f3 PDF

ACCA Paper F3
Financial Accounting
(INT)
Class Notes
December 2009
Appendix
The following notes are suitable for both the international and UK streams. There will some
terminology differences between the two streams. These are summarised below:
International UK
Statement of comprehensive income Profit and loss account
Statement of financial position Balance sheet
Non-current assets Fixed assets
Inventory Stock
Trade receivables Debtors
Non-current liabilities Long term liabilities
Trade payables Creditors
Irrecoverable debts Bad debts
www.studyinteractive.org 2
Contents
Paper background
Session 1 Introduction to accounting
Session 2 Financial statements
Session 3 Double entry book keeping
Session 4 Non-current assets
Session 5 Inventory
Session 6 Irrecoverable Debts
Session 7 Control Accounts
Session 8 Bank Reconciliations
Session 9 Accruals and prepayments
Session 10 Limited Company accounts
Session 11 Statements of cash flow
Session 12 Incomplete records
Session 13 Partnerships
Paper background
Aim
The aim of this paper is to develop knowledge and understanding of the underlying principles and
concepts relating to financial accounting and technical proficiency in the use of double-entry
accounting techniques including the preparation of basic financial statements.
Main capabilities
On completion of this paper, you should be able to:
Explain the context and purpose of financial reporting
Define the qualitative characteristics of financial information and the fundamental bases of
accounting
Demonstrate the use of double-entry and accounting systems
Record transactions and events
Prepare a trial balance (including identifying and correcting errors)
Prepare basic financial statements for incorporated and unincorporated entities
The assessment
The exam can be sat either written or computer based, both methods are 2 hours long.
Written
40 x 2 mark questions Multiple choice A / B / C / D
10 X 1 mark questions Multiple choice A / B or A / B / C
Computer based
40 x 2 mark questions Questions can be multiple choice, multiple response, matching or number
entry
10 x 1 mark questions Multiple response (correctly identify two from three right answers)
The pass mark is 50%
SESSION 1 INTRODUCTION TO ACCOUNTING
Learning outcomes
• Understand the purpose of accounting
• Identify the different types of businesses
• Indentify the users of accounts
• Explain the qualitative characteristics of financial statements
• Understand the underlying assumptions of financial statements
Introduction
WHAT IS ACCOUNTING?
Accounting is made up of two elements:
I. Recording business transactions - Book keeping

II. Presenting the information
WHAT IS A BUSINESS?
A business is a commercial organisation which exists with a view to making a profit. There are
different types of businesses which will fall into 3 categories:
Sole Trader
This is a business that is owned and operated by one person
Partnership
This type of business is owned by several individuals, some of which will actively be involved in the
business
Companies
This type of business is owned by shareholders and is operated on their behalf by a nominated board
of directors. Companies will be covered in greater detail in later sessions
Users of accounts
The users of accounts will depend on the type of accounts that are produced. There are two main
types of accounts:
• Management accounts
• Financial accounts
Management accounts
These are produced as often as a business wants them (usually monthly). They are produced for
internal use and will not, usually be seen by external people. Management accounts can be
prepared using the company’s own internal policies.
Financial accounts
These accounts are usually produced annually. They are based on historical information and are
rarely used internally. Financial accounts are used by external users for several reasons:
• Investors
• Lenders
• Employees
• Government
• Public
SESSION 2 FINANCIAL STATEMENTS
Learning outcomes
After completing this chapter, you should be able to:
• Identify the layout of a Statement of Financial Position for a sole trader and a company
• Identify the layout of a Statement of Comprehensive income for a sole trader and a
company
• Understand the principles and layout for a Statement of Changes in Equity
Introduction
There are four key financial statements:
Statement of Financial Position
This financial statement lists the assets and liabilities of a business at a point in time. It is a snapshot
of the company’s position “AS AT A POINT IN TIME”
Statement of Comprehensive Income
This statement is a summary of the income and expenditure of the business for a “PERIOD OF TIME”.
Statement of Changes in Equity
This statement links the statements of comprehensive income and financial position.
Statement of Cash Flow
The statement of cash flow reports the cash generation and cash absorption for a “PERIOD OF
TIME”.
The starting point in the preparation of the financial statements is to produce a TRIAL BALANCE. The
trial balance is basically a list of ledger balances. A business will use a trial balance as an INDICATION
that all accounting entries have been recorded and all entries are correct.
A trial balance MUST balance. If there is an imbalance, this indicates an error in the initial entries. In
this case a suspense account is created until the errors can be detected.
Proforma set of financial statements for a sole trader.
Statement of Financial Position as at 31 December 2007
Non – current assets

Cost Dep’n NBV
Buildings 150,000 (12,000) 138,000

Fixtures and fittings 45,000 (11,250) 33,750
Motor vehicles 26,000 (13,260) 12,740
221,000 (36,510) 184,490
Current assets
Inventory 13,777
Trade receivables 12,775
Prepayments 2,800
Cash 3,400 32,752
Total assets 217,242
Opening capital 152,465

Profit 51,787
Drawings (35,900) 168,352
Non – current liabilities
Loan 20,000
Current liabilities
Trade payables 12,445

Accrued Loan interest 1,000
Other accruals 15,445 28,890
Total liabilities 217,242
Statement of Comprehensive Income for the year ended 31 December 2007
Revenue 233,000
Less: Cost of sales
Opening inventory 12,332

Purchases 119,098
Carriage inwards 1,009
132,439
Closing inventory (13,777) 118,662
GROSS PROFIT 114,338
Discounts received 5,111
Other income 4,000
123,449
Less: Expenses
Discounts allowed 3,444

