partnership is dissolve on death of a partner.
 It is difficult to liquidate or transfers partnership.
 A partnership may have difficulty in raising sufficient capital for a large scale operation. Increase unlimited
liability could also be a deterrent to expanding the business.
 There is a risk of disagreement and friction among partners and management.
Benefits of taking partners into the business:
For:
 More capital introduce.
 More ideas.
 More people to share the responsibility and cover the work.
 Specialist scale available.
Against:
 Greater chance of disagreement between partners.
 Profit share between more partners.
 Dilution in management influence of main partner.
Decision benefits of becoming a partner:
Non-Financial factor:
 Job security.
 Has a stake in the business.
 Improves the prestige or status.
Financial factors:
 Investment required from personal assets.
 Unlimited liability for losses.
 Loss of security of regular salary.
 Extra work put into the business would result in extra income
Decision of partners not to admit new partners:
For:
 Profit should be shared between fewer partners.
 Possibly easier decision making as fewer partners.
Against:
 Loss of skills.
 Loss of management capacity.
 High risk among fewer partners.
 Difficulties in raising partners’ capital
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Q: Evaluate trading as a partnership rather than a sole trader.

Arguments for:
• More skill and expertise available
• Greater capital
• Cover for holidays and sickness
• Partners can specialise
• Share risks.
Arguments against:
• Profits shared
• Discussion before all decisions made
• Responsibility for the decisions of another person/joint liability.
• There may be conflicts.
Q: Why partnership is superior than sole-trader?
For:
 More capital available.
 Greater skill ability.
 Share of responsibility.
 Decision made jointly
Against:
 Profit need to be/get shared.
 Cannot make decision alone, need everyone consent.
 Unlimited liability.
 Conflicts/disagreement might take place.
Partnership Act 1890:
1. All partners may contribute equally to the capital of the partnership.
2. Partners are entitled to:
a. Interest on capital.
b. Salaries.
3. Partners not to be charged interest on drawings.
4. Partners to share balance of profit and losses equally.
5. Partners entitled to interest at 5% per annum over and above agreed capital.
Necessity for partnership agreement:
Favour:
 May define the business relationship & responsibly.
 Clears the concepts of the business operation.
 Clear instruction of partners’ responsibilities.
 Removes any queries regarding the operation.
 Defines the distribution of profit.
Against:
 Cost of preparation of agreement.
 Not flexible to take account of changing circumstances.
 Generally requires legal services to prepare.
 May change according to economic factors.
 If not prepared provision of 1890 Partnership Act.
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Q: What is goodwill?
Ans: Goodwill is the worth of a business over and above the value of the tangible asset. It is derived from e.g. good
location establish loyal customer base.
Concept that prevents goodwill:
 Prudence concept.
 Mon measurement concept
Benefits of writing off/recording goodwill:
Positive:
 Accurate value of the business to partners.

 Does not undervalue the business.
 Required when purchasing or selling a business.
 It is more prudent to write off goodwill e.g. prudent concept.
Negative:
 Meets the legal framework.

 Goodwill is difficult to value/measurement of money.
 Goodwill can change in value due to sudden event.
 Accounting standards only recommend purchase goodwill recorded.
Q: Why a partner may wish/willing to pay for goodwill?
 Reputation.
 Location
 Specialist product/service.
 Brand image.
Partnership dissolution:
 Non-financial factor a partner should consider before purchasing/investing in a business.
 Location
 Brand image
 Reputation
 Quality
 Skill of workforce
 Future market potential
Q: why a partnership may dissolve?
 Retirement.
 Death.
 Admission of a new partner.
 Sale of business.
 If partners want to leave.
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Benefits of keeping full set of double entry accounts/records.

In favour:
 It provides details of all transactions and individual account.

 Easy to construct final account and to analyse financial position.
 Accrual adjustments are made automatically.
 Valve of debtors and creditors would be readily available.
 Provide information to both internal and external users.
 Details of all transactions are recorded and available for inquire.
 Accuracy can be tested through trial balance.
Against:
 More complex and time consuming.

