f3 - Acca (Slide)

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Chapter 1:
Introduction to accounting
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What you will learn?

 The purpose of financial reporting
 Types of business entity
 Natures, principles and scope of financial

reporting
 Introduction to financial statements
 Those changed with governance

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The purpose of financial reporting
Financial reporting is a way of recording, analysing and

summarising financial data
Actual transactions (sales of goods, purchases of

goods,...) are recorded in books of prime entry.
The transactions are analysed in the books of prime

entry and the totals are posted to the ledger accounts.
Finally, the transactions are summarised in the financial

statements.
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Types of business entity

Main types of business entity
A business owned and run by one

individual, perhaps employing one or
Sole traders
two assistants and controlling their
work
Limited the business’s debts and personal

liability debts of the business’s owners
companies (shareholders) are legally separate
 Arrangements between
individuals to carry on business in
Partnerships
common with a view to profit
 Involves obligations to others
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Exam focus point
Which of the following are TRUE of partnerships?

1 The partners’ individual exposure to debt is limited.
2 Financial statements for the partnership by law must be
produced and made public.
3 A partnership is not a separate legal entity from the partners
themselves.
A. 1 and 2 only B. 2 only
C. 3 only D. 1 and 3 only

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Exam focus point
C. 3 only
 Unless a partnership is a limited liability partnership, the

partners’ individual exposure to debt is not limited because
the partnership is not a separate legal entity from the
partners themselves.
 Financial records must be maintained by a partnership, but

there is no requirement to make them publicly available
unless the partnership is a limited liability partnership.
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Natures of financial reporting

In comparison with management accounting
Financial Accounting Management Accounting
Communication of financial
Purpose Decision making
position
Requirement Mandatory Optional
External Internal
Primary audience (Investors, Regulators, Tax (Management& decision
authorities, etc.) makers)
Regulations/
GAAP, IFRS, IAS None
guidelines
Quarterly, annual or per
Frequency As needed and ongoing
period
External review Auditors, regulators None
Information to aid
Focus Past transactions
decisions for the future
Narrow per segment,

Scope Company wide
product, etc. As needed.
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Users’ and stakeholders’ needs

Business stakeholders
Business stakeholders
Internal External
Owners Creditors
(sole traders/
partnerships)
Trade contacts
Shareholders
Tax authority
Government
Managers
Financial analysts
Employees
Society
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Needs to use financial statements
Types Comments
Shareholders For investment decisions
Managers For planning and making decision
To access company’s ability in providing

Employees
remuneration, employment opportunities...
Creditors Interested in the security of their loan
 Suppliers: To evaluate company’s long term

Trade health and liquidity position
contacts  Customers: To secure the sources of supply
for themselves
Financial Interested in profit performance and estimates of

analyst future operations
Allocation of resources and activities of

Government
enterprises trends within the economy
Entities effect: Members of the public and the

Society
environment (pollution)
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Exam focus point
Which group of people are most likely to be interested in

the financial statements of a sole trader?
1 Shareholders of the company
2 The business’s bank manager
3 The tax authorities
4 Financial analysts
A. 1 and 2 only B. 2 and 3 only
C. 2,3 and 4 only D. 1,2 and 3 only

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Exam focus point
B. 2 and 3 only
 A sole trader does not have any shareholders.

 The financial statements are unlikely to be of interest to a
financial analyst, they are more usually interested in the
financial statements of public companies
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Governance
Responsible for preparation of financial

statements
Main aim: To create wealth for

shareholders
Must act honestly in best interests of

Directors
company
Fiduciary position
Duty of care to show reasonable

competence
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Governance
Exam focus point
Which of the following statements is/are true?

1 Directors of companies have a duty of care to show reasonable
competence in their management of the affairs of a company.
2 Directors of companies must act honestly in what they
consider to be the best interest of the company.
3 A Director’s main aim should be to create wealth for the
shareholders of the company.
C. 1,2 and 3 D. 1 and 3 only

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Governance
Exam focus point

1 Directors of companies have a duty of care to show reasonable
competence in their management of the affairs of a company.
2 Directors of companies must act honestly in what they
consider to be the best interest of the company.
3 A Director’s main aim should be to create wealth for the
C. 1,2 and 3 D. 1 and 3 only

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Main elements of financial reports

Content in financial statements
Financial Statements
Statement of Financial Position (SOFP)
Statement of Profit or Loss (and Other Comprehensive

Income) (SPL or SPLOCI)
Statement of Cash Flows (SOCF)
Statement of Changes in Equity (SOCIE)
Notes to the Financial Statements

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Statement of financial position
A list of all the assets owned and all the liabilities owed by a
business as at a particular date
LIABILITIES
ASSETS  Non-current liabilities
 Non-current assets - Long-term borrowings
- Properties, plant and  Current liabilities
equipment (PPE) - Trade and other payables
- Bank overdraft
- Other NCA
- Taxation
 Current assets - Other CL
- Cash and cash Present obligation arising from
equivalents past events and expected
Inventories outflow economic benefits
- Other CA
Resource controlled by EQUITY

entity as a result of past  Share capital/premium
events and future  Retained Earnings (RE)
 Reserves
economic benefits are
Residual interest in the assets
expected after deducting all liabilities
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STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20X7

$ $
Assets
Plant and machinery 55,000
Inventory 5,000
Receivables (from customers) 1,500
Cash at bank 500
7,000
Total assets 62,000
Liabilities
Bank loan 25,000
Payables (to suppliers) 1,600
Equity
Balance brought forward 25,000
Profit for the year 10,400

Balance carried forward 35,400
Total liabilities plus equity 62,000
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Statement of profit or loss
 A record of income generated and expenditure incurred

over a given period
 The statement shows whether the business has had
more revenue than expenditure (a profit) or vice versa
(loss)
increases in economic benefits during the

accounting period in the form of inflows or
Income
enhancements of assets or decreases of
liabilities that results in increases in equity
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STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 APRIL 20X7
$
Revenue 150,000
Cost of sales 75,000
Gross profit 75,000
Other expenses 64,600
Revenue arises in the course of the

Revenue
ordinary activities of an entity
decreases in economic benefits during the

accounting period in the form of outflows or
Expenses
depletions of assets or incurrences of
liabilities that results in decreases in equity
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Chapter 2:
Regulatory framework
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 The regulatory system
 The International Accounting Standards Board

(IASB)
 International Financial Reporting Standards

(IFRSs)
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The regulatory system
National law
Form and content of accounts may be regulated
by national legislation. ‘ Fair presentation’
Accounting standard
The IASB produces standards
Influences Accounting concepts and individual judgement

upon can lead to subjectivity
financial Accounting standards developed to address
accounting subjectivity
GAAP - Drawn from: Local company law,

Accounting standards, statutory requirements in
other countries, stock exchanges
Other international issues

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The IASB
IFRS Foundation
The Monitoring Board
Appoints & advises
IFRS Foundation Trustees

Appoints Appoints Appoints
& Advises & &
oversees oversees oversees
The IFRS The IFRS

The IASB
Advisory Interpretations
(the Board)
Council Committee
Develop &
issues Interprets
IFRS Standards
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The IASB
Objectives of IFRS Foundation
Develop a single set of high quality, understandable,

enforceable and globably accepted IFRSs through
Standard- setting body IASB
Promote use and rigorous application of these standards
Take account of the needs of emerging economics and

SMEs
Bring about convergence of national accounting standards

and IFRSs to high quality solutions
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The IASB
Exam focus point 1

1 The IFRS Interpretations Committee is a forum for the IASB to
consult with the outside world.
2 The IFRS Foundation produces IFRSs. The IFRS Foundation is
overseen by the IASB.
3 One of the objectives of the IFRS Foundation is to bring about
convergence of national accounting standards and IFRSs.
C. 2 and 3 only D. 3 only

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The IASB
Exam focus point 1
D. 3 only
 The IFRS Advisory Council is a forum for the IASB to consult

with the outside world.
 The IASB produces IFRSs and is overseen by the IFRS

Foundation
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The IASB
Exam focus point 2
Which ONE of the following is NOT an objective of the
IFRS Foundation?
A. Through the IASB, develop a single set of globally

accepted International Financial Reporting Standards (IFRSs)
B. Promote the use and rigorous application of International

Financial Reporting Standards (IFRSs)
C. Ensure International Financial Reporting Standards (IFRSs)

focus primarily on the needs of global, multi-national
organisations
D. Bring about the convergence of national accounting

accounting standards and IFRSs
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The IASB
Exam focus point 2
Which ONE of the following is NOT an objective of the
IFRS Foundation?
C. Ensure International Financial Reporting Standards (IFRSs)

focus primarily on the needs of global, multi-national
organisations
 The IFRS Foundation does not focus primarily on the needs

of global, multi-national organisations.
 One of the objectives of the foundation is to take account of
the financial reporting needs of emerging economies and
small and medium-sized entities (SMEs).
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IFRSs
The use and application of IFRSs
IFRSs have helped to both improve and harmonise financial

reporting around the world
By regulatory authorities
As national requirements for domestic and foreign
countries
As the basis for all or some

By companies themselves
national requirements
As an international
benchmark for countries to
develop their owns
requirements
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IFRSs
Standard – setting process
 Establish an Advisory Committee to give advice

on issues arising in the project
Step 1  Consultation with the Advisory Committee and
the IFRS Advisory Council occure throughout the
project
 IASB may develop and publish Discussion Papers

Step 2 for public comment
 IASB develops and publishs an Exposure Draft

Step 3 for public comment
Step 4  IASB issues a final IFRS

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IFRSs
Standard – setting process
Consultative Group
Board
On acceptance
Steering Committee Public

Discussion Paper comment
(chaired by board members)
Public
Exposure Draft comment
IFRS
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Chapter 3:
The qualitative characteristics
of financial information
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 The IASB’s Conceptual framework
 The qualitative characteristics of financial

information
 Accounting concepts
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The IASB’s Conceptual Framework

Underlying assumption
Going concern
The business will

continue to operate in
approximately the The assets should not
same manner for the be valued at their
foreseeable future “break-up” value
(at least the next
12months)
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The IASB’s Conceptual Framework

Underlying assumption
Accruals basis
The transactions and

Profit revenue earned
events are recognised
must be matched
when they occur
againsts the
(not as cash or its
expenditure incurred in
equivalent is received
earning it
or paid)
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The qualitative characteristics of

financial information
Qualitative characteristics of financial information
Fundamental characteristics Enhancing characteristics
Relevance Comparability
 Materiality Verifiability
Faithful representation Timeliness
 Complete Understandability
 Neutral
 Free from error
 Substance over form
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Fundamental characteristics
Relevance
Materiality
 Professional judgement
 Affects decision making process
Faithful representation
Complete Free from error

All necessary information for No errors in:
users to understand the  description
phenomenon is depicted  producing financial
information
Neutral Substance over form

 Free from bias – both Economic reality of transactions
content and presentation rathers than its legal form
 No manipulation
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Enhancing characteristics
Timeliness Understandability
Information available Classifying

to decision makes in representing
time information clearly
Comparability Verifiability
Information faithfully
With previous period,
represents economic
with other entities
phenomena
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Exam focus point
The IASB’s Conceptual Framework for Financial Reporting gives

six qualitative characteristics of financial information.
What are these six characteristics?
A. Relevance, Faithful representation, Comparability,

Verifiablity, Timeliness and Understandability
B. Accuracy, Faithful representation, Comparability,

Verifiability, Timeliness and Understandability
C. Relevance, Faithful representation, Consistency, Verifiability,

Timeliness and Understandability
D. Relevance, Comparability, Consistency, Verifiability,

Timeliness and Understandability
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Exam focus point
The IASB’s Conceptual Framework for Financial Reporting gives

six qualitative characteristics of financial information.
What are these six characteristics?
A. Relevance, Faithful representation, Comparability,

Verifiablity, Timeliness and Understandability
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Accounting concepts
 Compliance with IFRSs

Fair presentation  All relevant IFRSs must be followed
 Use of an appropriate accounting policy
 Anticipated profit: Do not be recorded

Prudence until actually realized
 Anticipated loss: A provision is created
Revenue earned should be matched against

Matching
the expenditure incurred in earning it
Transactions are recorded in the accounts

Historical cost
with their original costs
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Accounting concepts
 The effect of transaction are recognized

Accruals when they occur and not when they are
paid or received
The presentation and classification of items in

Consistency the FS should stay the same from one period
to the next
The business  For accounting purpose, the business unit

entity is separate and distinct from its owners
concept  The business exists in its own rights
Going concern like “Underlying assumption” slide 3

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Accounting concepts
Conflicts between concepts
Consistency
and Prudence
Prudence
If circumstances change, the different treatment must be

adopted
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Accounting concepts
Exam focus point
Which accounting concept states that omitting or misstating

this information could influence users of
the financial statements?
A. Consistency concept B. Accruals concept
C. Materiality concept D. Doing concern concept

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Accounting concepts
Exam focus point
Which accounting concept states that omitting or misstating

this information could influence users of
the financial statements?
C. Materiality concept
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Chapter 4:
Sources, record and books of
prime entry
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 Business transactions
 Sources of documents
 Books of prime entry
 Imprest system
hệ thống duy trì tiền mặt
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Business transactions
Types of business transactions
Cash sales
Cash
transaction
Cash purchases
Credit sales
Business Credit
transactions transaction
Credit purchase
Trade discount
Discount
Cash discount
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Source documents
Types of source documents
1
Quotation
2 Purchase order
3 Good dispatched note + Invoice

Customers
Supplier
Goods received note
4 Credit note
Debit note
5 Remittance advice
Receipt note + Statement

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Source documents
Source of
Contents Purpose
documents
Quotation Quantity/ To establish price from
description/details of various suppliers and cross
goods required refer to purchase
requisition
Purchase order Details of supplier, e.g. Sent to supplier as a
name, address. request for supply. To
Quantity/description/de check to the quotation and
tails of goods required delivery note.
and price.
Terms and conditions of

delivery, payment, etc.
Sales order Quantity/description/de Cross checked with the
tails of goods required order placed by customer.
and price Sent to the
stores/warehouse
department for processing
of the order
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Source documents
Source of
Contents Purpose
documents
Goods Details of supplier e.g. Provided by supplier.
despatched note name and address. Checked with goods
(GDN) Quantity and description received and purchase
of goods order
Good received Quantity and description Produced by company
note (GRN) of goods receiving the goods as
proof of receipt. Matched
with delivery note and
purchase order
Invoice Name and address of Issued by supplier of goods
supplier and customer; as a request for payment.
details of goods, e.g. For the supplier selling the
quantity, price, value, goods/services this will be
sales tax, terms of treated as a sales invoice.
credit, etc For the customer this will
be treated as a purchase
invoice.
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Source documents
Source of
Contents Purpose
documents
Statement Details of supplier, e.g. Issued by the supplier.
name and address. Has Checked with other
details of date, invoice documents to ensure that
numbers and values, the amount owing is
payments made, correct
refunds, amount owing
Remittance Method of payment, Sent to supplier with, or as

invoice number, account notification of, payment
number, date, etc
Receipt Details of payment Issued by the selling
received company indicating the
payment received
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Source documents
Source of
Contents Purpose
documents
Credit note Details of supplier, e.g. Issued by the supplier.
name and address. Checked with documents
Contains details of regarding goods returned
goods returned, e.g.
quantity, price, value,
sales tax, terms of
credit, etc.
Debit note Details of the supplier. Issued by the company

Contains details of receiving the goods. Cross
goods returned, e.g. referred to the credit note
quantity, price, value, issued by the supplier
sales tax, terms of
credit, etc.
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Source documents
Exam focus point
Which of the following documents should accompany a return of

goods to a supplier?
A. Debit note B. Remittance advice
C. Purchase invoice D. Credit note

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Source documents
Exam focus point
Which of the following documents should accompany a return of

goods to a supplier?
A. Debit note B. Remittance advice
C. Purchase invoice D. Credit note
A debit note is sent to a supplier with a return of goods. A debit

note is in effect a request for a credit note.
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Books of prime entry

Main types of books of prime entry
Sales day book
Purchase day book

Sales return day book
Purchase returns day book
Cash book
Pretty cash book
Journal
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Sales day book
The sales day book is the book of prime entry for credit sales.
SALES DAY BOOK
Total amount
Date Invoice Customer Boot sales Shoe sales
Invoiced
$ $ $
Jan 10
247 Jones & Co 105.00 60.00 45.00
20X0
248 Smith Co 86.40 86.40
249 Alex & Co 31.80 31.80
250 Enor College 1,264.60 800.30 464.30
1,487.80 946.70 541.10

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Purchase day book
The purchase day book is the book of prime entry for

credit purchases.
PURCHASE DAY BOOK
Total
Internal inv Supplier
Date Supplier amount Purchases Electricity
No. Inv. No.
invoiced
$ $ $
Mar
YH0009
15 654 Cook Co 315.00 315.00
39
20X0
655 A00167 W Butter 29.40 29.40
656 1267 EEB 116.80 116.80
657 GB1778 Show Co 100.00 100.00
561.20 440.40 116.80

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Sales return day book
The sales returns day book is the book of prime entry for
credit notes raised
When customers return goods for some reason, a credit note is

raised. All credit notes are recorded in the sales returns day book.
SALES RETURNS DAY BOOK
Date Credit note Customer and goods Amount
$
Mick Petty
12 April 20X8 CR007 90.00
30 hats
Owen Plenty
30 April 20X8 CR008 Three pairs ‘Texas’ 135.00
boots
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Purchase return day book
The purchase returns day book is the book of prime entry for
credit notes received from suppliers
The purchase returns day book records credit notes received in

respect of goods which the business sends back to its suppliers.
PURCHASE RETURNS DAY BOOK
Date Supplier and goods Amount
$
Cap Co
15 April 20X8 500.00
100 hats
Boxes Co
29 April 20X8 46.60
300 cardboard boxes
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Cash book
The cash book is the book of prime entry for

cash receipts and payments
CASH BOOK (RECEIPTS)
Accounts Cash
Date Narrative Total Other
receivable sales
$ $ $ $
1 Sep
Balance b/d 900
20X7
Cash sale 80 80
Accounts receivable: Hay 380 380
Accounts receivable: Been 720 720
Account receivable: Seed 140 140

Loan: Len Dinger 1,800 1800
Cash sale 150 150
Sale of non- current asset 200 200
4,370 1240 230 2,000
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Cash book
The cash book is the book of prime entry for

cash receipts and payments
CASH BOOK (PAYMENTS)

Accounts Petty
Date Narrative Total Wages Other
payable cash
$ $ $ $ $
1 Sep
Accounts payable: Kew 120 120
20X7
Accounts payable: Hare 310 310
Telephone 400 400
Gas bill 280 280
Petty cash 100 100
Machinery purchase 1,500 1,500
Balance c/d 1,660

4370 430 100 - 2,180
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Petty cash book
Petty cash: A small amount of cash on the premises to make

occasional small payments in cash, eg staff refreshments, postage
stamps, to pay the office cleaner, taxi fares, etc.
A petty cash book is a cash book for small payments
PETTY CASH BOOK
Receipt Date Narrative Total Milk Pen Travel Others
$ $ $ $ $ $
1 Sep
250 Bal b/d
20X7
Milk bill 25 25
Postage stamps 5 5
Taxi fare 10 10
Flowers for sick
15 15
staff
Bal c/d 195
250 250 25 5 10 15
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Journal
The journal keeps a record of unusual movement between

accounts.
The journal is used to record any double entries made

which do not arise from the other books of prime entry
(sales day book, sales returns day book, purchase day book,
purchase returns day book, cash book, petty cash book)
Example:
- Correction of errors
- Depreciation
- Provision
- Accruals
- Allocation of prepayments
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Journal
A journal voucher is used to record the equivalent of one entry in

the journal
JOURNAL VOUCHER
Ledger: 335100
Journal type: Accrual Date: 30 Oct 20X9
Journal No.:
GJ10/01
Payable to: Mobile phone
Account
Description Dr/Cr Amount Analysis code
code
THLCO 3482498 D 300 1010
CNQKO 3481236 D 700 4050
Total amount 1449543 C 1,000
Prepared by Checked by Approved by Explanation
Accrual for mobile phone fee
for Oct 20X9
21