Depreciation 10,710
Gas and electricity 14,122
Irrecoverable debts 7,134
Loan interest 4,000
Carriage outwards 5,666
Water rates 8,444
Advertising 15,000
Other expenses 3,142 71,662
NET PROFIT 51,787
Proforma set of financial statements for a limited company or Plc
Statement of financial position as at 31 December 2007

Note
Intangible assets 6 200,000
Tangible assets 7 187,999
Current assets
Inventory 8 88,432
Trade receivables 9 97,455
Cash 13,400 199,287
Equity and liabilities
Share capital 100,000

Retained earnings 220,497
Revaluation reserve 7 38,000 358,497
Interest bearing borrowings 10 100,000
Current liabilities

Taxation 5 51,000 128,789
Statement of comprehensive income for the year ended 31 December 2007
Note
Revenue (Sales) 385,000
Cost of sales 1 188,000
Distribution costs 2 38,500
Administration expenses 3 37,700
PROFIT FROM OPERATIONS 120,800
Finance costs 8,000
PROFIT BEFORE TAX 112,800
Income tax 53,000
PROFIT FOR THE PERIOD 59,800
Statement Of Changes In Equity for the year ended 31 December 2007 (SOCIE)
Share Retained Revaluation

Capital Earnings Reserve Total
Balance as at 1 Jan 2007 100,000 188,697 40,000 328,697
Profit for the period 59,800 59,800
Surplus depreciation (not impt for F 3) 2,000 (2,000)
Dividend paid (30,000) (30,000)
Closing balance 100,000 220,497 38,000 358,497
The format for company accounts is laid down in I.A.S. 1 Presentation of Financial Statements. This
structured format aids comparability and makes information more useful.
Notes detailing the balances in the financial statements are provided giving a detailed breakdown of
the balance.
SESSION 3 DOUBLE ENTRY BOOK KEEPING
Learning outcomes
When you have completed this chapter, you should be able to:
• Understand the principles of double entry bookkeeping

• Apply double entry bookkeeping to a list of transactions
• Prepare financial statements for a sole trader
Introduction
Bookkeeping is “the recording of monetary transactions” of a business.
Double entry bookkeeping
Double entry bookkeeping is the fundamental concept underlying accountancy. All accounting
transactions should be recorded using the double entry system. There are some basic rules that we
MUST follow:
1. Every debit must have a credit

2. A debit entry is an ASSET in the STATEMENT OF FINANCIAL POSITION or an EXPENSE in the
STATEMENT OF COMPREHENSIVE INCOME
3. A credit entry is a LIABILITY in the STATEMENT OF FINANCIAL POSITION or an INCOME in the
STATEMENT OF COMPREHENSIVE INCOME
T accounts
In order to assist us with the preparation of the financial statements we use T accounts for
simplicity. The principles of T accounts are:
• Every debit entry has a credit entry

• Every T account will belong to the statement of financial position or the statement of
comprehensive income
• The closing balance of a T account at the end of the period is entered into a trial balance
EXAMPLE 1
George commences business on 1 April 2006. The following transactions take place in his first two
weeks of trading.
• 1 April He invests $50,000 in to a business

• 1 April He purchases $5,000 worth of goods on credit
• 2 April He sells half of the inventory for $6,000 cash
• 5 April He issues a cheque to pay for the goods he received on credit
• 4 April Pays his rent for April of $450 by cheque
• 7 April He sells his remaining stock for $6,000 on credit
• 10 April Purchased goods on credit for $7,000
• 14 April He purchases a delivery van for $7,000 cash
Required
For the first two weeks of trading prepare:
• The T accounts for George (State if the account is Position or Income)

• The trial balance
• The Statement of Comprehensive Income
• The Statement of Financial Position
EXAMPLE 2
Tina starts her business on 1 January 2007. The following transactions take place in her first month
of trading:
• 1 Jan She invests $65,000 in to the business

• 2 Jan She purchases $8,000 worth of goods on credit
• 2 Jan She sells a quarter of the inventory for $4,000 cash
• 3 Jan Issues a cheque to pay for half of the goods she received on credit
• 14 Jan Pays her insurance for January by issuing a cheque for $75
• 15 Jan She sells the remaining inventory for $12,000 on credit
• 16 Jan Purchases inventory at a cost of $10,000 on credit
• 18 Jan Purchases some office equipment for $3,000 cash
• 20 Jan Pays her rent for January by cheque $150
• 21 Jan Sells half her inventory for $10,000 cash
• 25 Jan Withdraws $100 for petty cash
• 31 Jan Purchases office supplies worth $30 from petty cash
Required
For the first month of trading prepare:
• The T accounts for Tina (state if the account is Position or Income)

• The trial balance
• The Statement of Comprehensive Income
• The Statement of Financial Position
ANSWER TO EXAMPLE 1 GEORGE
Bank Account
Dr Cr
1 April Capital 50,000 5 April Trade Payables 5,000
2 April Sales 6,000 4 April Rent 450
14 April Delivery Van 7,000
Carried Forward 43,550
56,000 56,000
Bought Forward 43,550
Capital Account
Dr Cr
1 April Bank 50,000
Purchases
Dr Cr
1 April Trade Payables 5,000
10 April Trade Payables 7,000 Carried Forward 12,000
12,000 12,000
Trade Payables
Dr Cr
5 April Bank 5,000 1 April Purchases 5,000
Carried Forward 7,000 10 April Purchases 7,000
12,000 12,000
Sales
Dr Cr
2 April Cash 6,000
Carried Forward 12,000 7 April Trade Receivables 6,000
12,000 12,000