 Preparation requires specialist knowledge to maintain.
 Harder to understand for unqualified people.
 As the system is complex there is a greater possibility of committing errors and mistakes.
Advantage of incomplete records:
 Simple accounting entries that is limited in recording cash transactions.

 Provide information for income tax purpose.
 Familiar and popular with even the uneducated community.
Disadvantage of incomplete records:
 Data may not be available to management for effective planning and controlling the business.
 Lack of systematic and precise bookkeeping may lead to in efficient administration and reduced control over
the affairs of the business.
 Incomplete records do not provide a cheque against clerical error.
 Incomplete records seldom make provision for recording all transactions.
58
Non-Trading organisations are non-profit earning entities. The aim is to provide services to their members at cost. It
provides the policy that no individual or group will share in any profit or losses.
Acceptance of membership subscriptions at discounted rate.
In favour:
 Improve cash flow of the business in early years.

 Saves administration costs over the years.
 Reduces bad debts.
 May attract new members.
 Can be used to repay any liability.
 May result in a lower borrowings and savings in interest.
 Members retained for five, ten, fifteen years.
Against:
 Discount is too high.

 Less overall income due to few members interested in this type of offers.
 Liability to provide services after cash have been spent.
 Overall cash received lower than the sum of annual subscriptions.
Note: Receipts and payments account is a summary of the cash book of a non-profit making organisation.
Note: Income and Expenditure is merely another name for profit and loss account. It is adopted by non-trading
concerns like hospital, charity, club, society etc. this account is credited with all earnings and debited with all the
expenses and the difference represents a surplus/deficit for a given period.
Subscriptions: The members of the association, as per rules, are generally required to make annual subscriptions to
enable it to serve the purpose for which it was created. It appears on the receipt sides of the Receipts and Payments
account and is usually credited to income.
Donation: An amount received from any source by way of gift is described as donation.
Life membership: In some clubs and societies, members can make a payment for life membership. This means that
by paying a fairly large amount once, members can enjoy the facilities of the club for the rest of their lives. Such a
receipt should not be treated as income in the income and expenditure account solely in the year in which the
member paid the money. It should be credited to a life membership account, and transfers should be made from that
account to the credit of the income and expenditure account of an appropriate amount annually.
Difference between receipts and payments account and income and expenditure account.
1. Nature: Receipts and payments account is a summary of cash transactions for a period and it is real
account. Income and expenditure account is a summary of expenditure and income and it is nominal
account.
2. Objective: Receipts and payments is prepared to show cash and bank receipts, and income and expenditure
is prepared to show the net result of the operation.
3. Statement of affairs requirement: In receipts and payments account there is no need to prepare balance
sheet. In income and expenditure to know the financial position balance sheet is prepared.
4. Difference between two sides of receipts and payments account represents cash in hand or cash overspent
(overdrawn). Difference between two sides in income and expenditure account represents excess of income
over expenditure or vice versa.
5. Receipts and payments account begins with opening balance and ends with closing balance. Income and
expenditure doesn’t commence with any balance.
59
Decision of club and societies in considering bad debts.

 Prudence concept apply.
 Amount of account receivables will be accurate.
 Not all debts will be collectable and therefore a significant provision should be made.
 Accuracy in measuring the liquidity of a business.
Acceptance of cheap rate offer:

In favour:
 Cheaper manufacturing cost and so possibility of higher profits.

 Less on manufacturing responsibilities.
 Can concentrate on marketing products.
 No manufacturing expense, no management of stuff.
 Liquidity position of business can be improved by selling fixed asset of business.
Against:
 Loss of manufacturing independence.