Exam focus point
In which book of prime entry will a business record debit notes in

respect of goods which have been sent back to suppliers?
A. The sales return day book
B. The cash book
C. The purchase return day book
D. The purchase day book

22

Exam focus point
In which book of prime entry will a business record debit notes in

respect of goods which have been sent back to suppliers?
A. The sales return day book
B. The cash book
C. The purchase return day book
D. The purchase day book
Debit notes sent to suppliers are recorded in the purchase

returns day book.
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Imprest System
Basis of imprest system
The amount of money in petty cash is kept

Imprest system
at an agreed sum or “float”
The total float is made up regularly to the

agreed sum
Cash from the bank account is transferred

into the petty cash
Date Particulars Debit Credit
Petty cash 77.10

8 July 20X8
Cash at bank 77.10
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Imprest System
Example
DEF operates an imprest system for petty cash. During February

20X9, the following petty cash transactions took place.
$
2.2.X9 Stamps 12.00
3.2.X9 Milk 25.00
8.2.X9 Taxi fare 15.00
17.2.X9 Stamps 5.00
18.2.X9 Received from staff for photocopying 8.00
28.2.X9 Stationery 7.50
The amount remaining in petty cash at the end of the month
was $93.50. What is the imprest amount?
A. $166.00 B. $150.00
C. $72.50 D. $56.50
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Imprest System
Example
B. $150.00
$
Opening balance (imprest amount) 150.00
(balancing figure)
Add amount received from staff 8.00
158.00
Less expenditure (64.50)
(12+25+15+5+7.50)
Cash in hand at the end of month 93.50
26
Imprest System
Exam focus point 1
Which one of the following statements about an imprest system

of petty cash is correct?
A. An imprest system for petty cash book controls small cash
expenditures because a fixed amount is paid into petty cash
at the beginning of each period
B. The imprest system provides a control over petty cash

spending because the amount of cash held in petty cash at
any time must be equal to the value of the petty cash
vouchers for the period.
C. An imprest system for petty cash can operate without the

need for petty cash vouchers or receipts for spending
D. An imprest system for petty cash helps with management

of small cash expenditures and reduces the risk off fraud
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Imprest System
Exam focus point 1
D. An imprest system for petty cash helps with management

of small cash expenditures and reduces the risk off fraud
An imprest system for petty cash helps with management of

small cash expenditures and reduces the risk of fraud.
The amount paid in to replenish petty cash at the beginning

of each period should be the amount of petty cash spending
in the previous period, which is the total of expenditures
show by petty cash vouchers for the previous period.
The amount of petty cash at any time is the maximum petty

cash balance minus the value of the petty cash vouchers for
the period.
28
Imprest System
Exam focus point 2
Which one of the following provides evidence that an

item of expenditure on petty cash has been approved or
authorised?
A. Petty cash voucher
B. Record of the transaction in the petty cash book
C. Receipt for the expense
D. Transfer of cash from the bank account into petty cash

29
Imprest System
Exam focus point 2
Which one of the following provides evidence that an

item of expenditure on petty cash has been approved or
authorised?
A. Petty cash voucher
B. Record of the transaction in the petty cash book
C. Receipt for the expense
D. Transfer of cash from the bank account into petty cash
The petty cash voucher is a record that cash has been

issued for an approved item of expense. The receipt is
evidence of the amount of the expense. The petty cash
book is used to record the transaction in the bookkeeping
1
Chapter 5:
Ledger accounts and double
entry
2

 Financial accounting process
 The accounting equation
 Double entry and bookeeping
 Receivables (sales) ledger and payables

(purchases) ledger
 The nominal/general ledger

3
Financial accounting process

Sales Sales Day
invoices books
Receivables
Sales Sales ledger
Credit Returns
Note day book
Wages Wages
Reconcile
docs book
Cheques
issued/ Cash book Nominal
received ledger Trial
(General balance
FSs
Petty cash Petty cash ledger)
voucher book
Journal Reconcile
Journal
voucher
Purchase Purchase
invoices day book Payables
Purchase ledger
Purchase
Credit Returns
Notes day book
4
The accounting equation
LIABILITIES
ASSETS  Non-current liabilities
 Non-current assets  Long-term borrowings
 Properties, plant and  Long-term provisions
equipment (PPE)
 Long-term investment  Current liabilities
 Other NCA  Trade and other
payables
 Current assets  Short-term borrowings
 Cash and cash  Bank overdraft
equivalents  Taxation
 Inventories  Other CL
 Trade receivables EQUITY
 Short-term investment  Share capital/premium
 Other CA  Retained Earnings (RE)
 Reserves
ASSETS EQUITY LIABILITY

5

Example
Liza Doolittle purchases a market stall from Len Turnip, who is

retiring from his fruit and vegetables business. The cost of the
stall is $1,800.
She also purchases some flowers and potted plants from a
trader in the wholesale market, at a cost of
$650. This leaves $50 in cash, after paying for the stall and
goods for resale, out of the original of $2,500.
6

Example
The assets and liabilities of the business have now altered

and, at 3 July before trading begins, the state
of business is as follow:
Asset = Equity + Liabilities
$ $ $
Stall 1,800 = 2,500 + 0
Flower and
650
plants
Cash 50
2,500
7

Common concepts
CONCEPTS DESCRIPTION
Stocks/Inventories Unsold goods
Account receivables
Amounts owed to the business by its customers
(AR)
Account payables
Amount owed by the business to its suppliers
(AP)
Retained earnings Profit generated from operation by a business but

(RE) not yet distributed to its owners
Amounts of money or assets taken out of a business

Drawings
by its owners
Return inwards Goods returned to the business
Return outwards Goods returned by the business
Gross profit Gross profit = Sales – Cost of goods sold (COGS)
Net profit Net profit = Gross profit – Expenses

8

Business equations
NET ASSETS = ASSETS - LIABILITIES
Closing net assets Profit
Opening net assets Closing net assets
Introduced capital Opening net assets
Profit Introduced capital
Drawings Drawings
9

Exam focus point
The net assets of Altese, a trader, at 1 January 20X2 amounted

to $128,000. During the year to 31 December 20X2 Altese
introduced a further $50,000 of capital and made drawings of
$48,000. At 31 December 20X2 Altese’s net assets totalled
$184,000.
What is Altese’s total profit or loss for the year ended 31
December 20X2?
A. $54,000 profit B. $54,000 loss
C. $42,000 loss D. $58,000 profit

10

Exam focus point
A. $54,000 profit
Increase in net assets = Capital introduced + profit – drawings
184,000 – 128,000 = 50,000 + profit – 48,000
Profit = 56,000 – 50,000 + 48,000
= $54,000
11
Double entry and bookeeping

Double entry
DOUBLE ENTRY
ACCOUNT TYPE FSs
Debit Credit
ASSETS
Except from (adversely recorded)
- Accumulated depreciation/Provision
for depreciation
- Provion for slow moving stocks
- Provision for doubtful SOFP
debts/irrecoverable debts (Balance
sheet)
LIABILITIES
CAPITAL
Except from (adversely recorded)
- Drawings
SALES/INCOME
COS/COGS
Except from (adversely recorded) SOPL
- Return outwards
EXPENSES
12

Double entry for Sales transactions
Cash sales Sold goods for cash at $1,000
DR Cash at bank $1,000

CR Sales $1,000
Sold goods on credit for $ 1,175 including

Credit sales 17.5% sales tax
DR Trade receivables $1,175

CR Sales [1,175/(1+17.5%)] $1,000
CR Sales tax – Output [=bal. fig.] $ 175
A customer returned goods value $ 117.5
Sales return including 17.5% sales tax
DR Sales return [117.5/(1+17.5%)] $ 100

DR Sales tax – Output [=bal. fig.] $ 17.5
CR Trade receivable $ 117.5
13

Double entry for Purchases transactions
Payment of a rental bill totaling $ 1,175
Cash purchases including sales tax of 17.5%
DR Rental expenses [1,175/(1+17.5%)] $1,000
DR Sales tax – Input [=bal. fig.] $ 175
CR Cash at bank $ 1,175
Credit Bought goods on credit $ 1,175 including
purchases sales tax of 17.5%
DR Purchases [1,175/(1+17.5%)] $ 1,000

DR Sales tax – Input [=bal. fig.] $175
CR Trade payables $ 1,175
Purchases A business returned goods valued $ 100
return excluding sales tax of 17.5%
DR Trade payables [100 x (1+17.5%)] $ 117.5

CR Purchases return $ 100
CR Cash at bank [=bal. fig.] $ 17.5
14

Exam focus point
Tallon had the following transactions:
1. Sale of goods on credit for $150 to F Rogit
2. Return of goods from B Blendigg originally sold for $300 in cash to
B Blendigg
What are the correct ledger entries to record these transactions?
A. Dr Receivables $150
Dr Sales Returns $300
Cr Sales $150
Cr Cash $300
B. Dr Sales $150
Dr Cash $300
Cr Receivables $150
Cr Sales Returns $300
C. Dr Receivables $450
Cr Sales $150
Cr Sale Returns $300
D. Dr Sale Returns $300

Dr Sale $150
Cr Cash $450
15

Exam focus point
Tallon had the following transactions:
1. Sale of goods on credit for $150 to F Rogit
2. Return of goods from B Blendigg originally sold for $300 in cash to
B Blendigg
What are the correct ledger entries to record these transactions?
A. Dr Receivables $150
Dr Sales Returns $300
Cr Sales $150
Cr Cash $300
16
Financial accounting process

Sales Sales Day
invoices books
Receivables
Sales Sales ledger
Credit Returns
Note day book
Wages Wages
Reconcile
docs book
Cheques
issued/ Cash book Nominal
received ledger Trial
(General balance
FSs
Petty cash Petty cash ledger)
voucher book
Journal Reconcile
Journal
voucher
Purchase Purchase
invoices day book Payables
Purchase ledger
Purchase
Credit Returns
Notes day book
17
Receivables ledger and payables ledger

Receivables ledger
Sale invoice/ Credit notes
Sales Day Book/

Sales Return Day Book
Sum of transactions Value of each transaction
Nominal ledger/
Receivables ledger
Account ledger
DR Receivables
CR Sales DR Personal account
CR Sales tax output
Nominal ledger/
Account ledger
DR Sales Return
DR Sales tax output CR Personal account
CR Receivables
18

Payables ledger
Purchase invoice/ Credit notes
Purchases Day Book/

Purchases Return Day Book
Sum of transactions Value of each transaction
Nominal ledger/
Paybles ledger
Account ledger
DR Purchases
DR Sales tax input CR Personal account
CR Payables
Nominal ledger/
Account ledger
DR Payables
CR Sales tax input DR Personal account
CR Purchase returns
19

Exam focus point
The following totals appear in the day books for March 20X8.
$
Sales day book 40,000
Purchases day book 20,000
Returns inwards day book 2,000
Returns outward day book 4,000
Opening and closing inventories are both $3,000.
What is the gross profit for March 20X8?
A. $22,000 B. $24,000
C. $20,000 D. $18,000
20

Exam focus point
A. $22,000
The gross profit for March 20X8:

$ $
Sales 40,000
Returns inwards (2,000)
38,000
Opening inventory 3,000
Purchases 20,000
Returns outwards (4,000)
Closing inventory (3,000)
(16,000)
Gross profit 22,000
21
The nominal/general ledger

Definitions
The nominal/ general ledger
an accounting record which

 contains the principle accounts and
 summarises the financial affairs of a business
Ledger accounts
summarise all the individual transactions listed in

the book of prime entry
22

Ledger accounts
NAME OF ACCOUNT
DEBIT SIDE CREDIT SIDE
Date Corresponding $ Date Corresponding $

Accounts/ Accounts/
Narratives Narratives
Example:
ADVERTISING EXPENSES
Date Narrative Ref. $ Date Narrative Ref. $
15 JFK Agency PL 2,5

April for quarter 348 00
20X6
23

Exam focus point
Bert has extracted the following list of balances from his general
ledger at 31 October 20X5:
$
Sales 258,542
Purchases 142,958
Expenses 34,835
Non-current assets (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is the total of the debit balances in Bert’s trial balance at 31
October 20X5?
A. $267,049 B. $275,282
C. $283,148 D. $284,931
24

Exam focus point
D. $284,931
The total of the debit balances in Bert’s trial balance at

31 October 20X5:
$
Purchases 142,958
Expenses 34,835
Non-current assets 63,960
Receivables 31,746
Cash at bank 1,783
284,931
1
Chapter 6:
From trial balance to financial
statements
2
 Prepare the trial balance

 Prepare the statement of profit or loss
 Prepare the statement of financial position
3
Steps to drawing up FSs
Open, update and balance off ledger accounts
Prepare the trial balance
Prepare the Statement of Profit or Loss
Prepare the Statement of Financial Position

4
Prepare trial balance

What is trial balance?
A trial balance is a list of ledger balances

shown in debit and credit columns
Sample of Trial balance

Account name Debit Credit
Cash at bank 6,500
Capital 5,100
Bank loan 1,000
Purchases 5,000
Rent 3,500
Shop fittings 2,000
Sales 12,500
Bank loan interest 100
18,600 18,600
5

Example: Draw up a trial balance
As at 30.3.20X7, your business has the following balances in its ledger accounts.
Accounts Balance
$
Bank loan 12,000
Cash at bank 11,700
Capital 13,000
Local business taxes 1,880
Trade accounts payable 11,200
Purchases 12,400
Sales 14,600
Sundry payables 1,620
Trade accounts receivable 12,000
Bank loan interest 1,400
Vehicles 2,020
During 31.3.20X7, the business made the following transactions.
(a) Bought materials for $1,000, half for cash and haft on credit
(b) Made $1,040 sales, $800 of which was for credit
(c) Paid wages to shop assistants of $260 in cash
6

Now we must take account of the effects of the three transactions

which took place on 31.3.20X7.
.
$ $
(a) DEBIT Purchase 1,000
CREDIT Cash at bank 500
CREDIT Trade accounts payable 500
(b) DEBIT Cash at bank 240
DEBIT Trade accounts receivable 800
CREDIT Sales 1,040
(c) DEBIT Other expenses 260
CREDIT Cash at bank 260
7

First it is necessary to decide which of the original balances are

debits and which are credits.
Accounts Dr Cr
$ $
Bank loan (liability) 12,000
Cash at bank (asset; overdraft = liability) 11,700
Capital (Equity) 13,000
Local taxes (expense) 1,880
Trade accounts payable (liability) 11,200
Purchases (expense) 12,400
Sales (revenue) 14,600
Sundry payables (liability) 1,620
Trade accounts receivable (asset) 12,000
Bank loan interest (expenses) 1,400
Vehicles (non- current asset) 2,020
52,420 52,420
8

When these figures are included in the trial balance, it becomes:

Accounts Dr Cr
$ $
Bank loan 12,000
Cash at bank (11,700 + 240 – 500 – 260) 11,180
Capital 13,000
Local taxes 1,880
Trade accounts payable (11,200 + 500) 11,700
Purchases (12,400 + 1,000) 13,400
Sales (14,600 + 1.040) 15,640
Sundry payables 1,620
Trade accounts receivable (12,000 + 800) 12,800
Bank loan interest 1,400
Other expenses (11,020 + 260) 11,280
Vehicles 2,020
53,960 53,960
9

Exam focus point
Bert has extracted the following list of balances from his general
ledger at 31 October 20X5:
$
Sales 258,54
2
Purchases 142,95
8
Expenses 34,835
Non-current assets (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is the total of the debit balances in Bert’s trial balance at 31
October 20X5?
A. $267,049 B. $275,282
C. $283,148 D. $284,931
10

Exam focus point
D. $284,931
$
Purchases 142,95
8
Expenses 34,835
Non-current assets 63,960
Receivables 31,746
Cash at bank 1,783
284,93
1
11
Prepare statement of profit or loss

What is statement of profit or loss?
A profit or loss ledger account is opened up to gather all items

relating to income and expenses. When rearranged, these items
make up the statement of profit or loss.
Sample of Statement of profit or loss

$ $
Revenue 20,000
Cost of sales 5,000
Gross profit 15,000
Expenses
Rent 3,000
Other expenses 900
(4,000)

12

Basis of prepare statement of profit or loss
First open up a new ledger account for the statement of profit

or loss, called profit or loss account
PROFIT OR LOSS ACCOUNT
Look through the ledger accounts and identify which ones relate
to income and expense. The balances on these accounts are
transferred to the profit or loss account
Expenses account Income accounts

Balance Balance
at DR at CR
13

Example: Draw up statement of profit or loss
During the year end at 20X7, your business, ABC Co, has the trial
balance below:
Accounts Dr Cr
$ $
Cash at bank 6,500
Capital 5,500
Bank loan 1,000
Purchases 5,000
Trade accounts payable - -
Rent 3,500
Shop liftings 2,000
Sales 12,500
Trade accounts receivable - -
Other expenses (11,020 + 260) 1,900
19,000 19,000
14

Transfer balances of ledger accounts related to income and expenses

to profit or loss account

PURCHASES SALES
5,000 12,500
RENT
3,500
BANK LOAN INTEREST
100
OTHER EXPENSES
1,900
15

Transfer balances of ledger accounts related to income and expenses

to profit or loss account

$ $
Purchases 5,000 Sales 12,500
Gross profit c/d 7,500
12,500 12,500
Rent 3,000 Gross profit b/d 7,500
7,500 7,500
16

So the statement of profit or loss will be:

Dr Cr
$ $
Revenue 12,500
Cost of sales (=Purchase) (5,000)
Gross profit 7,500
Expenses
Rent 3,500 -
(5,500)
17

Exam focus point
The following totals appear in the day books for March 20X8.
$
40,00
Sales day book
0
20,00
Purchases day book
0
Returns inwards day book 2,000
Returns outward day book 4,000
Opening and closing inventories are both $3,000. What is the
gross profit for March 20X8?
A. $22,000 B. $24,000
C. $20,000 D. $18,000
18

Exam focus point
A. $22,000
$ $
Sales 40,000
Returns inwards (2,000)
38,000
Purchases 20,000
Returns outwards (4,000)
Closing inventory (3,000)
(16,000)
Gross profit 22,000
19
Prepare statement of financial position

What is statement of financial position?
The balances on all remaining ledger accounts (including the

profit or loss account) can be listed and rearranged to form the
statement of financial position.
$
Assets
Non-current assets
Vehicles 6,000
Current assets
Cash at bank 6,500
Total assets 12,500
Capital and liabilities
Capital 8,500
Non-current liabilities 4,000
Total capital and liabilities 12,500

20

Example: Draw up statement of financial position
Continue the example with your business, ABC Co has the statement
of financial position as below:
$
Assets
Non-current assets
Shop liftings 2,000
Current assets
Cash at bank 6,500
Total assets 8,500
Capital and liabilities
Proprietor’s capital (5,500 + 2,000 profit) 7,500
Non-current liabilities 1,000
Total capital and liabilities 8,500

21

Exam focus point
Alpha has the following opening balances on its ledger accounts.