Rent
Dr Cr
4 April Bank 450
Trade Receivables
Dr Cr
7 April Sales 6,000
Delivery Van
Dr Cr
14 April Bank 7,000
George Trial Balance
Statement Dr Cr
Bank Account FP 43,550
Capital Account FP 50,000
Purchases CI 12,000
Trade Payables FP 7,000
Sales CI 12,000
Rent CI 450
Trade Receivables FP 6,000
Delivery Van FP 7,000
Total 69,000 69,000
George
2 Week Period Ended 14 April 2007
Sales 12,000
Cost of sales
Opening inventory 0
Purchases 12,000
12,000
Closing inventory (7,000)

5,000
GROSS PROFIT 7,000
Less expenses
Rent 450
NET PROFIT 6,550
George
as at 14 April 2007
Non Current Assets
Delivery Van 7,000
Current Assets
Inventory 7,000
Trade Receivables 6,000
Bank Account 43,550
56,550
TOTAL ASSETS 63,550
Capital 50,000
Profit 6,550
56,550
Non Current Liabilities 0
Current Liabilities
Trade Payables 7,000
63,550
ANSWER TO EXAMPLE 2 TINA
Bank Account
Dr Cr
1 Jan Capital 65,000 3 Jan Trade Payables 4,000
2 Jan Sales 4,000 14 Jan Insurance 75
21 Jan Sales 10,000 18 Jan Office Equipment 3,000
20 Jan Rent 150
25 Jan Petty Cash 100
c/f 71,675
79,000 79,000
b/f 71,675
Capital Account
Dr Cr
1 Jan Bank 65,000
Purchases
Dr Cr
2 Jan Trade Payables 8,000
16 Jan Trade Payables 10,000 c/f 18,000
18,000 18,000
b/f 18,000
Trade Payables
Dr Cr
3 Jan Bank 4,000 2 Jan Purchases 8,000
c/f 14,000 16 Jan Purchases 10,000
18,000 18,000
b/f 14,000
Sales
Dr Cr
2 Jan Bank 4,000
15 Jan Trade Receivables 12,000
c/f 26,000 21 Jan Bank 10,000
26,000 26,000
b/f 26,000
Insurance
Dr Cr
14 Jan Bank 75
Trade Receivables
Dr Cr
15 Jan Sales 12,000
Office Equipment
Dr Cr
18 Jan Bank 3,000
Rent
Dr Cr
20 Jan Bank 150
Petty Cash
Dr Cr
25 Jan Bank 100 31 Jan Office Supplies 30
c/f 70
100 100
b/f 70
Office Supplies
Dr Cr
31 Jan Petty Cash 30
Tina Trial Balance
Statement Dr Cr
Bank Account FP 71,675
Capital Account FP 65,000
Purchases CI 18,000
Trade Payables FP 14,000
Sales CI 26,000
Insurance CI 75
Trade Receivables FP 12,000
Office Equipment FP 3,000
Rent CI 150
Petty Cash FP 70
Office Supplies CI 30
Totals 105,000 105,000
Tina
For January 2007
Revenue 26,000
Cost of sales
Opening inventory 0
Purchases 18,000
18,000
GROSS PROFIT 13,000
Less expenses:
Insurance 75
Rent 150
Office supplies 30
255
NET PROFIT 12,745
Tina
as at 31 January 2007
Non Current Assets
Office Equipment 3,000
Current Assets
Inventory 5,000
Bank Account 71,675
Petty Cash 70
88,745
TOTAL ASSETS 91,745
Capital 65,000
Profit 12,745
77,745
Non Current Liabilities 0
Current Liabilities
Trade Payables 14,000
91,745
SESSION 4 NON CURRENT ASSETS
Learning outcomes
• Define a non current asset