 The offered price may run in long run.
 Supplies placed in the hands of another company.
 Problems in exchange rate difficulties.
 Loss of control of quality and product management.
 Social accounting consideration: loss of jobs, rise of unemployment may lead to poverty and lower standard
of living.
Fixed cost: Are those costs which remains same and constant and does not varies with the level of output. E.g. rent
of office building, supervisor salary.
Semi-fixed cost: contain both fixed cost and variable cost element. The variable element varying with the level of
output. E.g. Electricity, heat & light, telephone bill etc.
Allocated cost: Allocation occurs when a cost can be directly attributed to a specific departments.
Apportionment: Apportionment occurs when a cost cannot be directly attributed to a single department but the cost
is apportioned on a reasonable basis. E.g. floor area.
Q: Why is cost of production important?
Ans: It is important in order to calculate how much amount is spent on the production of good. So that per unit cost
can be found and selling price can be set. Another reason is that in order to compare the cost of production of goods
in the previous year with the present year.
Q: Explain the difference between direct costs and indirect cost.
Ans: Direct costs are included in the prime cost whereas indirect costs are included in the factory overheads. Direct
costs are directly related to production whereas indirect costs are classified as factory overheads or revenue expenses.
Q: Explain why manufacturing companies does depreciates its equipment and machineries?
Ans:
 Decrease in value as the assets/machineries wear and tear/obsolesce.
 Spread the cost over the years of useful life.
 It follows the prudence concept.
 Doesn’t overstate the profit taking.
60
Method of stock valuation:
 FIFO (first in first out)

 LIFO (last in first out)
 AVCO (average cost method)
FIFO (first in first out): Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the
period, whilst the cost of material bought later in the year. During periods of inflation, the use of FIFO will result in
the lowest estimated of cost of goods sold among the three approaches and the highest net income.
LIFO (last in first out): Under LIFO, the cost of goods is based upon the cost of material bought, towards the end of
the period, resulting in costs that closely approximate current costs, the inventory however is valued on the basis of
the cost of material bought earlier in the year. During periods of inflation, use of LIFO will result in highest estimate
to cost of goods sold among the three approaches and of the lowest net income.
Benefits of FIFO:
 Stock value are easy to calculate.

 FIFO more widely accepted.
 Maintains inventory value nearer to market/replacement value.
 Accepted by the tax authorities/accounting standards.
 Is logical in that the oldest stock values are sold/issued first.
 Gives a higher closing stock values and higher profits when periods are rising (during inflation).
 It is acceptable method for the purpose of the companies Act. 1885, SSAP 9.
Against:
 Higher profits mean higher taxes.

 Stock is sold/issued at values that may be below current market prices.
 In times of rising prices, FIFO values stock at the highest prices, which lowers the cost of goods sold and
thus increasing the profit figures.
Benefit of LIFO:
 The value if closing stock is based on prices actually paid for the stock.
 The value of closing is easy to calculate.
 LIFO is accepted mostly, during inflation, as it lowers the net income and reduced the tax.
 LIFO follows the prudence concept.
Against:
 It is usually unrealistic because it is based on the assumption that the most recently acquired stock is used or
sold before older stock.
 LIFO is not acceptable for the purpose of SSAP 9.
 Closing stock is not valued at the most recent prices.
Periodic Inventory: Under periodic inventory, stock will be valued periodically by summarizing the receipts and the
issues and applying the valuation technique such as FIFO and LIFO to the units of stock at the end of that period.
“A periodic inventory is one in which only the totals of receipts and issues are recorded at the end of each accounting
period and a new balance is calculated at the end only.
61
Perpetual inventory: Under perpetual method, the application of the stock valuation technique such as FIFO or LIFO
will take place after receipt or issue of stock has taken place. This will value issue and the stock balance on an
ongoing basis.
“A perpetual inventory is one which a running balance is maintained of stock remaining after every receipt and
issue of stock”
Stock Valuation: Stock valuation relates to the price attached in the issue of stock to the production or resale/ for the
valuation of closing stock.
Stock rotation: Stock rotation relates to physical rotation of stock, the oldest stock will be issued first to avoid
deterioration.
Q: What is the effect on Net profit if the business changes to LIFO method?
Ans: Where LIFO is used the value of closing stock is lower than where FIFO is used. Cost of goods sold will be
higher and the Gross and Net profit will be lower.
Q: What is the effect on Net profit if the business changes to LIFO method?
Ans: If the business changes to LIFO method the closing stock value would be lower therefore cost of goods sold
would be higher as a result gross profit would be lower therefore net profit would also be lower.
Characteristics of job costing:
 Orders are one off and unique.