$
Fixtures 5,000
Trade accounts receivable 2,000
Bank account 1,000
Loan 3,000
What is the opening figure for capital?
A. $6,000 B. $5,000
C. $8,000 D. $3,000
22

Exam focus point
B. $5,000
Capital = Assets – Liabilities = ((5,000 + 2,000 + 1,000) – 3,000
= 5,000
1
Chapter 7:
Inventory
2

 Definition of inventory, cost of goods sold
 Measurement of inventory
 Valuation of inventory
 Recognition and presentation

3
Definition
Inventory
Inventories are assets:
Held for sale in the ordinary course of business
In the process of production for such sale
In the form of materials or supplies to be consumed in

the production process or in the rendering of services
Example:
 Goods purchased and held for resale
 Finished goods produced
 Work in progress (WIP) being produced
 Materials and supplies awaiting use in the production
process (raw materials)
4
Definition
Cost of goods sold (COGS)
COGS = Opening inventory + purchases – Closing inventory
The cost of goods sold is found by applying the following formula
$
Opening inventory value X
Add cost of purchases (or, in the case of a
manufacturing company, the cost of production) X
X
Less closing inventory value (X)
Cost of goods sold X
5
Definition
Example: Cost of goods sold
On 1 January 20X6, the Grand Union Food Stores had goods in

inventory valued at $6,000. During 20X6 its proprietor
purchased supplied costing $50,000. Sales for the year to 31
December 20X6 amounted to $80,000. The cost of goods in
inventory at 31 December 20X6 was $12,500.
What is the gross profit for the year?
$ $
Sales 80,000
Opening inventories 6,000
Add purchases 50,000
56,000
Less closing inventories 12,500
Cost of goods sold 43,500
Gross profit 36,500
6
Definition
Exam focus point: Cost of goods sold
The financial year of Mitex Co ended on 31 December 20X1. An

inventory count on 4 January 20X2 gave a total inventory value of
$527,300.
The following transactions occurred between January 1 and January 4.
$
Purchases of goods 7,900
Sales of goods (gross profit margin 40% on sales) 15,000
Goods returned to a supplier 800
What inventory value should be included in Mitex Co’s financial
statements at 31 December 20X1?
A. $525,400 B. $527,600
C. $529,200 D. $535,200
7
Definition
Exam focus point: Cost of goods sold
C. $529,200
Closing inventory balance
$
Inventory count, 4 January 20X2 527,300
Purchases since end of year (7,900)
Cost of sales since end of year (15,000 x 60%) 9,000
Purchase returns since end of year 800
Inventory at 31 December 20X1 529,200
Opening inventory balance

8
Definition
Cost of carriage inwards and outwards
Cost of
carriage usually added to the cost of purchases
inwards
Cost of
is a selling and distribution expense in
carriage
the statement of profit or loss
outwards
9
Definition
Example: Cost of carriage inwards and outwards
On 1 July 20X5, Clickety had clocks in inventory valued at

$17,000. During the year to 30 June 20X6 the purchased more
clocks at a cost of $75,000. Carriage inwards amounted to
$2,000. Sales for the year were $162,100. Other expenses of
the business amounted to $56,000 excluding carriage
outwards which cost $2,500. The value of the goods in
inventory at the year end was $15,400.
Prepare the statement of profit or loss of Clickety Clocks for

the year ended 30 June 20X6.
10
Definition
Example: Cost of carriage inwards and outwards
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 JUNE 20X6

$ $
Revenue 162,100
Purchases 75,000
Carriage inwards 2,000
94,000
Less closing inventory 15,400
Cost of goods sold 78,600
Gross profit 83,500
Carriage outwards 2,500
58,500
11
Definition
Exam focus point: Cost of carriage inwards and outwards
Which of the following costs may be included when arriving at

the cost of finished goods inventory for inclusion in the financial
statements of a manufacturing company?
1 Carriage inwards
2 Carriage outwards
Cost of goods procedure
3 Depreciation of factory plant
4 Finished goods storage costs
5 Factory supervisors’ wages
A. 1 and 5 only B. 2, 4 and 5 only
C. 1,3 and 5 only D. 1,2,3 and 4 only

12
Definition
Exam focus point: Cost of carriage inwards and outwards
Which of the following costs may be included when arriving at

the cost of finished goods inventory for inclusion in the financial
statements of a manufacturing company?
1 Carriage inwards
2 Carriage outwards
3 Depreciation of factory plant
4 Finished goods storage costs
5 Factory supervisors’ wages
C. 1,3 and 5 only
Carriage outwards and storage are distribution costs.

13
Measurement of inventory
Inventory
lower of
Net realisable value Cost
Fair value Purchase cost
Cost to sell Cost of conversion
Other cost bringing the

inventories to present
location and condition
14
Net realisable value (NRV)
Situations in which NRV is likely to be less than cost:
An increase in costs or a fall in selling price
A physical deterioration in the condition of inventory
Obsolescence of products
Errors in production or purchasing

15
Cost of inventory
Costs of
Purchase cost Other costs
conversion
incurred in
bringing the
Purchase price Costs directly inventories to
related to the
units of their present
Import duties production location and
condition
Other directly (abnormal
attributable
Fixed and amounts,
cost
variable
production selling costs...)
Trade discount overheads
16
Exam focus point
The closing inventory at cost of a company at 31 January 20X3
amounted to $284,700.
The following items were included at cost in the total:
1 400 coats, which had cost $80 each and normally sold for $150
each. Owing to a defect in manafacture, they were all sold
after the reporting date at 50% of their normal price. Selling
expenses amounted to 5% of the proceeds.
2 800 skirts, which had cost $20 each. These two were found to
be defective. Remedial work in February 20X3 cost $5 per
skirt, and selling expenses for the batch totalled $800. They
were sold for $28 each.
What should the inventory value be according to IAS 2 Inventories
after considering the above items?
A. $276,400 B. $281,200
C. $282,800 D. $329,200
17
Exam focus point
B. $281,200
Original value at 31 January 20X3: $284,700

$
 Coats - Cost 400 x $80 32,000
- NRV ($75 x 95%) x 400 28,500
NRV < Cost => Adjustments is made for $3,500
 Skirts:
At 31 January 20X3 the skirts were correctly valued at costs
incurred to date of $20 per skirt which was lower than the NRV of
$22 (= $28 - $5 - $800/800).
Therefore no adjustment is required for the value of the skirts.
Value of inventory after considerations = $284,700 - $3,500 = $281,200
18
Valuation of inventory
Calculation cost of inventory
Method Key points Conditions
For costing purposes, the The cost of closing

FIFO – first items of inventory inventory is the cost of
first
in first received are assumed to the most recent
out be the first ones sold. purchases of inventory.
The cost of an item of The average cost can be

inventory is calculated by calculated periodically or
AVCO –
Average taking the average of all continuously.
cost
inventory held.
19
Example
TRANSACTIONS DURING MAY 20X7
Quantiy Unit cost Total cost
Units $ $
Opening balance 1 May 100 2.00 200
Receipts 3 May 400 2.10 840
Issues 4 May 200
Receipts 9 May 300 2.12 636
Issues 11 May 400
Receipts 18 May 100 2.40 240

Issues 20 May 100
Closing balance 31 May 200
1,916
How would issues and closing inventory be valued using FIFO and
AVCO ?
20
Example: FIFO
Date of issue Quantity Value issued Cost of issues

Units $ $
4 May 200 100 OI* at $2 200
100 at $2.10 210
410
11 May 400 300 at $2.10 630
100 at $2.12 212
842
20 May 100 100 at $2.12 212
1,464
Closing 200 100 at $2.12 212
inventory value
100 at $2.40 240
452
1,916
* OI= opening inventory
21
Example: AVCO
Total
inventory
Date Received Issued Balance Value Unit Cost of
cost issue
Units Units Units $ $ $
Opening inventory 100 200 2.00
3 May 400 840 2.10
500 1,040 2.08*
4 May 200 (416) 2.08** 416
300 624 2.08
9 May 300 636 2.12
600 1,260 2.10*
11 May 400 (840) 2.10** 840
200 420 2.10
18 May 100 240 2.40
300 660 2.20*
20 May 100 (220) 2.20** 220
1,476
Closing inventory
value 200 440 2.20 440
1,916
* A new unit cost of inventory is calculated whenever a new receipt of materials.
** Whenever inventories are issued, the unit value of the items issued is the
current weighted average cost
22
Example: AVCO
The weighted average cost under the periodic method for May is:
= Total cost/(Opening quantity + Total quantity received)
= 1,916/(100 + 400 + 300 + 100)
= $2.13 per unit
This gives a valuation of 200 x $2.13 = $426.00

23
Exam focus point
A company values its inventory using the first in, first out (FIFO)
method. At 1 May 20X2 the company had 700 engines in inventory,
valued at $190 each.
During the year ended 30 April 20X3 the following transactions took
place:
20X2
1 July Purchased 500 engines at $220 each
1 November Sold 400 engines for $160,000
20X3
1 February Purchased 300 engines at $230 each
15 April Sold 250 engines for $125,000
What is the value of the company’s closing inventory of engines
at 30 April 20X3?
A. $188,500 B. $195,500
C. $166,000 D. None of these figures

24
Exam focus point
A. $188,500 FIFO method

Quantiy Unit cost
Units $
Opening balance 1 May 700 190
Purchased 1 July 20X2 500 220

Sold 1 November 20X2 400
Purchased 1 Feb 20X3 300 230
Sold 15 April 250
Closing balance 30 April 850

$
Closing balance (= 850 units)
300 units x $230 69,000
500 units x $220 110,000
50 units x $190 9,500
850 units 188,500
25
Recognition and presentation

Accounting methods
Perpetual inventory Periodic inventory

system system
determine the amount

Records the sale or of inventory at the end
Definition purchase of inventory of each accounting
immediately period or in specified
periods
 Better information  Cheaper in most

for inventory control situations than the
costs of
 Excessive build-up of maintaining
certain lines of continuous
inventory whilst inventory records
Pros and having insufficient
cons inventory of other  Need to check the
lines is avoided accuracy of the
information
 Less work is needed recorded by having
to calculate inventory a physical check of
at the end of the some of the
accounting period inventory lines
1
Chapter 8:
Tangible non-current assets
2
 Capital Expenditure and Revenue Expenditure
 Capital Income and Revenue Income
 IAS 16 – Property, Plant and Equipment (PPE)

3
Capital and Revenue Expenditure

Comparision
Capital Expenditure Revenue Expenditure

(CAPEX) (OPEX)
Results in the acquisition of

Incurred for the purpose of
non-current assets, or an
trade or to maintain the
improvement in their
existing non-current assets
earning capacity
Recognize as non-current Recognize as expense in

assets in the balance sheet SOPL
Example: Example:
 Buy a new car for use  Buy cars for resale
 Buy and install equipments  Rent a factory
to improve the capacity of  Maintainance expenses
plant  Repair costs
4

Exam focus point
Which of the following costs would be classified as

capital expenditure for a restaurant business?
A. A replacement for a broken window
B. Repainting the restaurant
C. An illuminated sign advertising the business name
D. Cleaning of the kitchen floors

5

Exam focus point
An illuminated sign advertising the business name will provide

long-term benefits for the business and is therefore a non-
current asset, ie capital expenditure.
A replacement for a broken window is a repair, so it is revenue

expenditure.
Repainting the restaurant is a repair and renewal expense so it

would be likely to be treated as revenue expenditure.
Cleaning of the kitchen floors is a maintenance cost and

therefore is revenue expenditure.
6
Capital and Revenue Income

Comparision
Capital Income Revenue income
Proceed from the sale of:

- Sale of trading assets
Proceed from the sale of
- Provison of services
non-trading assets
- Interest and dividends
received
Recognize as other income Recognize as sales revenue

7
IAS 16: Property, Plant and Equipment

Scope of IAS 16
IAS 16 cover all aspects of accounting for property, plant and

equipment. This represents the bulk of items which are
‘tangible non-current assets’
Agriculture assets (IAS 41)
Forests and other regenerative natural

resources (IFRS 6)
IAS 16 does
not apply
Mineral rights, exploration for and
extraction of minerals, oil, gas and other
non-regenerative resources (IFRS 6)
Non-current assets held for sale (IFRS 5)

8

Terminology
The amount of cash or cash equivalents paid,

Cost or the fair value of other consideration given at
the date of acquisition or construction
The price received to sell an asset or paid to

Fair value transfer a liability in an orderly transaction
between market participants
The amount at which an asset is recognized

Carrying
after deducting any accumulated depreciation
amount
and impairment losses
The amount at which the entity expected to

Recoverable
recover from the future use of an asset,
amount
including its residual value on disposal.
9

Terminology
Recoverable amount
Higher of
Fair value – Costs to sell Value in use
Present value of the future

Expected selling price
net cash flows expected to
–
be derived from continue
Expected costs to sell
using of asset
10

Definition
tangible assets held for:

 production/supply goods or services
 Rental to others (not including real estate for
rental – IAS 40)
PPE is  administrative purpose
expected to be used during more than one period

11

Recognition
It is probable that future economic benefits

associated with the flow to the enterprise
Recognition The cost of the asset to the enterprise can

criterias be measured reliably
Practically, value threshold is met (based

on the enterprise’s policy)
12

Initial measurement

or the fair value of other consideration given
at the date of acquisition or construction
PPE is initially
recognised at
cost
Includes all costs necessary to bring the PPE

to working condition for its intended use
13

Initial measurement
Costs necessary to bring the PPE to working condition for its intended
use includes:
Original purchase price
Costs of site preparation
Delivery and handling
Installation
Related professional fees for architects and engineers
Cost of testing after deducting net proceeds from selling samples

produced from the testing
Staff costs arising directly from construction or acquisition of the

assets (exluding cost of training staffs to use the new assets)
Estimated cost of dismantling, removing PPE and restoring the site

14

Initial measurement
Accounting for initial measurement of PPE is:
DR PPE – cost
CR Cash/Payables
CR Provison for dismantling, removing and restoring cost

( = present value of the estimated cost)
15

Subsequent measurement
REVALUATION
COST MODEL or MODEL
COST FAIR VALUE
− −
Subsequent
Accumulated
accumulated
depreciation
depreciation
− −
Subsequent
Accumulated
accumulated
Impairment loss
impairment loss
16

Depreciation
Depreciation is the allocation of the depreciable amount of an

asset over its estimated useful life
Physical wear and tear
Technical obsolesence
Useful life
Legal limit
Should be reviewed periodically
Cost less residual value/scrap value expected

at the end of the useful life
Depreciable
amount
Recognised as an expense over its useful life
17

Depreciation method
Straight line Cost – Residual value

method Expected useful life of the asset
Reducing balance
Carrying amount x %
method
(Original value – Salvage value) x Units

Units of production
per year
method
Estimated Production Capability
(Cost – Residual Value) x y/d

Sum of digits y: remaining useful life
method d: sums of digit = n(n+1)/2
n: useful life
18

Example: Depreciation method
ABC bought a new van for $5,000 on 1 January 20X9. The van’s
estimated useful life is 4 years, at the end of which it is expected
to have a scrap value of $1,000. ABC applied straight-line method
in calculating depreciatio
5000 - 1000
Annual depreciation = = 1000
4
Brought Depreciation in Carried

Year
forward year forward
1 5000 1000 4000
2 4000 1000 3000
3 3000 1000 2000
4 2000 1000 1000

19

to have a scrap value of $1,000. ABC applied reducing balance
method in calculating depreciatio, with depreciation rate = 30%.
Annual depreciation = CA x %
Brought Depreciation Carried

Year Calculation
forward in year forward
1 5000 5000 x 30% 1500 3500
2 3500 3500 x 30% 1050 2450
3 2450 2450 x 30% 735 1715
4 1715 1715 - 1000 715 1000

20

Exam focus point
A company’s policy is to charge depreciation on plant and

machinery at 20% per year on cost, with proportional
depreciation for items purchased or sold during a year.
The company’s plant and machinery at cost account for
the year ended 30 September 20X3 is shown below.
What should be the depreciation charge for plant and

machinery (excluding any profit or loss on the
disposal) for the year ended 30 September 20X3?
21

Exam focus point
$43,000
$
Plant held all year (200,000 – 40,000) x 20% 32,000
Disposal 40,000 x 20% x 9/12 6,000
Additions 50,000 x 20% x 6/12 5,000
43,000
22

Change in depreciation method/expected useful life/residual value
Change in method of depreciation
If there are any changes in the expected pattern of use of the asset
Method of depreciation used should be changed
Remaining carrying amount is depreciated under the new method
Change in expected useful life or residual value
Remaining depreciated amount

New depreciation = Rfaasfemaining depreciated amount
Revised useful life
23

Example: Change in method of depreciation
XYZ bought a new van for $5,000 on 1/1/20X6. The van’s estimated
useful life is 4 years, scrap value is $1,000, and it was depreciated
using reducing balance method (with rate of 33%). However, on
1/1/20X8 it was decided to change in method to straight line.
Brought Depreciation in Carrying

Year
forward year amount
1 5000 1650 3350
2 3350 1105.5 2244.5
(2244.5 – 1000)/2
3 2244.5 1622.25
= 622.25
4 1622.25 622.25 1000

24

Disposal
When a PPE is sold, there is likely to be a gain or loss on disposal
Gain/Loss on disposal of non-current assets

= (Sale price – Selling cost) – Carrying amount
Sale price – Selling cost = Proceed from disposal

25

Disposal
The ledger account entries are as follow
1. Proceed from disposal
DR Cash
CR Disposal of NCA
2. Remove cost of the disposal asset
DR Disposal of NCA
CR NCA - cost
3. Remove acc.dep
DR NCA acc.dep
CR Disposal of NCA
4. Transfer gains/losses on disposal
DR Disposal of NCA/Income & Expenses account
CR Income & Expenses account/Disposal of NCA

26

Example: Disposal
On 1/4/20X8, a machinery which had cost $24,000 and with

accumulated depreciation at 30/6/20X7 of $10,500 was sold for
$14,500. The company makes up accounts to 30/6 each year.
The depreciation policy is to provide 25% per annum, reducing
balance with a full charge in the year of acquisition and none in
the year of disposal.
DISPOSAL ACCOUNT
20X8 $ 20X8 $
30/6 Machinery - cost 24,000 1/4 Cash 14,500
30/6 Income and 1,000 30/6 Machinery 10,500
expenses account acc.dep
25,000 25,000
27

Part exchange of non-current assets
1. Recognize cost of new asset, trade-in value and payment
DR NCA at cost (of the new asset)
CR Disposal of NCA (trade-in value)
CR Cash (additional payment for the exchange)
DR Disposal of NCA (of the disposal asset)
CR NCA at cost (of the disposal asset)
3. Remove accumulated depreciation of disposal asset
DR NCA accumulated depreciation (of the disposal asset)
CR Disposal of NCA (of the disposal asset)
4. Transfer gains/losses
DR Disposal of NCA/Income and expesnes account
CR Income and expesnes account/Disposal of NCA

28

Example: Part exchange of non-current asset
IMG needs a new van. The van cost $10,000. IMG pays $6,000 and
exchanges its existing car on the last day of the accounting period.
The existing car had cost of $8,000 three year ago. Depreciation on
motor vehicle is 20% on the straight line basis.
1. Recognize cost of new van, trade-in value and payment

DR Van at cost 10,000
CR Disposal of NCA 4,000 (10,000 – 6,000)
CR Cash 6,000
2. Remove cost of the car
DR Disposal of NCA 8,000
CR Car at cost 8,000
3. Remove accumulated depreciation
DR Car acc.dep 4,800 (8,000 x 20% x 2)
CR Disposal of NCA 4,800
4. Transfer gain
DR Disposal of NCA 800
CR I&E account 800
29

Revaluation of PPE
Professional valuation
Should be stated Depreciated replacement
cost
at fair value
Indexation
General
principle on If an item is revalued, the entire class of it should
revaluation be revalued
model
If an item is revalued, the revaluation should be

regularly updated
30

Revaluation of PPE
Upward revaluation
FV > CV Gain/Surplus revalution
1. Adjust cost/old FV to the new revalued amount (new FV)
DR PPE at cost/valuation (if new FV > cost/old FV)
CR PPE at cost/valuation (if new FV < cost/old FV)
2. Remove balance in accumulated depreciation account
DR PPE accumulated depreciation
3. Reverse previous loss (if any) due to previous downward revaluation
CR SOPL
4. Credit ant excess of the surplus to Revaluation Reserve/Revaluation Surplus

Also present
CR Revaluation Surplus (on Equity)
under OCI of
SOPLOCI
31

Revaluation of PPE
Revaluation Surplus/Revaluation Reserve
Not included in SOPL
Included in Other comprehensive income of SOPLOCI

and Capital of SOFP
When upward revaluation, revaluation surplus is transferred

annually to Retained Earnings, to compensate excess depreciation
due to upward revaluation:
DR Revaluation Surplus
DR Retained Earnings
32

Revaluation of PPE
Downward revaluation
FV < CV Loss/Deficit revalution
CR PPE at cost/valuation
3. Reverse previous gain (if any) due to previous upward revaluation
DR Revaluation surplus (on Equity) Also present

under OCI of
4. Debit any excess of the deficit to SOPL SOPLOCI
DR SOPL
33

Example: Revaluation model
XYZ has its plants as following:
Plant A Plant B
Cost 500 600

