FINANCIAL ACCOUNTING

T-ACCOUNTS
TRIAL BALANCE ACCUMULATED DEPRECIATION

Cash /Bank Bank overdraft Ending Balance Beg Balance

Accounts receivable Accounts payable Disposal Depreciation charge

Purchases Purchase returns RETAINED EARNINGS

Sales returns Sales Dividends paid Beg Balance

Sales discount Purchase discount Ending balance Profit for the year

Accumulated
Freight in Depreciation
PAYABLES
Expense Capital
Beginning balance (debit Beginning balance (credit
Drawing Retained earnings balance) -overdrawn balance)

Bad debts Expense Share premium Credit purchase

Bank/Cash payments (Purchase day book)
Allowance for
receivables Bank refunds of debit
Discounts received balance
Revaluation surplus
Contra account Interest charged
Purchase returns
NORMAL BALANCE Closing balance

Asset Liabilities
Expenses Equity RECEIVABLES LEDGER ACCOUNT

Revenue Beginning balance (debit

balance) Sales returns
Credit sales Payment received
NON-CURRENT ASSETS -PPE
Bank dishonored cheques Irrecoverable debts
Opening Balance Disposal
Cash refunds to customer Contra account
Additional Purchases Depreciation
Interest charged Sales discounts
Profit on disposal Loss on Disposal
Revaluation surplus Allowance for
Closing balance receivables
Decrease in allowance Increase in allowance
DISPOSAL ACCOUNT
ALLOWANCE FOR RECEIVABLES
Asset at cost (or
revaluation) Accum Depreciation Bad Debts expense Opening balance

Disposal expense Disposal Proceeds Decrease in allowance Increase in allowance

Profit / Gain Loss Profit /Loss

Closing balance

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 FINANCIAL ACCOUNTING
BAD DEBTS

Opening balance Decrease in allowance

Increase in allowance Profit/loss PAYABLES LEDGER CONTROL

Cash receipt from debt Beginning balance (debit Beginning balance (credit
previously written off balance) -overdrawn balance)
Closing balance Credit purchase
Bank/Cash payments (Purchase day book)
ACCRUED EXPENSES (ACCRUED LIABILITY)
Bank refunds of debit
Payment Cash / Bank Expenses Discounts received balance
Contra account
CASH IN HAND Purchase returns
Beginning balance Cash purchases
Cash sales Sundry Expenses
Sundry Income Banking Depreciation overstated Profit is overstated

Money stolen Sales overstated Overstated net income

Balance c/f Expenses overstated Understated net income

Gross profit understated Net profit understated

CASH IN BANK
Ending Inventory Understated gross profit
Beginning balance Cash paid to suppliers understated current year
Cash received from Ending Inventory Overstated gross profit
customer Expenses
understated next year
Sundry Income Drawings
Money stolen
Increase sales Increases profit
Balance c/f
Increases purchases COGS increases

COGS decreases Gross profit increases

RECEIVABLES LEDGER CONTROL ACCOUNT Expenses increases Net income decreases

Beginning balance (debit Closing inventory

balance) Sales returns Gross profit increases
increases
Credit sales Payment received
Bank dishonored cheques Irrecoverable debts
Cash refunds to customer Contra account
Interest charged Discount allowed
Closing balance
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 FINANCIAL ACCOUNTING

ENTRIES

Goods withdrawn for personal use

Purchase and Purchase returns
Drawings x
Purchases x
Purchases x
Cash x

Cash x
Issuance of Shares Purchase return x
Cash / Bank x
Share capital x
Share premium x Sales and Sales returns
Cash x
Depreciation charges Sales x

Depreciation expense x Sales return x

Accumulated depreciation x Cash x

Bad debts expense Revaluation surplus

Irrecoverable debt expense x NCA x
Receivables x Accum Dep x
Revaluation surplus x

Bad debts expense

Revaluation deficit
Irrecoverable debt expense x
Receivables x Revaluation deficit x
NCA x

Prepayment
Prepayment (Current asset) x
Expenses (SOCI) x

Increase in allowance for receivables

Irrecoverable debt expense x
Allowance for receivables x

Accruals
Expenses (SOCI) x
Accrual (Liability) x

Closing inventory
Inventory (SOFP) x
Statement of profit or loss / Purchases x
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 FINANCIAL ACCOUNTING
FORMULAS  Profit = Closing net assets + Drawings – Capital
Intro – Opening net assets
Cost of sales  Capital intro = Closing net asset + Drawings –
Opening inventory x Profit – Opening net asset
 Closing net asset = Profit - Drawings + Capital
Add: Purchases x intro + Opening net asset
 Opening net asset = Closing net assets + Drawings
Add: Freight it x – Capital intro – Profit
Less: Purchase returns (x)  Drawings = Closing net assets – Capital intro –
Opening assets – Profit
Less: Closing inventory (x)
Provision required at year end
Cost of sales x
Provision b/f x
Utilized during the year (payment) (x)
Statement of changes in equity
Increased required (charge to SOCI) x
Balance, Beginning x
Provision required at year end x
Issue of share capital x
Dividends (x)
Total sales on credit
Revaluation x
Total receipts x
Total comprehensive income x
Cash sales (x)
Balance, ending x
Opening receivables (x)
Ending receivables x
Issuance of shares – MAY BUMILI
Total sales on credit x
ABC Company made an issue for cash of 10,000 $1.50
shares at a premium of $0.30 per share

Issue price = 10,000 x $1.80 18,000 Decrease / Increase in allowance for receivables

Par value = 10,000 x $1.50 (15,000) Opening allowance for Receivables x

Closing allowance for receivables (x)
Share premium = 10,000 x $0.30 3,000
Decrease / Increase in allowance for receivables x

Sole trader net profit

Closing net assets x Opening > Closing = Decrease ( deduct on bad debts)

Drawings x Opening < Closing = Increase (add on bad debts)

Capital introduced (x)

Opening net assets (x) Closing retained earnings
Net profit x Closing RE = Opening RE + Profit – Profit year final
dividend

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 FINANCIAL ACCOUNTING
Opening RE = Closing RE – Profit + Profit year final Salary & Wages (x)
dividend Bad debt expense (x)
Utilities expense (x)
Repair & maintenance (x)
Profit before interest & taxes x
Investment Income (bank interest received) x
Less: Finance cost (x)
Statement of changes in equity for year ended 31, Dec Profit before tax x
20X3 Less: income tax expense (x)
Profit for the year x
Balance,Beg, 1.1.X2 x
Other comprehensive income
Changes in accounting policy (x) Gain on revaluation surplus x
Total comprehensive income x
Restated balance x *profit for the year – to be transferred to equity (balance
sheet) (add on retained earnings)
Changes in equity for 20X2 *revaluation surplus – applicable only to limited
companies financial statements, changes in equity
Dividends (x)

Total comprehensive income for the year x

Issue of share capital x

Balance at 31.12.X2 x

Movement in the shareholder’s equity comprises the

following elements:

 Net profit or loss during the accounting period

attributable to shareholders
 Increase or decrease in share capital reserves
 Dividend payments to shareholders

FINANCIAL STATEMENTS
STATEMENT OF PROFIT / LOSS
ABC Company Profit and Loss statement for the year STATEMENT OF FINANCIAL POSITION
ended December 31, 2022
Sales revenue x Statement of financial position as at 31 December 20X2
Less: Sales returns (x) Non-current assets
Net sales x Property plant, and equipment x
Less cost of sales (x) Investments x
Gross profit x Intangibles x
Add: other income
Discount received x Current assets
Bad debt recovered x Inventories (Closing inventory) x
Interest income x
Gain on disposal x Trade and other receivables (less bad debt) x
Gross profit x Prepayments x
Less: Expenses Cash and cash equivalent x
Rent expense (x)
Freight out (x) Total assets x
Depreciation expense (x)
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 FINANCIAL ACCOUNTING
Equity INTANGIBLE NON-CURRENT ASSETS
Ordinary share capital x
Share premium x  Useful life or amortization rate
Retained earnings  Amortization method
(reporting date + Profit for the year) x  Gross carrying amount
Revaluation reserve  Accumulated amortization and impairment losses
(reporting date + revaluation surplus) x  Reconciliation showing
o Additions
Non-current liabilities o Disposals
Loan notes (Bank loan) x o Reduction in carrying amount
o Amortization
Current liabilities o Any other movements
Trade and other payables x
Accrual (interest) x
Bank loan repayable in 1 year x PROVISION
Bank overdraft x
Dividends payable x  Disclosure of details of change in carrying amount
Tax payable x of a provision from the beginning of the year
o Additional provisions made
Total equity and payables x o Amounts used
o Other movements
*Accruals on SOFP – debit = asset  For each class of provision
*Accruals on SOFP – credit = liability o Brief description
 Nature of provision
DISCLOSURES
 Expected timing of any
 Provide more details about the information in the resulting outflows
main financial statements, not all details o Indication
 Uncertainties about the amount
INVENTORIES or timing of those outflows
 Necessary to provide adequate
 Accounting policies information
 Total carrying amount of inventories and the o Reimbursement
carrying amount in classification  Amount of any expected
 Carrying amount carried at NRV reimbursement relating to the
 Any write-down inventories recognized as expense provision
 Any reversal of write-down to NRV and the  Whether any asset that has been
circumstances that led to such reversal recognized for that expected
 Carrying amount of inventories pledged as security reimbursement
for liabilities
 Cost of inventories recognized as expense CONTINGENT LIABILITY

