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Know the preparation and understanding of financial statements elements and components through easy step by step method.
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© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Elements of Financial Statements
Topic 2
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Explain the main elements of financial statements
� Describe the purpose of financial statements
� Identify the main types of business transactions
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Describe the accounting equation
� Explain the matching convention and duality concept
� Draft simple financial statements
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
What are Financial Statements
“Reports that quantitatively summarize
the financial status of an organization for
a stated period of time. They include an
income statement and balance sheet describing the flow of resources, profit or
loss, and the distribution or retention of
profits.”
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Primary Financial Statements
� Balance sheet
� Income Statement
� Statement of Cash Flows
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Balance Sheet
� Describes where the enterprise stands at a specific date. It can be shown in two formats:
� Horizontal
� Vertical
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Example of a Horizontal
Balance Sheet
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Example of a Vertical Balance
Sheet
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Income Statement
� Depicts the revenue and expenses for a designated period of time.
� Net income (or net loss) is simply the difference between revenues and expenses.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Example of Income Statement
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Statement of Cash Flows
� Depicts the ways cash has changed during a designated period of time.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Balance Sheet Equation
� Assets – Liabilities = Proprietor's Capital
� Horizontal format balance sheet is an expansion of this form of the accounting equation
� Assets = Proprietor's Capital + Liabilities
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Assets
� Assets are economic resources that are owned by the business and are expected to provide positive future cash flows.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Assets
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Types of Assets
� Fixed Assets
� Any tangible or intangible asset acquired on a long-term basis to be used in providing a service to the business
� Not held for resale in normal course of business e.g. land and buildings, plant and machinery
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Types of Assets
� Current Assets
� Assets which are expected to be realised in the normal course of trading
� Disclosed in the balance sheet with least liquid asset first e.g. Stock, debtors
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Liabilities
� Liabilities are debts that represent negative future cash flows for the enterprise.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Liabilities
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Types of Liabilities
� Long-term liabilities
� Payable more than 12 months after the balance sheet date e.g. loan
� Current liabilities
� Payable within 12 months of the balance sheet date e.g. creditors, bank overdraft
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Owners’ Equity
� Owners’ equity represents the owner’s claim to the assets of the business.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Owners’ Equity
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Changes in Owners’ Equity
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Understanding Income
Statement
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
The Concept of the Business
Entity
� According to this concept, a business entity is separate from the personal affairs of its owner..
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Revisiting Accounting
Equation
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Relationships Among Financial
Statements
1
© SmartClasses.com 2007 Student Notes for Financial Accounting
Financial AccountingDouble Entry Bookkeeping
© SmartClasses.com 2007 Student Notes for Financial Accounting
Accounting YearScenario involves a company ABC Ltd.(The company sells clothing items)
12 months, but not necessarily coinciding with calendar year.
Define a period for which accounting books are maintained and summarized for yearly financial statements.
© SmartClasses.com 2007 Student Notes for Financial Accounting
Financial Statements
� Trading and Profit & Loss Account
� Summary of Income
(Sales plus any other income) and
Expenses
� Highlight Profit or Loss generated for an
accounting period
� Balance Sheet
� A snapshot of the
Assets, Liabilities and Capital
� Confirm to Accounting
equation:
Accounting Equation
Assets = Liabilities + Capital
© SmartClasses.com 2007 Student Notes for Financial Accounting
Scenario involves ABC LTD.A company is into clothing business
� Assets: Owned by ABC
� Fixed Assets
• Material things owned
by ABC Ltd. that gives it benefit in a period exceeding one
accounting period
� Current Assets
• Cash
• Stock or inventory
• Debtors: Businesses that owe money to
ABC Ltd.
