AAT Level 3:

Final Accounts Preparation

Session 1
What’s the point of
having an
accounting system?
Business Organisations
What business structure is right for our clients?
Sole Traders
Advantages
 Cheap and easy to set up.
 Owner has independence and
can run the business as he sees
fit.
 All profits belong to the owner.
 The owner can ensure that
quality is maintained.
 Easy to establish legally.
Disadvantages
 The owner has unlimited
liability for debts.
 Expansion is limited as access
to finance is hard.
 The owner usually has to work
long hours and the business is
reliant on the owner being
there.
Partnership
Advantages
 Possibility of increased capital.
 Partners may be able to
specialise in a particular area
of the business.
 The responsibility doesn’t just
fall on one person.
Disadvantages
 Decisions may take longer as
there is more than one owner.
 There may be disagreements
among partners.
 Each partner is liable for the
whole business.
 The retirement or death of a
partner can cause problems.
Limited Liability Partnerships

Advantages Disadvantages

 Limited liability.  Extra regulations.

 Easier access to finance.  Must file financial statements.
 Separate entity.  Financial statements are open
to public scrutiny.
Limited Company

Advantages Disadvantages

 Limited liability.  Extra regulations.

 Easier access to finance.  Costs of record keeping.
 Separate entity.  Must file financial statements.
 Transfer of ownership is easier  Financial statements are open
(sell shares) to public scrutiny.
Charities

 Run by a trustee for the public benefit

 If unincorporated, trustees may be liable for debts.
 Exempt from tax if they have charitable status.
 The distributions are the charitable activities.
 Regulation:
 Charities Act 2011
 Charity Commission
 FRS 102
 Must file with the charity commission
Users and the Framework of
Accounting
Who needs to know information?

 Owners and existing/potential investors.

 Lenders
 Suppliers
 Employees
 Customers
 Government/HMRC
 The Public
The Framework of Accounting
Accounting Principles Business Entity
Materiality
Going Concern
Accrual Basis

Accounting Policies and Characteristics Application of accounting policies

Fundamental Qualitative
Characteristics

Supporting Qualitative Characteristics

Ethical Principles Integrity

Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
How the Underlying Assumptions Help

 Internal control- help to ensure the financial records are accurate and the
true position of the business is known.
 Measuring business performance- because the standards are the same, we can
compare businesses.
 Getting Finance- Banks can see and trust the information.
 Statutory Requirements- The government can see what is owed to them and
whether any company is not obeying the law.
Accounting Principles

 Business entity - the business is separate from the owner.

 Materiality - reporting on every minute detail will not be useful to the users,
so it is fine to lump smaller transactions together.
 Going concern - the business is likely to continue in the near future. If not,
the accounts must be prepared on a break-up basis.
 Accruals - Income and expenses are matched to the period they relate to.
Accounting Policies and Characteristics

 Relevance - financial information should be of use to the users

 Faithful representation - the information should be neutral, complete and
free from error
 Comparability - financial statements should be comparable to previous years
and businesses
 Verifiability - users will be assured that the info is correct (evidence)
 Timeliness - users should receive information in time to make decisions
 Understandability - a person with a reasonable knowledge of accounting
should understand the information
AAT’s Ethical Code of Conduct

 Integrity - being straightforward and honest in all relationships

 Objectivity - being aware of conflicts of interest and not allowing them to
influence you
 Professional Competence and Due Care - having the knowledge or skill to do
your job
 Confidentiality - not disclosing information to a third party
 Professional Behaviour - not bringing the profession into disrepute.
Financial Statements
The Trial Balance - not revealed errors

 Error of principle - entered into the wrong type of account

 Error of commission - entered into the wrong account
 Error of original entry - wrong amount is entered into both accounts
 Error of omission - note entered at all
 Reversal of entries - debits and credits made on the wrong side.
Trial Balance- Revealed Errors

 One sided entry

 Entry duplicated on one side
 Unequal entries
 Account balance incorrectly transferred

 From the trial balance, we make an extended trial balance (Advanced

Bookkeeping) and from this we make the accounts.
The Statement of Profit and Loss (SPL)
 The SPL shows the income a business has and also the expenses incurred over
the year. Using this information, the profit for a business can be determined.
The basic formula for the SPL is:

 Sales revenue
 Less
 Cost of sales (opening inventory + purchases – closing inventory)
 Equals
 Gross profit
 Less
 Expenses
 Equals
 Profit for the year
The Statement of Financial Position
(SFP)
 From previous studies:
 Assets – Liabilities = Capital

 Assets
 Non-current- long-term items owned by the company (buildings etc.)
 Current - short-term items held for trade or resale (inventory)
 Liabilities
 Current- will be paid in 12 months
 Non-current- payment due in more than one year
 Net Assets- total of non-current and current assets less current and non-
current liabilities
 Capital- where the money to finance the company has come from
What goes where?
To Find the Capital:

Opening Capital
Add
Profit for the year
Less
Drawings
Equals
Closing capital
Order of Liquidity

Non-Current Assets (premises – fixtures and fittings – machinery – vehicles)

Current Assets (inventory – receivables – bank (not overdrawn) – cash)

Other Items

 Carriage in- add the price to the purchase costs

 Carriage out- this is shown as an expense for the business
 Returns in- deduct the amount from the sales figures
 Returns out- deduct this from purchases
 Discounts received- this is shown as income on the SPL
 Discounts allowed- this is shown as an expense in the SPL