TANGIBLE NON-CURRENT ASSET If Significant, do not disclosed if not significant

 Measurement bases – accounting policies  Brief description of the nature of the contingent
 For each class of PPE liability
o Depreciation methods  Estimate of its financial effect
o Useful life  Indication of the uncertainties that exist
o Gross amount of depreciable assets  Possibility of any reimbursement
 For revalued assets CONTINGENT ASSET
o Date of the revaluation
o Whether an independent valuer was involved  Brief description of its nature
o Carrying amount  Estimate of its financial effect
o Revaluation surplus

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 FINANCIAL ACCOUNTING
REVENUE FROM CONTRACTS WITH  Owners can increase or decrease capital as when
CUSTOMER the owner wish
 The accounting policy for revenue recognition Partnership
should be disclosed
 Significant judgements made to apply the 5-step
approach required by IFRS15 should be disclosed
 The total amount of revenue recognized, broken
down into significant categories should be
disclosed.
EVENTS AFTER REPORTING PERIOD
Identified and material non-adjusting events

 Nature of the event

 Estimate of the financial effect, or a statement
that such an estimate cannot be
INTRODUCTION TO FINANCIAL ACCOUNTING
RECORD TO REPORT PROCESS
1. Transactions are recorded in books of prime
entry (journal entries)
2. Analyzed in the books of prime entry and the
totals are posted to the ledger accounts (ledger)
3. Summarized in the trial balance  Unlimited liability – debt accountability
4. Reported in financial statements  No existence outside of its members
 Dissolved when any partner leaves
THE NEED OF FINANCIAL STATEMENTS  No audit requirement, to make financial accounts
 No transaction for paying salary for partners. It can
Provide information about the financial position,
be called as Capital Withdrawal
performance and cash flows of an entity that is useful to
a wide range of users in making economic decisions Limited Liability
USERS OF FINANCIAL STATEMENTS
 Legal entity separate from its members
1. Shareholders – access their investment’s  Change in ownership does not affect existence
performance  Tax rate may be lower
2. Managers – formulate plans and improve
 Difficult in reducing share capital
performance
 Have to publish financial statements
3. Employees – opportunities
4. Creditors – company’s liability to meet interest GOVERNANCE
payments
5. Trade Contacts – suppliers to evaluate the liquidity  System by which companies are directed and
6. Financial advisers – profit performance controlled
7. Tax authority – collection of taxes  Board of directors – usually the top management
8. Governments – allocation of resources and in charged with the governance of the company
9. Public – contribution to the local economy
Duties of Directors
TYPES OF BUSINESS
 Create wealth for the shareholders
Sole Traders  Responsible for the preparation of the financial
statements
 Unlimited liability – liable for all debts
 Not legally separate THE REGULATORY FRAMEWORK
 No audit requirement, to make financial accounts
 Riskier to operate REGULATORY SYSTEM
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 FINANCIAL ACCOUNTING
National Legislation Forms and contents are
regulated
Accounting Concepts Lead to subjectivity
Accounting Standards Achieve comparability
GAAP All the rules from
govern accounting
Fair Presentation Relevant and faithfully
represented
Other international Agreement between two
influences countries
 Raise the standard of financial reporting and
eventually bring about global harmonization of
accounting standards
QUALITATIVE CHARACTERISTICS OF
FINANCIAL INFORMATION
IASB’S CONCEPTUAL FRAMEWORK
Going Concern Assumption
 Business will continue to operate at least the next
12 months
 Assets should not be valued at their break-up value

Accrual basis

 Transactions are recognized when they occur not as

cash or its equivalent it received or paid
STRUCTURE OF REGULATORY SYSTEM  Profit revenue earned must be matched against the
expenditure incurred in earning it.
IFRS Foundation
FUNDAMENTAL QUALITATIVE
 Formerly called the IASCF CHARACTERISTICS
 Oversee the IASB
 Develop globally accepted IFRS RELEVANCE
 Promote the use and rigorous application of those 1. Predictable
standards 2. Confirmatory- compare with actual result
3. Materiality - professional judgement
IFRS Advisory Council
Faithful Representation
 Giving practical advice on the implementation of
particular standards 1. Complete
 Consult with the outside world 2. Neutral – free from bias
 Advise the IASB on range of issues – project 3. Free from error
timetable, application and implementation, agenda 4. Substance over form – economic reality of
transactions rather than its legal form
IFRS Interpretations Committee
ENHANCING CHARACTERISTICS -CVTU
 Review newly identified financial reporting issues
 Clarify issues to reach consensus on the appropriate 1. Comparability
treatment 2. Verifiability – faithfully represented
3. Timeliness – information available
IASB 4. Understandability – information is clear
Other Accounting Concepts
1. Prudence – prevent the business from being
over-optimistic about future profit

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 FINANCIAL ACCOUNTING
SOURCES,RECORDS, & BOOKS OF PRIME Remittance Notification of payment
ENTRY advice
Business Transaction
1. Sales – either credit or cash BOOKS OF PRIME ENTRY
2. Purchases – either credit or cash
3. Payroll related transactions 1. Sales day – credit sales
2. Purchases day – credit purchases
Sources of Information 3. Sales returns – returns of goods sold
4. Purchases returns – returns of goods bought
5. Cash book – cash sales , cash purchases
6. Petty cash – small cash expenditures
7. Journal – all transactions not recorded elsewhere

Petty Cash

 Must be topped up from time to time with cash

from the business bank account
 Expenditure on petty cash that has been approved
or authorized = petty cash voucher
Imprest System

 Helps with management of small cash expenditures

are reduces the risk of fraud
 Amount of money is kept at an agreed sum or float
 Imprest Amount = Expenses + On hand – Income
Quotation Establish price
or Cash received
Sales order Cross checked with the order
places by customer
Goods Provided by supplier, contains LEDGER ACCOUNTS AND DOUBLE ENTRY
dispatched details of the goods FORMULA
note
 Profit = Closing net assets + Drawings – Capital
Invoice Issued by supplier of goods as Intro – Opening net assets
request for payment  Capital intro = Closing net asset + Drawings –
Credit note Checked with documents Profit – Opening net asset
regarding goods returned  Closing net asset = Profit - Drawings + Capital
intro + Opening net asset
Receipt Payment received  Opening net asset = Closing net assets + Drawings
– Capital intro – Profit
Statement Checked with other documents to
 Drawings = Closing net assets – Capital intro –
ensure that the amount owing is
Opening assets – Profit
correct
FROM TRIAL BALANCE TO FINANCIAL
Purchase order Request for supply/order
STATEMENTS
Goods Receiving the goods as proof of
received note receipt
Debit note Cross referred to the credit note
issued by supplier

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 FINANCIAL ACCOUNTING
OUTPUT TAX < INPUT TAX

 Tax authorities will refund the difference to the

business
Example

A is in the business of manufacturing of canned

goods. To produce canned goods, A will buy the
materials. 
Spices costs 1000 plus 10% sales tax 
= 1000 + input 100 
= 1,200 

Sells the product 

2000 + output tax of 200 = 2,200 
SALES TAX & DISCOUNTS Sales tax due 
 Indirect tax levied on the sale of goods and services = 200 - 120 [ output > input ] 
 Cumulative tax = 80 Tax payable
 Charge output tax on sales
 Suffer input tax on purchases Irrecoverable sales tax

Terms  Sales tax paid on inputs cannot be reclaimed

 Trader is not registered for sales tax or where inputs
 Gross amount = inclusive of sales tax are not related to taxable business activities
 Net amount = exclusive of sales tax  Tax must be included in the part of the cost of the
items purchased
FORMULA  Total amount should be charged to the SOPL as an
Gross amount expense
Net amount=
100+tax rate Sales Tax account
Gross amount = Gross profit + ( Gross profit x rate) Credit purchases Credit sales
Input tax Closing balance
 Input sales tax on purchases
Purchases xxx TYPE OF DISCOUNT
Sales Tax xxx Trade Discount
Payables/ Cash xxx  Wholesale price for bulk orders
Output tax Discount received
 Charge output sales tax on sales  Given by suppliers to the business
 Deducted from the gross amount purchased
Receivable/Cash xxx
Discount allowed
Sales xxx
Sales Tax xxx  Given by the business to customers
 Deducted from the gross sales amount
OUTPUT TAX > INPUT TAX
Cash/ Settlement Discount
 Business pays the difference in tax to authorities