� Liabilities: Owed by ABC
� Long-term liabilities
• Loans taken by ABC
Ltd. that are repayable in more than one accounting period
� Short-term liabilities
• Overdraft
• Accruals: Unpaid bills
• Creditors: Businesses
to whom ABC Ltd. owes money
© SmartClasses.com 2007 Student Notes for Financial Accounting
Duality Concept in recording
accounting transactions
� Monetary transaction in day to day business at ABC Ltd. would involve:� Buying of assets for cash or credit
� Selling of assets for cash or credit
� Creates a two-sides to a transaction in any of the four combinations:
Assets decrease
Debtors increase
Assets increase
Creditors increase
Assets decrease
Cash increases
Assets increase
Cash decreases
© SmartClasses.com 2007 Student Notes for Financial Accounting
Recording of a transaction
� Recorded in ledgers – that are accounts created for each of the asset, liability, income and expense
� A ledger has two sides for accounting entry
� Each transaction will either impact its Debit Side or its Credit Side
Credit Side
(expressed as Cr)
Debit Side
(expressed as Dr)
Right SideLeft Side
2
© SmartClasses.com 2007 Student Notes for Financial Accounting
A typical ledger format
£DetailsDate£DetailsDate
CrName of the account
For example: Cash; Plant & Machinery; Sales
Dr
© SmartClasses.com 2007 Student Notes for Financial Accounting
Impact on ledger
� Debit side is impacted when increase in:
� Assets
� Expenses
� Drawings (money withdrawn by owner from the business for personal reasons. The action decreases Capital)
� Credit side is impacted when increase in:
� Liability
� Income
� Capital (money invested by the owners into the business at the start or during the course of business)
© SmartClasses.com 2007 Student Notes for Financial Accounting
Recording a cash transaction
TRANSACTION ONE: On 1 Jan 2008: ABC Ltd. was incorporated with investment
of £ 50000.00 from its owner. Money deposited into company bank account.
£
50000.00Capital01-01-08
CrBank AccountDr
Account Ledger impacted: Bank Account of ABC Ltd.
Increase in cash (current assets)hence debit entry
£
50000.00Bank01-01-08
CrCapital AccountDr
Account Ledger impacted: Capital Account of Owner
Increase in capital hence credit entry
© SmartClasses.com 2007 Student Notes for Financial Accounting
Recording a cash transaction
£
4750.00Computers01-01-08
CrBank AccountDr
£
4750.00Bank01-01-08
CrComputer AccountDr
TRANSACTION TWO: On 1 Jan 2008: ABC Ltd. purchased computersby paying cheque of £ 4750.00
Account Ledger impacted: Bank Account
Account Ledger impacted: Computer Account
Decrease in cash (current assets)hence credit entry
Increase in fixed assets hence debit entry
© SmartClasses.com 2007 Student Notes for Financial Accounting
Recording a cash transaction
£
250.00Stationery05-01-08
CrBank AccountDr
£
250.00Bank05-01-08
CrOffice Stationery AccountDr
TRANSACTION THREE: On 5 Jan 2008: ABC Ltd. purchased stationery itemsby paying cheque of £ 250.00 to their supplier.
Account Ledger impacted: Bank Account
Account Ledger impacted: Office Stationery Account
Decrease in cash (current assets)hence credit entry
Increase in expenses hence debit entry
© SmartClasses.com 2007 Student Notes for Financial Accounting
Recording a cash transaction
TRANSACTION FOUR: On 6 Jan 2008: ABC Ltd. sold clothing itemsAnd received cash of £ 2500.00
£
2500.00Sales06-01-08
CrBank AccountDr
Account Ledger impacted: Bank Account
Increase in cash (current assets)hence debit entry
£
2500.00Bank06-01-08
CrSales AccountDr
Account Ledger impacted: Sales Account
Increase in income (sales) hence credit entry
3
© SmartClasses.com 2007 Student Notes for Financial Accounting
Recording a credit transaction
TRANSACTION FIVE: On 10 Jan 2008: ABC Ltd. purchased fabric (raw material)
worth £ 4500.00 from its regular supplier Joe Ltd. Payment to be made in 60 days.