 Made to customers specific requirement.
 Often associated with larger projects.
 Items not produced for stock.
 Special order.
 Each job is comparatively short duration.
In job costing we cannot charge such expenses to our customers:
 Preparing quotation.
 Preparing account for the business.
 Dealing with government agencies e.g. tax.
 Liaison with supplies for materials.
 Advertising cost.
 Promotion of business.
 Illness.
 Interviewing staff etc.
62
Allocation: Allocation occurs when a cost can be directly attributed to a specific department. Allocation of overheads
is the process of charging overhead cost to a particular department or cost centre. It is the allotment or assignment of
an overhead cost to a particular cost unit.
Apportionment: Apportionment occurs when a cost cannot be directly attributed to a single department but the cost is
apportioned to a single department but the cost is apportioned on a reasonable basis. E.g. floor area.
Q: why some overhead cost can be allocated others need to be apportioned?
Ans: Allocation of overheads occurs when an overhead can be specifically identified as being attributed to a specific
department whereas apportionment occurs where overheads are attributable to a number of departments and therefore
must be apportioned to those departments on the most reasonable basis available.
Q: Define when it will be appropriate to use machine hours as a basis for the calculation of overhead recovery rate?
Ans: It would be appropriate to use machine hour rates when the major of the cost centre is machine driven.
Q: What is under absorption overhead?
Ans: Under absorption of overheads mean that the amount of overheads in the production is less than the amount of
actual overhead incurred. If overhead is under absorbed, this means that more actual overhead costs were incurred
than expected. This usually mean that the recognition of expense is accelerated into the current period, so that the
amount of profit recognized declines.
Q: What is over absorption of overhead?
Ans: Over absorption of overhead means the excess of overhead absorbed over the actual amount of overheads
incurred. If overhead is over absorbed, this means that fewer actual overhead cost were incurred than expected. This
means that the recognition of expense is reduced in the current period, which increases profits.
Q: Benefit of using separate overhead recovery rates for the machining and finishing department as an alternative to
calculating a single overhead recovery rate for the business.
Ans: Favour:
 If manufacturing uses separate overhead recovery rates this will means that the charges made to customer for
the service of each department would more accurately reflect, the costs incurred in the delivery of services
by that department.
 When a single overhead is used, charges levied could represent a loss activity.
 Departmental rates help to avoid cross subsidization of rates.
Against:
 A single overhead recovery rate would be simpler to calculate.
 Separate overhead method is time consuming.
63
Time rates:
Advantages:
 Workers are guaranteed a fixed wage each week provided they work the agreed hours.
 The method is uncomplicated and easy for the workers to understand.
 The wages are easy to calculate.
 The method can be applied to all workers.
 Quality of work is not sacrificed as consequence of attempts to increase earnings.
Disadvantages:
 All workers are paid the same regardless of whether they work well or not.
 There is no incentive for them to make any extra effort.
 Workers may slack during normal hours in order to work overtime at enhanced rates of pay.
 It may be necessary to install rigid systems of control to ensure adequate productivity.
Piece rate:
Advantages:
 Wages paid are proportionate to production.
 Wages are easy to calculate.
 The system encourage greater efficiency.
 The worker is completed more quickly and time wasting is discouraged.
Disadvantages:
 May not be suitable for all workers.
 More rigid quality control may needed.
 Unions may be contentious over fixing of piece rates.
Day rate:
Advantages:
 Wages calculations are simple.
 The firm benefit from high performance through lower unit costs.
 Employment with such a firm is usually well sought after.
 The firm is in a position to choose a better class of worker.
Disadvantage:
 Standards must be continuously and closely monitored.
Labour Productivity: labour productivity is the relationship between the inputs and outputs. This is normally
measurement to the number of units produced per hour.
Bonus scheme: Bonus scheme are designed to encourage and reward labour to complete task in a shorter period of
time.
Evaluate the system of costing orders using labour and overhead hourly rates?
In favour
 Reasonably accurate calculation which will provide sift quotations.
 Customers knows exactly what he is paying for.
Against
 Only valid if the percentage activity on customers work remains constant.
64
Suspense: In accounting, the sections of a company’s book where unclassified debits and credits are recorded, thus
the creation of suspense. This suspense account temporarily holds unclassified transaction while a decision is being
made as to their classification. Transactions in the suspense account will still appear in the general ledger, giving the
company an accurate indication of how much money it has.
Role of the suspense in correcting error:
In situations where a debit balance has not been matched with a credit entry of equal value, the error will cause the
books to fail to balance. In such circumstances the suspense account will make a valuable contribution by acting as
holding error until they are discovered and corrected. In case of both error of omission and commission there is debit
and credit entry of equal value and therefore the use of a suspense account will not aid the correction of those errors.
Q: whether it is useful to prepare a financial statement when a trial balance contains a suspense account?
 Errors need to be corrected before progression to final accounts.

