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Session Objectives

Topic 2
Elements of Financial
Statements

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Student Notes for ACCA F3-Financial Accounting

Session Objectives



Describe the accounting equation


Explain the matching convention and
duality concept
Draft simple financial statements

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Student Notes for ACCA F3-Financial Accounting

Explain the main elements of financial


statements
Describe the purpose of financial
statements
Identify the main types of business
transactions

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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.

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Student Notes for ACCA F3-Financial Accounting

Primary Financial Statements






Balance sheet
Income Statement
Statement of Cash Flows

Balance Sheet


Describes where the enterprise stands at


a specific date. It can be shown in two
formats:



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Student Notes for ACCA F3-Financial Accounting

Example of a Horizontal
Balance Sheet

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Student Notes for ACCA F3-Financial Accounting

Horizontal
Vertical

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Student Notes for ACCA F3-Financial Accounting

Example of a Vertical Balance


Sheet

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Student Notes for ACCA F3-Financial Accounting

Income Statement


Example of 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.

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Student Notes for ACCA F3-Financial Accounting

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Statement of Cash Flows




Depicts the ways cash has changed


during a designated period of time.

Balance Sheet Equation





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Student Notes for ACCA F3-Financial Accounting

Student Notes for ACCA F3-Financial Accounting

Assets Liabilities = Proprietor's Capital


Horizontal format balance sheet is an
expansion of this form of the accounting
equation
Assets = Proprietor's Capital + Liabilities

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Student Notes for ACCA F3-Financial Accounting

Assets


Assets

Assets are economic resources that are


owned by the business and are expected
to provide positive future cash flows.

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Student Notes for ACCA F3-Financial Accounting

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Types of Assets


Fixed Assets


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Types of 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

Student Notes for ACCA F3-Financial Accounting

Student Notes for ACCA F3-Financial Accounting

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

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Student Notes for ACCA F3-Financial Accounting

Liabilities

Liabilities


Liabilities are debts that represent


negative future cash flows for the
enterprise.

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Student Notes for ACCA F3-Financial Accounting

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Types of Liabilities


Long-term liabilities


Owners Equity


Payable more than 12 months after the


balance sheet date e.g. loan

Student Notes for ACCA F3-Financial Accounting

Owners equity represents the owners


claim to the assets of the business.

Current liabilities


Payable within 12 months of the balance


sheet date e.g. creditors, bank overdraft

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Owners Equity

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Student Notes for ACCA F3-Financial Accounting

Understanding Income
Statement

Changes in Owners Equity

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The Concept of the Business


Entity


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Student Notes for ACCA F3-Financial Accounting

Student Notes for ACCA F3-Financial Accounting

According to this concept, a business


entity is separate from the personal
affairs of its owner..

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Student Notes for ACCA F3-Financial Accounting

Revisiting Accounting
Equation

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Student Notes for ACCA F3-Financial Accounting

Relationships Among Financial


Statements

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Student Notes for ACCA F3-Financial Accounting

Accounting Year

Financial Accounting

Scenario involves a company ABC Ltd.

Double Entry Bookkeeping

(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.

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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

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Scenario involves ABC LTD.


A company is into clothing business


Assets: Owned by ABC




Student Notes for Financial Accounting

Fixed Assets
Material things owned
by ABC Ltd. that gives
it benefit in a period
exceeding one
accounting period

A snapshot of the
Assets, Liabilities and
Capital
Confirm to Accounting
equation:

Current Assets
Cash
Stock or inventory
Debtors: Businesses
that owe money to
ABC Ltd.

Accounting Equation

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

Assets = Liabilities + Capital


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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 increase
Cash decreases

Assets decrease
Cash increases

Assets increase
Creditors increase

Assets decrease
Debtors increase

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Student Notes for Financial Accounting

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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

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Left Side

Right Side

Debit Side
(expressed as Dr)

Credit Side
(expressed as Cr)
Student Notes for Financial Accounting

A typical ledger format

Impact on ledger


Name of the account

Dr

Cr

For example: Cash; Plant & Machinery; Sales

Date

Details

Date

Details

Debit side is
impacted when
increase in:

Credit side is
impacted when
increase in:





Assets
Expenses
Drawings (money

Liability
Income
Capital (money





withdrawn by owner
from the business for
personal reasons. The
action decreases
Capital)

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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.
Account Ledger impacted: Bank Account of ABC Ltd.