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 FINANCIAL ACCOUNTING
 Reduction in the amount payable in return for Purchases (or cost of production) x
payment in cash or within an agreed period
Less closing inventory (x)
Discount received
Cost of goods sold x
 Given by the business to customers
Terms
 Recorded as other income
Discount allowed  Carriage inwards – part cost of purchase
 Carriage outwards – Selling expense
 Given by the business to customers
VALUATION
 Expected to take up discount
 Deducted from sales revenue  Initial measurement – at cost
 Subsequent measurement – lower of cost or net
realizable value
ENTRIES
1. Record income
COST FORMULA
Accounts receivable xxx
Cost of purchase:
Sales xxx
Purchase price x
Takes the setlltement discount
Cost of purchase x
Cash /bank xxx
Other costs x
Accounts receivable xxx
Trade discount (x)
2. Received payment without discount
Cash / Bank xxx Cost of conversion:
Accounts receivable xxx Direct cost x
3. Remove discount
Cash/Bank xxx Overheads cost x
Accounts receivable xxx
Sales xxx Other Costs
4. Takes discount NET REALIZABLE VALUE
Cash /bank xxx
Sales xxx NRV < Cost reasons:
Accounts receivable xxx
 Increase in cost or a fall in selling price
INVENTORIES  Physical deterioration
 Errors in production or purchasing
 Held for sale in the ordinary course of business
o Finished goods produced NRV FORMULA
 In the process of production for such sale
o Work in progress Estimated selling price x
 Raw materials Estimated cost of completion x
Value of closing inventory Cost necessary to make the sales x (x)
Inventory Account x Net Realizable value x
Profit /loss account x Lower of cost and NRV
COST OF GOODS SOLD FORMULA 1. Calculate cost
Opening Inventory x 2. Calculate NRV
3. Select lower of cost and NRV to measure goods
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 FINANCIAL ACCOUNTING
4. Calculate the total value of inventory = sum of  Cost of inventories recognized as expense
value of goods
PERPETUAL INVENTORY
FIFO
 Records the sale or purchase of inventory
 First items of inventory received are assumed the immediately
first ones sold  Example business: luxury cars
Total receipts x PERIODIC INVENTORY
Total issues (x)  Determine the amount of inventory at the end of
each period
Closing inventory cost x
 Example company: Sari-sari store
CONTINUOUS WEIGHTED AVERAGE COST

 Cost of an item of inventory is calculated by taking

TANGIBLE NON-CURRENT ASSETS
the average of all inventory held
 Has physical substance
Beginning Balance 5 3.5 17.5
Purchase 5 4 20  Used to generate income
Purchase 5 5 25  Non acquired for resale
15 (62.5/15) 62.5  Use in the long term
Sales ( 7) 4.17 (29.19)  All NCA are depreciable = false
8 33.31  All tangible assets are depreciable = false
Purchase 5 5.5 27.5
Closing INV 13 60.81 CAPITAL EXPENDITURE

PERIODIC AVERAGE  Forms part of the cost of non-current assets

 Example: Purchase cost, delivery costs, legal fees
1. Opening inv + Total purchases = x units
2. Calculate total units sold REVENUE EXPENDITURE
3. Calculate average cost per unit
 Forms part of expense in the SOPL
4. Calculate closing inventory = unit x ave. cost per
unit  Example: repairs & maintenance, training costs,
wastage
1. 5 + purchases 15 = 20 units RECOGNITION
2. Total units sold = 7 units
3. (5x3.5)+ (5x4) + (5x5) + (5x5.5) / 20 units = 4.5  Future economic benefits will flow
4. Closing inv = 20 – 7 units = 13 x 4.5 = 58.50  Cost can be measured reliably
Written off / written down Subsequent Expenditure
 Written down – value less than original cost  Added to the carrying amount
o To their NRV  Improves the condition of the asset
 Written off – worthless, do nothing  Recognized as an expense
DISCLOSURES DISCLOSURES
 Accounting policies  Measurement bases
 Total carrying amount of inventories and the  For each class of PPE
carrying amount in classification o Depreciation methods
 Carrying amount carried at NRV o Useful life
 Any write-down inventories recognized as expense o Gross amount of depreciable assets
 Any reversal of write-down to NRV and the  For revalued assets
circumstances that led to such reversal o Date of the revaluation
 Carrying amount of inventories pledged as security o Whether an independent valuer was involved
for liabilities
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 FINANCIAL ACCOUNTING
o Carrying amount Carrying value * x%
o Revaluation surplus
Change in method of depreciation
KEY POINTS
FORMULA
Purchase of tangible assets
Carrying amount at date of change
Depreciaiton
Non current asset x Remaining useful life of asset
Cash / Payables x Revaluation
COST OF THE NCA 1. Calculate carrying amount at revaluation date
2. Determined if gain/loss on revaluation
Purchase price x 3. Depreciate using revalued amount
Import duties x 4. Compute change in depreciation
Less: trade discount (x) 5. Additional depreciation transferred to retained
Add: Dismantling cost x earnings
Add: Attributable Cost x
Cost of the NCA x Revaluation surplus x
Residual value Retained earnings x
 Net amount which the entity expects to obtain for FORMULA
an asset at the end of its useful life after deducting
the expected costs of disposal Revalued amount x
Carrying amount x
CARRYING AMOUNT Gain/loss on revaluation x/(x)
Cost x Gain or loss on revaluation
Accum Dep (x)
Accum Impairement loss (x)  If revalued amount > carrying amount = gain
Carrying amount x o Include in SOCI
 If revalued amount < carrying amount = loss
o Include in SOPL
Methods of depreciation
Disposal of the asset
1. Straigh line method
 Proceeds > Carrying amount = Gain
FORMULA  Proceeds < Carrying amount = Loss
Cost x
Through Cash
Residual value (x)
Depreciable amount x Cash x
Divide: Useful life x Proceeds
Disposal Acc x
Accum Dep x
Multiply (months) x Disposal acc x
Remove original cost
Depreciation expense x NCA x

DEPRECIATION Accum Dep x

Remove accum dep
Disposal x
Depreciation Expense x
Disposal x
Accumulated Depreciation x Transfer gain
Income/Exp x
2. Reducing balance method Through Part – Exchange
 Calculates the annual depreciation charge as a fixed
percentage of the carrying amount of the asset, as at Recognize New asset NCA x
the end of the previous accounting period Disposal Acc x
Cash x
FORMULA
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 FINANCIAL ACCOUNTING
DISCLOSURES

Disposal acc x  Useful life or amortization rate

Remove cost of disposal
NCA x  Amortization method
 Gross carrying amount
Accum Dep x
Remove accum dep  Accumulated amortization and impairment losses
Disposal x
 Reconciliation showing
Disposal x o Additions
Transfer gain
Income/Exp x o Disposals
o Reduction in carrying amount
ASSET REGISTER o Amortization
Include the following o Any other movements

 Reference number
 Serial number RESEARCH AND DEVELOPMENT COST
 Description of asset
 Location of asset RESEARCH DEVELOPMENT
 Purchase date
Write off as expense – Intangible NCA – SOFP
 Cost
SOPL
 Depreciation method
 Carrying amount Ex: obtaining new Ex. Prototypes and
knowledge models
Function
Development is recognized as intangible NCA
 Make sure information are accurate and correct
 Reconciling the net carrying amount of all the If met the criteria – PIRATE = not be capitalized
assets on the asset register with the net carrying
amount of NCA recorded in the nominal ledger  Probable future economic benefits
 Intention
 Resource
 Ability to use or sell
 Technical feasibility
 Expenditure measurement

INTANGIBLE NON-CURRENT ASSETS ACCRUALS AND PREPAYMENTS

INITIAL MEASUREMENT FORMULA

 If acquired separately – recognized at cost + Payment / Receipt x

 Acquired as part of business combination – fair
Opening prepayment x
value at the date of acquisition
Less: Opening accrual (x)
SUBSEQUENT MEASUREMENT
Add: Closing accrual x
 Cost model
o Finite useful life – amortization Less: Closing prepayment (x)
 Ex. Licensing
o Amortization should start when the What amount of x should appear in the P&L?
asset is available for use, and cease at ACCRUALS -ARREARS
the date that the asset is classified as
held for sale
 Revaluation
o Having active market – apply
revaluation

