June 2014 QCF Study Tips: Introduction to Accounting

In conjunction with this Study Tips article, please see the Important Advice for June
2014 QCF Exam Candidates on the Members Area of the ABE website, which contains
essential information for the upcoming June 2014 QCF ABE examinations, as well as
links to other useful student support materials to supplement your learning.
Introduction
The Introduction to Accounting syllabus comprises eight learning outcomes, which are tested in
every examination. To gain a pass in the examination you must attempt all the required
questions and achieve success in each learning outcome, as well as passing the examination
as a whole.
All the learning outcomes have to be covered in each examination paper.
The learning outcomes have been carefully selected to give a broad knowledge of how
businesses record financial data, and how they use and present financial information. So, by the
time you have completed your course of study, you will be able to answer such important
questions as:
How successful is the business this year compared with last year?
How does its performance compare with other organisations?
Can it afford its plans for the future?
Course Content

A good starting place for studying Introduction to Accounting is to examine the learning
outcomes and assessment criteria with care and plan the time you have available to study in
order to thoroughly understand and meet each learning outcome. Think about the links between
learning outcomes. For instance, double entry book-keeping is used to record all financial
transactions. If you do not understand it well, you will need to keep coming back to revise it
when working on final accounts, ratios and so on. Therefore, it is worth spending extra time
practising your double-entry skills to save time later. Be guided by your teacher about how much
work you need to undertake to master each learning outcome.
Learning Outcome 1: Understand the nature and scope of accounting
As you read through this learning outcome you will see you are expected to show
your understanding by defining, explaining and describing. You should make
sure you clearly understand the meaning of these command words which are
detailed in the QCF Examination Guidance for Students and Colleges document on
the QCF Resources section of the Members Area.
No calculations are needed in this Learning Outcome.
You will start by defining financial and management accounting and describing the
purposes and aims of both. They are employed to fulfil the needs for information of
a variety of people and organisations with an interest in the reporting organisation.

The learning outcome looks at the types of business you will study and their
reporting rules.
A number of terms are used in accounting and it is important to be clear about the
terminology and use it in an appropriate way.
Tip: Maintain a list of accounting terms and their meanings on cards during your
studies which can be used for revision.
Assessment Criterion 1.2
People/organisations with an interest in the reporting business are called
stakeholders. You need to know who they are, whether they are internal or external,
their relationship with the reporting organisation, understand their needs and how
those needs are fulfilled.
Tip: Keep your notes in a table format so you can see all relevant information
easily. For example:
Stakeholder
Accounts
payable/
creditors

Internal/
external
External

Relationship

Needs

How fulfilled

Supplier on
credit

Liquidity to pay for

goods/services

Information about
working capital

Growth potential to
expand supplies

Details of profitability
and sales growth

Continuity for
future orders

Liquidity/profits over
time

Assessment Criterion 1.3

Be clear about the ownership of sole trader and partnership businesses and limited
companies. This will help later when preparing accounts.
Tip: Keep your notes on this topic in a table that you can add to later with the
accounting aspects of each of the different types of business covered. For
example, companies are owned by shareholders meaning that you will see
share capital and dividends in the final accounts.
Accounting concepts, bases, standards and principles govern presentation of some
financial statements and how assets, liabilities and expenses are valued and dealt
with.
Tip: Link accounting bases and standards with underlying concepts to help
understanding. For example, depreciation uses matching or accruals to spread
the cost of a non-current asset over its life.
Make sure you are completely clear on the accounting rules. For example,
straight-line depreciation is calculated on cost less residual value. Reducing
balance depreciation is calculated on the net book value each year.

Learning Outcome 2: Be able to carry out double entry book-keeping

Double entry book-keeping is used for virtually all accounting, whether it takes place
using computer programs or manually. Once it is well understood, any transaction can
be recorded, no matter how complex.
Tip: A mnemonic such as PEARLS can be useful in helping you remember accounts which usually
have debit or credit balances.

PEARLS
Debit balances

Credit balances

Purchases
Expenses
Assets

Revenue
Liabilities
Sales

Tip: It takes time and practice to understand double entry well. Work on as many
examples as you can. It will make later work easier to understand and faster to complete
with accuracy.
Books of prime entry, such as the sales day book, record every transaction before or at
the same time as the transaction is recorded in ledger accounts. It is important to
understand how they are used. For example, the three column cash book is the book of
original entry for cash and bank transactions and is the only book which contains ledger
accounts (cash and bank). The discount columns are not ledger accounts but a
memorandum record, and the totals of cash/settlement discount are transferred to the
relevant ledger accounts.
Tip: Make notes in your own words to explain each book of original entry. Revisit your
notes every month. Read, question and update them as you learn more. The notes will
become clearer as your understanding improves.
Control accounts are used to check the accuracy of part of the ledgers. For example, the
total of balances in the accounts receivable (debtors) ledger should equal the balance of
the Sales Ledger Control Account, which is drawn up from information in the day books.
Accurate ledger accounts ensure the final accounts used for decision making are
reliable.
Accruals and prepayments are balances on ledger accounts showing the extent, for
example, of an expense paid in advance for the next accounting period.
A trial balance checks that the total of debit balances in the ledger accounts equals the
total of the credit balances thus helping to maintaining accuracy. The debit column
comprises assets and expenses, while the credit column comprises income, liabilities
and capital.