As at
Acc.dep (100) (100)
31/12/20X7
Remaining useful life 4 5
Fair value as 31/12/20X7 600 400

of 31/12/20X8 200 470
XYZ wants to use the revaluation model on plant A and B from

20X7. Company’s policy is to depreciate all assets using straight
line method.
34

Plant A Plant B
CV as at 31/12/20X7 400 (500 – 100) 500 (600 – 100)
Surplus/(Deficit) 200 (100)
FV as at 31/12/20X7 600 400
Depreciation for 20X8 (150) (600/4) (80) (400/5)
CV as at 31/12/20X8 450 320
Surplus/(Deficit) (250) 150
FV at 31/12/20X8 200 470

35

Accounting treatment for plant A
20X7:
DR Plant A at valuation 100 (600 – 500)
DR Plant A acc.dep 100
CR Revaluation Surplus 200
20X8:
1. Recognize depreciation charge for the period
DR Depreciation charge 150
CR Plant A dep.accumulated 150
2. Transfer of excess depreciation
DR Revaluation surplus 50
CR Retained Earnings 50 (200/4 years)
3. Recognize revaluation at the end of the period
DR Revaluation Surplus 150 (200 - 50)
DR SOPL 100
CR Plant A at valuation 400 (600 - 200)
36

Accounting treatment for plant B
20X7:
DR Plant B acc.dep 100
DR SOPL 100
CR Plant B at valuation 200
20X8:
DR Depreciation charge 80 (400/5 years)
CR Plant B dep.accumulated 80
DR Plant at valuation 70 (470 – 400)
CR SOPL 100
1
Chapter 8:
Tangible non-current assets
2
 Capital Expenditure and Revenue Expenditure
 Capital Income and Revenue Income
 IAS 16 – Property, Plant and Equipment (PPE)

3

Comparision
Capital Expenditure Revenue Expenditure

(CAPEX) (OPEX)
Results in the acquisition of

Incurred for the purpose of
non-current assets, or an
trade or to maintain the
improvement in their
existing non-current assets
earning capacity
Recognize as non-current Recognize as expense in

assets in the balance sheet SOPL
Example: Example:
 Buy a new car for use  Buy cars for resale
 Buy and install equipments  Rent a factory
to improve the capacity of  Maintainance expenses
plant  Repair costs
4

Exam focus point
Which of the following costs would be classified as

capital expenditure for a restaurant business?
A. A replacement for a broken window
B. Repainting the restaurant
D. Cleaning of the kitchen floors

5

Exam focus point
An illuminated sign advertising the business name will provide

long-term benefits for the business and is therefore a non-
current asset, ie capital expenditure.
A replacement for a broken window is a repair, so it is revenue

expenditure.
Repainting the restaurant is a repair and renewal expense so it

would be likely to be treated as revenue expenditure.
Cleaning of the kitchen floors is a maintenance cost and

therefore is revenue expenditure.
6
Capital and Revenue Income

Comparision
Capital Income Revenue income
Proceed from the sale of:

- Sale of trading assets
Proceed from the sale of
- Provison of services
non-trading assets
- Interest and dividends
received
Recognize as other income Recognize as sales revenue

7

Scope of IAS 16
IAS 16 cover all aspects of accounting for property, plant and

equipment. This represents the bulk of items which are
‘tangible non-current assets’
Agriculture assets (IAS 41)
Forests and other regenerative natural

resources (IFRS 6)
IAS 16 does
not apply
Mineral rights, exploration for and
extraction of minerals, oil, gas and other
non-regenerative resources (IFRS 6)
Non-current assets held for sale (IFRS 5)

8

Terminology

Cost or the fair value of other consideration given at
the date of acquisition or construction
The price received to sell an asset or paid to

Fair value transfer a liability in an orderly transaction
between market participants
The amount at which an asset is recognized

Carrying
after deducting any accumulated depreciation
amount
and impairment losses
The amount at which the entity expected to

Recoverable
recover from the future use of an asset,
amount
including its residual value on disposal.
9

Terminology
Recoverable amount
Higher of
Fair value – Costs to sell Value in use
Present value of the future

Expected selling price
net cash flows expected to
–
be derived from continue
Expected costs to sell
using of asset
10

Definition
tangible assets held for:

 production/supply goods or services
 Rental to others (not including real estate for
rental – IAS 40)
PPE is  administrative purpose
expected to be used during more than one period

11

Recognition
It is probable that future economic benefits

associated with the flow to the enterprise
Recognition The cost of the asset to the enterprise can

criterias be measured reliably
Practically, value threshold is met (based

on the enterprise’s policy)
12

Initial measurement

or the fair value of other consideration given
at the date of acquisition or construction
PPE is initially
recognised at
cost
Includes all costs necessary to bring the PPE

to working condition for its intended use
13

Initial measurement
Costs necessary to bring the PPE to working condition for its intended
use includes:
Original purchase price
Costs of site preparation
Delivery and handling
Installation
Related professional fees for architects and engineers
Cost of testing after deducting net proceeds from selling samples

produced from the testing
Staff costs arising directly from construction or acquisition of the

assets (exluding cost of training staffs to use the new assets)
Estimated cost of dismantling, removing PPE and restoring the site

14

Initial measurement
Accounting for initial measurement of PPE is:
DR PPE – cost
CR Cash/Payables
CR Provison for dismantling, removing and restoring cost

( = present value of the estimated cost)
15

Subsequent measurement
REVALUATION
COST MODEL or MODEL
COST FAIR VALUE
− −
Subsequent
Accumulated
accumulated
depreciation
depreciation
− −
Subsequent
Accumulated
accumulated
Impairment loss
impairment loss
16

Depreciation
Depreciation is the allocation of the depreciable amount of an

asset over its estimated useful life
Physical wear and tear
Technical obsolesence
Useful life
Legal limit
Should be reviewed periodically
Cost less residual value/scrap value expected

at the end of the useful life
Depreciable
amount
Recognised as an expense over its useful life
17

Depreciation method
Straight line Cost – Residual value

method Expected useful life of the asset
Reducing balance
Carrying amount x %
method
(Original value – Salvage value) x Units

Units of production
per year
method
Estimated Production Capability
(Cost – Residual Value) x y/d

Sum of digits y: remaining useful life
method d: sums of digit = n(n+1)/2
n: useful life
18

to have a scrap value of $1,000. ABC applied straight-line method
in calculating depreciatio
5000 - 1000
Annual depreciation = = 1000
4
Brought Depreciation in Carried

Year
forward year forward
1 5000 1000 4000
2 4000 1000 3000
3 3000 1000 2000
4 2000 1000 1000

19

to have a scrap value of $1,000. ABC applied reducing balance
method in calculating depreciatio, with depreciation rate = 30%.
Annual depreciation = CA x %
Brought Depreciation Carried

Year Calculation
forward in year forward
1 5000 5000 x 30% 1500 3500
2 3500 3500 x 30% 1050 2450
3 2450 2450 x 30% 735 1715
4 1715 1715 - 1000 715 1000

20

Exam focus point
A company’s policy is to charge depreciation on plant and

machinery at 20% per year on cost, with proportional
depreciation for items purchased or sold during a year.
The company’s plant and machinery at cost account for
the year ended 30 September 20X3 is shown below.
What should be the depreciation charge for plant and

machinery (excluding any profit or loss on the
disposal) for the year ended 30 September 20X3?
21

Exam focus point
$43,000
$
Plant held all year (200,000 – 40,000) x 20% 32,000
Disposal 40,000 x 20% x 9/12 6,000
Additions 50,000 x 20% x 6/12 5,000
43,000
22

Change in depreciation method/expected useful life/residual value
Change in method of depreciation
If there are any changes in the expected pattern of use of the asset
Method of depreciation used should be changed
Remaining carrying amount is depreciated under the new method
Change in expected useful life or residual value
Remaining depreciated amount

New depreciation = Rfaasfemaining depreciated amount
Revised useful life
23

Example: Change in method of depreciation
XYZ bought a new van for $5,000 on 1/1/20X6. The van’s estimated
useful life is 4 years, scrap value is $1,000, and it was depreciated
using reducing balance method (with rate of 33%). However, on
1/1/20X8 it was decided to change in method to straight line.
Brought Depreciation in Carrying

Year
forward year amount
1 5000 1650 3350
2 3350 1105.5 2244.5
(2244.5 – 1000)/2
3 2244.5 1622.25
= 622.25
4 1622.25 622.25 1000

24

Disposal
When a PPE is sold, there is likely to be a gain or loss on disposal
Gain/Loss on disposal of non-current assets

= (Sale price – Selling cost) – Carrying amount
Sale price – Selling cost = Proceed from disposal

25

Disposal
The ledger account entries are as follow
1. Proceed from disposal
DR Cash
CR Disposal of NCA
DR Disposal of NCA
CR NCA - cost
3. Remove acc.dep
DR NCA acc.dep
CR Disposal of NCA
4. Transfer gains/losses on disposal
DR Disposal of NCA/Income & Expenses account
CR Income & Expenses account/Disposal of NCA

26

Example: Disposal
On 1/4/20X8, a machinery which had cost $24,000 and with

accumulated depreciation at 30/6/20X7 of $10,500 was sold for
$14,500. The company makes up accounts to 30/6 each year.
The depreciation policy is to provide 25% per annum, reducing
balance with a full charge in the year of acquisition and none in
the year of disposal.
DISPOSAL ACCOUNT
20X8 $ 20X8 $
30/6 Machinery - cost 24,000 1/4 Cash 14,500
30/6 Income and 1,000 30/6 Machinery 10,500
expenses account acc.dep
25,000 25,000
27

Part exchange of non-current assets
1. Recognize cost of new asset, trade-in value and payment
DR NCA at cost (of the new asset)
CR Disposal of NCA (trade-in value)
CR Cash (additional payment for the exchange)
DR Disposal of NCA (of the disposal asset)
CR NCA at cost (of the disposal asset)
3. Remove accumulated depreciation of disposal asset
DR NCA accumulated depreciation (of the disposal asset)
CR Disposal of NCA (of the disposal asset)
4. Transfer gains/losses
DR Disposal of NCA/Income and expesnes account
CR Income and expesnes account/Disposal of NCA

28

Example: Part exchange of non-current asset
IMG needs a new van. The van cost $10,000. IMG pays $6,000 and
exchanges its existing car on the last day of the accounting period.
The existing car had cost of $8,000 three year ago. Depreciation on
motor vehicle is 20% on the straight line basis.
1. Recognize cost of new van, trade-in value and payment

DR Van at cost 10,000
CR Disposal of NCA 4,000 (10,000 – 6,000)
CR Cash 6,000
2. Remove cost of the car
DR Disposal of NCA 8,000
CR Car at cost 8,000
3. Remove accumulated depreciation
DR Car acc.dep 4,800 (8,000 x 20% x 2)
CR Disposal of NCA 4,800
4. Transfer gain
DR Disposal of NCA 800
CR I&E account 800
29

Revaluation of PPE
Professional valuation
Should be stated Depreciated replacement
cost
at fair value
Indexation
General
principle on If an item is revalued, the entire class of it should
revaluation be revalued
model
If an item is revalued, the revaluation should be

regularly updated
30

Revaluation of PPE
Upward revaluation
FV > CV Gain/Surplus revalution
DR PPE at cost/valuation (if new FV > cost/old FV)
CR PPE at cost/valuation (if new FV < cost/old FV)
3. Reverse previous loss (if any) due to previous downward revaluation
CR SOPL
4. Credit ant excess of the surplus to Revaluation Reserve/Revaluation Surplus

Also present
CR Revaluation Surplus (on Equity)
under OCI of
SOPLOCI
31

Revaluation of PPE
Revaluation Surplus/Revaluation Reserve
Not included in SOPL
Included in Other comprehensive income of SOPLOCI

and Capital of SOFP
When upward revaluation, revaluation surplus is transferred

annually to Retained Earnings, to compensate excess depreciation
due to upward revaluation:
DR Revaluation Surplus
DR Retained Earnings
32

Revaluation of PPE
Downward revaluation
FV < CV Loss/Deficit revalution
CR PPE at cost/valuation
3. Reverse previous gain (if any) due to previous upward revaluation
DR Revaluation surplus (on Equity) Also present

under OCI of
4. Debit any excess of the deficit to SOPL SOPLOCI
DR SOPL
33

XYZ has its plants as following:
Plant A Plant B
Cost 500 600

As at
Acc.dep (100) (100)
31/12/20X7
Remaining useful life 4 5
Fair value as 31/12/20X7 600 400

of 31/12/20X8 200 470
XYZ wants to use the revaluation model on plant A and B from

20X7. Company’s policy is to depreciate all assets using straight
line method.
34

Plant A Plant B
CV as at 31/12/20X7 400 (500 – 100) 500 (600 – 100)
Surplus/(Deficit) 200 (100)
FV as at 31/12/20X7 600 400
Depreciation for 20X8 (150) (600/4) (80) (400/5)
CV as at 31/12/20X8 450 320
Surplus/(Deficit) (250) 150
FV at 31/12/20X8 200 470

35

Accounting treatment for plant A
20X7:
DR Plant A at valuation 100 (600 – 500)
20X8:
DR Depreciation charge 150
CR Plant A dep.accumulated 150
2. Transfer of excess depreciation
DR Revaluation surplus 50
CR Retained Earnings 50 (200/4 years)
DR Revaluation Surplus 150 (200 - 50)
DR SOPL 100
CR Plant A at valuation 400 (600 - 200)
36

Accounting treatment for plant B
20X7:
DR SOPL 100
CR Plant B at valuation 200
20X8:
DR Depreciation charge 80 (400/5 years)
CR Plant B dep.accumulated 80
DR Plant at valuation 70 (470 – 400)
CR SOPL 100
1
Chapter 9:
Intangible non-current assets
2

 Definition of intangible non-current assets
 Research and development costs
 Disclosure in financial statements

3
Definition
An identifiable non-monetary asset without physical substance
The item must either be capable of being sold as a

Identifiable
single item or must arise from contractual rights
Non- The item must not be cash or an asset to be

monetary settled in a fixed amount of cash
The item must be controlled by the entity as a

An Asset result of past events and result in probable future
economic benefits
4
Definition
Acquired externally
Intangible
asset
Generated internally
future economic benefits associated with

Intangible the item will flow to the entity
asset is
recognised if item’s cost can be measured reliably
IAS 38 prohibits the recognition of internally generated:

 Brands  Customer lists
 Mastheads  Goodwill
 Publishing titles
5
Definition
In comparison with tangible non-current assets
Tangible Non-current Intangible non-current

asset asset
Have physical substance No physical substance

Identification eg: land and buildings.. eg: copyright
Involve expenditure purchased or generated

incurred to bring assets internally. Expenditure
Cost
to present condition incurred is not recognised
in the cost of asset
Cost of the intangible Purchasd intangible non-

non-current asset is current assets are
capitalised capitalised. Internally
Capitalisation
generated assets may be
capitalised when certain
criterias are met
Depreciation is a Amortisation is a
Depreciation reflection of the wearing reflection of a wearing
out of the asset out of (capitalised) assets
6
Definition
Exam focus point
According to IAS 38 Intangible assets, which of the following
are intangible non-current assets in the financial statements
of Lota Co?
1 A patent for a new glue purchased for $20,000 by Lota Co
2 Development costs are capitalised in accordance with IAS 38.
3 A license to broadcast a television series, purchased by Lota Co for
$150,000
4 A state of the art factory purchased by Lota Co for $1.5 million
A. 1 and 3 only B. 1, 2 and 3 only
C. 2 and 4 only D. 2,3 and 4 only

7
Definition
Exam focus point
According to IAS 38 Intangible assets, which of the following
are intangible non-current assets in the financial statements
of Lota Co?
1 A patent for a new glue purchased for $20,000 by Lota Co
2 Development costs are capitalised in accordance with IAS 38.
3 A license to broadcast a television series, purchased by Lota Co for
$150,000
4 A state of the art factory purchased by Lota Co for $1.5 million
B. 1, 2 and 3 only
A factory is a tangible asset as it has physical form. The others

are intangible assets
8
Research and development costs

Definitions
original and planned investigation

undertaken with the prospect of gaining
Research
new scientific or technical knowledge and
understanding
the application of research findings or

other knowledge to a plan or design for the
production of new or substantially
Development
improved materials, devices... prior to the
commencement of commercial production
or use
the systematic allocation of the

Amortisation depreciable amount of an intangible asset
over its useful life
Depreciable the cost of an asset, or other amount

amount substituted for cost, less its residual value
9

Examples
Research Development
 Activities aimed at obtaining  The design, construction and
new knowledge testing of pre-production
prototypes and models
 The search for applications
of research findings or other  The design of tools, jigs,
knowledge moulds and dies involving
new technology
 The search for product or
process alternatives  The design, construction and
operation of a pilot plant that
 The formulation and design is not of a scale economically
of possible new or improved
product or process  The design, construction and
alternatives testing of a chosen alternative
for new/improved materials
10

Components of R&D costs
R&D costs will include all costs that are

 directly attributable to R&D activities,
 or that can be allocated on a reasonable basis
Salaries, wages and other employment – related costs of

personnel engaged in R&D activities
Costs of materials and services consumed in R&D activities
Depreciation of property, plant and equipment to the extent

that these assets are used for R&D activities
Overhead costs related to R&D activities
Other costs (amortisation or patents/licenses used for R&D

activities)
11

Recognition of R&D costs
Research costs
Work to gain new knowledge and understanding
Must be recognised as expense in profit or loss

12

Recognition of R&D costs
Development costs
Application of research findings for commercial purpose
Must be capitalised if specific criteria met
 Probable future economic benefits

 Intention to complete and use/sell it
 Resources adaquate and available
 Ability to use or sell the asset
PIRATE
 Technical feasibility
 Expenditure reliably measurable
13
Disclosure in financial statements
IAS 38 Intangible assets requires both numerical and

narrative disclosures for intangible assets
The financial statements should show a reconciliation of

the carrying amount of intangible assets at the beginning
and at the end of the period.
The movement on intangible assets includes:
Additions Amortisation
Disposals Any other movements
Reductions in carrying
amount
14

Example: Disclosure on movement intangible assets
Total Development Patents
costs
$ $ $
Cost
At 1 January 20X4 40,000 30,000 10,000
Additions in year 19,000 15,000 4,000
Disposals in year (1,000) - (1,000)
At 31 December 20X4 58,000 45,000 13,000

Amortisation
At 1 January 20X4 11,000 5,000 6,000
Charge for year 4,000 1,000 3,000
Eliminated on disposals (500) - (500)
At 31 December 20X4 14,500 6,000 8,500
Carrying amount
At 31 December 20X4 43,500 39,000 4,500
At 1 January 20X4 29,000 25,000 4,000
15

Narrative disclosure
Accounting policies for intangible assets that have been

adopted
For each class of intangible assets (including development

costs), disclosure is required of the following:
The method of amortisation used
The used life of the assets or the amortisation rate used
The gross carrying amount, the accumulated amortisation

and the accumulated impairment losses
The carrying amount of internally generated intangible
assets
The line item(s) of the statement of profit or loss in which
any amortisation of intangible assets is included
1
Chapter 10:
Accruals and Prepayments
2
 Definition of Accruals and Prepayment
 Recognition
 Practice
3
Definition
Accruals
Accruals (or accrued expenses) are expenses incurred but

invoices have not yet been received and so they have not
yet been paid for
Example:
- Utilities: Electricity, Water,…
- Wages incurred, for which payment to employees has

not yet been made
- Interest on loans, for which no lender invoice has yet

been received
Accruals are shown in the SOFP as a liability.

4
Definition
Prepayments
Prepayments (prepaid expenses) are payments which

have been paid in one accounting period, but should not
be charged against profit until a later period, because
they relate to that later period.
Example:
- Rental charges
- Insurance premium
Prepayments are shown in the SOFP as an asset.