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 FINANCIAL ACCOUNTING
Accrued income x
Sale x
2. Raise the invoice
Sales x
Accrued income x
ACCRUALS EXPENSES FOR THE YEAR Cash / Bank x
Sales x
Invoice /Payment x
PREPAYMENTS
Accrued Expense, End x
Prepaid Expenses
Accrued Expense, Beginning (x)
 Advance payment
Expense for the year x  Relate to the subsequence accounting period, but
have already been paid
ACCRUED EXPENSES
 Asset in the SOFP
 Incurred but invoices not yet been received and so
Examples:
they have not yet been paid for
 Current liability in the SOFP  Rental charges
 Insurance premium
Tips:
ENTRIES
1. When is the financial year end
2. When is the payment 1. Payment
Examples Prepayment account x
Cash/Bank x
 Utilities, electricity, water
2. Record the allocation
ENTRIES
Expense x
1. Estimating
Prepayment x
Utilities expense x
Prepaid Income
Accruals payable x
 Advance payment from customer
2. Payment  No impact on SOPL
Accruals payable x  Shown a payable on SOFP
Cash / Bank x
ENT1RIES
1. Has received income in advance
Cash x
Unearned income x
ACCRUED INCOME
2. Delivered goods and services
 An entity will accrue income when it has earned the
income during the period but it has not yet been Unearned income x
invoiced or received Sales x
 Increase income in SOPL , receivable in SOFP
ENTRIES IRRECOVERABLE DEBTS & ALLOWANCE

1. Received accrued income CREDIT SALES

15
 FINANCIAL ACCOUNTING
1. Recognize the revenue  Not written off, but an allowance for receivables is
made against the doubtful debt
Accounts receivable x  Example of accounting concept of Prudence

Sales revenue x Allowance for receivables

2. Customer eventually settles  Set up to recover for an estimated doubtful debt

 Specific – ex. Balance of the individual customer
Cash / Bank x  General / Percentage – based on past experiences.
Example. 2% of trade receivables
Accounts receivable x
ENTRIES
Credit control
1. First time of making allowance & increase in
Set credit limit allowance

 Customer will be given a credit limit, which cannot Irrecoverable debts expense x
be exceeded
Allowance for receivables x
Aged receivable analysis
2. Decrease in allowance
 Report of all receivables analyzed by customer and Allowance for receivable x
by age of the receivable, eg balance outstanding for
30 days, 60 days Irrecoverable debt expense x
 If a balance has been outstanding for a long period
of time, it may indicate that a customer is unable to PRESENTATION
pay
1. SOPL
 Credit controllers will have a system of chasing up
payment for long outstanding invoices Bad debts x
IRRECOVERABLE DEBTS – BAD DEBTS Increase / (Decrease) in specific allowance x / (x)
 Debt, which is definitely not expected to be paid Increase / (Decrease) in general allowance x / (x)
 Must be removed from the statement of financial
position (accounts receivable) Recovery of bad debts (x)
 Charged as an expense in the SOPL Bad debts expense x
ENTRIES
Irrecoverable debts expense x Bad debts x
Receivables x Beg, allowance for receivables
 Irrecoverable debts written off and subsequently End, allowance for receivables
paid
o Amount paid should be recorded under (Receivables – Bad debts) 5%
income in SOPL
Increase / Decrease x/(x)
Cash x
Recovery of bad debts (x)
Irrecoverable debts expense x
Bad debts expense x

ALLOWANCE FOR RECEIVABLES

2. SOFP
Doubtful debts
Trade receivables, End x
 possibly irrecoverable
16
 FINANCIAL ACCOUNTING
Less: allowance for receivables , end x Subsequent Recognition
Net trade receivables, end x Increase in provision
Key points Expenses x

 Decrease allowance for receivables ; decrease bad Provision x

debts expense = increase net profit
DISCLOSURE
PROVISION
 Disclosure of details of change in carrying amount
 A liability of uncertain timing or amount of a provision from the beginning of the year
o Additional provisions made
Settlement o Amounts used
Probable Greater than 50% likely o Other movements
 For each class of provision
Possible 5- 50% o Brief description
 Nature of provision
Remote Less than or equal to 5%  Expected timing of any
Certain 100% resulting outflows
o Indication
Impossible 0%  Uncertainties about the amount
or timing of those outflows
Recognized when  Necessary to provide adequate
information
 Entity has present obligation
o Reimbursement
o Legal obligation
 Amount of any expected
 Arise from contract, legislation
reimbursement relating to the
o Constructive obligation
provision
 Past behaviors and actions
 Whether any asset that has been
 Transfer of economic benefits is probable (greater recognized for that expected
than 50% likely) reimbursement
 Reliable estimate can be made
CONTINGENCIES
Measurement
CONTINGENT LIABILITY
 Single obligation – most likely the amount
payable  Possible obligation depending on the certainty of
 Large population – expected value future event
 Present obligation that is not probable or cannot be
Large population measured reliably
Anticipated amount Probability DISCLOSURE
300,000 x 5% = 15,000 If Significant, do not disclosed if not significant
50,000 x 20% = 10,000  Brief description of the nature of the contingent
liability
120,000 x 75% = 90,000
 Estimate of its financial effect
Expected provision = 115,000  Indication of the uncertainties that exist
 Possibility of any reimbursement
Initial recognition
CONTINGENT ASSET
Expenses x
 Possible asset that arises from past events
Provisions x  Whose existence depending on whether some
uncertain future event occurs
17
 FINANCIAL ACCOUNTING
DISCLOSURE  Discount must be recorded in the individual
account in the payables/ receivables ledger, and the
 Brief description of its nature payables/ receivables ledger control account in the
 Estimate of its financial effect nominal ledger
Outflow of Contra entries
Present
economic Measurable Item is
obligation?
benefit  Recorded to reverse or offset an entry on the other
side of an account
Yes Probable Yes Provision  May arise where a customer is also a supplier.
Yes Not No Contingent Instead of both owing each other money, it may be
probable liability agreed that the balances are contra

Yes Probable No Contingent Supplier statement

liability  Monthly statement showing invoices issues, credit
No. Not remote Contingent notes, payments received and discounts given.
Possible liability  Compared to the supplier’s personal account in the
payables ledger
Possible Remote Ignore

Supplier statement reconciliation

Present Inflow of 1. Tick of the item which appear in both the

Item is
obligation? economic benefit statement and the payables ledger
2. Agree the opening balance on the supplier’s
Yes Yes Asset statement invoice and credit note listed on the
statement
Yes Virtually certain asset
3. Allocate payments to invoices after allowing for
Possible Probable Contingent asset any credit notes
4. Identify differences
Possible Not probable Ignore.

CONTROL ACCOUNT
 Nominal ledger – record is kept of the total value of
a number of similar but individual items
 Control account – keeps a total record number of
individual items
o Used mainly in accounting for
receivables and payables
Control accounts in general ledger = personal
accounts in specific ledger
PURPOSE
 Check accuracy of entries made in the personal
accounts
 Assist in the location of errors
 Internal check where there is separation of
bookkeeping duties
 Quickly provide total receivables and payables
balances for producing a trial balance SOFP
Discount
18
BANK RECONCILIATIONS
Bank statement
 Bank debit – deduction to balance
 Bank credit – addition to balance
 Overdraft – debit balance
OBJECTIVE
 Determine the differences between the cash book
balance and the bank statement balance to
o Make changes to the accounting records
o Resolve any discrepancies
o Identify fraudulent transactions
 Adjusted book balance = adjusted bank balance
Unrecorded difference
 reflected in the bank statement but has not yet been
entered into the cash book
 Direct debits, standing orders, bank charges and
interest, dishonored cheques, and direct credits
 FINANCIAL ACCOUNTING
Timing difference ADJUSTED BANK STATEMENT BALANCE

 Amounts which have been entered into the cash Balance per bank statement x
book but not yet cleared the bank Outstanding lodgments x
 Ex. Outstanding lodgments, and outstanding Outstanding cheques (x)
cheques Bank errors x/(x)
Adjusted bank balance x
Recorded in bank statement but not in books

Book balance
adjustment

Bank interest / charges Interest = add

-already deducted or added in
the bank balance
Dishonored cheques
-cheques received & paid into
the bank, but the drawee
refused to pay
Standing orders / direct debit
-business’s instruction for the
bank to withdraw from an
account
Credit transfer
-payment already received by
the bank (ex. Gcash)
Charges = deduct CORRECTION OF ERRORS
Affecting trial balance
Deduct
 Create suspense accounts, and later clear the
suspense account by a journal entry
Not affecting trial balance
Deduct  Use journal entries
ERRORS NOT AFFECTING TRIAL BALANCE
ERROR OF FULL OMISSION
Add
 Transaction has been completely omitted from the
accounting records

Business errors Add/ Deduct Entry made correct entry

Recorded in cash book but not in bank balance or Cash 0 Cash 100
statement Sales 0 Sales 100