£
4500.00Joe Ltd.10-01-08
CrPurchases AccountDr
Account Ledger impacted: Purchases Account
Increase in stock (current assets)hence debit entry
£
4500.00Purchases10-01-08
CrJoe Ltd. AccountDr
Account Ledger impacted: Joe Ltd. Account
Increase in creditors (current liabilities)hence credit entry
© SmartClasses.com 2007 Student Notes for Financial Accounting
Recording a credit transaction
£
1750.00Malcolm Ltd.12-01-08
CrSales AccountDr
£
1750.00Sales12-01-08
CrMalcolm Ltd. AccountDr
TRANSACTION SIX: On 12 Jan 2008: ABC Ltd. sold clothing itemsworth £ 1750.00 to their regular client Malcolm Ltd. Payment due in 30 days.
Account Ledger impacted: Sales Account
Account Ledger impacted: Malcolm Ltd. Account
Increase in income hence credit entry
Increase in debtors (current assets)hence debit entry
© SmartClasses.com 2007 Student Notes for Financial Accounting
Balancing the ledger accounts
£
4,750.00
250.00
47,500.00
52,500.00
Computers
Stationery
Balance c/f
Total
01-01-08
05-01-08
31-01-08
£
50,000.00
2,500.00
52,500.00
47,500.00
Capital
Sales
Total
Balance b/f
01-01-08
06-01-08
01-02-08
CrBank AccountDr
END OF MONTH: All ledgers are balanced by making the Debit and the Creditsides EQUAL in the particular ledger account on last day of the month.
Balancing the Bank Account ledger
�Balance carried forward (c/f) is the amount that makes the smaller side
(debit OR credit) equal to the larger side.�Balance brought forward (b/f) is the starting balance on the first day
of the new month.
© SmartClasses.com 2007 Student Notes for Financial Accounting
Balances – The Importance
� Balance c/f
Is an asset or a liability at the END
of the accounting period.
� Balance b/f
Is an asset or a liability at the beginning of the
NEXT accounting period.
© SmartClasses.com 2007 Student Notes for Financial Accounting
Opening Balances
� Asset account
Will always have a DEBIT entry
� Expense account
Will always have a DEBIT entry
� Liability account
Will always have a CREDIT entry
� Income account
Will always have a CREDIT entry
© SmartClasses.com 2007 Student Notes for Financial Accounting
Other accounts & transactions
� Debit Side
� Sales returns -
inwards (loss)
� Discounts allowed
� Carriage Inwards
� Overheads
(expenses paid such as salaries; utilities;
advertising, carriage
outwards)
� Debtors
� Credit Side
� Purchases returned –
outwards (gain)
� Discounts received
� VAT (Unpaid tax received
as component of Gross
Selling Price)
� Sales (cash or credit)
� Creditors
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Topic 8
Non-current Assets
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Define non-current assets
� Recognise the difference between current and non-current assets
� Explain the difference between capital and revenue items
� Classify expenditure as capital or revenue expenditure
� Prepare ledger entries to record the acquisition and disposal of non-current assets
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Record profits or losses on disposal of non-current assets in the income statement including part exchange transactions
� Record the revaluation of a non-current asset in ledger accounts, the statement of comprehensive income and in the statement of financial position
� Calculate the profit or loss on disposal of a revaluedasset
� Illustrate how non-current asset balances and movements are disclosed in financial statements
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Explain the purpose and function of an asset register
� Understand and explain the purpose of depreciation
� Calculate the charge for depreciation using straight line and reducing balance methods
� Identify the circumstances where different methods of depreciation would be appropriate
� Illustrate how depreciation expense and accumulated depreciation are recorded in ledger accounts
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Calculate depreciation on a revalued non-current asset including the transfer of excess depreciation between the revaluation reserve and retained earnings
� Calculate the adjustments to depreciation necessary if changes are made in the estimated useful life and/or residual value of a non-current asset
� Record depreciation in the income statement and statement of financial position
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Characteristics of Non-current
Assets
� Long term in nature
� Not normally acquired for resale
� Could be tangible or intangible
� Used to generate income directly or indirectly
� Not normally liquid asset
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Capital Expenditure
� Expenditure on acquisition of Non-current assets for use in business
� Expenditure on increasing the earning capacity of existing assets.