• Distinguish between tangible and intangible non-current assets
• Explain the differences between capital and revenue expenditure
• Understand the concepts of I.A.S. 16 Accounting for non-current assets
• Compile a non current asset register
• Calculate and account for depreciation
• Record the accounting entries for disposals of non-current assets
Introduction
A non-current asset is intended for “continued use” in a business. This would generally mean for
more than one accounting period. Non-currents assets can be either TANGIBLE or INTANGIBLE.
ACCA F3 concentrates on tangible non-current assets, however a knowledge of intangible non
current assets is needed.
Tangible non-current assets
These are assets that have physical substance. Examples of tangible non-current assets would be:
Land and buildings
Plant and equipment
Motor vehicles
Computers
Fixtures and fittings
Intangible non-current assets
These assets have no physical substance. An example of an intangible non-current asset would be:
Goodwill
Development
Non-current assets are normally of substantial value and their accounting can have a material impact
on the financial statements. As a result of this there are large numbers of accounting standards that
help the preparers of financial statements to account for them.
The key accounting standard relevant at this level is I.A.S. 16 Non-Current Assets
Non-current asset register
The majority of companies will own a number of non-current assets, and it is imperative that
effective control is kept over them. In order to ensure management are aware exactly where each
item is located and that they are adequately maintained and serviced, a non current asset register is
maintained.
A non-current asset register is generally maintained in the finance department. Companies can
purchase specifically designed packages or a register can simply be maintained on an Excel
spreadsheet.
A register would include the following information:
• Item code
• Date of purchase
• Item description
• Cost
• Estimated useful life
• Residual value (if any)
• Depreciation method
• Location
• Disposal details
Capital and revenue expenditure
One of the key areas of accounting for non-current assets is deciding whether expenditure incurred
is CAPITAL or REVENUE expenditure.
If it is capital expenditure it will be capitalised in the statement of financial position and then
depreciated over the useful economic life of the asset. If it is revenue expenditure it will be
expensed through the statement of comprehensive income.
We need to classify expenditure incurred as either capital or revenue in order to ensure appropriate
accounting entries are made.
Capital expenditure is expenditure likely to increase the future earning capacity of the organisation
whereas revenue expenditure is regarded as maintaining the organisation’s present earning
capacity.
Per I.A.S. 16 the following costs may be capitalised on acquisition of a non-current asset:
• Initial cost
• Delivery costs
• Non-refundable import taxes
• Installation costs
• Any costs incurred in bringing the asset into intended use
• Initial training costs
• Subsequent expenditure that ENHANCES the performance of the asset
Costs that are regarded as revenue expenditure and may not be capitalised per I.A.S. 16 are:
• Insurance costs
• Repairs
• Maintenance
EXAMPLE 1
Capital Revenue
Purchase of a motor vehicle
Purchase of a tax disc
Fuel
Insurance
C D player
Alloy wheels
New tyre
Early settlement discount
Depreciation
Depreciation is the charge to the statement of comprehensive income to reflect the consumption of
an asset in a period.
By applying depreciation charges, we are consistent with the ACCRUALS / MATCHING CONCEPT i.e.
applying the cost of using the asset to the statement of comprehensive income for the same period.
All tangible non-current assets should be depreciated on a systematic basis per I.A.S. 16, with the
exception of land. This is because land is seen to appreciate in value.
Intangible non-current assets are amortised over their useful economic life (this is just another term
for depreciation).
Depreciation policies
Calculating depreciation in a given period are common questions in this paper. The main methods of
calculating depreciation are:
• Straight line
• Reducing balance
Straight line depreciation
Depreciation is charged on a straight line basis over the life of the non-current asset. Thus an equal
amount is charged in every accounting period over the life of the asset.
To calculate the depreciation charge the following formula is used:
Depreciation per annum = Original cost – estimated residual value

Estimated useful Life
EXAMPLE 2
Company A purchased a non-current asset on 31st July for $150,000. The asset has an expected
useful life of 5 years and a residual value of $20,000.
Calculate the depreciation charges for the year ended 31st December on the basis:
i. A full year’s charge is made in the year of acquisition and none in the year of disposal.
ii. The company’s policy is to time-apportion depreciation charges.
EXAMPLE 3
Company B purchases a machine for $23,000. They expect to use it for four years and then sell it for
$3,000.
What is the annual depreciation charge?
Reducing balance
This method of depreciation is generally used for assets which tend to lose more value in the initial
years and require greater maintenance in the later years. A good example would be a brand new
motor vehicle. Motor vehicles tend to depreciate rapidly in the earlier years and require very little
maintenance.
A fixed percentage is charged to the net book value on an annual basis. Hence, as the book value of
an asset reduces, the depreciation charge reduces accordingly.
EXAMPLE 4
Company C purchases a motor vehicle for $25,000 and will depreciate it at a rate of 25%.
Calculate the depreciation for the first three years.
Once the depreciation charge has been calculated it should be entered into the accounts via a
journal.
The journal for depreciation is:
Dr Depreciation expense (Statement of comprehensive income)
Cr Accumulated Depreciation (Statement of financial position)
Revaluations
When a non-current asset is purchased we record them at their initial cost. However, over time
these values may materially differ from their market value.
For example, if a company purchased a property 20 years ago and therefore subsequently charged
depreciation for 20 years, it would be safe to assume that the book value of the asset would be
significantly different from today’s market value.
In order to overcome this issue I.A.S. 16 permits companies to reflect the market value in the
statement of financial position. This policy may be adopted, and if so the following rules must be
applied per the standard:
i. If a company chooses to revalue an asset they must revalue all assets in that category
ii. Revaluations must be regular
iii. Subsequent depreciation must be based on the revalued amounts
iv. Gains from revaluations are not taken to the statement of comprehensive income, as no
gain as been realised. This is covered by the PRUDENCE concept.
EXAMPLE 5
Company X purchased a building for $45,000 15 year ago, and charges depreciation of 2% on a
straight line basis.
The property has been valued by a qualified person at $150,000 during the current financial year.
The directors would like to encompass these figures in the financial statements.
Required:
Complete the necessary journals to account for the revaluation.
Disposal of a non-current asset
When a business disposes of an asset it is unlikely that the sale proceeds will agree with the net
book value. Therefore, a gain or loss will arise from the sale.
EXAMPLE 6
Company C has a motor vehicle with a book value of $6,000 (cost $22,000) and disposes of it for
$8,000.
We can establish that there is a gain of $2,000 (proceeds – book value).
The accounting entries will need to follow three steps
1. Clear the cost from the cost account

2. Clear the depreciation from the accumulated depreciation account
3. Enter the proceeds
The entries are therefore:
Dr Disposal Account $22,000
Cr Motor vehicle cost account $22,000
Dr Accumulated depreciation $16,000
Cr Disposal Account $16,000
Dr Bank $8,000
Cr Disposal Account $8,000
ANSWERS TO EXAMPLE 1
Capital Revenue
Purchase of a motor vehicle √
Purchase of a tax disc √
Fuel √
Insurance √
C D player √
Alloy wheels √
New tyre √
Early settlement discount √
ANSWER TO EXAMPLE 2
150,000 - 20,000 = 26,000