5
Recognition
Accruals
Method 1
Period 1:
Accounting for unbilled expenses at end period
DR Expenses
CR Accrual (Liability)
Period 2:
Accounting for payment of expenses in the period
DR Accrual (Liability)
CR Cash
DR/CR Expenses (Under/over accrual)

6
Recognition
Accruals
Method 2
Period 1: Period 2:
Accounting for unpaid expenses 1. Accounting for payment of

at end of each accounting period expenses in the period
DR Expenses DR Expenses
CR Accrual (Liability) CR Cash
2. Accounting for reversal of accrual

made in the previous period
DR Accrual (Liability)
CR Expenses
3. Accounting for unbilled expense

at end period (same as Period 1)
DR Expenses
CR Accrual (Liability)
7
Recognition
Example: Accruals
At 1/1/20X6, ABC Co signed a contract to rent an office at $500 per

month with payment in arears in 7 months interval at end of each
interval. The company prepares the account bi-annually.
Method 1
Period 1:
30/6: Accural rental expenses for 6 months (Jan to Jun)
DR Expenses 3,000
CR Accruals (Liability) 3,000
Period 2:
31/7: Pay for 7 months rent (Jan to Jul)
DR Accruals 3,000
DR Rental Expenses 500
CR Cash 3,500
31/12: Accrual 5 months rent (Aug to Dec)
DR Rental Expense 2,500
CR Accrual 2,500
8
Recognition
Example: Accruals

month with payment in arears in 7 months interval at end of each
Method 2
Period 1:
30/6: Accural rental expenses for 6 months (Jan to Jun)
DR Expenses 3,000
CR Accruals (Liability) 3,000
Period 2:
31/7: Pay for 7 months rent (Jan to Jul)
DR Accruals 3,500
CR Cash 3,500
31/12: Reverse accruals made in the previous period
DR Accrual (Liability) 3,000
CR Rental expense 3,000
31/12: Accrual 5 months rental expense (Aug to Dec)
DR Rental expense 2,500
CR Accrual 2,500
9
Recognition
Prepayments
Method 1
Period 1:
Accounting for payment of prepaid expense in the period
DR Prepayment (Asset)
CR Cash
Period 2:
Accounting for allocation of prepayment to expenses in the

period at end period
DR Expenses
CR Prepayment (Asset)
10
Recognition
Prepayments
Method 2
Period 1: Period 2:
1. Accounting for payment of 1. Accounting for reversal of

prepaid expense in the period prepayment made in the previous
period
DR Expenses
DR Expenses
CR Cash
CR Prepayment
2. Accounting for outstanding
prepayment at end period 2. Accounting for outstanding
prepayment at end period
DR Prepayment
(Asset) DR Prepayment (Asset)
CR Expenses CR Expenses
11
Recognition
Example: Prepayments
month with payment in advance in 7 months at beginning of each
Method 1
Period 1:
1/1: Pay 7 months rent (Jan to Jul)
DR Prepayment 3,500
CR Cash 3,500
30/6: Accounting for allocation of prepayment for 6 months to
expense in the period
DR Rental expense 3,000
CR Prepayment 3,000
Period 2:
1/8: Pay 7 months rent (Aug 20X8 to Feb 20X9)
DR Prepayment 3,500
CR Cash 3,500
31/12: Accounting for allocation of prepayment for 6 months to
expense in the period (Jul to Dec)
DR Rental Expense 3,000
CR Prepayment 3,000
12
Recognition
Example: Prepayments
month with payment in advance in 7 months at beginning of each
Method 2
Period 1:
1/1: Pay 7 months rent (Jan to Jul)
DR Prepayment 3,500
CR Cash 3,500
30/6: Accounting for outstanding prepayment at end period
DR Prepayment 500
CR Expense 500
Period 2:
1/8: Pay 7 months rent (Aug 20X8 to Feb 20X9)
DR Prepayment 3,500
CR Cash 3,500
31/12: Accounting for reversal of prepayment made in previous period
DR Expense 500
CR Prepayment 500
31/12: Accounting for outstanding prepayment at end period
DR Prepayment 1,000
CR Rental Expense 1,000
13
Practice
Accruals
A company pays rent quarterly in arrears on 1 Jan, 1 Apr, 1 July

and 1 Oct each year. The rent was increased from $90,000 per year
to $120,000 per year as from 1 Oct 20X7.
What rent expense and accrual should be included in the
company’s financial statement for the year ended 31/1/20X8
14
Practice
Accruals
A company pays rent quarterly in arrears on 1 Jan, 1 Apr, 1 July

and 1 Oct each year. The rent was increased from $90,000 per year
to $120,000 per year as from 1 Oct 20X7.
What rent expense and accrual should be included in the
company’s financial statement for the year ended 31/1/20X8
Feb Oct Nov Dec Jan

20X7 20X8
$7,500/month $10,000/month
(90/12) (120/12)
 Rent expense = $7,500 x 8 + $10,000 x 4 = $100,000

 Accrual = $10,000 (rent expense for Jan 20X8)
15
Practice
Prepayment
EDF Co prepares its financial statements for the year to 30/4 each
year. The company pays rent for its premises quarterly in advance
on 1 Jan, 1 Apr, 1 Jul and 1 Oct. The annual rent was $84,000 per
year until 30/6/20X7. It was increased from that date to $96,000
per year.
What rent expense and end of year prepayment shoulde be
included in the financial statements for the year ended
30/4/20X8.
16
Practice
Prepayment
EDF Co prepares its financial statements for the year to 30/4 each
year. The company pays rent for its premises quarterly in advance
on 1 Jan, 1 Apr, 1 Jul and 1 Oct. The annual rent was $84,000 per
year until 30/6/20X7. It was increased from that date to $96,000
per year.
What rent expense and end of year prepayment shoulde be
included in the financial statements for the year ended
30/4/20X8.
Apr Jul Apr

20X7 20X8
$7,000/month $8,000/month
(84/12) (96/12)
 Rent expense = $7,000 x 2 + $8,000 x 10 = $94,000

 Prepayment = $8,000 x 2 = $16,000 (pay for May and
Jun 20X8)
17
Practice
Exam focus point 1
A company has sublet part of its offices and in the year ended
30/11/20X9 the rent receivable was:
Until 30/6/20X9 $8,400 per year
From 1/7/20X3 $12,000 per year
Rent was paid quarterly in advance on 1 January, April, July and
October each year.
What amounts of rent receivable and sundry payables should
appear in the company’s financial statements for the year
ended 30/11/20X9?
A. $9,900 and $2,000 B. $9,900 and $1,000
C. $10,200 and $1,000 D. $9,900 and $2,000

18
Practice
Exam focus point 1
B. $9,900 and $1,000
$
December to June 8,400 x 7/12 4,900
July to November 12,000 x 5/12 5,000
9,900
1
Chapter 11:
Provision and contingencies
2

 Provisions
 Contingent liabilities and contingent assets
 Disclosure in financial statements

3
Provisions
Definition
A provision is a liability of uncertain timing or amount
a present obligation of the entity arising

from past events
Liability
The settlement of obligation is expected to
result in an outflow of economic benefit
from the entity
4
Provisions
Recognition
An enity has incurred a present

obligation
A provision
It is probable (more than 50% likely)
should be
that a transfer of economic benefits
recognised
will be required to settle it
when:
A reliable estimate can be made of the

obligation
5
Provisions
Ledger accounting entries
First set up a provision
Full amount of provision should be recognised
DR Expenses Statement of profit or loss

CR Provisions Statement of financial position
6
Provisions
Subsequent years
Calculate the new provision required
Compare it with the existing balance on the provision account

(ie the balance b/f from the previous accounting period)
Calculate increase or decrease required

7
Provisions
Subsequent years
Adjustments for increase/ decrease in provisions with the

amount of increase/decrease.
Higher provision required
DR Expenses Statement of profit or loss

CR Provisions Statement of financial position
Lower provision needed
DR Provisions Statement of financial position
CR Expenses Statement of profit or loss

8
Provisions
Example 1
A business has been told by its lawyers that it is likely to have to

pay $10,000 damages for a product that failed. The business
duty set up a provision at 31 December 20X7.
However. the following year, the lawyers found that damages
were more likely to be $50,000.
How the provision treated in the accounts at:

a. 31 December 20X7?
b. 31 December 20X8?
9
Provisions
Example 1
a. At 31 December 20X7
The business needs to set up a provision as follows:
DR Damages (SOPL) $10,000
CR Provisions (SOFP) $10,000
EXTRACT FROM STATEMENT OF PROFIT OR LOSS $

Expenses
Provision for damages 10,000
EXTRACT FROM STATEMENT OF FINANCIAL POSITION $

Non-current liabilities
10
Provisions
Example 1
b. At 31 December 20X8
The business needs to increase a provision as follows:
DR Damages (SOPL) $40,000
CR Provisions (SOFP) $40,000
EXTRACT FROM STATEMENT OF PROFIT OR LOSS $

Expenses
EXTRACT FROM STATEMENT OF FINANCIAL POSITION $

11
Provisions
Measurement of provisions
The best estimate of a provision will be:
the most likely amount payable for a single obligation
an expected value for a large population of items

12
Provisions
Example 2
A customer has brought a lawsuit against Bone Co and is

claiming $800,000 in damages. Bone Co’s legal advisors have
assessed the probability of Bone Co losing and having to pay
the damages at 80%.
There is single obligation and provision is measured at the

single most likely outcome $800,000
The provision is not measured at 80% x $800,000 = $640,000

because there is not a large population of items
13
Provisions
Exam focus point
Mobiles Co sells goods with a one year warranty under which customer
are covered for any defect that becomes apparent within a year of
purchase. In calendar year 20X4, Mobiles Co sold 100,000 units.
The company expects warranty claim for 5% of units sold. Half of these
claims will be for a major defect, with an average claim value of $50.
The other half of these claims will be for a minor defect, with an
average claim value of $10.
What amount should Mobiles Co include as a provision in the

statement of financial position for the year ended 31 December 20X4?
A. $125,000 B. $25,000
C. $300,000 D. $150,000
14
Provisions
Exam focus point
D. $150,000
Mobiles Co should provide on the basis of the expected cost.

The expected cost would be calculated as
(2.5% x 100,000 x $50) + (2.5% x 100,000 x $10)
= $125,000 + $25,000 = $150,000.
15
Contingencies
Definition
Possible obligation depending on

certainty of future event occurs, or
Contingent
liability
Present obligation that is not probable or
cannot be measured reliably
Possible asset that arises from past

events
Contingent
asset
Whose existence will be confirmed only
by the (non)occurrence of uncertain
future events
16
Contingencies
Recognition
Degree of
Outflow Inflow
probability
Virtually certain Recognise

Recognise asset
(≥ 90%) liability
Probable Recognise Disclose

(50% ≤ X < 90%) provision contingent asset
Possible Disclose
(5% ≤ X < 50%) contingent Ignore
liability
Remote
Ignore Ignore
(X < 5%)
17
Contingencies
Recognition: Contingent liability flow chart
Start
Present obligation as a No No
Possible
result of an obligating
obligation?
event?
Yes Yes
Probable No Possible No
outflow? outflow?
Yes
Reliable No Yes
estimate? (Rare)
Yes
Recognise Disclose Do
provision contingent liability nothing
18
Contingencies
Example
After a wedding in 20X0 ten people became seriously ill,

possibly as a result of food poisoning from products sold by
Callow Co. Legal proceedings are started seeking damages from
Callow but it disputes liability.
Up to the date of approval of the financial statements for the
year to 31 December 20X0, Callow’s lawyers advise that it is
probable that it will not be found liable.
However, when Callow prepares the financial statements for
the year to 31 December 20X1 its lawyers advise that, owing to
developments in the case, it is probable that it will be found
liable.
What is the required accounting treatment:

a. At 31 December 20X0?
b. At 31 December 20X1?
19
Contingencies
Example
a. At 31 December 20X0
 On the basis of evidence available when the financial statements

were approved, there is no obligation as a result of past events.
 No provision is recognised. The matter is disclosed as a
contingent liability unless the probability of any transfer is
regarded as remote
b. At 31 December 20X1
 On the basis of evidence available, there is present obligation. A

transfer of economic benefits in settlement is probable.
 A provision is recognised for the best estimate of the amount
needed to settle the present obligation.
20
Contingencies
Exam focus point 2
A former director of Biss Co has commenced an action against the
company claiming substantial damages for wrongful dismissal. The
company’s solicitors have advised that the former director is unlikely
to succeed with his claim, although the chance of Biss Co paying any
money to the ex-director is not remote. The solicitors’ estimates of
Biss Co’s potential liabilities are:
$
Legal costs (to be incurred whether the claim is successful 50,000
or not)
Settlement of claim if successful 500,000
550,000
According to IAS 37, how should this claim be treated in Bliss Co’s
financial statements?
A. Provision of $550,000
B. Disclose of contingent liability of $550,000
C. Disclose a provision of $50,000 and a contingent liability of $500,000
D. Provision for $500,000 and a contingent liability of $50,000

21
Contingencies
Exam focus point 2
C. Disclose a provision of $50,000 and a contingent liability of $500,000
 As the claim is unlikely to succeed, the potential settlement

of $500,000 should be disclosed as a contingent liability note.
 However, given that the legal costs of $50,000 must be paid

whether the claim is successful or not, this amount should be
provided for in the company’s financial statements.
22

Disclosure for Provisions
1. Disclosure of details of the change in carrying amount of a

provision from the beginning to the end of the year,including:
Additional provisions made
Amounts used
Other movements
23

Disclosure for Provisions
2. Each class of provision, disclosure of

 the background to the making of provision
 the uncertainties affecting its outcome
A brief description of the nature of the provision and the

expected timing of any resulting outflows relating to the
provision
An indication of the uncertainties about the amount or timing

of those outflows
The amount of any expected reimbursement relating to the

provision and whether any asset that has been recognised for
that expected reimbursement
24

Disclosure for Contingent liabilities
Unless remote, disclose for each contingent liability:
A brief description of its nature, and where practicable
An estimated of the financial effect
An indication of the uncertainties relating to the amount or

timing of any outflow
The possibility of any reimbursement

25

Disclosure for Contingent assets
Where an inflow of economic benefits is probable, an entity

should disclose:
A brief description of its nature, and where practicable
An estimated of the financial effect

1
Chapter 12:
Irrecoverable debts and
allowances
2
 Irrecoverable debt
 Allowance for receivables
 Presentation
3
Irrecoverable debts
Definition
Irrecoverable debts are specific debts owed to a business

which it decideds are never going to be paid.
An age analysis of receivables (Debt ageing report) breaks

down the customer balances on the receivables ledger into
different period of outstanding debt
4
Irrecoverable debts
Recognition
When business decides that a particular debt is unlike to be paid,

the amount of the debt is “written off” as an expense in the SOPL
DR Irrecoverable debts expense
CR Receivables
An irrecoverable debt which has been written off might

occasionally be unexpected paid. The amount paid should be
recorded under income in SOPL
DR Cash
CR Irrecoverable debt expense

5
Irrecoverable debts
Example
At 1 October 20X5 a business had total outstanding debts of $8,600.

During the year to 30/9/20X6 the following transaction tool place.
(a) Credit sales amounted to $44,000.
(b) Payments from various customers (accounts receivable)
amounted to $49,000.
(c) Two debts, for $180 and $420, were declared irrecoverable and
the customers are no longer purchasing goods from the company.
These are to be writen off.
Prepare the trade receivables ledger account and the irrecoverable
debts expense account for the year.
6
Irrecoverable debts
Example
TRADE RECEIVABLES (SOFP)
$ $
49,00
Opening balance b/f 8,600 Cash
0
Sales 44,000 Irrecoverable debts 180
Irrecoverable debts 420
Closing balance c/d 3,000
52,60
52,600
0
Opening balance
3,000
b/d
IRRECOVERABLE DEBTS EXPENSE (SOPL)

$ $
18
Receivables P/L a/c 600
0
42
Receivables
0
60
600
0
7
Allowance for receivables

Definition
Allowances for receivables are allowances that a company set

up to recover for an estimated doubtful debts
A doubtful debt is a debt which is possibly irrecoverable
Specific allowance: an allowance

against a particular receivable
Types of
allowances for
receivables Percentage/general allowance: an
allowance based on past experience of
irrecoverable debts
8

Recognition
1. First time of making allowance
DR Irrecoverable debts expense
CR Allowance for receivables
2. Second time onwards
a, Closing balance of allowance for receivables > Opening balance

of allowance for receivable  Positive result
DR Irrecoverable debt expense
CR Allowance for receivable
b, Closing balance of allowance for receivables < Opening balance

of allowance for receivable  Negative result
DR Allowance for receivable
CR Irrecoverable for receivable

9

Example
Alex Gullible has total receivables outstanding at 31/12/20X2 of

$28,000. He has calculated that the equivalent of 1% of the these
balances might not be collected and wishes to make an appropriate
allowance. Before now, he has not made any allowance for
receivables at all.
On 31/12/20X3 his trade accounts receivable amounted to $40,000.
Upon reviewing the balances, he calculated that an allowance
should be made equivalent to 5% of the total balance.
What accounting entries should Alex make on 31 December 20X2
and 31 December 20X3, and what figures for trade receivables will
appear in his statements of financial position as at those dates?
10
Irrecoverable debts
Example
At 31/12/20X2
Allowance required = 1% x $28,000 = $280
Alex will make the following entries.
DEBIT Irrecoverable debts expense $280

(statement of profit or loss)
CREDIT Allowance for receivables $280
(statement of financial position)
Receivables will appear as follows under current assets.
$
Receivables ledger balances 28,000

Less allowance for receivables (280)
27,720
11
Irrecoverable debts
Example
At 31/12/20X3
Following the procedure describe above, Alex will calculate as
follows.
$
Allowance required now (5% x $40,000) 2,000
Existing allowance (280)
Additional allowance required 1,720
He will make the following entries

DEBIT Irrecoverable debts expense $1,720
CREDIT Allowance for recceivables $1,720
12
Irrecoverable debts
Example
ALLOWANCE FOR RECEIVABLES (SOFP)

20X2 $ 20X2 $
31 Dec Balance c/d 280 31 Dec P/L account 280
20X3 20X3
31 Dec Balance c/d 2,000 1 Jan Balance b/d 280
31 Dec P/L account 1,720
2,000 2,000
20X4
1 Jan Balance b/d 2,000
Trade receivables will be valued as follows.