� Expenditure incurred for a long term that creates an asset with value
� Examples: New machineries purchased, renovation of buildings, purchase of furniture and fixtures, purchase of computer equipment and office vehicles
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Revenue Expenditure
� Expenditure incurred for carrying on the day-to-day operations of the organisation.
� Expenditure on current assets
� Expenses for maintaining the earning capacity
� Examples : Salaries paid to employees, expenditure on rent incurred, interest payments, administrative expenses, sales commissions etc.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Non-current Assets Registers
� Records of individual tangible Non-current assets held by the business.
� Function of the Register is to control Non-current assets and keep a track of them
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Non-current Assets Registers
� The details include:
� Cost, Date of Purchase
� Description of Asset, Serial / reference number
� Location of asset
� Depreciation method, Expected useful life
� Net book value
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Acquisition of Non-current
Assets
� Cost of Non-current asset = Amount incurred to acquire the Non-current asset and bring it to working condition
� Cost includes:Purchase price + Delivery cost + Legal fees + Subsequent expenditure which enhances the asset
� Cost DOES NOT include revenue expenditure such as repairs or renewals or repainting cost
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Acquisition of Non-current
Assets
� Entry to record purchase of asset:
Dr. Non-current asset
(Non-current Asset = Real account: Debit what comes in)
Cr. Bank / Cash / Creditors
(Bank and Creditors: Personal account: Credit the giver)
� A separate account should be kept for each category of Non-current asset.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Subsequent Expenditure which
Enhances the Asset
� This expenditure can only be recorded as a part of the cost or capitalised if it enhances the benefits of the asset.
� Example includes: extension to a shop building. However, repair work does not form a part of this expenditure.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Depreciation
� According to IAS 16, depreciation is
“the measure of the cost or revaluedamount of the economic benefits of the tangible non-current asset that has been consumed during the period”
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Causes of Depreciation
� Use
� Physical wear and tear
� Passing of time
� Obsolescence through technology and market changes
� Depletion
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Methods of Calculating
Depreciation
� Straight line method
� Reducing balance method
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Straight Line Method
� Depreciation charge is the same each year as the assumption is that the benefit is consumed evenly over the life of the asset
� Useful for assets which provide equal benefit each year e.g. machinery
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Straight Line Method
� Depreciation charge = (Cost – Residual value) / Useful economic life
� Residual value or scrap value or salvage value = Estimated disposal value of the asset. Often this value is zero
� Useful economic life = Estimated number of years during which the business will use the asset
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Reducing Balance Method
� Reducing amount of depreciation is charged each year
� Useful for assets which provide more benefit in the earlier years e.g cars
� Depreciation charge = X% x Net Book Value (NBV)
� NBV = original cost – accumulated depreciation
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Accounting for Depreciation
Dr Depreciation Expense
Cr Accumulated depreciation
� Reduce the balance sheet value of the Non-current asset by cumulative depreciation to reflect the wearing out.
� Record the depreciation charge as an expense in the income statement to match the revenue generated by the Non-current asset.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Consistency and Subjectivity
When Accounting for
Depreciation
� IAS 16 Property, Plant and Equipment requires the following:
• Depreciation method should be reviewed at each year end and changed if the method used no longer reflects the pattern of use of the asset
• Residual value and useful economic life should be reviewed at each year end and changed if expectations differ from previous estimates
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Disposal of Non-current
Assets
� Profit / loss on disposal
� An accounting profit or loss will arise on the disposal of Non-current asset.
� If:
• Proceeds > NBV (at disposal date) PROFIT
• Proceeds < NBV (at disposal date) LOSS
• Proceeds = NBV (at disposal date) NEITHER PROFIT NOR LOSS
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Disposal for Cash
Consideration
� Step 1: Remove the original cost of the Non-current asset from the Non-current asset account
Dr. Disposals (Original cost)
Cr. Non-current assets (Original cost)
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Disposal for Cash
Consideration
� Step 2: Remove Accumulated depreciation on the Non-current asset from accumulated depreciation account.