 Inappropriate decision making and measurement.
 Costly and time consuming to prepare accounts requiring additional work.
Q: When suspense is corrected the usefulness of financial statement.
 Enables progress to the Trading and profit and loss account to take place.
 Gives an indication of the potential profit made by the business.
 Enable errors which located and to be corrected and adjustment made to the draft profit on an on-going basis.
 Efficient measurement and decision making.
Q: Evaluate the preparation of financial statements when there are still errors in the books.
Arguments for:
• Enables a draft profit to be calculated to give an idea of the profit that may have been generated during the year
• Timing may require that financial statements are prepared before all errors are located.
Arguments against
• The work in preparing the draft financial statements will have to be repeated
• The draft profit is inaccurate and could be misleading.
65
To assess the performance of the firm only profits cannot provide us much information. We need some standard to
assess items, such as profits, sales and so on. Ratio analysis is the combination of figures from the financial
statements of the firm into a format where judgments can be made on the overall performance of the business. For
the ratios to be a reliable guide to performance we need to apply two criteria’s:
1. The financial statements used for calculating the current ratios must be up to date.
2. Each ratio must be compared with the same ratio from the previous year’s accounts or with those from a
competitors accounts.
Profitability: The profitability ratio is to assess a business’s ability to generate earning as compared to its expenses
and other relevant costs incurred during a specific period of time.
Liquidity: Liquidity is a measurement of whether the firm have enough cash available for immediate use. The ratio is
focused on the ability of the firm to meet day to day running requirements and ability to pay its debts.
Liquidity is the ability of a business to meets its short term obligation/liabilities by ensuring that it can convert stock
into cash in sufficient quantities and in sufficient time to meet those short term liability.
Ways to increase/improve profitability of a business:
 By increasing sales.
 By reducing cost of goods sold.
 By reducing expense.
 Advertising campaign boost up sales.
Ways to improve liquidity:
 High liquidity can be increased by purchasing fixed assets.

 By investing more into other business which shows the proper utilization of liquid cash.
 Low liquidity can be improved by selling the existing fixed assets which are under-utilized.
 Low liquidity can also be improved by injecting more capital from personal funds.
 Another way of improving liquidity is through improving rate of stock turnover. Rate of stock turnover can
be improved by increasing sales and reducing the purchase of stock at the same time within a given time.
Disadvantage of high liquidity: (working capital ratio 5:1)
 High closing stock which indicates unpopular goods for the business in market, also increase the warehouse
expenses.
 High debtors which increase the chance of risk of bad debt.
 High cash/bank which indicates managers unable to investigate properly or improper utilization of liquid
money.
Q: How to improve rate of stock turnover?
Ans: Rate of stock turnover can be improved by increasing sales and reducing the purchase of stock at the same time
within a given time.
Note: Ideal current ratio is 2:1 is the industry benchmark [common yardstick]. Ideal acid test ratio is 1:1
66
How to draw up evaluation?