Tip: When dealing with a question on adjustments to trial balance figures, show the
workings for the adjustments in the Journal or ledger accounts adjacent to your answer,
not in the trial balance columns. Include the final adjusted balance for each account in
the Trial Balance.

Learning Outcome 3: Be able to prepare a set of final accounts

There are many similarities but also a few differences between the contents of
the final accounts of different types of business.
Income and expenses are recorded in a Statement of Comprehensive Income
(profit and loss account).
Non-current and current assets and liabilities appear in the Statement of
Financial Position (balance sheet).
Tip: It is easiest to learn about the contents when preparing the final accounts of
a sole trader. Practise preparing several final accounts of sole traders before
moving on to partnerships and companies
Use ledger accounts for workings for accruals, prepayments, and so on. These should
appear adjacent to the final accounts.
Tip: Be clear on the differences between types of organisation.
Sole Trader profits or losses are not shared so the total profit for the year is added to
capital and drawings are deducted in the Statement of Financial Position.
Partnership profits or losses are shared between partners, so an appropriation
account is required to record this. Partnership transactions are recorded either
in the current accounts or capital accounts of partners.
Debit side
Share of loss
Drawings
Interest on drawings

Credit side
Share of profit
Partnership salary
Interest on capital

Columnar current accounts save time in the examination, e.g.

Balance b/d
Drawings

Ann

1,000
200

John

Balance b/d
400 Share of profit

Ann

John

500
1,200 1,500

Limited company profits or losses can be retained in the business as a company

has its own legal identity. In sole trader and partnership businesses the owners
can remove the capital when they like. Shareholders cannot do this. Shareholders
receive a share of profits as dividends, so an appropriation account is needed to
record these and other changes in reserves, etc.

Learning Outcome 4: Be able to prepare a cash flow statement

Statements of cash flow (cash flow statements) are part of the final accounts and are
used to show how cash has been used over the last year. They should not be confused
with cash budgets (Learning Outcome 8).
You need to be able to describe and prepare a statement of cash flows. The
presentation and contents are set out in an accounting standard, so the topic can be a
useful example to consider when discussing concepts, standards and principles
(Learning Outcome 1).
Statements of cash flow can be prepared using the direct method (from cash records) or
the indirect method (from accruals based information). The latter uses the same data
required to prepare the Statements of Comprehensive Income and Financial Position.
Tip: When calculating items within the statement of cash flow, think about the
underlying transactions, e.g. a purchase of non-current assets means cash will
have been spent, shown as a reduction in cash (figure in brackets) in the
statement of cash flows.
Similarly, inventory purchase/increase reduces the cash, so an increase in
inventory is deducted from the net profit. For example:

Net profit for the year

Depreciation for the year
Increase in inventory

10,500
5,000
(3,000)

Depreciation is added back as that is a non-cash expense.

Do not confuse cash with profit when explaining the use of a statement of cash
flows.
Learning Outcome 5: Be able to interpret accounts using financial ratio analysis
To be able to interpret accounts, you must be able to understand what appears in the
Statements of Comprehensive Income and Financial Position (Learning Outcome 3). An
excellent understanding of final accounts means you can quickly identify the numerators
and denominators for use in ratio calculations.
Tip: Remember the information that each ratio is intended to provide, in order to
help in recalling the formula. For example, the acid test ratio shows how well an
organisation can pay its bills (short-term liabilities) from assets which can quickly
be liquidated (i.e. not inventory or non-current assets). So the ratio is current
assets less inventory: current liabilities.
Always state the formulae and provide answers as ratios/ percentages/days as
appropriate. Answers should be given to the number of decimal places required.

Tip: The analysis of ratios specified in AC 5.2 requires an understanding of the

business and the implications of financial changes on the business as a whole.
For example, if the net profit ratio has reduced from 20% to 10%, stakeholders
need to know why the change has or may have occurred. For instance,
expenses may have increased (higher wages, interest).

Learning Outcome 6: Understand and be able to calculate different elements of cost.