Bank balance ERROR OF COMMISSION

adjustment
 Transaction has been recorded in the wrong account
Outstanding/ Unrepresented cheque Deduct (Cash, Account receivable) , but same type of
-payment sent but not yet recorded account ( asset, liability, equity)
in bank
Entry made correct entry
Outstanding / Uncleared Add
Cash 0 Cash 100
lodgements
Bank 100 Bank 0
-cheques / income received but not
Sales 100 Sales 100
yet recorded in bank
To correct
Errors Add / Deduct
Cash 100
ADJUSTED CASH BOOK Bank 100
*disregard sales since it’s already a correct entry
Cash book balance beg x
Bank interest /charges x/(x) ERROR OF PRINCIPLE
Direct credits x
 Transaction has conceptually been recorded
Bank errors x/(x)
incorrectly, with different type of account
Direct debits (x)
Dishonored cheques (x) Entry made correct entry
Adjusted cash balance x
19
 FINANCIAL ACCOUNTING
Repairs Exp 100 PPE 100 Cash 0 Cash 100
Cash 100 Repairs Exp 0 Sales 100 Sales 100
Cash 100
To correct the entry
To correct Suspense Account 100
PPE 100 Sale 100
Repairs expense 100 To remove suspense account:
*expense are overstated = net income understated Cash 100
Suspense account 100
COMPENSATING ERROR
ENTRIES AT DIFFERENT VALUES
 Two different errors have been made which cancel
each other out  Debit or credit have been made but at different
values
ERROR OF ORIGINAL ENTRY
Entry made correct entry
 The correct double entry has been made but with
the wrong amount - still balanced Cash 150 Cash 100
Sales 100 Sales 100
Entry made correct entry
TWO DEBITS/ CREDIT
Cash 100 Cash 500
Sales 100 Sales 500  Two debit or two credit entries have been posted
To correct entry Entry made correct entry
Cash 400
Sales 400 Cash 100 Cash 100
Cash 100 Sales 100
REVERSAL OF ENTRIES Sales 100

 Correct amount has been posted to the correct INCORRECT ADDITION

accounts but in the wrong side
 PPE purchased was credited to a non-current asset  An incorrect addition in any individual account
accounts EXTRACTION ERROR
Entry made correct entry
 The balance in the trial balance is different / or
PPE 500 PPE 500 placed in wrong column from the balance in the
Cash 500 Cash 500 relevant account
Examples
To correct entry 1. Business has recorded a repair cost of 1,500 to a
PPE 500 machine as a debit in the machinery at cost account
PPE 500
Entry made correct entry

Repairs Expense 1500 PPE 1,500

ERRORS AFFECTING TRIAL BALANCE Cash 1,500 Cash 1,500
SINGLE SIDE ENTRY
To Correct :
 Debit entry has been made but no corresponding
PPE 1,500
credit entry or vice versa
Repairs Expense 1,500
 “debit side understated”
 Petty cash book balance had been omitted from the
trial balance
2. Business has recorded discounts allowed of 2,600
Entry made correct entry as a debit in the discounts received account

20
 FINANCIAL ACCOUNTING
Discounts received – purchase Closing asset x
Discount allowed – sales (given to customer)
Closing liability (x)
Entry made correct entry – discount
allowed account Closing share capital (x)

Discount received 2,600 Discount allowed 2,600 End other reserves (x)
Cash 2,600 Cash 1,500
Closing retained earnings x

2. Compute for P/L for the year

To Correct :
Discount allowed 2,600 Closing retained earnings x
Discount received 2,600
Beginning retained earnings (x)
Dividends (x)
SUSPENSE ACCOUNT
P/L for the year x
 Temporary account, showing a balance equal to the
difference in a trial balance Business equation method
 Clear the suspense account at year end when the
final correct entries are determined Opening capital (OC) x

Adjustment to profit Capital introduced (CI) x

 If any entry credits the SOPL – profit increases Profit / Loss (P/L) x/(x)
compared to prior profit Drawings (D) (x)
INCOMPLETE RECORDS Closing capital (CC) x
Reasons of incomplete records OC + CI + P – D = CC
 Does not keep a full set of accounts OC + CI – L – D = CC
 Some of the business accounts are accidentally lost
or destroyed CC – OC – CI + D = PROFIT

WAYS TO ESTIMATE ANY MISSING FIGURES OC + CI – D – CC = LOSS

 Accounting & business equation method Profit ratios

 Ledger account / balancing figure approach
GROSS PROFIT MARGIN
 Cash / banking data
 Profit ratios – markup & margin  Gross profit is a percentage of sales, using
margin
Accounting equation method - to calculate P/L
Sales x Margin (%)
Sales 100%
Cost of sales 80%
Gross profit 20%
MARK-UP ON COST

 Gross profit is a percentage of cost of sales, using

mark-up
FORMULA
Cost of sales x markup (%)
1. Compute for closing retained earnings
Sales 125%
21
 FINANCIAL ACCOUNTING
Cost of sales 100% FUNDING SOURCES OF A LIMITED COMPANY
Gross profit 25%  Owner’s share capital
o Ordinary shares
Example o Preference shares
1. What is the cost of sales?  Loan notes
 Short-term liabilities ( trade accounts payable)
Sales = 476,000  Retained profits
Gross margin = 40% OWNER’S SHARE CAPITAL
Sales 100% 476,000 Share capital is always measured at par
Cost of sales (476,000 x 60%) 285,000 1. Par value – value per share as stated in the article of
corporation
Gross profit 40% 190,400
a. Share’s minimum value
b. Remains fixed, whereas the market value of
the shares fluctuates over time.
FINANCIAL STATEMENTS FOR SOLE TRADERS 2. Authorized shares – maximum number of shares
can issue
Steps 3. Issue price – price of new shares when they are sold
1. Transactions recorded in ledger accounts for the first time
2. Ledger accounts balanced and closed off 4. Market value – value at which the shares are
3. Trial balance extracted trading on the open market
4. Year-end adjustment made and ledger accounts a. Hard to estimate as the shares in private
closed off companies do not change hands very often
5. Trial balance used to prepare financial 5. Share premium – in excess of par
statements a. Difference between the par value of the
shares issue and the issue price
INTRODUCTION TO COMPANY ACCOUNTING b. Account in which sums received as payment
for shares in excess of their nominal value
LIMITED VS. UNLIMITED LIABILITY must be placed
Unlimited liability Example
 If the business runs up debts that it is unable to pay, Company might issue 100,000 $2.00 shares at $2.40
the proprietors will become personally liable for the each
unpaid debts
 Sole trader – drawings would only appear in the Issued price = 100,000 x $2.40 240,000
financial statements of a sole trader
Par value = 100,000 x 2 = (200,000)
Limited liability
Share premium $40,000
 Maximum amount that an owner stands to lose, in
Terminologies
the event that the company becomes insolvent and
cannot pay off its debts, is their share of the capital Authorized capital (legal capital)
in the business
 Maximum number of share capital that a company
CHARACTERISTICS OF A LIMITED COMPANY can issue
 Owners equal to shareholders or members  Can change by agreement
 Large number of owners Issued capital
 Owner and manager are separated
 Owners appoint directors to run business on their  Par amount of share capital that has been issued
behalf  Amount of issued capital cannot exceed the amount
 Owners received share of profits in form of of authorized capital
dividends
22
 FINANCIAL ACCOUNTING
Called-up capital 1. Redeemable preference shares
a. Company will redeem (repay) the nominal
 When shares are issued, it might call up only a part value of those shares at a later date
of the issue price and wait until a later time before b. Shares will then be canceled and no further
it calls up the remainder dividends paid
c. RPS are treated as loans included as non-
Example:
current liabilities
Issued share capital 500,000 $ each d. Dividends paid on RPS are treated like
interest paid on loans and are included in
Calls up 75c per share = 500,000 x 0.75 = 375,000 financial costs in the SOPL
Paid-up capital 2. Irredeemable preference shares
 The amount of called-up capital that has been paid a. Form part of equity
b. Dividends are treated as appropriations of
Example: profit

Issued share capital 500,000 $ each LOAN NOTE (LOAN CAPITAL)

Calls up 75c per share = 500,000 x 0.75 = 375,000  Type of promissory agreement that outlines the
legal obligation of the lender and the borrower
Paid up capital = $275,000  Long-term liabilities
Capital no yet paid $100,000 Characteristics
ORDINARY SHARES  Providers of loan capital are creditors
 Not preferred with regard to dividend payment  Holders of loan capital are entitles to a fixed rate of
 Receives a dividend after fixed dividend have been interest (expense charged against revenue)
paid to preference shareholders  Loan note holders can take legal action against a
company if their interest is not paid when due
Characteristics  Loan notes are often secured on company assets