5
Ii
26,000 x 5 = 10,833
12
ANSWER TO EXAMPLE 3
23,000 - 3,000 = 5,000

4
ANSWER TO EXAMPLE 4
Year 1 25,000 x 25% = 6,250

Year 2 25,000 - 6,250 x 25% = 4,688
Year 3 25,000 - 6,250 - 4,688 x 25% = 3,516
ANSWER TO EXAMPLE 5
Pre Revaluation Post Revaluation

Building Cost Accumulated Net Book Building Cost Accumulated Net Book
Account Depreciation Value Account Depreciation Value
45,000 13,500 31,500 150,000 4,286 145,714
Accumulated depreciation pre revaluation
45,000 X 2% X 15 Years = 13,500
Accumulated depreciation post revaluation
150,000 / 35 Years = 4,286 pa
Journals Required
Dr Buildings Cost 105,000

Dr Accumulated Depreciation
13,500
Cr Revaluation Reserve 118,500
Dr Depreciation 4,286
Cr Accumulated Depreciation
4,286
SESSION 5 INVENTORY
Learning Outcomes
When you have completed this chapter you should be able to:
• Explain the principles of I.A.S. 2 Inventories

• Explain and apply the different methods of inventory valuation including F.I.F.O., A.V.C.O.
and L.I.F.O.
• Understand and apply the double entry for inventory
Introduction
Inventory is the product we purchase and sell in a business.
In a business it is unlikely that all of the inventory will be sold at the end of an accounting period,
therefore there will be an adjustment needed in the financial statements for the value of the closing
inventory.
Opening and closing inventory needs to be included in the statement of comprehensive income in
order to calculate the cost of the goods sold with-in a given period. The statement of financial
position will show the value of the inventory at the end of the accounting period (the closing
inventory).
I.A.S. 2 is the accounting standard that gives us detailed guidance on how to value our closing
inventory.
RULE: Closing inventory should be valued at the lower of cost and net realisable value (N.R.V.)
By applying the I.A.S. 2 rule we ensure our inventory is never overstated in the statement of financial
position, hence the PRUDENCE concept.
Valuation of closing inventory
We will cover three methods of valuing the closing inventory:
F.I.F.O. – First In First Out
The closing inventory consists of items purchased at the latest dates, as we assume the items that
were purchased first were the items sold first.
In times of rising prices, closing inventory will have a higher cost and therefore profit will be higher.
Weighted average cost (AVCO)
Under this method we assume:
• All units are issued at the current weighted average cost per unit
• A new average cost is calculated whenever more items are purchased
L.I.F.O. – Last In First Out
The closing inventory consists of items purchased at the earliest date, as we assume the last item
purchased is the first item to be sold.
In times of rising prices the closing inventory will have a lower value and therefore profit will be
lower.
From a practical perspective it is unlikely last items purchased will be sold first, and as a result of this
I.A.S. 2 does not permit L.I.F.O. method of stock valuation.
W.I.P. – Work in progress
In some cases, where a company has modified it’s inventory it is necessary to take the cost of that
modification into account when valuing closing inventory.
Net realisable value
Net realisable value is the amount we can get from selling inventory less any further costs to be
incurred.
Accounting Entries
The double entry to account for closing stock is:
Dr Inventory Statement of financial position
Cr Inventory Statement of comprehensive income
EXAMPLE 1
Navigator Office Supplies made the following purchases and sales in January:
Purchases
3rd 500 pens @ 4.00 = 2,000

12th 500 pens @ 4.60 = 2,300
16th 400 pens @ 4.75 = 1,900
22nd 700 pens @ 5.25 = 3,675
31st 900 pens @ 5.40 = 4,860
3,000 14,735
Sales
7th 300 pens @ 10.00 = 3,000

13th 400 pens @ 10.00 = 4,000
17th 300 pens @ 10.00 = 3,000
29nd 700 pens @ 10.00 = 7,000
1,700 17,000
Required
Assuming there is no opening inventories prepare the statement of comprehensive income using the
following:
• LIFO
• FIFO
• AVCO
ANSWER TO EXAMPLE 1
L.I.FO.
IN OUT BALANCE
Date No. Cost Total No. Cost Total No. Cost Total
03/01 500 4.00 2000.00 500 2000.00
07/01 300 4.00 1200.00 200 800.00
12/01 500 4.60 2300.00 700 3100.00
13/01 400 4.60 1840.00 300 1260.00
16/01 400 4.75 1900.00 700 3160.00
17/01 300 4.75 1425.00 400 1735.00
22/01 700 5.25 3675.00 1100 5410.00
29/01 700 5.25 3675.00 400 1735.00
31/01 900 5.40 4860.00 1300 6595.00
F.I.F.O
Total Purchases 3,000 pens
Total Sales 1,700 pens
Closing inventory 1,300 pens
Valuation
900 @ $5.40 each $4,860
400 @ $5.25 each $2,100
= $6,960
AVCO
IN OUT BALANCE
Date No. Cost Total No. Cost Total No. Cost Total
03/01 500 4.00 2000.00 500 2000.00
07/01 300 4.00 1200.00 200 800.00
12/01 500 4.60 2300.00 700 3100.00
13/01 400 3100 1771.00 300 1329.00

divided
by 700
16/01 400 4.75 1900.00 700 3229.00
17/01 300 3229 1384.00 400 1845.00

divided
by 700
22/01 700 5.25 3675.00 1100 5520.00
29/01 700 5520 3513.00 400 2007.00