Again it is important to understand the terminology (such as direct and indirect costs,
fixed and variable costs, and overhead costs) used in Indicative Content 6.1.1 and 6.2.1
and to be able to define and describe terms. The glossary cards you maintain throughout
your course should help with revising.
In determining labour and materials costs, both direct costs and indirect costs are used.
Indirect costs are also known as overheads.
Tip: Candidates find wages calculations difficult in the examination. Understand
what is meant by basic rate, time and a half, bonus, and so on. For example:
Ahmed works seven hours each day, five days a week
at a basic rate of 10 per hour. For overtime, the firm
pays time and a quarter. It also pays 0.50 per unit for
each unit manufactured above 200 units per day.
On Thursday, Ahmed worked two hours overtime and
manufactured 240 units. Calculate how much he
earned on Thursday.
7 hours at basic rate (10)
= 70.00
2 hours at time and a quarter (10 x 1.25) = 25.00
95.00
Bonus 0.50 x 40 units
20.00
Total earned on Thursday
115.00
You should also practise the calculations and make use of past examination
questions, which can be found with suggested answers on the QCF Resources
section of the Members Area.
Tip: Ensure you understand what is meant by FIFO, LIFO and AVCO and
practise calculations of inventory issues. Make good use of past examination
questions and answers so you present your answer in an appropriate way to
clearly show all the information required. Ensure you are clear about both
perpetual and periodic methods used in inventory valuation.

Learning Outcome 7: Understand break-even analysis.

Fixed and variable costs are terms you must understand and be able to express in order
to meet this learning outcome. Record both terms and your definition and explanation of
them in your glossary to help in your revision.
The key to understanding break-even analysis is an appreciation of contribution (sales
less variable costs). The contribution earned by each unit produced goes towards
meeting fixed costs and towards generating profit. Break-even point occurs when no
profits or losses are made. The margin of safety indicates the ease of covering fixed
costs and generating profit because a high margin of safety indicates that the level of
sales can decline significantly before the break-even point is reached and a loss made.
Tip: Practise identifying variable and fixed costs and break-even calculations.
Learn all the relevant terms used in break-even analysis. Practical examples
may help you visualise what break-even point and the various terms mean. For
example:
Jasmin is organising a party. She can hire a room for 200
and people to play music for 250. She works out that she
can provide food and refreshment for everyone at 5 each.
She sells tickets at 10 per person.
Calculate how many people must buy tickets for her to breakeven.
Fixed costs = 200 (room) + 250 (music) = 450
Variable costs = 5
Contribution per ticket = sales 10 - 5 variable costs = 5
Break-even point = Fixed costs
= 450 = 90 people
Contribution per unit
5
If 100 people buy tickets Jasmin will have a margin of safety
of 10 people.

Learning Outcome 8: Understand budgeting.

The purposes and benefits of budgets are important for managers to understand as
each business department will be involved in the budgeting process. You should know
the steps for preparing budgets and about the types of budget. Most budgets are
prepared on an incremental approach, such as a 5% increase in costs. The alternative is
zero-based budgeting.
The only budget you will need to prepare is the cash budget. A columnar style should be
used, typically on a month by month basis.

Tip: When preparing cash budgets you will make calculations for purchases and
sales on credit, and you will need to make allowances for timing differences and
proportions. For example, 60% sales income is received immediately and the
remaining 40% one month later. Be clear in showing information in cash
budgets.
Jan

Receipts
Sales immediate receipt of
cash
Sales one month credit
Total receipts

Feb

Mar

1,200

960

1,080

Nil
1,200

800
1,760

640
1,720

Remember, no depreciation appears in cash budgets.

General Study Tips
The core recommended texts (in the Business Management reading list in the QCF
Resources section of the Members Area) form a useful basis for study, so encourage your
teachers to use these in class and, if at all possible, get your own copies as well. At the time of
writing, the Introduction to Accounting Study Manual may be downloaded free of charge from
the Members Area, again in the QCF Resources section.
Also, use the real world. When buying something at a market, think about how it will be
recorded in the business. What kind of business are you dealing with? What expenses does it
have? How will it use the techniques you study in the course? Concepts and ideas often
make more sense when you see them working in reality.
You must study and practise every Learning Outcome so that you will be able to attempt each part of every
question. If, because of illness or other commitments you find it difficult to complete your course, speak to
your teacher to help you plan the most effective approach to your studies.
Conclusion
To achieve success:
Preparation is the key study and practise, practise, practise.
Study the syllabus and learning outcomes carefully.
Make a revision timetable and tick off each topic once you have revised it
Use past papers and note the approach taken by examiners to test knowledge, application
and analysis. Carefully note the elements required by each question and then check the
answers to see how these requirements are fulfilled. Check answers to see how the
requirements are fulfilled.

And in the examination:

You must answer every compulsory question.
You must answer the required number of optional questions.
Attempt each part of the questions you answer.
You must achieve every learning outcome on the syllabus.
Do not answer more than is required. For example, if a Statement of Comprehensive Income
only is required, do not prepare a Statement of Financial Position too.
Spend an appropriate amount of time on questions, as indicated in the suggested time allocations on
the question paper.
Check your answers as you work through the examination. Do the figures make sense?
Does what you have said make sense and address the question correctly?