$
Receivables ledger balances 40,000
Less allowance for receivables 2,000
38,000
13
Presentation
Statement of profit or loss (extract)

Irrecoverable debts
Irrecoverable debt written off X
Increase/(Decrease) in specific allowance for receivables X/(X)
Increase/(Decrease) in general allowance for receivable X/(X)
Recovery of debts written off (X)
X/(X)
Statement of financial position (extract)

Trade receivables (closing balance) X
Less: Allowance for receivables (closing balance) X
Net trade receivables (closing balance) X
Less:
OR Allowance for receivables (closing balance) X
Trade receivables (closing balance) X

14
Exam focus point

Exam focus point 1
At 31/12/20X2 a company’s receivables totalled $400,000 and

an allowance for receivables of $50,000 had been brought
forward from the year ended 31/12/20X1.
It was decided to write off debts totalling $38,000. The
allowance for receivables was to be adjusted to the equivalent
of 10% of the receivables.
What charge for receivables expense should appear in the
company’s statement of profit or loss for the year ended 31
December 20X2?
A. $74,200 B. $51,800
C. $28,000 D. $24,200
15
Exam focus point

Exam focus point 1
D. $24,200
$
Closing allowance (400,000 – 38,000) x
36,200
10%
Opening allowance 50,000
Decrease in allowance (13,800)
Irrecoverable debts written off 38,000
Statement of profit or loss charge 24,200
1
Chapter 13:
Sales tax
2

 The nature of sales tax and how it is
collected
 Accounting for sales tax

3
Nature of sales tax

Definition
Sales tax
Sales tax is an indirect tax levied on the sale of goods

and services
Administered by tax authorities
Can have a number of rates

eg: standard rate, reduced rate...
4
Nature of sales tax

How is sales tax collected ?
Sales tax is a cumulative tax, collected at various stages during
the life of goods or services
Example: Price net of Sales tax Total
sales tax 15% price
$ $ $
i) Manufacturer purchases raw
40 6 46
materials and components
ii) Manufacturer sells the completed
200 30 230
television to a wholesaler
The manufacture hands over to tax
24
authorities
i) Wholesaler purchases television 200 30 230
ii) Wholesaler sells television to retailer 320 48 368
Wholesaler hands over to tax
18
authorities
i) Retailer purchases television 320 48 368
ii) Retailer sells television 480 72 552
Retailer hands over to tax
24
authorities
Customer purchases television 480 72 552
5
Nature of sales tax

Example: How is sales tax collected ?
The total tax of $72 is borne by the ultimate consumer but it is
collected on behalf of the tax authorities at different stages in
the products’s life
Supplier of materials and components 6
Manufacturer 24
Wholesaler 18
Retailer 24
Total sales tax paid 72
 Sales tax does not affect the statement of profit or loss

(unless it is irrecoverable)
 Simply being collected on behalf of tax authorities to whom a
payment is made
6
Nature of sales tax

Input and output sales tax
Registered businesses
 Charged output sales tax on sales
 Suffer input sales tax on purchases
Output sales
The business pays the difference in
tax exceeds
tax to the authorities
input sales tax
Output sales
tax is less The tax authorities will refund the
input sales tax difference to the business
in a period
7
Nature of sales tax

Irrecoverable sales tax
Some sales tax is irrecoverable
Must be regarded as part of the cost of the items

purchased
Included in the statement of profit or loss (SOPL) charge/

in the statement of financial position as appropriate
8
Nature of sales tax

Example: Irrecoverable sales tax
 A business pays $500 for entertaining expenses

 Suffers irrecoverable input sales tax of $75 on this
amount
The total of $575 should be charged to the statement of

profit or loss (SOPL) as an expense
 A business pays $5000 for a motor vehicle

 Suffers irrecoverable input sales tax of $400
The business should capitalise the full amount of $5,400 as

a non-current asset in the statement of financial position
(SOFP)
9
Nature of sales tax

Amounts inclusive and exclusive of tax
The gross amount of a sale/purchase is the amount inclusive of

sales tax
The net amount of a sale/purchase is the amount exclusive of

sales tax
Example:
Net amount exclusive of sales tax = $100
Sales tax = $100 x 15% = $15
Gross amount inclusive of sales tax = $100 + $15 = $115

10
Accounting for sales tax

 Sales tax charged on sales is collected by the business on

behalf of the tax authorities
 It does not form part of the revenue of the business
Purchases Sales
 Irrecoverable input sales

Statement of
tax: include Exclude
profit or loss
 Recoverable input sales sales tax
(SOPL)
tax: exclude
11

Example: Statement of profit or loss
Sales:
 A business sells goods for $600 + sales tax $90 = total price $690
 The sales account should only record $600 excluding sales tax
DR Cash or trade receivables $690

CR Sales $600
CR Sales tax control account (output sales tax) $90
Purchases (sales tax is recoverable)

 A business purchses goods on credit for $400 + sales tax $60
DR Purchases $400
DR Sales tax control account (input sales tax) $60
CR Trade payables $460
12

Exam focus point 1
Alana is not registered for sales tax purposes. She has recently
received an invoice for goods for resale which cost $500 before sales
tax, which is levied at 15%. The total value was therefore $575.
What is the correct entry to be made in Alana’s general ledger in
respect of the invoice?
A. Dr Purchases $500, Dr Sales tax $75, Cr Payables $575
B. Dr Purchases $575, Cr Sales tax $75, Cr Payables $500
C. Dr Purchases $500, Cr Payables $500
D. Dr Purchases $575, Cr Payables $575

13

Exam focus point 1
Alana is not registered for sales tax purposes. She has recently
received an invoice for goods for resale which cost $500 before sales
tax, which is levied at 15%. The total value was therefore $575.
What is the correct entry to be made in Alana’s general ledger in
respect of the invoice?
D. Dr Purchases $575, Cr Payables $575

14

Payable for sales tax
An outstanding payable for sales tax will appear as a current

liability in the statement of financial position
Example:
A business
 invoiced for input sales tax $8,000
 charges sales tax of $15,000 on its credit sales and sales tax
of $2,000 on its cash sales
SALES TAX CONTROL ACCOUNT

$ $
Payables 8,000 Receivables (output
(input sales tax) sales tax invoiced) 15,000
Cash (payment to 9,000 Cash (output sales tax 2,000

authorities) on cash sales)
17,000 17,000
15

Exam focus point 2
The following information relates to Eva Co’s sales tax for the
month of March 20X3:
$
Sales (including sales tax) 109,250
Purchases (net of sales tax) 64,000
Sales tax is charged at a flat rate of 15%. Eva Co’s sales tax account
showed an opening credit balance of $4,540 at the beginning of the
month and a closing debit balance of $2,720 at the end of the
month.
What was the total sales tax paid to regulatory authorities during
the month of March 20X3?
16

Exam focus point 2
$11,910
SALES TAX CONTROL ACCOUNT

$ $
b/d 4,540
Purchases 9,600 Sales 14,250
($64,000 x 15%) ($109,250 x 15%/115%)
Cash 11,910 c/d 2,720
21,510 21,510
1
Chapter 14:
Control Accounts
2
 What is control account?
 Discounts
 The operation of control accounts
 Agreeing control accounts with receivables and

payables ledgers
3
What is control accounts?

Definition
A control account is an account in the general ledger in which

a record is kept of the total value of a number of similar but
individual items
Control account is an impersonal account which will appear in

the general ledger
Control accounts are used mainly in accounting for

receivables and payables. However, they can also be kept for
other items (inventories, wages and salaries, cash…)
Control accounts in
general ledger
Information is available on
reconcile
about balances 2 places
Personal accounts in
specific ledgers
4

Example: Control accounts and personal accounts
A business has three trade accounts receivable: A Arnold owes

$80, B Bagshaw owes $310 and C Cloning owes $200. The
debit balances on the various accounts would be:
Receivables ledger (personal accounts) $

A Arnold 80
B Bagshaw 310
C Cloning 200
590
General ledger: receivables control account 590
5

Purpose of control accounts
Check accuracy of entries made in the

personal accounts
Assist in the location of errors

The
purpose of
control
accounts Internal check where there is separation of
bookkeeping duties
A balance can be extracted quickly for

producing a trial balance
6
Discounts
Types of discount
Trade discount Cash/Settlement discount
A reduction in the list price

of goods, given by a A reduction in amount
wholesaler or manufacturer payable in return for
to a retailer. It is often given payment in cash, or within
in return for bulk purchase an agreed period
orders
Example: Example:
A customer is quoted a price of A supplier charges $1,000 for
$1 per unit for a particular item, goods, but offers a discount of
but a lower price of $0.95 per 5% if the goods are paid within
unit if the item is bought in 1 week.
quantities of more than 100
units at a time.
7
Discounts
Trade discount
Discount is
Trade deducted DR Purchase
discount from gross (deduct discount)
received cost of CR Trade payables
Trade discount
purchases.
Discount is
Trade DR Trade receivables
deducted
discount (deduct discount)
from gross
allowed CR Income
sales price
8
Discounts
Example: Trade discount
Trade discount received:

A Co purchases inventory on credit from supplier B Co at a gross
cost of $100, and receives a trade discount of 5% from the
supplier. The double entry for the purchase is as follow:
DR Inventory $95
CR Trade payables $95
Trade discount allowed:

B Co sells inventory on credit to customer C Co at a gross sale
price of $100, and offers a trade discount of 10% to the customer.
The double entry for the sale is as follow:
DR Trade receivables $90
CR Income $90
9
Discounts
Cash/Settlement discount
Discount DR Purchase
Cash received is (full trade price)
discount recorded as CR Trade payables
received other CR Other income
Cash/Settlement discount
income (Discount amount)
If customer
is expected
to take up
Cash DR Trade receivables
discount,
discount CR Sales
discount is
allowed (deduct discount)
deducted
from sales
revenue
10
Operation of control accounts

Receivables control account
Enter with total credit sales from the sales day book and total
cash from debtors and discounts allowed
Balance on the Sum of the balances on the

receivables individual accounts in the
control account debtors ledger
RECEIVABLES CONTROL ACCOUNT

$ $
Sales Sales return
X X
(Credit sales) (Goods returned by customer)
Sales tax Sales tax
X X
(Sales tax on credit sales) (Sales tax on goods returned)
Cash Irrecoverable debts
X X
(Refund) (Debt written off)
Sales return (Refund) X
Payables control account
X
(Contra entry)
Discount allowed X
11

Enter with total credit purchase from the purchase day book and
total cash paid to creditors and discounts received
Balance on the Sum of the balances on the

purchase control individual accounts in the
account creditors ledger
PAYABLES CONTROL ACCOUNT

$ $
Purchase return X Purchase X
Sales tax Sales tax (Input sales tax on
X X
(Input sales tax on goods return) goods purchased)
Cash
X Cash (Cash refund) X
(Payment for credit supplier)
X
(Contra entry)
Purchase return (Refund)
Discount received X
12

Contra entry/Debts off-setting
Contra entry happens when a business both purchases goods

from and sell goods to the same entity on credit.
Contra entry off-sets amounts due to and due from the same
entity in the payables ledger and receivables ledger.
Even the supplier and the customer are the same, it will have
separate account in each ledger.
In the general ledger:

DR Payables control account
CR Receivables control account
In the payables ledger:
DR Payables to company A
In the receivables ledger:
CR Receivables from company A
13
Agreeing control accounts with

receivables and payables ledgers
Reasons for being imbalance
The control accounts should be balanced regularly (at least

monthly), and the balance on the account agreed with the
sum of the individual debtors’ or suppliers’ extracted fom the
receivables or payables ledgers respectively.
Miscast of total in the books of prime entry
Transposition error occurs in posting individual balance

Reasons from book of prime entry to individual account
for being
imbalance Transactions recorded in the control account are
not in the memorandum ledger
Extract incorrectly or miscast the sum of balances

entracted from the memorandum ledger
14

Example
ABC has a payables control account balances of $12,500 at

31/12/20X9. However, the extract of balances from the
payables ledger totals $12,800. Investigation finds the
following errors: purchases for week 52 of $1,200 had been
omitted from the control account; a supplier account of $900
had been omitted from the list of balances.
What is the correct payables balance at 31/12/20X9?
15

Example
ABC has a payables control account balances of $12,500 at

31/12/20X9. However, the extract of balances from the
payables ledger totals $12,800. Investigation finds the
following errors: purchases for week 52 of $1,200 had been
omitted from the control account; a supplier account of $900
had been omitted from the list of balances.
What is the correct payables balance at 31/12/20X9?
PAYABLES CONTROL ACCOUNT

$ $
Bal b/d 12,500
Balance c/d 13,700 Purchase – week 52 1,200
13,700
Corrected list of balance:
$
Original 12,800
Omitted account 900
13,700
16

Exam focus point 1
An inexperienced bookkeeper has drawn up the following
receivables ledger control account:
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 180,000 Credit sales 190,000
Cash from credit 232,200 Irrecoverable debts 1,500
customers written off
Sales returns 8,000 Contras against 2,400
payables
Cash refunds to 3,300 Closing balance 229,600
credit customers (balancing figure)
423,500 423,500
What should the closing balance be after correcting
the errors made in preparing the account?
A. $130,600 B. $129,200
C. $142,400 D. $214,600
17

Exam focus point 1
B. $129,200
RECEIVABLES LEDGER CONTROL ACCOUNT

$ $
Opening Cash from credit
180,000 232,200
balance customers
Irrecoverable
Credit sales 190,000 1,500
debts written off
Cash refunds 3,300 Sales returns 8,000
Contras 2,400
Closing balance 129,200
373,300 373,300
1
Chapter 15:
Bank reconciliations
2

 Bank statements and cash books
 The bank reconciliation

3
Bank statement and cash book

Overview
 In theory, the entries appearing on a business’s bank

statement should be the same as those in the
business cash book
 The balance shown by the bank statement should be
the same as the cash book balance on the same date
Cash book Bank statement
differences
Reconciliation
4

Differences on bank reconciliation
There are three reasons why, at a given point in time, the

cash book and bank statement may not be in agreement:
The bank lacks knowledge of transactions effected by the

business (timing differences)
There is unavoidable delay between transactions being

effected by the bank and the business' acknowledgement of
them (omissions – items on the bank statement not in the
cash book)
Errors by the bank or the business

5

Example: Differences on bank reconciliation
Timing  Unpresented cheques

differences  Outstanding lodgements
 Bank interest/charges
Omisions  Standing orders/direct debits
 Dishonoured cheques
 Banks errors
 Errors in calculation, or recording
Error
income and payments
 Cast errors ...
6

Terminology
Unpresented cheques
A cheque is a money order drawn by a payer to settle an
amount due to the payee.
The payee presents the cheque to his bank to have the
money transferred to the payee's account.
Outstanding lodgements
Uncleared (i.e. outstanding) deposits are also called
outstanding lodgements. That is, money which has been
lodged (i.e. placed) with the bank, but has not yet cleared
the banking system to be included on the bank statement
Standing order
This is an instruction given by a payer to its bank telling the
bank to pay a fixed amount on a predetermined date to a
third party. Note that the third party has no power to
request payment from the bank
7

Terminology
Direct debit
This is an authority given by a payer to a third party (the

payee) to debit the payer's account on a specific date (or
nearest banking day thereto). This authority can be for fixed
amount per month or variable.
Dishonoured cheques
If the issuer of the cheque—the payer—does not have

sufficient funds to cover the amount of the payment, then
the cheque is returned to the payer as dishonoured. The
transfer to the payee is reversed and the payer's liability is
not discharged, which results in the payee needing to ask
for payment again.
8
The bank reconciliation

Reconciliation Procedure
Identify cash book adjustments and

STEP 1
bank statement adjustments.
Correct/amend the cash book (CB)—

STEP 2
requires double entries.
Adjust bank statement (BS) balance for

STEP 3
timing differences and bank errors.
9

Correct the cash book
CASH ACCOUNT
Balance b/f X Dishonoured cheque X

Undercast error Bank charges X
in balance b/f X Standing orders X
Direct debits X
Balance c/f X
X X
Corrected balance b/f X
Corrected cash book balance is the cash balance that is

shown in the SOFP
10

Reconcile to the bank statement
Proforma bank reconciliation
$
Balance per bank statement X
Less outstanding cheques (X)
Plus outstanding lodgements X
Plus/less bank errors X/(X)
Balance per corrected cash book X
11
Worked examples
Worked example 1
At 30 September 20X6, the balance in the cash book of Wordsworth

Co was $805.15 debit. A bank statement on 30 September 20X6
showed Wordsworth Co to be in credit by $1,112.30
On investigation of the difference between the two sums, it was
established that:
(a) The cash book had been undercast by $90,000 on the debit
site*
(b) Cheques paid in not yet credited by the bank amounted to
$208.20, called outstanding lodgements
(c) Cheques drawn not yet presented to the bank amounted to
$425.35 called unpresented cheques
Required
(a) Show the correction to the cash book.
(b) Prepare a statement reconciling the balance per bank statement

to the balance per cash book.
12
Worked examples
Worked example 1
(a) Corrected cash book:

$
Cash book balance brought forward 805.15
Add
Correction of undercast 90.00
Corrected balance 895.15
(b) Bank reconciliation

$
Balance per bank statement 1,112.30
Add outstanding lodgements 208.20
1,320.50
Less unpresented cheques (425.35)
Balance per cash book 895.15
13
Exam focus point
The following information relates to a bank reconciliation:
(i) The bank balance in the cashbook before taking the items below
into account was $8,970 overdrawn.
(ii) Bank charges of $550 on the bank statement have not been
entered in the cashbook.
(iii) The bank has credited the account in error with $425 which
belongs to another customer.
(iv) Cheque payments totalling $3,275 have been entered in the
cashbook but have not been presented for payment.
(v) Cheques totalling $5,380 have been correctly entered on the
debit side of the cashbook but have not been paid in at the
bank.
What was the balance as shown by the bank statement
before taking the above items into account ?
A. $9,520 overdrawn B. $11,200 overdrawn
C. $9,520 in credit C. $11,200 in credit

14
Exam focus point
A. $9,520 overdrawn
Cash book $ Bank statement $

Balance (8,970) Balance b/f (bal fig) (11,200)
Bank charges (550) Credit in error (425)

Unpresented cheques (3,275)
Outstanding deposits 5,380
9,520 (9,520)
1
Chapter 16:
Preparation of financial
statements for sole traders
2

 Errors
 Accruals and prepayments
 Depreciation
 Irrecoverable debts written off
 Adjustment to receivables allowance
 Closing inventory figures

3
Preparation of final accounts

Process of preparing financial statements
Transactions recorded in ledger accounts
Ledger accounts balanced and closed off
Trial balance extracted
Year end adjustments made and ledger accounts

closed off
Trial balance used to prepare financial statements

4

Adjustments to initial trial balance
Common adjustments made at the end of the

accounting period
Depreciation Irrecoverable debts
Allowance for
Inventory
receivables
Accruals and Profit/Loss disposal of

prepayment non-current assets
5

Common accounting adjustments to initial trial balance
Closing inventory
DR Inventory (SOFP)
CR Cost of sales (SOPL)
Depreciation charged
DR Depreciation expense (SOPL)

CR Accumulated depreciation (SOFP)
Accruals
DR Expenses (SOPL)
CR Accrual (Liability – SOFP)
Prepayments
DR Prepayment (Current asset – SOFP)

CR Expenses (SOPL)
6

Common accounting adjustments to initial trial balance
Irrecoverable debts
DR Irrecoverable debt expense (SOPL)

CR Receivables (SOFP)

Increase in allowance
DR Irrecoverable debt expense (SOPL)
CR Allowance for receivables (SOFP)
Decrease in allowance
DR Allowance for receivables (SOFP)
CR Irrecoverable debt expense (SOPL)
Tax estimate for the year
DR Tax charge (SOPL)

CR Current tax liabilities (SOFP)
7
Example: Preparation of final accounts

The following trial balance was extracted from the ledger of Stephen Chee, a
sole trader, as at 31 May 20X1 – the end of his financial year ($)
Dr Cr
Property, at cost 120,000
Equipment, at cost 80,000
Accumulated depreciation (as at 1 June 20X0)
- on property 20,000
- on equipment 38,000
Purchases 250,000
Sales 402,200
Inventory, as at 1 June 20X0 50,000
Discounts received 4,800
Returns out 15,000
Wages and salaries 58,800
Irrecoverable debts 4,600
Loan interest 5,100
Other operating expenses 17,700
Trade payables 36,000
Trade receivables 38,000
Cash in hand 300
Bank 19,300
Drawings 24,000
Allowance for receivables 500
17% long-term loan 30,000
Capital, as at 1 June 20X0 121,300
667,800 667,800
8

Requirement
The following additional information as at 31 May 20X1 is available:
a. Inventory as at the close of business has been valued at cost at
$42,000
b. Wages and salaries need to be accrued by $800
c. Other operating expenses are prepaid by $300
d. The allowance for receivables is to be adjusted so that it is 2% of
trade receivables
e. Depreciation for the year ended 31 May 20X1 has still to be
provided for as follows.
 Property: 1.5% per annum using the straight line method
 Equipment: 25% per annum using the reducing balance
method
Required:
Prepare Stephen Chee’s Statement of profit or loss for the
year ended 31 May 20X1
9

Adjustments
Workings:
1. Irrecoverable debts $
Previous allowance 500
New allowance (2% x 38,000) 760
Increase 260
Per trial balance 4,600
Statement of profit or loss 4,860
2. Depreciation
Property
Opening accumulated depreciation 20,000
Charge for the year (1.5% x 120,000) 1,800
Closing accumulated depreciation 21,800
Equipment
Opening accumulated depreciation 38,000
Charge for the year (25% x 42,000) 10,500
Closing accumulated depreciation 48,500
Total charge in statement of profit or loss 12,300
10

Statement of profit or loss for the year ended 31 May 20X1
$ $
Revenue 402,200
Cost of sales
Purchases 250,000
Purchase returns (15,000)
285,000
Closing inventory 42,000
243,000
Gross profit 159,200
Other income – discounts received 4,800
164,000
Expenses
Operating expenses
Wages and salaries ($58,800 + $800) 59,600
Irrecoverable debts (W1) 4,860
Loan interest 5,100
Depreciation (W2) 12,300
Other operating expenses ($17,700 - $300) 17,400
99,260
1
Chapter 17:
Introduction to company
accounting
2