divided
by
1100
31/01 900 5.40 4860.00 1300 6867.00
Therefore Income Statement is as follows:
All $ L.I.F.O. F.I.F.O. AVCO
Revenue 17,000 17,000 17,000
Cost of sales
Opening inventory 0 0 0
Purchases 14,735 14,735 14,735
Closing inventory -6,595 -6,960 -6,867
8,140 7,775 7,868
8,860 9,225 9,132
EXAMPLE 2
Radiance Kitchenware has the following items in their financial statements for the year ended 31st
December 2007:
Inventory @ 01/01/07 $45,678
Purchases $98,000
Inventory @ 31/12/07 $42,800
Closing inventory includes the following damaged items:
• A table was purchased for $500. Due to fire damage the maximum it can be sold for is $200
after a wax product costing $50 has been applied.
• Four chairs costing $100 each were also damaged in the fire. They can be sold for $20.
Required
Calculate the cost of sales for 2007.
ANSWER TO EXAMPLE 2
Stock Valuation
Closing valuation 42,800
Less
Damaged inventory Table 500
Chairs 400 900
Add NRV
Table (200 – 50) 150
Chairs 80 230
42,130
Cost of Sales

Purchases 98,000
Closing inventory -42,130
101,548
SESSION 6 IRRECOVERABLE DEBTS AND PROVISION FOR DOUBTFUL DEBTS
Learning Outcomes
• Explain the difference between a irrecoverable debt and a doubtful debt

• Compute the double entries required for irrecoverable debts and the provision for doubtful
debts
Introduction
The majority of companies sell their product on credit. The length of credit will vary between
companies, but the most common length of credit is 30 days.
If however, someone fails to pay we need to be able to account for this is our ledgers. It would not
be prudent to hold a receivable in our statement of financial position if we were aware that they are
unlikely to pay.
There are 2 types of debts that we need to consider:
• Irrecoverable debt (bad debt)

• Doubtful debt
There is a clear distinction between irrecoverable and doubtful debts:
Irrecoverable Debt
This is a debt that you consider to be uncollectable. Circumstances where this would occur are if the
company has been fraudulent, gone bankrupt or disappeared. Thus it is unlikely that we will receive
the money due to us.
If this is the case we should not have this balance in our receivables, and would therefore write the
debt off.
The double entry would be:
Dr Irrecoverable debts Statement of comprehensive income
Cr Trade receivables Statement of financial position
EXAMPLE 1
George has a small antiques business and at the end of the financial year ended 30th April 2007 has a
receivables balance of $42,500. Included in the year end balance is $4,000 that is owed by Zippy
Traders. George has heard that they have been closed down due to financial irregularities and that
all the directors have disappeared.
Also included in the amount is $500 owed by Bungle who is George’s brother-in-law. Bungle has left
George’s sister and George is not sure if he will pay his debt which is due in 2 weeks time.
Required
How should George account for these items?
Recovering debts written off
If a debt that has been written off is later recovered, we will need to adjust the ledgers to reflect
this. The entry required would be:
Dr Bank
Cr Irrecoverable debts
Doubtful debt
A doubtful debt is a debt that is owed to a business, but they are dubious about its collectability.
The distinguishing factor is that this debt could be collected as it is doubtful not bad. We therefore,
make a provision for this amount.
Dr Irrecoverable debts Statement of comprehensive income
Cr Provision for doubtful debts Statement of financial position
This type of provision is called a specific allowance as we know exactly which debts the provision is
for. As you can see the debt remains in the receivables ledger, as a result the company can still
actively chase the debt. If or when the company pays the debt the double entry would be the
normal entry for a receipt i.e.
Dr Bank
Cr Trade receivables
We would then reverse the provision we had for this debt.
General allowance
In order to apply the prudence concept we need to review our receivables at the end of the financial
year and take a view of collectables. A large number of companies have a constant provision for
receivables. This would be calculated as a percentage of the receivables balance.
EXAMPLE 2
For the year ended 31st December 2005 a company’s receivables balance was $150,000. They had a
general allowance of 5%. At the year ended 31st December 2006 the company’s receivables are
$135,000 – the company would like to maintain a 5% general allowance.
Required
What is the impact on the statement of comprehensive income and how will the receivables be
presented in the statement of financial position?
ANSWER TO EXAMPLE 1
Zippy Traders
This debt should be treated as an irrecoverable debt. Therefore the entry needed would be:
Dr Irrecoverable debts $4,000
Cr Trade receivables $4,000
Bungle
This debt is neither an irrecoverable or doubtful debt at this stage. This is because the debt is not
yet due and we know where Bungle lives. We also have no reason to suspect that Bungle cannot
afford to repay the debt.
ANSWER TO EXAMPLE 2
31ST December 2005
General provision – 5% x $150,000 = $7,500
Double entry
Dr Irrecoverable debts 7,500
Cr Allowance for receivables 7,500
Extract from statement of financial position:
Current assets
Receivables 150,000
General Allowance -7,500
142,500
31st December 2006
General Provision – 5% x $135,000 = $6,750
Provision bought forward = $7,500
Therefore overprovision = $750 (7,500 – 6,750)
Double entry
Cr Irrecoverable debts 750
Dr Allowance for receivables 750
Current assets
Receivables 135,000
General Allowance -6,750
128,250
SESSION 7 CONTROL ACCOUNTS AND CORRECTION OF ERRORS
Learning outcomes
• Understand the principles of control accounts

• Prepare the control accounts for trade receivables and trade payables
• Explain the function of a suspense account
• Prepare nominal ledger accounts
• Prepare journal entries
Introduction
In session 3 we prepared financial statements from T accounts. The number of transactions was
limited, and therefore the process was simple to follow. If an error had been made it would have
been easy to detect.
However, in the real world of business the number of transactions is large, and to help us detect
errors we use control accounts. Therefore, daily entries are normally made in a number of “Prime
Entry” books and then a summary total is transferred to the nominal ledger periodically. This could
be done daily, weekly or even monthly.
The following have a large volume of transactions on a daily basis and are used as prime entries:
• Sales day book