 Carry no right to fixed dividend *the holder of loan capital is therefore generally in a
 Normally carry voting rights less risky position than the shareholder. They have
 Sometimes referred to as equity shareholders and in greater security, although their income is fixed and
many ways more like payables of the company cannot grow, unlike ordinary dividends

PREFERENCE SHARES Interest on loan note

 Shares that confer certain preferential rights on  Calculated on the par or legal value of loan
their holder capital, regardless of its market value

Characteristics RESERVES

 Priority right to a return of their capital over Capital = Share capital + other reserves
ordinary shareholders if the company goes into
 Part of profits or gain that has been allocated for a
liquidation
specific purpose or not (called general reserves)
 Do not carry a right to vote
Other reserves
Cumulative shares
Reserves x
 Before a company can pay an ordinary dividend, it
must not only pay the current year’s preference Share premium x
dividend but must also make good arrears of
preference dividends unpaid in previous years Revaluation surplus x

Preference shares classified into 2 Retained earnings x

Capital reserves
23
 FINANCIAL ACCOUNTING
 Established out of capital profits and normally not
allocated as dividends
Example:
 Gain on sale of fixed assets, gain on revaluation of
liabilities and assets, share premium, debenture
premium
Revenue reserves
 Gain acquired from operating activities
 Retained for the purpose of expanding its business
or to meet out contingencies in the future
Example:
 Dividends to shareholders, expansion of trading
concern, balance the dividend rate
Statutory vs Non. Statutory reserves
Statutory Reserves
 Capital reserves which a company is required to set
up by law, and which are not available for the
distribution of dividends
Non-statutory reserves
 Revenue reserves consisting of profits that are
distributable as dividends if the company wishes
DIVIDENDS
 Appropriation of profit after tax
 Deducted from retained earnings in the SOFP
 Not shown in SOPL
 Dividends which have been paid are shown in the
Statement of changes in equity
 Proposed dividends ae not adjusted for, simply
disclosed by notes
 Not all profits are distributed as dividends
 In SOFP we only show dividends that have been
declared but not yet paid at the end of the year
( meaning no dividends payable)
DIVIDENDS
1. Date of declaration
Retained earnings x shareholders holdings
Cash dividend payable x 
2. Date of record – no entry
3. Date of payment
Cash dividend payable x
24
Cash x
SHARE PREMIUM
 Cannot be distributed as dividends
 In excess of par value
 Increase in value if and when new shares are
issued at a price above par value
 Decrease in value only in certain very limited
ways that we will look at. Such as to finance the
issue of bonus shares
REVALUATION SURPLUS
 Upward revaluation of a non-current asset
 Non-distributable, as it represent unrealized
profit on the revalued assets. It is another capital
reserve
 Can only become realized if the asset in
question is sold, thus realizing the gain
 Revaluation surplus may fall if an asset which
had previously been revalued upwards suffered
a fall in value in the next revaluation
RETAINED EARNINGS
 Profits earned by the company
 Not appropriated by dividends, taxation or
transfer to another reserve account
Reasons for retaining some profit
 Enable the company to pay dividends even when
profits are low
 Usually shortage cash
BONUS ISSUES
 Company wished to increase its share capital
without wishing to raise additional finance by
issuing new shares
 Accumulated earnings which are not given out as
dividends, but are converted into free shares
 Given to the current shareholders without any
additional cost
Advantages
 Increased capital without diluting current
Capitalizes reserves, so they cannot be paid as
dividends
Disadvantages
 Does not raise any cash
 FINANCIAL ACCOUNTING
 Could jeopardize payment of future dividends if
profits fall
ENTRIES
Reserves account x Identify the contract
Share capital x Must satisfy the 5 following criteria:
RIGHTS ISSUE
 Issue of shares for cash to raise additional capital
 Use rights issue to pay down debt, especially when
they are unable to borrow money
 To acquire competitor or open new facilities
 Shareholders can buy new shares at a discount price
compared to the market price for a certain period
Advantages
 Raises cash for the company
 Keep reserves available for future dividends
Disadvantages
 Dilutes shareholder’s holdings if they do not take
up rights issue
 As more shares are issued to the market, the stock
price is diluted and will likely go down.
ENTRIES
5. Recognize revenue when a performance obligation
is satisfied. – when goods are delivered to the
customer or over time
1. all parties have approved the contract and
committed to perform their respective
obligations
2. can identify each party’s rights and obligations
regarding the goods or services to be transferred
3. payment terms for the goods and services can be
identified
4. contract has commercial substance
5. probable to collect consideration
Identify the separate performance obligation
1. Distinct goods/ services
a. Customer can benefit from the goods or
services
b. Entity’s promise to transfer the good or
services is separately identifiable
2. Series of distinct goods or services
a. A performance obligation that is satisfied
over time
b. A single method of measuring

Cash x Determine the transaction price

Share capital x  Significant financing component

o Different between amount of promised
Share premium x consideration and the cash selling price
 Lower price if they pay by cash
REVENUE FROM CONTRACTS WITH
o Different between transfer of the goods &
CUSTOMERS – IFRS 15
services & payment date
Applies to all contracts with customers except:  Variable consideration – amount of consideration
can vary because of discounts, rebates, refunds,
 Leases with the scope of IFRS 16 credits, price concessions, incentives, performance
 Insurance contracts under the IFRS 4 bonuses, penalties or other similar items
 Financial instruments and other contractual rights  Non-cash consideration – value may vary because
and obligations of the form of the consideration
 Non-monetary exchanges between the entities in  Consideration payable to customer
the same line of business o Consideration payable as an exchange of
goods/services
REVENUE RECOGNITION – FIVE STEPS
o Consideration payable not as an exchange of
MODEL
goods/ services = reduction of transaction
1. Identify the contract price
2. Identify the separate performance obligations
Allocate the transaction price to the performance
3. Determine the transaction price
obligations
4. Allocate the transaction price to the performance
obligations 1. Identify stand-alone price of each performance
2. Calculate total stand-alone selling price
25
 FINANCIAL ACCOUNTING
Recognize revenue when (or as) a performance  Bankruptcy of a customer that conforms that a
obligation is satisfied year-end is irrevocable
 Sale of inventories at a price lower than cost
 Customer simultaneously received and consumes  Determination of the cost of assets purchased or
the benefits provided by entity’s performance proceeds from assets sold before the reporting date
 Entity’s performance creates or enhance an asset  Discovery of fraud or errors showing that the
that the customer controls as the asset is created or financial statements are incorrect – Fraud occurs in
enhanced previous year but the company obtain evidence
 Entity’s performance does not create an asset with about it after reporting period
an alternative use to the entity and the entity has an  A fire destroyed all inventory on the premises with
enforceable right to payment the consequence that it was unlikely company
If not satisfied all three above criteria = recognize at a would be able to continue as a going concern.
point in time NON-ADJUSTING EVENTS
If satisfied 1/3 above criteria = recognize revenue over  Announcing a plan to discontinue an operation
time  Major purchases of assets
DISCLOSURE  The destruction of assets after the reporting date
by fire or by flood
 The accounting policy for revenue recognition  Entering into significant commitments or
should be disclosed contingent liabilities
 Significant judgements made to apply the 5-step  Commencing a court case arising out of events
approach required by IFRS15 should be disclosed after the reporting date
 The total amount of revenue recognized, broken  Issue of share or loan notes
down into significant categories should be  Changes in foreign exchange rates
disclosed.  A litigation commenced after the end of the
reporting period
EVENTS AFTER REPORTING PERIOD
DISCLOSURE
 Occurs between the reporting period and the date
that the financial statements are authorized for issue Identified and material non-adjusting events
Type of events  Nature of the event
 Estimate of the financial effect, or a statement
Adjusting Non-adjusting
that such an estimate cannot be
Provide additional Do not affect the Notes:
evidence of conditions situation at the reporting
existing at the reporting date Dividends proposed or declared after the end of the
date reporting period but before the financial statements are
authorized will:
Change the figure in the Disclosure of material
financial statements  Not recognized as a liability in the accounts at
the reporting date
Disclose by note details
 Disclosed in the notes to the account
of all adjusting events
allowed for in the
financial statements


ADJUSTING EVENTS

 Settlement of a court case which confirms a year-

end obligation
 Receipt of information that indicates that an asset
was impaired at the reporting date
26
 FINANCIAL ACCOUNTING
STATEMENT OF CASH FLOWS
Operating activities DIRECT METHOD - INFLOW – OUTFLOW

 Principal revenue-producing activities of the entity From operating activities

and other activities that are not investing or
financing activities Cash received from sales x

Example: Collection of account receivable x

 Cash receipts from the sale of goods and the Refunds from supplier x
rendering of services Payment to supplier (x)
 Cash receipts from royalties, fees, commissions,
and other revenue Payment to salaries (x)
 Cash payments to suppliers for goods and services
Payment of interest expense (x)
 Cash payments to and on behalf of employees
 Tax paid Cash refund to customers (x)
Investing activities