Dr
01-01-08

50000.00

Capital

Increase in cash (current assets)


hence debit entry

Account Ledger impacted: Capital Account of Owner

Dr

Cr

01-01-08

50000.00

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Bank

Student Notes for Financial Accounting

Recording a cash transaction


TRANSACTION THREE: On 5 Jan 2008: ABC Ltd. purchased stationery items
by paying cheque of 250.00 to their supplier.
Account Ledger impacted: Bank Account

Dr

Cr

05-01-08

250.00

Stationery

05-01-08

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Office Stationery Account


Bank

250.00

TRANSACTION TWO: On 1 Jan 2008: ABC Ltd. purchased computers


by paying cheque of 4750.00

Dr

Bank Account

Cr

01-01-08

4750.00

Decrease in cash (current assets)


hence credit entry

Computers

Dr
01-01-08

Cr

Computer Account
Bank

4750.00

Increase in fixed assets hence debit entry

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Student Notes for Financial Accounting

Recording a cash transaction


TRANSACTION FOUR: On 6 Jan 2008: ABC Ltd. sold clothing items
And received cash of 2500.00

Dr

Bank Account

06-01-08

2500.00

Sales

Cr
Increase in cash (current assets)
hence debit entry

Account Ledger impacted: Sales Account

Account Ledger impacted: Office Stationery Account

Dr

Recording a cash transaction

Account Ledger impacted: Bank Account

Bank Account

Decrease in cash (current assets)


hence credit entry

Student Notes for Financial Accounting

Account Ledger impacted: Computer Account

Capital Account

Increase in capital hence credit entry

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Account Ledger impacted: Bank Account

Cr

Bank Account

invested by the owners


into the business at the
start or during the
course of business)

Cr

Increase in expenses hence debit entry

Student Notes for Financial Accounting

Dr

Sales Account

Cr

06-01-08

2500.00

Increase in income (sales) hence credit entry

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Bank

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.
Account Ledger impacted: Purchases Account

Dr
10-01-08

Joe Ltd.

Increase in stock (current assets)


hence debit entry

Account Ledger impacted: Joe Ltd. Account

Dr

10-01-08

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Dr

Purchases

4500.00

Student Notes for Financial Accounting

Balancing the ledger accounts


END OF MONTH: All ledgers are balanced by making the Debit and the Credit
sides EQUAL in the particular ledger account on last day of the month.

Dr

01-01-08

Capital

06-01-08

Sales
Total

01-02-08

Balance b/f

47,500.00

12-01-08

Malcolm Ltd.

Computers
Stationery
Balance c/f
Total

Malcolm Ltd. Account


Sales

12-01-08

1750.00

Cr

Increase in debtors (current assets)


hence debit entry

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Student Notes for Financial Accounting

Balances The Importance




Cr

Bank Account

50,000.00 01-01-08
05-01-08
2,500.00 31-01-08
52,500.00

Cr

1750.00

Increase in income hence credit entry

Balancing the Bank Account ledger

Dr

Sales Account

Account Ledger impacted: Malcolm Ltd. Account

Cr

Joe Ltd. Account

Increase in creditors (current liabilities)


hence credit entry

TRANSACTION SIX: On 12 Jan 2008: ABC Ltd. sold clothing items


worth 1750.00 to their regular client Malcolm Ltd. Payment due in 30 days.
Account Ledger impacted: Sales Account

Cr

Purchases Account

4500.00

Recording a credit transaction

4,750.00
250.00
47,500.00
52,500.00

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.

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.
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Student Notes for Financial Accounting

Opening Balances


Asset account
Will always have a
DEBIT entry
Expense account
Will always have a
DEBIT entry

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Other accounts & transactions

Liability account
Will always have a
CREDIT entry
Income account
Will always have a
CREDIT entry

Debit Side





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Student Notes for Financial Accounting

Student Notes for Financial Accounting

Sales returns inwards (loss)


Discounts allowed
Carriage Inwards
Overheads
(expenses paid such
as salaries; utilities;
advertising, carriage
outwards)
Debtors

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Credit Side







Purchases returned
outwards (gain)
Discounts received
VAT (Unpaid tax received
as component of Gross
Selling Price)
Sales (cash or credit)
Creditors

Student Notes for Financial Accounting

Session Objectives

Topic 8




Non-current Assets

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Student Notes for ACCA F3-Financial Accounting

Define non-current assets


Recognise the difference between current and noncurrent 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

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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 revalued
asset
Illustrate how non-current asset balances and
movements are disclosed in financial statements

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Student Notes for ACCA F3-Financial Accounting

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

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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

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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

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Capital Expenditure


Expenditure on acquisition of Noncurrent 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

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Student Notes for ACCA F3-Financial Accounting

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.