 Limited liability and accounting records
 Share capital
 Reserves
 Bonus and rights issues

3
Limited liability and accounting records

Limited liability
Limited liability
The maximum amount that an owner stands to lose, in
the event that the company becomes insolvent and
cannot pay off its debt is their share of the capital in the
business
Owners = shareholders or members
Large number of owners
Owner/Manager split
Owners appoint directors to run business on their behalf
Owners receive share of profits in form of dividends

4
Share capital
The capital of limited liability companies
The proprietors’s capital in a limited liability company consists

of share capital
When the company is set up for the first time, it issues shares,
which are paid for by investors, who then become
5
Share capital
Example: The capital of limited liability companies
Example 1:
A company is set up with a share capital of $100,000, it may be

decided to issue:
 100,000 shares of $1 each par value
 200,000 shares of 50c each
 400,000 shares of 25c each
 250,000 shares of 40c each.
6
Share capital
The capital of limited liability companies
 An arbitrary value assigned to a share,

which is often perceived as the share’s
Nominal/
minimum value (often $1, 50c or 25c)
par value
 Remains fixed, whereas the market value
of the shares fluctuates over time
 The price at which shares are sold by a

Issue price
company in the first instance
Market  The value at which the shares are trading

value on the open market
7
Share capital
Example: The capital of limited liability companies
Example 2:
A company might issue 100,000 $1 shares at a price of $1.20 each

Subscribers will then pay a total of $120,000.
 Par value: $1/share
 Issued share capital of the company would be shown in its
accounts at par value: $100,000
 The excess of $20,000 is described as share premium or
capital paid up in excess of par value
8
Share capital
Authorised, issued, called-up and paid-up share capital
Authorised
The maximum amount of share capital that a
(or legal
company is empowered to issue
capital)
 The par amount of share capital that has

Issued been issued to shareholders
capital  The amount of issued capital cannot
exceed the amount of authorised capital
When shares are issued or allotted, a company

does not always expect to be paid the full
Called-up
amount of shares at once.
capital
Instead, it call up only a part of the issue
price. Call up the remainder later.
When capital is called up, some shareholders

Paid-up might delay their payment.
capital Paid-up capital is the amount of called-up
capital that has been paid.
9
Share capital
Preference shares and ordinary shares
Two types of shares most often encountered
Preference Shares which confer certain preferential rights

shares on their holder
Shares which are not preferred with regard to

dividend payments.
Ordinary
Thus a holder only receives a dividend after
shares
fixed dividends have been paid to preference
shareholders
10
Share capital
Preference shares
The rights attaching to preference shares are set out in the

company’s situation. They may vary, but typically:
 Right to fixed dividend with priority over ordinary shares
 Preference shares do not carry a right to vote
 Generally priority for capital in winding up

11
Share capital
Classification of Preference shares
Redeemable preference Irredeemable preference

shares shares
The company will redeem

the nominal value of those Treated just like other
shares at a later date shares.
They form part of equity and

Treated like loans, included their dividends are treated
as non-current liabilities in as appropriations of profit.
SOFP
Dividends paid on
redeemable preference
shares, treated like interest
paid on loans, included in
financial costs in SOPL
12
Share capital
Ordinary shares
The most common type of share, has such features:
 No right to fixed dividend
 Entitled to remaining profits after preferred dividend
 Entitled to surplus on repayment of capital

13
Share capital
Loan stock or bonds
Long-term liabilities – a means of raising finance, in the same

way as issuing share capital raises finance
Different from share capital in the following ways:
Providers of loan capital are creditors
Holders of loan capital are entitled to a fixed rate of interest
Loan capital holders can take legal action against a company if

their interest is not paid when due
Loan stock is often secured on company assets, whereas

shares are not
14
Share capital
Exam focus point 1
Which of the following items may appear as current liabilities

in a company’s statement of financial position?
1 Revaluation surplus
2 Loan due for repayment within one year
3 Taxation
4 Preference dividend payable on redeemable preference
shares
A. 1,2 and 3 B. 1,2 and 4
C. 1,3 and 4 D. 2,3 and 4

15
Share capital
Exam focus point 1
Which of the following items may appear as current liabilities

in a company’s statement of financial position?
1 Revaluation surplus
2 Loan due for repayment within one year
3 Taxation
4 Preference dividend payable on redeemable preference
shares
D. 2,3 and 4
 The revaluation surplus is part of equity.

 Dividends paid on redeemable preference shares are treated like
interest paid on loans, and are therefore accrued for as finance
costs in the financial statements
16
Reserves
Shareholders’ equity
Share capital Other equity

(The par value of
issued capital
minus any amounts Share premium
not yet called up on
issued shares)
Revaluation surplus
Reserves
Retained earnings
17
Reserves
Share premium account
An account into which sums received as payment for shares in

excess of their nominal value must be placed
Example
If X Co issues 1,000 $1 ordinary shares at $2.60 each the book

entry will be:
DR Cash $2,600
CR Ordinary shares $1,000
CR Share premium account $1,600
18
Reserves
Reserves
Statutory reserves Non-statutory reserves
 Reserves which a
company is required to set  Reserves consisting of
up by law profits
 Not available for the  Distributable as dividends,

distribution of dividends if the company so wishes
 Capital reserves (share  Revenue reserves

premium. revaluation)
19
Reserves
Example: Reserves
$ $
Profit after tax 100,000
Appropriations of profit
Dividend 60,000
Transfer to general reserves 10,000 70,000
Retained earnings for the year 30,000
Retained earnings b/f 250,000

Retained earnings c/f 280,000
20
Reserves
Retained earnings
This is the most significant reserve and is variously described as:
Revenue reserves Retained earnings
Accumulated profits Undistributed profits
Unappropriated profits
These are profits earned by the company and not appropriated

by dividends, taxation or transfer to another reserve account
 To enable the company to pay dividends even when profits are low
 Shortage of cash
 ....
21
Bonus and rights issues

Bonus issues
A bonus (or capitalisation) issue uses reserves to pay for the
issue of share capital
Example: $’000 $’000

Share capital
$1 ordinary shares (fully paid) 1,000
Reserves
Share premium 500
Retained earnings 2,000 2,500
3,500
Bubbles decided to make a ‘3 for 2’ bonus issues
(ie 3 new shares for every 2 already held)
DR Share premium $500,000

DR Retained earnings $1,000,000
CR Ordinary share capital $1,500,000
22

Rights issues
A rights issue enables existing shareholders to acquire further shares
Example: $’000 $’000

Share capital
$1 ordinary shares (fully paid) 1,000
Reserves
Share premium 500
Retained earnings 2,000 2,500
3,500
Bubbles decided to make a right issue, shortly after the bonus issue (above).
The terms are ‘1 for 5 @ $1.20’ (ie 1 new share for every 5 already held, at a
price of $1.20).
Assuming that all shareholders take up their rights
DR Cash (2,500 / 5 x $1.20) $600,000
CR Ordinary share capital $500,000
CR Share premium $100,000
23

Exam focus point 1
A company made an issue for cash of 1,000,000 50c shares at a premium

of 30c per share.
Which one of the following journal entries correctly records the issue?
A. Dr Share capital $500,000
Dr Share premium $300,000
Cr Bank $800,000
B. Dr Bank $800,000
Cr Share capital $500,000
Cr Share premium $300,000
C. Dr Bank $1,300,000
Cr Share capital $1,000,000
D. Dr Share capital $1,000,000
Cr Bank $1,300,000
24

Exam focus point 1
A company made an issue for cash of 1,000,000 50c shares at a premium

of 30c per share.
B. Dr Bank $800,000
Cr Share capital $500,000
25

Exam focus point 2
At 30 June 20X2 a company’s capital structure was as follow:
$
Ordinary share capital
500,000 shares of 25c each 125,000
Share premium account 100,000
In the year ended 30 June 20X3 the company made a rights issue of one
share for every two held at $1 per share and this was taken up in full.
Later in the year the company made a bonus issue of one share for
every five held, using the share premium account for the purpose.
What was the company’s capital structure at 30 June 20X3?
Ordinary share capital Share premium account
$ $
A. 450,000 25,000
B. 225,000 325,000
C. 225,000 250,000
D. 212,500 262,500
26

Exam focus point 2
Ordinary share capital Share premium account
C. $225,000 $250,000
$
Ordinary shares
Opening balance 125,000
Right issue 250,000 x 25c 62,500
Bonus issue 150,000 x 25c 37,500
225,000
Share premium
Opening balance 100,000
Rights issue 250,000 x 75c 187,500
Bonus issue 150,000 x 25c (37,500)
250,000
1
Chapter 18:
statements for companies
2
 IAS 1 – Presentation of financial statements
 The statement of financial position
 The statement of profit or loss and other

comprehensive income
 Statements of changes in equity
 Notes to the financial statements
 IFRS 15 – Revenue from contracts with customers

3
IAS 1 – Presentation of financial statements

Content of financial statements
IAS 1 required contents of a company’s financial statements.

It also gives guidance on how items should be presented in
the financial statements
Statement of financial position (SOFP)
Statement of profit or loss and other

comprehensive income (SPLOCI)
A complete
set of
Statement of changes in equity (SOCIE)
financial
statements
Statement of cash flows (SOCF)
(Detail in Chapter 20)
Notes to financial statements

4

How are items disclosed?
Some items must appear on the face of the

SOFP or SOPL
Other items can appear in a note to the

financial statements
Recommended formats are given which

entities may or may not follow, depending on
their circumstances.
5

Disclosures requirements
Name of the reporting entity

Whether the accounts cover the single entity or

a group of entities
The reporting date or the period covered by

The reporting currency
The level of precision used in presenting the

figures in the financial statements
FSs should be prepared at least as often as annually

6

Requirement
Assets and liabilities should be

Information should be
presented:
disclosed
current items and non-current items
expected to be realized in Classes of property, plant

normal operating cycle and equipment
held for purpose of

Classifications of inventory
trading
Current expected to be realized

Types of provision
items within 1 year
unrestricted cash or cash Details of classes of share

equivalent capital
a liability has to be A description of reserves

settled within 1 year within equity
7

Simple format of SOFP
20X2 20X1
$’000 $’000 $’000 $’000
Assets
Non-current assets X X
Property. Plant and equipment X X
Goodwill X X
Other intangible assets X X
X X
Current assets
Inventories X X
Trade receivables X X
Other current assets X X
Cash and cash equivalents X X
X X
Total assets X X
8

20X2 20X1
$’000 $’000 $’000 $’000
Equity and liabilities
Equity
Share capital X X
Retained earnings X X
Other reserves X X
X X
Long-term borrowings X X
Long-term provisions X X
X X
Current liabilities
Trade and other payables X X
Short-term borrowings X X
Current tax payable X X
Total equity and liabilities X X

9
Statement of profit or loss and

other comprehensive income
Requirement
SPLOCI may be presented as one statement or two seperate

statements
Other comprehensive income

Profit or loss includes
includes
Items of income Revaluation surplus arising on PPE
Remeasurement of defined
Items of expenses pension schemes
Cash flow hedges
Change in fair value of financial

instruments
Exchange differences arising on

translation of foreign subsidiary
10

Requirement
Disclosure requirement
Share of profit or loss of

Revenue
associates/joint ventures
Gains/losses on Gains/losses on
derecognition of financial reclassification of financial
assets assets
Finance costs Tax expense
Impairment losses (and Single amount for

reversals) discontinued operations
11

Simple format of SPLOCI
20X2 20X1
$‘000 $‘000
Revenue X X
Cost of sales (X) (X)
Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance cost (X) (X)
Profit before tax X X
Tax expense (X) (X)
Profit for the year X X
Other comprehensive income:
Gains on property revaluation X X
Total comprehensive income for the year X X
12
Statement of changes in equity

SOCIE includes
Total comprehensive income for the period
The effects of changes in accounting policies and

corrections of errors recognised in accordance with IAS 8
A reconciliation between the carrying amount at the

beginning and end of the period
13

Simple format of SOCIE
Share Share Revaluation Retained

Total
capital premium surplus earnings
Balance at
X X X X X
1.1.20X8
Changes in
- - - (X) (X)
accounting policy
Restated balance X X X X X
Changes on
equity for 20X8
Dividends - - - (X) (X)
Comprehensive
income for the - - X X X
year
Issue of share
X X - - X
capital
Balance at
X X X X X
31.12.20X9
14

Requirement
Notes are included in a set of financial statements to give

users extra information
Present information about the basic of

preparation and accounting policies
Notes to the
financial Disclose information required by IFRS
statements Standards that is not disclosed elsewhere
should
Provide other relevant information not
presented elsewhere
15

Format of notes to the financial statements
Tangible non-current assets (IAS 16)

• Measurement model
• Depreciation method
• Depreciation rate or useful life
• Reconciliation of opening and closing carrying value
• Revalued assets
Intangible non-current assets (IAS 38)

• Intangible assets with definite life
• Intangible assets with indefinite life
• Factors to assess indefinite life intangible assets
• Internally generated intangible assets
• Reconciliation of carrying value at start to year end
• Impairment loss
Inventories (IAS 2)
• Accounting policies of measuring inventories
• Total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity
• Carrying amount of inventories at NRV
16

Provision, Contingent liabilities and Contingent assets (IAS 37)

• Provision
₋ Opening balance
₋ Increase in period
₋ Release in period
₋ Closing balance
• Contingent liabilities
₋ A brief description of its nature, and where practicable
₋ An estimate of financial effects
₋ An indication of the uncertainties relating to the amount or timing
of any outflow
₋ The possibility of any reimburesement
• Contingent assets
Events after the reporting period (IAS 10)

• Nature of the event
• An estimate of its financial effect (or a statement that an estimate
cannot be made)
17

Exam focus point 1
Which TWO of the following items must be disclosed in the

note to financial statements for intangible assets?
A. The useful lives of intangible assets capitalized in the

B. A description of the development projects that have been

undertaken during the period
C. A list of all intangible assets purchased or developed in the

period
D. Impairment losses written off intangible assets during the

period
18

Exam focus point 1


period
An entity is not required to disclose a description of the

development projects undertaken in the period, or a list of all
intangible assets purchased or developed in the period.
An entity is required to:
- Disclose a description, the carrying amount and remain
amortization period of any individual intangible assets that
is material to the entity’s financial statements, and
- Distinguish between internally generated intangible assets
capitalized in the period and those acquired in the period.
19

Exam focus point 2
Which of the should appear in a company’s statement of changes

in equity?
1. Total comprehensive income for the year
2. Amortisation of capitalized development assets
3. Surplus on revaluation of non-current assets
A. 1, 2 and 3 B. 2 and 3 only
C. 1 and 3 only D. 1 and 2 only

20

Exam focus point 2
C. 1 and 3 only
Amortisation of development costs will appear in the

statement of profit or loss, not the statement of changes in
equity
21
IFRS 15:
Revenue from Contracts with Customers
Introduction
IFRS 15 - Revenue from contracts with customers replaces IAS 18

- Revenue and IAS 11 - Construction Contracts.
IFRS is effective from 1 January 2018
Revenue is recognized when the entity has transferred control of

goods or services to the buyer.
Control of an asset is “the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset”.
22
IFRS 15:
Scope
IFRS 15 is applicable for all contracts with customers
Leases within the scope of IFRS 16: Leases
Insurance contracts within the scope of

IFRS 4: Insurance contract
Except:
Financial instruments and other

contractual rights and obligations within
the scope of IFRS 9, IFRS 10, IFRS 11, IAS
27 or IAS 28
23
IFRS 15:
Five-step model
STEP 1 Identify the contract
STEP 2 Identify the performance obligations
STEP 3 Determine the transaction price
Allocate the transaction price to each performance

STEP 4
obligation
STEP 5 Recognise revenue

24
IFRS 15:
Five-step model
STEP 1
Identify the contract
Approved by all parties
Rights can be identified
Features of a
Payment terms can be identified
“contract”
Commercial substance
Consideration is probable
25
IFRS 15:
Five-step model
STEP 2
Identify the performance obligations
Performance obligation
Series of distinct
Distinct goods/services
goods/services
Entity's
A
Customer promise to
performance
can benefit transfer the A single
obligation
from the good or method of
that is
good or service is measuring
satisfied
service separately
over time
identifiable
26
IFRS 15:
Five-step model
STEP 2
Example
Steadman Construction Co is contracted to build an office for a

customer. It will design the building, purchase materials, prepare the
site, construct the property, install wiring and air conditioning and finish
the property.
Although each element of the construction process is capable of being

distinct, in the context of the contract, the company provides a
significant service in integrating the input processes to produce a
property.
Therefore there is a single performance obligation, being the
construction of the property.
27
IFRS 15:
Five-step model
STEP 3
Determine the transaction price
Elements for considering

TRANSACTION PRICE the transaction price
The amount of Significant financing

components
consideration an entity
Variable consideration
expects to be entitled to in
exchange for transfering the Non-cash consideration
promised goods/services
Consideration payable to
a customer
28
IFRS 15:
Five-step model
STEP 3
Example
Taplop Co supplies laptop computer to businesses.

1/7/20X8: entered contract with Trill Co – Trill Co purchases laptop $500/unit
If Trill Co purchase more than 500 laptops/year, price reduces to $450/unit
Taplop year end on 30/6.
a, At 30/9/20X8, Trill Co bought 70 laptops. Taplop Co estimates Trill Co
purchase would not exceed 500 in the year to 30/6/20X9, and Trill Co would
not be entitled to the volume discount.
b, During quarter ended 31/12/20X8, Trill Co purchased an additional 250
laptops. Taplop estimates Trill Co purchases would exceed the threshold for
the volume discount in the year to 30/6/20X9.
29
IFRS 15:
Five-step model
STEP 3
Example
a, Recognized revenue in Taplop Co in quarter ended 30/9/20X8

Taplop recognized revenue of 70 x $500 = $35,000
b, Recognize revenue in Taplop Co in quarter ended 31/12/20X8

Taplop should recognize revenue of $109,000
Calculation: $112,500 (250 laptops x $450) less change in transaction
price of $3,500 (70 laptops x $50 price reduction) for the the reduction of
price in the laptop sold in the quarter ended 30/9/20X8.
30
IFRS 15:
Five-step model
STEP 4
Allocate the transaction price
Allocate base on stand-alone price
Stand-alone price of each performance obligation

31
IFRS 15:
Five-step model
STEP 5
Recognise revenue
Entity has a present right to payment for the asset
Customer has legal title to asset
Revenue
at a point Entity has transferred physical possession of the asset
in time
Customer has significant risks and rewards related
to ownership of the asset
Customer has accepted the asset

32
IFRS 15:
Five-step model
STEP 5
Recognise revenue
Customer simultaneously receives and

consumes all the benefits provided
If any of 3
criterias
Revenue are met The entity’s work creates or enhances an
asset controlled by the customer
overtime
Entity's performance does not create an

asset with an alternative use & has an
enforceable right to payment for
performance completed to date
33
IFRS 15:
Example
FPT received an online order from a customer X to buy a

smartphone at a price of $500 on 10/2/20X9. According to the
order, the customer X is entitled to a free simcard. FPT delivered
the 2 products to customer X on 15/2/20X9. Customer X received
the products satisfactorily.
If the customer buys the smartphone or the simcard separately,
FPT would charge him at $490 for the smartphone and $60 for the
simcard.
How should FPT recognized revenues from the order with
customer X under IFRS 15?
34
IFRS 15:
Example
STEP 1
Identify the Online order signed on 10/2/2019
contract
FPT has 2 separate POs:

STEP 2
 PO1: Smartphone
Identify the PO
 PO2: Simcard
STEP 3
Determine the $500 for both POs  Combined price
TP
35
IFRS 15:
Example
STEP 4
Allocate TP to each PO
Single price TP Billing
PO1:
490 445.45 (500 x 490/550) 500
Smartphone
PO2:
60 54.55 (500 x 60/550) 0
Simcard
Total 550 500 500

36
IFRS 15:
Example
STEP 5
Recognize revenue when the PO is satisfied
Control for both POs is passed on 15/2/20X9

On 15/2/20X9:
PO1 Smartphone:
DR Cash 500
CR Sales revenue 445.45
CR Contract asset 54.55
PO2 Simcard:
DR Contract asset 54.55
37
IFRS 15:
Measurement of revenue
Settlement discount
Expect customer to
take up discount?
Yes No
Recognize revenue
deducted from discount Recognize revenue fully
amount
Customer Customer
subsequently subsequently
does not take take up
up discount? discount?
Increase revenue by the Reduce revenue by the

discount amount discount amount
38
IFRS 15:
Example
Khalin Co is a company that manufactures office furnitures. A

customer placed an order on 22/12/20X8 for an office desk at a
price of $330 plus sales tax at 20% of $57.
Khalin Co offered a settlement discount of 5% if payment within
1 month from the invoice date. Khalin Co assessed it is likely that
the customer will take up this discount.
The desk was delivered to the customer on 25/1/20X9, who
accepted the good as satisfactory by signing a delivery note.
Khalin Co then invoiced the customer for the good on 2/2/20X9.
The customer paid $342 to Khalin Co on 1/3/20X9.
How should Khalin Co account for revenue?
39
IFRS 15:
Example
STEP 1
Identify the A contract to supplu the desk
contract
STEP 2 There is one PO: The delivery of a satisfactory

Identify the PO desk
STEP 3
Determine the TP = $300 - $300 x 5% = $285
TP
STEP 4
Full TP is allocated to PO: The delivery of a
Allocate TP to
satisfactory desk
each PO
40
IFRS 15:
Example
STEP 5
On 25/1/20X9: Control of the office desk is passed

DR Accrual revenue 285 (not recognize receivables)
CR Revenue 285
On 2/2/20X9: Invoice issued
DR Receivables 342 (285 + 57)
CR Accrual revenue 285
CR Sales tax 57
On 1/3/20X9: Payment received
DR Cash 342
CR Receivables 342
1
Chapter 18:
statements for companies
2
 IAS 1 – Presentation of financial statements
 The statement of financial position
 The statement of profit or loss and other

comprehensive income
 Statements of changes in equity
 Notes to the financial statements
 IFRS 15 – Revenue from contracts with customers

3

Content of financial statements
IAS 1 required contents of a company’s financial statements.