First paragraph: First compare profitability using figure, secondly identify which one is better, and thirdly give
reasons for your answers (yardstick).
Second paragraph: Firstly compare liquidity using figures, secondly identify which one is better, and thirdly give
reason for your answers (yardstick).
Third paragraph: Given overall discussion based on your profitability and liquidity which one is better (strong
reasons are recommended for your justification).
Reasons why gross profit is lower than forecasted
 Business sold the goods at lower price which have taken away some business profits.
 The owner might have taken/withdrawn a few stocks from the business without paying for them.
 Decrease in the sales of stock due to competition in the market.
 High cost of goods sold due to inefficient quality management.
 Cost of raw material increased despite sales constant.
Why net profit margin decrease despite gross profit increase?
 High selling and distribution expenses.

 High advertising campaign which increase the sales but also increases the expenses.
 Sales revenue increases due to discount given to customer which at the same time increases the expenses.
 Goods sold on credit which may make debts irrecoverable.
How to ensure quick payment from debtors?
 The first credit order supplied may be of limited quantity.

 Ensuring payment of first credit order before second order is issued.
 After order supplied immediately issue of invoice.
 Monthly remittance mail/advice.
 After 28 days contact to encourage payment.
 Possible allowance of discount.
 Where no payment made in set time court action may be commenced.
Usefulness of ration analysis/accounting ratios in assessing the success of business.
 Analysing financial statement.

 Judging efficiency.
 Locating witness.
 Helps in decision-making.
 Provide a yardstick against accepted standards.
 It is helpful in budgeting and forecasting.
 Provides to assess some comparison with other business.
 Time series analysis – helps firms to make comparison between two fiscal year.
 A quantitative objective measure.
67
Limitations/Disadvantage of ratio analysis:
 Does not take account of state of assets. E.g. Probability of debtor’s payment.
 Does not take account of non-financial factors. E.g. skill of workforce, management and quality manners.
 Ratio does not show the strength of the demand of the product.
 Not having more than one year’s data, even two years may not be enough to give a clear picture of the
overall direction of the firm.
 Comparisons with other firms are only meaningful if the firms are very similar (same industry and similar
size)
 All firms will be affected by changes in the economy in different ways. This must be taken into account when
analysing firms result.
Case #1: Current ration = 1.3:1, acid test ratio = 0.5:1, debtors collection period 60 days.
Evaluation: Benchmark understated. Current ratio is low but not critical. Acid test ratio stands poor. Debtor’s
payment period is too long (28 days standard). Awareness to check the stock. Awareness to check the bank balance.
Case #2: Current ratio 1.5:1, liquidity ratio 1:1, stock turnover 9.9 times.
Evaluation: Current ratio below benchmark. Liquid test ratio satisfactory and at the level of benchmark. Stock
turnover also appears satisfactory. (Use how to improve liquidity for overall)