Dr. Accumulated Depreciation
Cr. Disposals
� Step 3: Record the cash proceeds
Dr. Cash (proceeds)
Cr. Disposals (proceeds)
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Disposal for Part-Exchange
Agreement
� Step 1: Remove the original cost of the Non-current asset from the Non-current asset account
Dr. Disposals (Original cost)
Cr. Non-current assets (Original cost)
� Step 2: Remove Accumulated depreciation on the Non-current asset from accumulated depreciation account.
Dr. Accumulated Depreciation
Cr. Disposals
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Disposal for Part-Exchange
Agreement
� Step 3: Record the part-exchange allowance (PEA) as proceeds:
Dr. Non-current assets (Part of cost of new asset)
Cr. Disposal (Sale proceeds of old asset)
� Step 4: Record the cash paid for new asset
Dr. Non-current assets (Cash)
Cr. Cash (Cash)
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Revaluation of Non-current
Assets
� Business may need to revalue assets to present the revalued amounts in the balance sheet.
� The difference between the NBV and the revalued amount is shown as revaluation reserve in the balance sheet
� The gain is not recorded in the income statement as it is unrealised gain
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Depreciation of a Revalued
Asset
� The charge for depreciation should be based on the revalued amount and the remaining useful life of the asset
� This charge will be higher than depreciation prior to the revaluation
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Depreciation of a Revalued
Asset
� The excess of the new depreciation charge over the old depreciation charge should be transferred from the revaluation reserve to the accumulated profits
� This is done within the capital section of the balance sheet
Dr. Revaluation reserve
Cr. Accumulated profits
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Topic 10
Books of Prime Entry and
Control Accounts
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Identify and explain the function of the main data sources in an accounting system
� Outline the contents and purpose of different types of business documentation
� Understand the basic function and form of accounting records in a typical manual system
� Understand the purpose of control accounts for accounts receivable and accounts payable
� Understand how control accounts relate to the double-entry system
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Prepare ledger control accounts from given information
� Perform control account reconciliations for accounts receivable and accounts payable
� Identify errors which would be highlighted by performing a control account reconciliation
� Identify and correct errors in control accounts and ledger accounts
� Record cash transactions in ledger accounts
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Understand the need for a record of petty cash transactions
� Describe the features and operation of a petty cash imprest system
� Account for petty cash using imprest and non-imprest methods
� Understand the importance of, and identify controls and security over the petty cash system
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Business Documentation
� Quotation: Asking price. Used for establishing price from various suppliers
� Purchase order: A written authorization prepared by a buyer for the purchase of goods or services at a specified price.
� Sales order: An order received by a business from a customer. A sales order may be for products and/or services.
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Business Documentation
� Delivery Note (Goods Delivery Note): A written document from the seller to the buyer that accompanies a delivery of goods and specifies type of goods and quantity.
� Purchase Invoice: Produced by company receiving the goods as a proof of receipt.
� Credit Note: A monetary instrument issued by a seller that allows a buyer to purchase an item or service from that seller on a future date.
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Business Documentation
� Debit Note: Note to a person or a company signifying an amount owed. Although it is very similar to an invoice, the invoice always represents sales, whereas a debit note is used for deducting money without a sale being made.
� Remittance Advice: A statement sent to providers showing that claims were processed and the amount for which the beneficiary is responsible. If denied, an explanation of denial is provided.