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Student Notes for ACCA F3-Financial Accounting

Non-current Assets Registers




Records of individual tangible Noncurrent assets held by the business.


Function of the Register is to control
Non-current assets and keep a track of
them

Non-current Assets Registers




The details include:








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Student Notes for ACCA F3-Financial Accounting

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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

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Student Notes for ACCA F3-Financial Accounting

Cost, Date of Purchase


Description of Asset, Serial / reference
number
Location of asset
Depreciation method, Expected useful life
Net book value

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.

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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.


Depreciation


the measure of the cost or revalued


amount of the economic benefits of the
tangible non-current asset that has been
consumed during the period

Example includes: extension to a shop


building. However, repair work does not form
a part of this expenditure.

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Student Notes for ACCA F3-Financial Accounting

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Use
Physical wear and tear
Passing of time
Obsolescence through technology and
market changes
Depletion

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Student Notes for ACCA F3-Financial Accounting

Student Notes for ACCA F3-Financial Accounting

Methods of Calculating
Depreciation

Causes of Depreciation


According to IAS 16, depreciation is




Straight line method


Reducing balance method

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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

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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

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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

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Student Notes for ACCA F3-Financial Accounting

Accounting for Depreciation


Dr Depreciation Expense
Cr Accumulated depreciation


Reduce the balance sheet value of the Noncurrent 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.

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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

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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:

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Disposal for Cash


Consideration


Step 1: Remove the original cost of the Noncurrent asset from the Non-current asset
account
Dr. Disposals (Original cost)
Cr. Non-current assets (Original cost)

Student Notes for ACCA F3-Financial Accounting

PROFIT
LOSS
NEITHER

Student Notes for ACCA F3-Financial Accounting

Disposal for Cash


Consideration


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Proceeds > NBV (at disposal date)


Proceeds < NBV (at disposal date)
Proceeds = NBV (at disposal date)
PROFIT NOR LOSS

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)

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Student Notes for ACCA F3-Financial Accounting

Disposal for Part-Exchange


Agreement


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Student Notes for ACCA F3-Financial Accounting

Step 1: Remove the original cost of the Noncurrent 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

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Student Notes for ACCA F3-Financial Accounting

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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)

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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

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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

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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

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Student Notes for ACCA F3-Financial Accounting

Session Objectives

Topic 10

Books of Prime Entry and


Control Accounts

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Student Notes for ACCA F3-Financial Accounting

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

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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

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Student Notes for ACCA F3-Financial Accounting

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 nonimprest methods
Understand the importance of, and identify controls
and security over the petty cash system

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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.

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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.

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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

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Student Notes for ACCA F3-Financial Accounting

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

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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

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Student Notes for ACCA F3-Financial Accounting

Sales Day Book Double Entry




Sales Day Book Format

Double entry will depend on whether individual


accounts are maintained in individual ledger or
sales ledger control account in general ledger

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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
Cr. Sales

$14,500
$14,500

Individual accounts part of double entry:


Dr. Sam
Dr. John
Cr Sales

Each entry also posted to individual memorandum


accounts in accounts receivable ledger

$4500
$10,000
$14,500

(Total sales posted to sales ledger control account)


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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Purchases Day Book, Sales


Returns Day Book, Purchases
Returns Day Book

Sales Returns Day Book

Format is similar to that of sales day book.

Purchases Day
Book

Individual accounts
part of double entry

Control accounts
part of double
entry

Dr. Purchases
Cr. Individual Accounts in
accounts payable ledger

Dr. Purchases
Cr. Purchase ledger
control account

Total purchases posted


to purchases ledger control

Each entry also posted


to individual
memorandum accounts
in accounts payable

account

Sales returns
day book

Individual accounts
part of double entry

Control accounts
part of double
entry

Dr Sales Returns
Cr Individual accounts in
accounts receivables ledger

Dr Sales Returns
Cr Sales ledger control
account

Total returns posted to


sales ledger control account

Each entry posted to


individual memorandum
accounts in accounts
receivable ledger

ledger
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Student Notes for ACCA F3-Financial Accounting

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Purchases Returns Day Book

Purchases
returns day
book

Individual accounts
part of double entry

Control accounts
part of double
entry

Dr. Individual accounts in


accounts payable ledger
Cr. Purchases returns

Dr. Purchase ledger


control account
Cr. Purchases returns

Total returns posted to


purchases ledger control
account

Each entry posted to


individual memorandum
accounts in accounts

Student Notes for ACCA F3-Financial Accounting

Control Accounts



Sales Ledger Control Account


Purchases Ledger Control Account

payable ledger

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Sales Ledger Control Account


Format

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Student Notes for ACCA F3-Financial Accounting

Purchases Ledger Control


Account Format

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Contra Entries


These are entries made when a


customer is also a supplier.