• Purchase day book
• Sale returns day book
• Purchase returns day book
• Cash book
• Petty cash book
• Journal entries
The transactions are recorded in the prime entry books. They are then transferred to the nominal
(general) ledger and we then extract a trial balance in order to prepare our financial statements.
Sales day book
This book records all the sales we make on credit. Sales should be recorded net of trade discount
but before cash (settlement) discount.
Purchase day book
This book of prime entry records all purchases we make on credit.
Sale returns day book
If a credit customer returns goods, this will be recorded in the sales returns day book.
Purchase returns day book
This book will record all the credit purchases that we return to suppliers.
Cash book
This book will record all the money that we will pay into the bank account, and any payments we
make from the bank account. This will also record any cash (settlement) discounts we allow or
receive.
Petty cash book
This records all the small sundry transactions occurring in a business on a day to day basis.
Journal entries
These are used for ad hoc entries that do not fall into any of the above categories. They are also
used to correct errors, both temporary and permanent.
EXAMPLE 1
L & M had the following transactions during the first week in December 2007.
1st December 2007
• Purchased goods on credit from A Ltd for $595 receiving a trade discount of 9.5%
• Purchased goods on credit for $795 from KP Ltd
• Sold goods on credit to JK Ltd for $999
3rd December
• Returned KP Ltd goods as they were defective

• Sold goods on credit to A Jones for $995
5th December
• Sold goods on credit to A Jones for $795

• Purchased goods on credit from A Ltd for $995, again with a 9.5% trade discount
NB Sales tax is 17.5%
SOLUTION
SALES DAY BOOK
DATE INV NO. CUSTOMER NET SALES TAX TOTAL

@17.5%
01/12 100555 J K Limited 999.00 174.82 1173.82
03/12 100556 A Jones 995.00 174.12 1169.12
05/12 100557 A Jones 795.00 139.12 934.12
2789.00 488.06 3277.06
PURCHASE DAY BOOK
DATE INV NO. SUPPLIER NET SALES TAX TOTAL

@17.5%
01/12 999241 A Limited 538.47 94.23 632.70
01/12 867544 K P Limited 795.00 139.12 934.12
05/12 999242 A Limited 900.47 157.58 1058.05
2233.94 390.93 2624.87
PURCHASE RETURNS DAY BOOK
DATE INV NO. SUPPLIER VALUE SALES TAX TOTAL
03/12 867544 K P Limited 795.00 139.12 934.12
795.00 139.12 934.12
EXAMPLE 2
The following are the balances on Explorers’ ledger accounts in the month of January
Opening receivables balance 22,500
Sales day book 88,650
Cash sales 23,950
Sale returns day book 5,555
Refunds to customers 3,325
Increase in provision 500
Purchase ledger contra 1,200
Required
Calculate total cash received from customers in January
Solution
RECEIVABLES CONTROL ACCOUNT
Dr Cr
All Jan All Jan
Opening balance 22,500 Returns book 5,555
Sales day book 88,650 Discounts allowed 6,786
Refunds 3,325 Irrecoverable debts 4,455
Contra 1,200
Closing balance 18,650
Receipts (bal fig) 77,829
114,475 114,475
Feb Opening balance 18,650
EXAMPLE 3
The following are the balances on a company’s ledger accounts in the month of March:
Opening payables balance 12,785
Purchase day book 44,999
Returns outwards daybook 3,950
Returns inwards day book 2,300
Cheques paid to suppliers 37,500
Sales ledger contras 900
Required
Calculate the closing balance for the payables account at the end of March.
Solution
PAYABLES CONTROL ACCOUNT
Dr Cr
All March All March
Returns outwards 3,950 Opening balance 12,785
Payments 37,500 Purchase day book
44,999
Contra 900
Closing bal (bal fig)
14,034
57,784 57,784
April Opening balance 14,034
Reconciling the control accounts
Normally at the end of each month we check to ensure our control accounts reconcile to the
individual balances on our ledger accounts. We do this by:
Checking our list of individual balances tie into the control account balance. If there is an imbalance
then it must be investigated. The main discrepancies are due to:
• Casting error in the day books

• Posting error
• A one sided contra
• An entry that has been made in the individual account but not in the control accounts
• An entry being omitted from the control account
EXAMPLE 4
At the financial year end 31 December 2007 Explorer Rain Wear had a balance on the payables
control account of $22,550. The balance on their purchase ledgers was $20,650. The management
accountant found the following discrepancies:
1. An invoice of $1,200 had been omitted from the control account

2. The purchase day book total was overstated by $1,000
3. Goods returned of $1,590 had not been recorded in the control account
4. Discounts received of $10 had not been posted
5. Contra entries of $500 need to be recorded in the control account
After these adjustments are made, the control account should balance.
Solution
Until a full knowledge of double entry is known, the easiest way to tackle this question is to identify
where the error has occurred and amend accordingly. In this case:
Error No. Location of Error Amend
1 Control Account Control Account

Dr Cr
All Dec All Dec
Error 2 1,000 Original balance 22,550
Error 3 1,590 Error 1 1,200
Error 4 10
Error 5 500
Amended balance 20,650
23,750 23,750
Jan Opening balance 20,650
Balancer per list 20,650
EXAMPLE 5
Hippo Manufacturing had the following balances on their payables / receivables for the financial
year ended 30 June 2006.
Credit sales 450,000