� Receipt: Details of payments received
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Books of Prime Entry
� Sales Day Book – Recording credit sales
� Purchases day book - Recording credit purchases
� Sales returns day book – Recording sales returns
� Purchases returns day book - Recording purchases returns
� Cash book - All cash / bank transactions
� Petty cash book – All small cash transactions
� Journal – All transactions not recorded elsewhere
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Ledger Accounts
� General ledger – Contains all accounts or a summary of all accounts necessary to produce the trial balance and financial statements
� Accounts receivables ledger- Contains an account for each credit customer. An account to summarise this information , Sales ledger control account, is normally contained in the General ledger
� Accounts payable ledger- Contains an account for each credit supplier. An account to summarise this information , Purchase ledger control account, is normally contained in the General ledger
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Sales Day Book Format
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Sales Day Book Double Entry
� Double entry will depend on whether individual accounts are maintained in individual ledger or sales ledger control account in general ledger
Individual accounts part of double entry:
Dr. Sam $4500
Dr. John $10,000
Cr Sales $14,500
(Total sales posted to sales ledger control account)
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Sales Day Book Double Entry
Sales Ledger Control Account part of double entry:
Dr. Sales Ledger Control Account $14,500
Cr. Sales $14,500
Each entry also posted to individual memorandum accounts in accounts receivable ledger
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Purchases Day Book, Sales
Returns Day Book, Purchases
Returns Day Book
Format is similar to that of sales day book.
Dr. Purchases
Cr. Purchase ledger control account
Each entry also posted to individual memorandum accounts in accounts payable
ledger
Dr. Purchases
Cr. Individual Accounts in accounts payable ledger
Total purchases posted to purchases ledger control
account
Purchases Day Book
Control accounts part of double entry
Individual accounts part of double entry
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Sales Returns Day Book
Dr Sales Returns
Cr Sales ledger control account
Each entry posted to individual memorandum accounts in accounts receivable ledger
Dr Sales Returns
Cr Individual accounts in accounts receivables ledger
Total returns posted to sales ledger control account
Sales returns day book
Control accounts part of double entry
Individual accounts part of double entry
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Purchases Returns Day Book
Dr. Purchase ledger control account
Cr. Purchases returns
Each entry posted to individual memorandum accounts in accounts
payable ledger
Dr. Individual accounts in accounts payable ledger
Cr. Purchases returns
Total returns posted to purchases ledger control account
Purchases returns day book
Control accounts part of double entry
Individual accounts part of double entry
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Control Accounts
� Sales Ledger Control Account
� Purchases Ledger Control Account
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Sales Ledger Control Account
Format
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Purchases Ledger Control
Account Format
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Contra Entries
� These are entries made when a customer is also a supplier.
Dr. Purchase ledger control account
Cr. Sales ledger control account
� Individual receivables and payables must also be updated to reflect this.
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Cash Book
� All transactions involving cash and bank are recorded in cash book.
� Many businesses may have separate books for cash receipts and cash payments
� A note of cash discounts is also made in the cash book
� Businesses generally use a columnar format of cash book
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Petty Cash Book
� All transactions involving small amounts are recorded in the petty cash book
� Petty cash is maintained using ImprestSystem
© SmartClasses.com 2007 Student Notes for ACCA F3-Financial Accounting
Imprest System
� Step 1: Business decides on an amount to be held as a float
Dr. Petty CashCr. Bank
� Step 2: As petty cashier makes payments he records them in the petty cash book. All expenditure must be evidenced by an expense receipt
� Step 3: Cheque is drawn to return the petty cash to the original float levelFloat = Cash in petty cash box + Sum total of expense
vouchers since last disbursement
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Topic 9
From Trial Balance to
Financial Statements
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Identify the purpose of a trial balance
� Extract ledger balances into a trial balance
� Prepare extracts of an opening trial balance
� Identify and understand the limitations of a trial balance
� Illustrate process of adjusting the financial statements for accruals and prepayments, depreciation, irrecoverable debts and allowances for receivables
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Trial Balance
� Trial balance is a statement of general ledger accounts that enables an accountant to confirm whether amounts debited equal amounts credited.
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Purpose of Trial Balance
� Check that for every debit entry there is an equal credit entry
� It is the first step towards preparation of financial statements
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Limitations of Trial Balance
� Trial balance does not identify all the errors.