 Acquisition and disposal of long term assets and From investing activities
other investments not included in cash equivalents
Cash proceeds from long term assets x
Example:
Payment for the purchase of long term asset (x)
 Cash payment to acquire non-current assets (PPE)
 Cash receipts from sales of non-current assets Payments to acquire investments (x)
 Cash payments to acquire shares or loan notes of Interest received x
other entities
 Cash receipts from sales of shares or loan notes of Dividends received x
other entities
 Cash advances and loans made to other parties
 Cash receipts from the repayment of advances and From financing activities
loans made to other parties
Cash inflow
Financing activities
Cash investment by owner x
 Activities that results in changes in the size and
composition of the contributed equity capital and Cash proceeds from issuance of share capital / long term
borrowing of the entity borrowing x

Examples Payments of cash dividend (x)

 Cash proceeds from issuing shares

 Cash payments to owners to acquire or redeem the
Net cash flow x
entity’s shares.
 Cash proceeds from short or long term borrowings Add: Cash, beginning x
 Cash repayments of amounts borrowed
 Cash payments to reduce a lease obligation Cash End x
o Bonus issues of shares is not a cash
flow

27
 FINANCIAL ACCOUNTING

INDIRECT METHOD
Profit before tax
Net profit x Advantages
Income tax x  Demonstrate ability to generate cash
Adjustment:  Cash flow is more objective than profit
Depreciation Charges x
 More comparability between entities
Amortization x
Profit on disposal (x) Disadvantages
Decrease in provision (x)
Investment income (PPE) (x)  Cash flow does not match income and expenditure
Non cash sales (x) in the income statement
Interest expense (Finance cost) x
Non Cash expenses x
Operating profit before working capital changes x  NON-CURRENT ASSETS -PPE
Increase in receivables (x)
Opening Balance Disposal
Increase in inventory (x)
Decrease in payables (x) Additional Purchases Depreciation
Cash generated from operations x
Interest paid (x) Profit on disposal Loss on Disposal
Income tax paid (x) Revaluation surplus
Net cash from operating x

Cash flow from investing activities DIVIDENDS PAID

Cash proceeds from long term assets x
Purchase of long term asset (x) Opening Balance Closing balance
Payments to acquire investments (x)
Interest received x Profit after tax for the Dividend paid (bal
Dividends received x year figure)
Proceeds from sale of PPE x
(Carrying amount + Profit on Disposal)
Development Expenditure (x) TAXATION
Net cash from investing activities x
Ending balance Beginning balance
From financing activities
Cash investment by owner x Tax paid Taxation occurred
Proceeds from issue of share
Payments of cash dividend (x) FORMULA – PROCEEDS FROM ISSUE OF
Repayment of debt (x) SHARE
Raising of long term loan x Share Capital (ending Balance) x
(Ending balance – Beginning Balance)
Proceeds of loans raised x Share capital (Beginning Balance) (x)
(Ending – Beginning Balance)
Dividends paid (x) Share capital issued x
Net cash from financing activities x Share Premium (ending Balance) x
Net cash flow x Share Premium (Beginning Balance) (x)
Add: Cash, beginning x Share premium issue x
Cash End x Proceeds from issue of share x
*Bonus issue of shares is not a cash flow LONG TERM LOANS REPAID

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 FINANCIAL ACCOUNTING
Long term loans beginning balance x
Long term loans ending balance (x)
Long term loans repaid x
*beginning balance > ending balance

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 FINANCIAL ACCOUNTING
1. Establish the group structure and acquisition
time
CONSOLIDATED FINANCIAL STATEMENTS a. Only the post-acquisition profits are
included in the group’s consolidated
TYPE OF INVESTMENT SOFP
Subsidiary (Control) 2. Calculate consideration transferred
3. Calculate FV of net asset of subsidiary at the
 Owns more than 50% of ordinary (equity) shares date of acquisition
 Owns 20 – 50% with control 4. Calculate goodwill
 Consolidated on a line by line basis 5. Calculate grouped retained earnings
6. Calculate non-controlling interest
Control

 Govern the financial and operating policies of the

entity CALCULATE CONSIDREATION
 Appoint or remove a majority of members of Board TRANSFERRED
of directors FV consideration paid x
 Cast a majority of votes at meeting of board of
directors Add: FV of NCI at acquisition date x

Associate (Significant Influence) Consideration transferred A

 Owns more than 20% of ordinary (equity) shares CALCULATE FV OF NET ASSET OF SUB
 Own 20-50% without control
Share capital x
 Owns less than 20% with significant influence
 Equity method – only the group share of associate’s Share premium x
profit after tax is added to the group’s profit
Revaluation surplus x
Significant influence
Retained earnings x
 Represent on the board of directors of the investee
 Participant in policy making FV of net assets of subsidiary at acquisition B
 Had material transactions with investee CALCULATE GOODWILL
 Had interchanged of management personnel
 Has provision of essential technical information Consideration transferred A
 Ability to appoint at least one director to the board
FV of net assets of subsidiary at acquisition (B)
Trade investment
Good will x
 Owns less than 20% no significant influence
CALCULATE GROUPED RETAINED EARNINGS
 Shown as investment under NCA in the
consolidated SOFP Parent’s retained earnings (100%) x
BASIC PRINCIPLES IN CONSOLIDATING Unrealized profit (x)
 Adding together – revenue, expense, assets, and Parent’s % of sub post acquisition RE
liability
 Cancellation of like items Subsidiary’s equity at reporting date x
o FV adjustment on PPE Subsidiary’s equity at acquisition (x)
o Intra group trading
 Consolidated as if you spend everything, then show Times: Parent’s percent x% x
the extent to which you do not own everything
(Non-controlling interest) Grouped retained earnings x

STEPS IN CONSOLIDATING CALCULATE NON-CONTROLLING INTEREST

FV of NCI at acquisition x
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 FINANCIAL ACCOUNTING
NCI % of post-acquisition RE Revenue from investment x
Subsidiary’s equity at reporting date x 3. Proportionate share – Dividends received
Subsidiary’s equity at acquisition (x) Cash x
Times: NCI percent x% x Cost of investment in associate x
Less: NCI share in unrealized profit (x)
Non-Controlling interest x Cost of investment in associate x
Share of profit x
CONSOLIDATED SOFP Dividend received x
Statements of financial position at 31 December 20X1 Investment in associate x
Non Current Assets Test bank
Goodwill Factors illustrate the existence of a parent-subsidiary
relationship
PPT Parent + Subsidiary + FV adjust
 Greater than 50% of the equity shares being held by
Current Assets an investor
Cash Parent + subsidiary  Control
 Non-controlling interest is 10%
AR Parent + Subsidiary – Intra group  100% of the equity shares being held by an investor
Inv Parent + Subsidiary – Unrealized profit CONSOLIDATED SOCI
Current liabilities Consolidated statement of profit or loss for the year
ended 31 December 20X1
Payable Parent + Subsidiary – Intra group Revenue (Parent + Sub – Intra group)
Non Current liabilities Parent + Subsidiary COS (Parent + Sub – Intra purchases + Unrealized
profit)
Gross Profit
Distribution cost (Parent + Sub) (x)
Equity Admin Expenses (Parent + Sub) (x)
Share Capital Parent( NCI is removed) Finance cost (Parent + Sub) (x)
Profit before tax
Share premium Parent (NCI is removed) Income tax expense (parent + Sub) (x)
Profit for the year x
Grouped retained earnings
Profit Attributable to :
Non Controlling interest
Owners of the parent x
(profit for the year – Non Controlling int.)
Non-controlling interest x
EQUITY METHOD (Profit of Sub x Percent) (unrealized profit x %)
1. Record investment at cost at acquisition UNREALIZED PROFIT FORMULA
Cost of investment in associate x Intra group sale x
Cost (x)
Cash x Profit x
2. Proportionate share – earnings Times: % of remaining inventory x
Unrealized profit x
Cost of investment in associate x

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 FINANCIAL ACCOUNTING
Unrealized profit attributable to NCI market
Unrealized profit x NCI % Received trade discount High proportion of sales
for bulk purchasing (Cost coming from products
of sales reduce) with reduced prices