It also gives guidance on how items should be presented in
Statement of financial position (SOFP)
Statement of profit or loss and other

comprehensive income (SPLOCI)
A complete
set of
financial
statements
Statement of cash flows (SOCF)
(Detail in Chapter 20)

4

Some items must appear on the face of the

SOFP or SOPL
Other items can appear in a note to the

Recommended formats are given which

entities may or may not follow, depending on
their circumstances.
5

Name of the reporting entity

Whether the accounts cover the single entity or

a group of entities
The reporting date or the period covered by

The reporting currency
The level of precision used in presenting the

figures in the financial statements
FSs should be prepared at least as often as annually

6

Requirement
Assets and liabilities should be

Information should be
presented:
disclosed
current items and non-current items
expected to be realized in Classes of property, plant

normal operating cycle and equipment
held for purpose of

Classifications of inventory
trading
Current expected to be realized

Types of provision
items within 1 year
unrestricted cash or cash Details of classes of share

equivalent capital
a liability has to be A description of reserves

settled within 1 year within equity
7

20X2 20X1
$’000 $’000 $’000 $’000
Assets
Non-current assets X X
Property. Plant and equipment X X
Goodwill X X
Other intangible assets X X
X X
Current assets
Inventories X X
Trade receivables X X
Other current assets X X
Cash and cash equivalents X X
X X
Total assets X X
8

20X2 20X1
$’000 $’000 $’000 $’000
Equity and liabilities
Equity
Share capital X X
Retained earnings X X
Other reserves X X
X X
Long-term borrowings X X
Long-term provisions X X
X X
Current liabilities
Trade and other payables X X
Short-term borrowings X X
Current tax payable X X
Total equity and liabilities X X

9

Requirement
SPLOCI may be presented as one statement or two seperate

statements
Other comprehensive income

Profit or loss includes
includes
Items of income Revaluation surplus arising on PPE
Remeasurement of defined
Items of expenses pension schemes
Cash flow hedges
Change in fair value of financial

instruments
Exchange differences arising on

translation of foreign subsidiary
10

Requirement
Disclosure requirement
Share of profit or loss of

Revenue
associates/joint ventures
Gains/losses on Gains/losses on
derecognition of financial reclassification of financial
assets assets
Finance costs Tax expense
Impairment losses (and Single amount for

reversals) discontinued operations
11

Simple format of SPLOCI
20X2 20X1
$‘000 $‘000
Revenue X X
Cost of sales (X) (X)
Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance cost (X) (X)
Profit before tax X X
Tax expense (X) (X)
Profit for the year X X
Other comprehensive income:
Gains on property revaluation X X
Total comprehensive income for the year X X
12

SOCIE includes
Total comprehensive income for the period
The effects of changes in accounting policies and

corrections of errors recognised in accordance with IAS 8
A reconciliation between the carrying amount at the

beginning and end of the period
13

Simple format of SOCIE
Share Share Revaluation Retained

Total
capital premium surplus earnings
Balance at
X X X X X
1.1.20X8
Changes in
- - - (X) (X)
accounting policy
Restated balance X X X X X
Changes on
equity for 20X8
Dividends - - - (X) (X)
Comprehensive
income for the - - X X X
year
Issue of share
X X - - X
capital
Balance at
X X X X X
31.12.20X9
14

Requirement
Notes are included in a set of financial statements to give

users extra information
Present information about the basic of

preparation and accounting policies
Notes to the
financial Disclose information required by IFRS
statements Standards that is not disclosed elsewhere
should
Provide other relevant information not
presented elsewhere
15

Tangible non-current assets (IAS 16)

• Measurement model
• Depreciation method
• Depreciation rate or useful life
• Reconciliation of opening and closing carrying value
• Revalued assets
Intangible non-current assets (IAS 38)

• Intangible assets with definite life
• Intangible assets with indefinite life
• Factors to assess indefinite life intangible assets
• Internally generated intangible assets
• Reconciliation of carrying value at start to year end
• Impairment loss
Inventories (IAS 2)
• Accounting policies of measuring inventories
• Total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity
• Carrying amount of inventories at NRV
16

Provision, Contingent liabilities and Contingent assets (IAS 37)

• Provision
₋ Opening balance
₋ Increase in period
₋ Release in period
₋ Closing balance
• Contingent liabilities
₋ An indication of the uncertainties relating to the amount or timing
of any outflow
₋ The possibility of any reimburesement
• Contingent assets
Events after the reporting period (IAS 10)

• Nature of the event
• An estimate of its financial effect (or a statement that an estimate
cannot be made)
17

Exam focus point 1
Which TWO of the following items must be disclosed in the

note to financial statements for intangible assets?

B. A description of the development projects that have been

undertaken during the period
C. A list of all intangible assets purchased or developed in the

period

period
18

Exam focus point 1


period
An entity is not required to disclose a description of the

development projects undertaken in the period, or a list of all
intangible assets purchased or developed in the period.
An entity is required to:
- Disclose a description, the carrying amount and remain
amortization period of any individual intangible assets that
is material to the entity’s financial statements, and
- Distinguish between internally generated intangible assets
capitalized in the period and those acquired in the period.
19

Exam focus point 2
Which of the should appear in a company’s statement of changes

in equity?
1. Total comprehensive income for the year
2. Amortisation of capitalized development assets
3. Surplus on revaluation of non-current assets
A. 1, 2 and 3 B. 2 and 3 only
C. 1 and 3 only D. 1 and 2 only

20

Exam focus point 2
C. 1 and 3 only
Amortisation of development costs will appear in the

statement of profit or loss, not the statement of changes in
equity
21
IFRS 15:
Introduction
IFRS 15 - Revenue from contracts with customers replaces IAS 18

- Revenue and IAS 11 - Construction Contracts.
IFRS is effective from 1 January 2018
Revenue is recognized when the entity has transferred control of

goods or services to the buyer.
Control of an asset is “the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset”.
22
IFRS 15:
Scope
IFRS 15 is applicable for all contracts with customers
Leases within the scope of IFRS 16: Leases
Insurance contracts within the scope of

IFRS 4: Insurance contract
Except:
Financial instruments and other

contractual rights and obligations within
the scope of IFRS 9, IFRS 10, IFRS 11, IAS
27 or IAS 28
23
IFRS 15:
Five-step model
STEP 1 Identify the contract
STEP 2 Identify the performance obligations
STEP 3 Determine the transaction price
Allocate the transaction price to each performance

STEP 4
obligation
STEP 5 Recognise revenue

24
IFRS 15:
Five-step model
STEP 1
Identify the contract
Approved by all parties
Rights can be identified
Features of a
Payment terms can be identified
“contract”
Commercial substance
Consideration is probable
25
IFRS 15:
Five-step model
STEP 2
Performance obligation
Series of distinct
Distinct goods/services
goods/services
Entity's
A
Customer promise to
performance
can benefit transfer the A single
obligation
from the good or method of
that is
good or service is measuring
satisfied
service separately
over time
identifiable
26
IFRS 15:
Five-step model
STEP 2
Example
Steadman Construction Co is contracted to build an office for a

customer. It will design the building, purchase materials, prepare the
site, construct the property, install wiring and air conditioning and finish
the property.
Although each element of the construction process is capable of being

distinct, in the context of the contract, the company provides a
significant service in integrating the input processes to produce a
property.
Therefore there is a single performance obligation, being the
construction of the property.
27
IFRS 15:
Five-step model
STEP 3
Elements for considering

TRANSACTION PRICE the transaction price
The amount of Significant financing

components
consideration an entity
Variable consideration
expects to be entitled to in
exchange for transfering the Non-cash consideration
promised goods/services
Consideration payable to
a customer
28
IFRS 15:
Five-step model
STEP 3
Example
Taplop Co supplies laptop computer to businesses.

1/7/20X8: entered contract with Trill Co – Trill Co purchases laptop $500/unit
If Trill Co purchase more than 500 laptops/year, price reduces to $450/unit
Taplop year end on 30/6.
a, At 30/9/20X8, Trill Co bought 70 laptops. Taplop Co estimates Trill Co
purchase would not exceed 500 in the year to 30/6/20X9, and Trill Co would
not be entitled to the volume discount.
b, During quarter ended 31/12/20X8, Trill Co purchased an additional 250
laptops. Taplop estimates Trill Co purchases would exceed the threshold for
the volume discount in the year to 30/6/20X9.
29
IFRS 15:
Five-step model
STEP 3
Example
a, Recognized revenue in Taplop Co in quarter ended 30/9/20X8

Taplop recognized revenue of 70 x $500 = $35,000
b, Recognize revenue in Taplop Co in quarter ended 31/12/20X8

Taplop should recognize revenue of $109,000
Calculation: $112,500 (250 laptops x $450) less change in transaction
price of $3,500 (70 laptops x $50 price reduction) for the the reduction of
price in the laptop sold in the quarter ended 30/9/20X8.
30
IFRS 15:
Five-step model
STEP 4
Allocate the transaction price
Allocate base on stand-alone price
Stand-alone price of each performance obligation

31
IFRS 15:
Five-step model
STEP 5
Recognise revenue
Entity has a present right to payment for the asset
Customer has legal title to asset
Revenue
at a point Entity has transferred physical possession of the asset
in time
Customer has significant risks and rewards related
to ownership of the asset
Customer has accepted the asset

32
IFRS 15:
Five-step model
STEP 5
Recognise revenue
Customer simultaneously receives and

consumes all the benefits provided
If any of 3
criterias
Revenue are met The entity’s work creates or enhances an
asset controlled by the customer
overtime
Entity's performance does not create an

asset with an alternative use & has an
enforceable right to payment for
performance completed to date
33
IFRS 15:
Example
FPT received an online order from a customer X to buy a

smartphone at a price of $500 on 10/2/20X9. According to the
order, the customer X is entitled to a free simcard. FPT delivered
the 2 products to customer X on 15/2/20X9. Customer X received
the products satisfactorily.
If the customer buys the smartphone or the simcard separately,
FPT would charge him at $490 for the smartphone and $60 for the
simcard.
How should FPT recognized revenues from the order with
customer X under IFRS 15?
34
IFRS 15:
Example
STEP 1
Identify the Online order signed on 10/2/2019
contract
FPT has 2 separate POs:

STEP 2
 PO1: Smartphone
Identify the PO
 PO2: Simcard
STEP 3
Determine the $500 for both POs  Combined price
TP
35
IFRS 15:
Example
STEP 4
Allocate TP to each PO
Single price TP Billing
PO1:
490 445.45 (500 x 490/550) 500
Smartphone
PO2:
60 54.55 (500 x 60/550) 0
Simcard
Total 550 500 500

36
IFRS 15:
Example
STEP 5
Control for both POs is passed on 15/2/20X9

On 15/2/20X9:
PO1 Smartphone:
DR Cash 500
CR Contract asset 54.55
PO2 Simcard:
DR Contract asset 54.55
37
IFRS 15:
Measurement of revenue
Settlement discount
Expect customer to
take up discount?
Yes No
Recognize revenue
deducted from discount Recognize revenue fully
amount
Customer Customer
subsequently subsequently
does not take take up
up discount? discount?
Increase revenue by the Reduce revenue by the

discount amount discount amount
38
IFRS 15:
Example
Khalin Co is a company that manufactures office furnitures. A

customer placed an order on 22/12/20X8 for an office desk at a
price of $330 plus sales tax at 20% of $57.
Khalin Co offered a settlement discount of 5% if payment within
1 month from the invoice date. Khalin Co assessed it is likely that
the customer will take up this discount.
The desk was delivered to the customer on 25/1/20X9, who
accepted the good as satisfactory by signing a delivery note.
Khalin Co then invoiced the customer for the good on 2/2/20X9.
The customer paid $342 to Khalin Co on 1/3/20X9.
How should Khalin Co account for revenue?
39
IFRS 15:
Example
STEP 1
Identify the A contract to supplu the desk
contract
STEP 2 There is one PO: The delivery of a satisfactory

Identify the PO desk
STEP 3
Determine the TP = $300 - $300 x 5% = $285
TP
STEP 4
Full TP is allocated to PO: The delivery of a
Allocate TP to
satisfactory desk
each PO
40
IFRS 15:
Example
STEP 5
On 25/1/20X9: Control of the office desk is passed

DR Accrual revenue 285 (not recognize receivables)
CR Revenue 285
On 2/2/20X9: Invoice issued
DR Receivables 342 (285 + 57)
CR Accrual revenue 285
CR Sales tax 57
On 1/3/20X9: Payment received
DR Cash 342
CR Receivables 342
1
Chapter 19:
Events after the reporting period
2

 Definitions
 Adjusting events
 Non-adjusting events
3

Definition
An event which could be favourable or unfavourable, that

occurs between the reporting period and the date that the
financial statements are authorised for issue
Start of the End of the

FSs are authorised Information Shareholder
reporting reporting
for issue made public meeting
period period
Events after the

Events after the reporting
reporting period
period not covered by IAS 10
covered by IAS 10
4

Types of events
Adjusting events Non - adjusting events
Provide additional
Concern conditions which
evidence of conditions
did not exist at the
existing at the reporting
reporting date
date
Standard accounting Standard accounting
Change the figure in Disclose an event in anote

financial statements if if it is material and is a
material either an non-adjusting event
adjusting events or the
going concern concept no
longer appropriate
5
Adjusting events
Examples
Evidence of a permanent diminution in property value prior

to the year end
Sale of inventory after the end of the reporting period for

less than its carrying value at the year end
Insolvency of a customer with a balance owing at the year

end
Amounts received or paid in respect of legal or insurance

claims which were in negotiation at the year end
Determine after the year end of the sale or purchase price

of assets sold or purchased before the year end
Evidence of a permanent diminution in the value of a long-

term investment prior to the year end
6
Non - adjusting events

Examples
Acquisition, or disposal, of a subsidiary after the year end
Announcement of a plan to discontinue an operation
Major purchases and disposals of assets
Destruction of a production plant by fire after the end of

the reporting period
Announcement or commencing, implementation of a major

restructuring
Share transactions after the end of the reporting period

7

Note
Dividends proposed or not recognised as a liability

declared in the accounts at the
reporting date
 after the reporting
period
disclosed in the notes to
 but before the FSs are
the accounts
authorised
the nature of the event

If disclosure of events
occuring after the reporting
period required, provide An estimate of the financial
effect, or a statement that
such information: such an estimate cannot be
made
8

Exam focus point 1
IAS 10 Events after the reporting period regulates the extent to
which events after the reporting period should be reflected in
financial statements.
Which one of the following lists of such events consists only of

items that, according to IAS 10, should normally be classified as
non-adjusting?
A. Insolvency of an account receivable which was outstanding
at the end of the reporting period, issue of shares or loan
notes, an acquisition of another company
B. Issue of shares or loan notes, changes in foreign exchange

rates, major purchases of non-current assets
C. An acquisition of another company, destruction of a major

non-current asset by fire, discovery of fraud or error which
shows that the financial statements were incorrect
D. Sale of inventory which gives evidence about its value at the
end of the reporting period, issue of shares or loan notes,
destruction of a major non-current asset by fire
9

Exam focus point 1
IAS 10 Events after the reporting period regulates the extent to
which events after the reporting period should be reflected in
financial statements.
Which one of the following lists of such events consists only of

items that, according to IAS 10, should normally be classified as
non-adjusting?
B. Issue of shares or loan notes, changes in foreign exchange

rates, major purchases of non-current assets
These events are adjusting if discovered between the reporting

date and the date the financial statements are authorised for
issue as they provide evidence about conditions that existed at
the reporting date:
insolvency of an account receivable which was outstanding at the
end of the reporting period, discovery of fraud or error which
shows that the financial statements were incorrect, sale of
inventory which gives evidence about its value at the end of the
reporting period.
10

Exam focus point 2
If a material event occurs after the reporting date but before the
financial statements are authorised for issue outside the
organisation, and this event does NOT require adjustment, what
information should be disclosed in the financial statements?
A. The nature of the event and an estimate of the financial

effect (or a statement that such an estimate cannot be made
B. The nature of the event only
C. An estimate of the financial effect (or a statement that such

an estimate cannot be made) only
D. No disclosure required

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1

What you will learn?

 Types of business entity

 Natures, principles and scope of financial

 Introduction to financial statements

 Those changed with governance

The purpose of financial reporting

Financial reporting is a way of recording, analysing and

Actual transactions (sales of goods, purchases of

The transactions are analysed in the books of prime

Finally, the transactions are summarised in the financial

Types of business entity

A business owned and run by one

Limited the business’s debts and personal

Types of business entity

Which of the following are TRUE of partnerships?

A. 1 and 2 only B. 2 only

C. 3 only D. 1 and 3 only

Types of business entity

 Unless a partnership is a limited liability partnership, the

 Financial records must be maintained by a partnership, but

Natures of financial reporting

Financial Accounting Management Accounting

Narrow per segment,

Users’ and stakeholders’ needs

Users’ and stakeholders’ needs

Shareholders For investment decisions

Managers For planning and making decision

To access company’s ability in providing

Creditors Interested in the security of their loan

 Suppliers: To evaluate company’s long term

Financial Interested in profit performance and estimates of

Allocation of resources and activities of

Entities effect: Members of the public and the

Users’ and stakeholders’ needs

Which group of people are most likely to be interested in

A. 1 and 2 only B. 2 and 3 only

C. 2,3 and 4 only D. 1,2 and 3 only

Users’ and stakeholders’ needs

 A sole trader does not have any shareholders.

Responsible for preparation of financial

Main aim: To create wealth for

Must act honestly in best interests of

Duty of care to show reasonable

Which of the following statements is/are true?

A. 1 and 2 only B. 2 only

C. 1,2 and 3 D. 1 and 3 only

Which of the following statements is/are true?

A. 1 and 2 only B. 2 only

C. 1,2 and 3 D. 1 and 3 only

Main elements of financial reports

Statement of Financial Position (SOFP)

Statement of Profit or Loss (and Other Comprehensive

Statement of Cash Flows (SOCF)

Statement of Changes in Equity (SOCIE)

Notes to the Financial Statements

Main elements of financial reports

Resource controlled by EQUITY

Main elements of financial reports

STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20X7

Profit for the year 10,400

Main elements of financial reports

 A record of income generated and expenditure incurred

increases in economic benefits during the