Cash Book



Dr. Purchase ledger control account


Cr. Sales ledger control account


Individual receivables and payables


must also be updated to reflect this.

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Student Notes for ACCA F3-Financial Accounting

Student Notes for ACCA F3-Financial Accounting




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

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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 Imprest
System

Imprest System


Step 1: Business decides on an amount to be held


as a float
Dr. Petty Cash
Cr. 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 level
Float = Cash in petty cash box + Sum total of expense
vouchers since last disbursement

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Session Objectives

Topic 9

From Trial Balance to


Financial Statements





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Student Notes for ACCA F3-Financial Accounting

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Trial Balance


Trial balance is a statement of general


ledger accounts that enables an accountant
to confirm whether amounts debited equal
amounts credited.

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Student Notes for ACCA F3-Financial Accounting

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

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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Student Notes for ACCA F3-Financial Accounting

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

Adjustments Required







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Student Notes for ACCA F3-Financial Accounting

Adjustments Entry for Closing


Inventory
Dr. Inventory
Cr. Cost of Sales

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(Balance Sheet)
(Income Statement)

Student Notes for ACCA F3-Financial Accounting

Closing inventory
Depreciation
Accruals
Prepayments
Irrecoverable Debts
Allowance for Receivables

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Student Notes for ACCA F3-Financial Accounting

Adjustments Entry for


Depreciation
Dr. Depreciation Expenses
Cr. Accumulated Depreciation

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(Income Statement)
(Balance Sheet)

Student Notes for ACCA F3-Financial Accounting

Adjustments Entry for


Accruals
Dr. Expenses
Cr. Accrual

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(Income Statement)
(Balance Sheet)

Student Notes for ACCA F3-Financial Accounting

Adjustments Entry for


Irrecoverable Debts
Dr. Irrecoverable debt
Cr. Receivables

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(Income Statement)
(Balance Sheet)

Student Notes for ACCA F3-Financial Accounting

Adjustments Entry for


Prepayments
Dr. Prepayments
Cr. Expenses

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(Balance Sheet)
(Income Statement)

Student Notes for ACCA F3-Financial Accounting

Adjustments Entry for


Allowance for Receivables
Dr. Irrecoverable debt
Cr. Allowance for Receivables

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(Income Statement)
(Balance Sheet)

Student Notes for ACCA F3-Financial Accounting

Session Objectives

Topic 7

Irrecoverable Debts and


Allowances for Receivables

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Student Notes for ACCA F3-Financial Accounting

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

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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

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Student Notes for ACCA F3-Financial Accounting

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

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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

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Student Notes for ACCA F3-Financial Accounting

Important Terms Associated


with Debts


Aged Receivables Analysis

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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Student Notes for ACCA F3-Financial Accounting

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

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Student Notes for ACCA F3-Financial Accounting

Accounting Entries: Cash Sale


When the sale is made
Dr. Cash account
Cr. Sales account

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Student Notes for ACCA F3-Financial Accounting

Accounting Entries: Credit


Sale

Accounting for Irrecoverable


Debts Recovered

When the sale is made

When the debt is written off

Dr. Receivables account


Cr. Sales account

Dr. Irrecoverable debt or Bad debt


Cr. Receivables account

On settlement of amount due


Dr. Cash account
Cr. Receivables account

When recoverable debt is recovered


Dr. Cash account
Cr. Irrecoverable debt or Bad debt

If amount becomes irrecoverable


Dr. Irrecoverable debt or Bad debt
Cr. Receivables account
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Student Notes for ACCA F3-Financial Accounting

Allowance for Receivables




Specific allowance:


Student Notes for ACCA F3-Financial Accounting

Accounting for Allowance for


Receivables
For Setting up 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:


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Dr. Irrecoverable debts expense account


Cr. Allowance for receivables account

A general allowance for receivables expected to


be irrecoverable.

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

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

Movement in the Allowance


for Receivables


Thus,
% (Closing receivables Irrecoverable debts
Specific allowance)




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Student Notes for ACCA F3-Financial Accounting

In Case of Existing
Allowance

Charge only the movement in the profit to


the profit and loss account
closing allowance opening allowance

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Student Notes for ACCA F3-Financial Accounting

Multiply the remaining receivables balance


by general allowance percentage

Add the specific and general allowances


Compare with brought forward allowance
Account for change in allowance

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Student Notes for ACCA F3-Financial Accounting