Case #3: Current ratio 1.9:1, liquidity ratio 1.3:1, debtor’s collection period 32 days, creditor’s payment period 72
days, return on capital employed 22%.
Evaluation: Current ratio 1.9:1 is acceptable and satisfactory but below the benchmark 2:1. Acid test ratio 1.3:1 is
satisfactory and above the average level. Debtor’s collection period is good and close to the 28 days credit normally
provided. Creditor’s payment period raises concerns (unethical) as this is considerably above the normal 28 days
credit that is provided. There is a considerable risk that the creditor will stop supplying goods.
Case #4:
2007 2008
ROCE 77% 40%
Current ratio 2.1:1 1.2:1
Acid test ratio 1.1:1 0.4:1
Evaluation: Return on capital employed 2007 was 77% which is a good return but in 2008, it was 40% which is
relatively a poor return. Current ratio in 2007 was in an appropriate level/around benchmark, but in 2008 it has
fallen to a dangerously low level. Acid test ration, in 2007 was at appropriate level and above the benchmark but in
2008 it has fallen to a dangerously low level showing that payment to creditors is difficult.
68
Case #5:
Company X Company Y
Gross profit margin 40% 50%
Net profit margin 6.25% 4%
ROCE 20% 25%
Current ratio 1.18:1 2:1
Debtors payment period 80 Days 20 days
Value of non-current assets £190,000 £130,000
Evaluation: Gross profit margin of company X is 40% which is good but company Y has higher gross profit margin
than X. Net profit margin of Company X is 6.25%, which is comparatively better than 4% of company Y. Net profit
margin of company Y can be increased by lowering the expenses. Return on capital employed (ROCE) of company X
is 20%, where company Y has 25% comparatively a better return on capital employed than company X. Current
ratio of company X is lower than the benchmark, which is a dangerous position but on the other hand company Y has
its current ratio on benchmark 2:1. The value of non-current asset of X is better than Y.
Case #6:
X Y
Gross profit margin 30% 38%
Stock turnover 6.4 times 10.3 times
ROCE 17.7% 35%
Acid Test 0.5:1 1.35:1
Debtors payment period 22 days 29 days
Compare profitability & liquidity of these two business:
 Gross Profit margin of X is 36% which is quite good, but Y has even a higher margin.
 Stock turnover of Y is 10.2 times is better than X which is 6.4 times.
 Return on capital employed of X is 17.7% which is ok, but Y has comparative ROCE of 35%.
 Acid test ratio of X is 0.5:1 which is below the benchmark and unhealthy for the company, this also means
that company X will have hard time paying off creditors. Whilst company Y has ratio of 1.3:1 which is well
above the benchmark 1:1.
 Debtors’ collection period of Company X is 22 days which is quite good and below the benchmark of 28
days, whilst collection period is 29 days and close to the standard 28 days allowed.
Case #7:
2007 2008
ROCE 7% 30%
Current ratio 2.2:1 1.2:1
Acid test ratio 1.19:1 0.4:1
Evaluation:
 In year 2007 rate of ROCE is relatively poor 7% compare to the year 2008 30%, which is relatively a good
return.
 In 2007 current ratio was 2.2:1 which was above benchmark but in 2008 it is at dangerously low level (write
ways to improve liquidity)
 In 2007 Acid test ratio was at appropriate level but in 2008 it turned into such a low level which reflects
difficulties in meeting its liabilities.
69
Q: What is social Accounting?