� It does not identify where those errors have been made or what those errors are
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Adjustments Required
� Closing inventory
� Depreciation
� Accruals
� Prepayments
� Irrecoverable Debts
� Allowance for Receivables
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Adjustments Entry for Closing
Inventory
Dr. Inventory (Balance Sheet)
Cr. Cost of Sales (Income Statement)
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Adjustments Entry for
Depreciation
Dr. Depreciation Expenses (Income Statement)
Cr. Accumulated Depreciation (Balance Sheet)
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Adjustments Entry for
Accruals
Dr. Expenses (Income Statement)
Cr. Accrual (Balance Sheet)
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Adjustments Entry for
Prepayments
Dr. Prepayments (Balance Sheet)
Cr. Expenses (Income Statement)
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Adjustments Entry for
Irrecoverable Debts
Dr. Irrecoverable debt (Income Statement)
Cr. Receivables (Balance Sheet)
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Adjustments Entry for
Allowance for Receivables
Dr. Irrecoverable debt (Income Statement)
Cr. Allowance for Receivables (Balance Sheet)
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Topic 7
Irrecoverable Debts and Allowances for Receivables
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Identify the benefits and costs of offering credit facilities to customers
� Understand the purpose of an aged receivables analysis
� Understand the purpose of credit limits
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Prepare the bookkeeping entries to write off a bad debt
� Record a bad debt recovered
� Identify the impact of bad (irrecoverable) debts on the income statement and on the statement of financial position sheet
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
� Prepare the bookkeeping entries to create and adjust an allowance for receivables
� Illustrate how to include movements in the allowance for receivables in the income statement and how the closing balance of the allowance should appear in the statement of financial position
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Provision of Credit Facilities
� Benefits:
� Enable businesses to enter new markets
� Possibility of increased sales
� Encourages customer loyalty
� Costs
� Can prove costly to the business
� May adversely affect the business cash flow
� Potential risk of irrecoverable debts
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Aged Receivables Analysis
� It is an analysis usually in the form of a list, ordered by name, showing how much each customer owes and how old their debts are
� It is used for keeping track of outstanding debts and follow up any that is overdue
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Important Terms Associated
with Debts
� Irrecoverable debt: Debt unlikely to be received from the customer
� Doubtful debt: Debt where there is some doubt whether a customer can or will pay his debt
� Allowance for receivables: An allowance created on doubtful debts
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Accounting Entries: Cash Sale
When the sale is made
Dr. Cash account
Cr. Sales account
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Accounting Entries: Credit
Sale
When the sale is made
Dr. Receivables account
Cr. Sales account
On settlement of amount due
Dr. Cash account
Cr. Receivables account
If amount becomes irrecoverable
Dr. Irrecoverable debt or Bad debt
Cr. Receivables account
© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Accounting for Irrecoverable
Debts Recovered
When the debt is written off
Dr. Irrecoverable debt or Bad debt
Cr. Receivables account
When recoverable debt is recovered
Dr. Cash account
Cr. Irrecoverable debt or Bad debt
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Allowance for Receivables
� Specific allowance:
� Allowance for debts where the customer is known to be in financial difficulties and is disputing their invoice or is refusing to pay
� General Allowance:
� A general allowance for receivables expected to be irrecoverable.
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Accounting for Allowance for
Receivables
For Setting up allowance
Dr. Irrecoverable debts expense account
Cr. Allowance for receivables account
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Movement in the Allowance
for Receivables
� Write irrecoverable debts
� Calculate receivables balance as adjusted for write offs
� Ascertain specific allowance
� Deduct debt specifically allowed for
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Movement in the Allowance
for Receivables
� Multiply the remaining receivables balance by general allowance percentage
Thus,
% (Closing receivables – Irrecoverable debts –Specific allowance)
� Add the specific and general allowances
� Compare with brought forward allowance
� Account for change in allowance
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In Case of Existing
Allowance
• Charge only the movement in the profit to the profit and loss account
closing allowance – opening allowance