Reduction in High manufacturing costs

INTERPRETATION OF FINANCIAL manufacturing costs / cost of purchasing
STATEMENTS
Stocktaking errors Due to expansion
Purpose of analysis of financial statements (Closing inventory costs(launch a new
overstated  COS product or increasing
1. Management – ensure the business is understated  GP market share)
performing efficiently and according to plan overstated )
2. Employees – to be able to assess the employer’s
ability to provide remuneration and benefits Changes in sales mix Other cost allocated to
3. Governments – to assess taxation and regulate ( sell more items of cost of sales  increased
industries and for statistical purposes higher margin/mark ups) cost of sales
4. Investors – need information and risk and return
on investment, the ability of the entity to pays
dividends.  Low margin meaning poor ability to control these
5. Lenders and suppliers – to assess whether loans, costs, which lead to cost of goods sold increase
related interest and invoices will be paid when o Inventory write offs
due  High margin
6. Customers – to judge whether the company will
o Low cost of goods sold
in existence
o Sales volume decreases
PROFITABILITY RATIO
Operating profit margin – HIGH
 Assess the company’s ability to earn profits
FORMULA
 How efficiently a company generates profit and
value for shareholders Profit before interest∧taxes
 ROCE, ROOE, GRPM,OPM, ASSET OPM= x 100 %
Revenue
TURNOVER
Gross profit margin – HIGH  How effectively the business manages the process
of producing and selling its products
FORMULA
Interpretation
Gross profit
GPM= x 100 % High OPM Low OPM
Revenue
Reduction in general Increase in general
 The margin that the company makes on its sales overhead costs overhead (advertising
and would be expected to remain reasonably cost increase to attract
constant sales)
 The ability to control costs involve in the
production Disposal of NCA  High expenses
reduce the depreciation
Interpretation expense
High GPM Low GPM Gain on disposal More depreciation due to
large acquisitions
Increase in selling price = Decrease in selling price
increase sales possibly due to price Restructuring  reduce Significant investments
wars/ to boost sales / staff costs in advertising
greater competition in the

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 FINANCIAL ACCOUNTING
Better control of selling, Improved profit margin
distribution and  increase profit =
administration cost increase ROCE

Selling of machine 
decrease capital
Return on capital employed – HIGH employed  increase
FORMULA ROCE

Profit before interest∧taxes

ROCE= x 100 %
Capital employed
Capital employed = total asset – current liabilities
Capital employed = fixed asset – working capital Return on Owner’s Equity (ROOE)

Capital employed = Shareholder’s equity + long term FORMULA

liability
Profit after tax−Preference dividends
EBIT = Profit before tax + Interest payable ROOE= x 100 %
OSC +reserves ( exclude preference shares )
Operating margin x Asset turnover = ROCE
Purpose
 Capital employed refers to the value of all sources
used by a company to generate earnings  To determine the returns due to ordinary
shareholders
Purpose
Asset turnover – High
 How efficiently a business is using its resources
FORMULA
 Should always be higher than the Company
borrowing cost Sales
 Low – use resources inefficiently ATO= x 100 %
Capital employed
o Increased costs or decreased sale
o Lack of inventory management
 Increase in sales, due to lower selling price
o Have many unprofitable or unnecessary
 How many times asset has been use to generate
assets
sales
Interpretation  A high asset turnover means that a company is
generating a lot of sales, but to do this it might have
High ROCE Low ROCE to keep its prices down and so accept a low profit
margin per $1 of sales
Higher Profit before Decrease Profit before
interest and taxes interest and taxes Interpretation
Better use of assets High ATO Low ATO
Due to inflation – Due to revaluation of Increase in sales (due to Increasing financing via
depreciation understated NCA lower selling price  issuance of shares
reduction in gross profit
Due to disposal of NCA Due to purchase of new margin)
– Gain on disposal NCA
increases PBIT Company using assets Reduction in sales
not in SOFP (operating volume / selling price
Reduction in long term Issue shares would lead assets)
borrowings would reduce increase capital employed
capital employed  = decrease ROCE
increase ROCE ratio

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 FINANCIAL ACCOUNTING
Disposal of NCA  Gain on revaluation of
NCA decrease  CE NCA
decrease Quick/ acid test ratio
0.8 to 1:1 = acceptable

Key points 1:1 to 0:7:1 = normal (supermarkets have very low

quick ratios)
 Low-margin business (food retailers) usually have
FORMULA
high asset turnover
LIQUIDITY RATIO Current assets−Inventory
Quick=
Current liabilities
Current ratio
 Measure the company’s ability to use its most
1 to 2:1 = acceptable liquid assets (receivables and cash) to pay off its
2 or higher = appropriate , for every $1 in current short-term liability
liabilities, the company must have 2 in current assets  To determine whether the company has sufficient
liquid resources
1:5:1 = norm, $1.5 assets for every $1 current  Indicates the extent to which the company could
liabilities pay current liabilities without relying on the sale of
inventory
FORMULA
EFFICIENCY RATIO
Current assets
Current= Inventory turnover period – low days
Current liabilities
FORMULA
 Measures the financial stability of a firm
 Ability to use its current assets ( inventory) to pay Ave . Inventory
off its short-term liabilities ITP= x 365
Cost of sales
 Higher than average of its industry, it may indicate
company failing to make good use of its assets
 High ratio may be due to high levels of inventory
and receivables Cost of sales
ITP= x 365
o High cash levels which could be put to Ave . Inventory
better use
Interpretation
Interpretation
High inventory Low inventory turnover
High Current ratio Low current ratio turnover
Receivables to high, Current liabilities are too Bought larger amounts to Lack of demand or poor
possibly due to poor high  difficulties obtain trade discounts inventory control
credit controls or may paying payables
lead to bad debts Increased inventory Poor inventory control
levels to avoid stock outs could result in high
Stocks too high, possibly Receivables decrease due storage and insurance
due to slow moving to good credit control but cost
stocks might lose customers

Indication of funds are Payables are too high –

tied up in cash which suppliers might raise  It indicates the average length of time that stock
could be earning money price spends in business before it is sold
elsewhere  Inventory turnover vary with the nature of the
business . If fast-paced business, seller of fish
Indication of poor inventory should be low, whereas a building
liquidity positions contractor may have high inventory
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 FINANCIAL ACCOUNTING
Receivable’s collection period – low days FINANCIAL POSITION RATIO
FORMULA Debt ratio – Low

Trade receivables FORMULA

RCP= x 365
Credit sales
Total debts
Debt ratio=
Collection period should be compared with: Total assets

 The stated credit policy  Measures how much the company owes in relation
 Previous period figures to its size
 Indicates the average length of time to collect cash  When a company is heavily in debt, debt ratio is
from credit customers once they have purchased greater than 50% , potential lenders may be
goods unwilling to advance further funds
Gearing Ratio – Low
FORMULA

Total long term debt

Gearing= x 100 %
Interpretation
SHE +total long term debts

High receivables Low receivables  Measure the proportion of assets invested in a

collection collection
Lack of proper credit Good sign though it
control which may lead could indicate that the
to irrecoverable debts company is suffering a
cash shortage
business that are financed by borrowings
 The higher the ratio, the higher are the risks to a
business
Interpretation
High gearing ratio Low gearing ratio

Greater risks that little Low borrowings

Payables payment period – Low profit will be available to
distribute as dividend to
FORMULA shareholders

Trade accounts payable High borrowing, possibly Due to repayment of

PPP=
Purchases
 Indicates the average time of the credit period taken
by the company from its suppliers
Interpretation
High payables payment Low payables payment
Company may develop a
poor reputation as a slow
payer and may not be
able to find more
suppliers
Company may be losing
out on worthwhile cash
discounts
x 365 due to low borrowing rate borrowing during the
year
Might affect liquidity Finance through issue of
because the company shares
needs to pay huge
interest, thus reduce cash
flow
Indication of future
borrowings might be
difficult and expensive
In a bad year when
profits are low, may face
difficulties as fixed
interest charges must be
paid regardless of profit,
might left nothing to pay
to shareholders

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 FINANCIAL ACCOUNTING
7. Different definitions of ratios between companies
8. Ratios on their own are meaningless
NCL(RPS∧debentures)
Total gearing ratio=
OSC +reserves+ NCL
NCL(RPS∧debentures)
Equity gearing=
OSC + Reserves
Leverage ratio
FORMULA

Shareholde r ' s equity

Leverage= x 100 %
SHE +long term debt
 Converse of gearing

Interest cover
2-3 times = reasonable
1.5 should be minimum but no fixed answer
FORMULA

Profit before interest ∧tax

Interest=
interest charnges

 Indicates the ability of a company to pay interest

out of profits generated
 Low ratio meaning that dividends are at risk
o Interpretation

High payables payment Low payables payment

Sufficient profits to meet Due to high borrowing

interest payments

Due to low borrowings Due to low profit before

( company is funded interest and taxes ,
primarily by share possible due to high
capital) general overheads cost

LIMITATIONS OF RATIO ANALYSIS

1. The use of norms can be misleading
2. One off event may distort the ratios
3. Different accounting policies between different
companies
4. Different accounting practices between different
companies
5. SOFP average
6. Inflation can distort trend analysis

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