Ans: Social accounting refers to the motives of the firm and the principle that there exist other considerations that
must be taken into account other than merely profit maximization. Decision affect not only profits but employers,
consumers and the environment and there is a moral responsibility to take those factors into account.
Q: If we consider social accounting what is the impact/the role of social accounting in decision making for a
business?
Pros:
 Improved reputation/increased profits in future.

 Consider matters such as the environment and impact on the community not just financial matters.
Cons:
 May reduce profits in the short run.

 In the final analysis the business must be profitable.
 Business are not obliged to consider accounting in the decision making.
Q: Evaluate use of accounting concept preparing final accounts.
Favour:
 Provides a framework of consistency in preparing final accounts.

 Provides assurance to user’s about the preparation of the accounts.
 Can be use internationally to compare business.
 True and fair view.
 Meet legal requirements.
 Profit can be relied upon.
Against:
 Concept can be contradictory.

 Many non-financial aspects of a business are not considered by accounting concept.
 Open to wide interpretation.
Q: Evaluate owner decision to purchase premises rather than renting.
Ans: Pros:
 Saving in rent
 Will have ownership control over premises
 An investment for long team as property tends to rise in future
Cons:
 Major capital outlay

 More depreciation
 Cost of premises is the opportunity cost where it can be used for other purposes.
Note: reduced for keeping short but further reading can be done on people (employees, local population, local
authority, the general public, government etc.), Places, Products, Politics etc.
70
Note: pure knowledge base you are not going to get assessed from this section and may ignore but it might come in
handy in later life on your study.
Q: What is ethics?
Ethics is a branch of philosophy that studies the difference between right and wrong. We have many opportunities to
choose between right and wrong, and as we see in the business press, making the wrong decision can lead to serious
consequences including corporate failure, loss of reputation, fines, or even jail sentences.
Different people will approach an ethical decision with different points of view, and we must all accept that different
cultures, for example, approach ethics in different ways. In any situation, you must begin with the laws of your
country. Next you look to the specific rules that govern the situation. For example, if you are an auditor, you will be
bound by the relevant auditing standards in your jurisdiction. Then, as a professional, you must consider the
principles of your professional body which form the basis of your professional ethics.
Most would see themselves as ethical. We usually like to feel we have done ‘the right thing’. Your personal ethics are
as important as your professional ethics. It is one thing to know what you should do – what you are told you should
do – but another thing to want to take the ‘correct’ course of action. Clearly, membership of a professional body
requires adherence to a code of ethical conduct. As accountants, we ‘profess’ to a high standard of ethical
behaviour. But leaving rules and regulations to one side, who is to say what is right and what is wrong?
Members of the public may place their trust in you because you are a member of a trusted professional body. The
public is not expected to know how to assess either the ability or the ethics of a doctor, lawyer or accountant. They
trust that the professional bodies will do that for them. This means that as a professional you owe the public a
certain level of integrity and objectivity - as well as professional competence and due care, confidentiality, and
professional behaviour.
Your own values, interests and experiences are the filter through which you view any situation. It is important for
you to be aware of those filters because they could influence your professional judgement. That is why it is important
to be able to recognise your own personal ethical perspective when you exercise your professional ethics. It is
important to be able to know the difference between the two. As a professional accountant, you should strive to
maintain objectivity by being mindful of the fact that your personal values are just that - personal and unique to you.
Note: This conclude this note. List of bibliography can be found at the end of the note
71

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Q: Necessity of accounting concept? (Evaluate the use of accounting concepts or conventions)

Q: Evaluate the use of accounting concepts in the preparation of financial statements.

Advantage of an ICT accounting software:

 the cost of the hardware and software

If capital expenditure is treated as revenue expenditure the affect are:

 Gross profit – no change

 Gross profit – no change

Advantages and Disadvantages of Double-entry Bookkeeping

 Maintain a complete record of every transaction.

 Double-entry bookkeeping system is complex and harder to understand.

Arguments against maintaining a set of books:

Q: Evaluate the decision of not to write off any bad debts.

 Debtor’s level is high.

 Income/Bad debts may still be recovered

 Ensures that profit is not overstated.

 Actual bad debt may be significantly different from estimate.

 Obsolescence: A fall in the value of asset as a result of its age on use.

Difference between straight line & Reducing methods

Benefits of using straight line rather than reducing method:

 Straight line is simpler to compute.

Benefits of using reducing balance method:

 Distorts profit calculation.

Importance of trial balance:

Errors affecting trial balance:

 Incorrect addition in the books of accounts.

Errors not affecting trial balance:

 Errors of omission – where a transaction is completely omitted from the books.

Advantage of trial balance:

 It does not prove that all transactions have been recorded

Purpose of control account:

Q: Evaluate the use of control accounts.

Benefit of forming a partnership business:

Q: Evaluate trading as a partnership rather than a sole trader.

 Accurate value of the business to partners.

 Meets the legal framework.

Q: why a partnership may dissolve?

Benefits of keeping full set of double entry accounts/records.

 It provides details of all transactions and individual account.

 More complex and time consuming.

 Simple accounting entries that is limited in recording cash transactions.

 Improve cash flow of the business in early years.

 Discount is too high.

Decision of club and societies in considering bad debts.

Acceptance of cheap rate offer:

 Cheaper manufacturing cost and so possibility of higher profits.

 Loss of manufacturing independence.

Method of stock valuation:

 FIFO (first in first out)

 Stock value are easy to calculate.

 Higher profits mean higher taxes.

Characteristics of job costing:

 Orders are one off and unique.

In job costing we cannot charge such expenses to our customers:

 Errors need to be corrected before progression to final accounts.

 High liquidity can be increased by purchasing fixed assets.

How to draw up evaluation?

 High selling and distribution expenses.

 The first credit order supplied may be of limited quantity.

 Analysing financial statement.

Limitations/Disadvantage of ratio analysis:

Q: What is social Accounting?

 Improved reputation/increased profits in future.

 May reduce profits in the short run.