Cash sales 22,000
Credit purchases 300,000
Cash purchases 4,500
Returns inwards 17,000
Returns outwards 14,000
Payments made to payables 263,100
Cash received from receivables 438,580
Contra’s 17,500
Balance at 1 July 2005:
Payables 53,500
Receivables 51,500
Provision for doubtful debts 3,400
Bad debt provision is to be maintained @ 1.5% of credit sales
Required:
Compute the receivables and payables control account and extract the closing balances for the
financial year end.
SOLUTION
This is a common CBA question. It is designed to ensure you know exactly what should go into
control accounts and also your knowledge of double entry. Again until you are comfortable with
debits and credits it is easier to write exactly where things will go before attempting to balance the
accounts. In this case:
Receivables / Payables Debit / Credit
Credit sales Receivables Debit

Cash sales Neither n/a
Credit purchases Payables Credit
Cash purchases Neither n/a
Returns inwards Receivables Credit
Returns outwards Payables Debit
Discounts allowed Receivables Credit
Discounts received Payables Debit
Irrecoverable debts Receivables Credit
Payments made Payables Debit
Cash Received Receivables Credit
Contra Receivables / Payables Credit / Debit
Dr Cr
Returns outwards 14,000 Opening balance 53,500

Discounts received 12,000 Credit purchases 300,000
Payments 263,100
Contra 17,500
Closing bal (bal fig) 46,900
353,500 353,500
RECEIVABLES CONTROL ACCOUNT
Dr Cr
Opening balance 51,500 Returns inwards 17,000

Credit sales 450,000 Discounts allowed 11,000
Cash received 438,580
Contra 17,500
Closing bal (bal fig) 14,920
501,500 501,500
Correction of errors
At the end of an accounting period we extract a trial balance, and use this as a basis for preparing
the financial statements.
The following are the main purposes of a trial balance:
• Account balances are reviewed to check for obscurities

• Reconcile all control account balances with the individual ledgers
• Ensure debits equal the credits.
If there is an imbalance a SUSPENSE ACCOUNT will be created. Therefore, a suspense account may
have a debit or credit balance.
Errors that will cause a difference in the trial balance are:
• Transposition error – Entering figures the wrong way round

• Single entries – Only one side of the transaction has been posted
• Both entries entered on the same side of the ledger account
• Casting error – An account has been incorrectly added
Although extracting a trial balance proves the above, there are certain errors that a trial balance will
not identify. These are:
• Error of principle – An entry has been entered in the wrong financial statement.
• Errors of omission – A transaction has been missed out.
• Errors of commission – Entering an amount in the wrong account, but in the correct financial
statement.
• Compensating errors – Where two or more errors cancel each other. This is extremely rare.
Journals
Journals are used for several reasons:
• Post unique, one off transactions

• Transfer items between accounts
• Adjust balances that are incorrect
• Correct items that have been incorrectly posted
Journals should have a unique number and should be clearly labelled.
Example 6
Correct the following errors using journals:
1. A sales day book has been under cast by $1,000.

2. Inventory purchased for $1,000 has been posted to stationery
3. A non-current asset has been purchased for $7,000 on credit, but has not been recorded.
Solution
Account Name Description Debit Credit
Sales Revenue SDB under cast 1,000

Stationery Incorrectly coded 1,000

Purchases 1,000
Non-current asset Capital purchased 7,000

Other payables 7,000
Example 7
Peter has the following balances on its trial balance at the end of the financial year:
Debit $213,852
Credit $212,390
A suspense account has been created for the difference.
The following errors have been identified by the accountant; after these errors have been corrected
the balance on the suspense account should be removed.
1. A payment for stationery for $440 was debited to stationery as $780.

2. Discounts allowed of $1,310 have been recorded as a credit.
3. Other income of $3,742 has only been recorded in the cash book.
Required
Correct the entries and clear the suspense account.
Solution
Account Name Description Debit Credit
Suspense Incorrect total posted 340

Stationery 340
Discounts allowed Posting to incorrect side 2,620

Suspense 2,620
Suspense One sided entry 3,742

Other income 3,742
Suspense Account
Journal 1 340 Opening Balance 1,462

Journal 3 3,742 Journal 2 2,620
4,082 4,082
SESSION 8 BANK RECONCILIATIONS
Learning Outcomes
• Prepare cash and bank accounts

• Prepare a bank reconciliation
Introduction
Within the ledger account is a bank account ledger, and it is important that the balance in the ledger
reconciles to the balance on the actual bank statement. We call this exercise a bank reconciliation.
Dependant on the size of the company, this can be done on a weekly or monthly basis, and in some
larger companies even daily.
Preparing a bank reconciliation has many advantages. They include:
• Provides a check on accuracy of recordings in the cash book

• Highlights any errors
• Assists in the day to day cash management
• Any differences can be identified quickly
Debits and Credits
On a bank statement the balances will be from the perspective of the bank not that of the business.
Therefore, if a bank statement shows a credit balance, the bank has a creditor. In other words the
bank owes the business money and is therefore in a positive position.
If the bank statement shows a debit balance this indicates the business is overdrawn. i.e. it is an
asset from the bank’s point of view.
Reconciling Items
It is extremely unlikely that the balance on the ledger account and the balance on the bank
statement will agree. This can be due to the following reasons:
• Cheques issued by the company are immediately entered into the cash book, but they will
not appear on the bank statement until they are presented to the bank. These are called
unpresented cheques.
• Receipts by the business are immediately entered in the cash book and then banked. This
can take a number of days to clear.
• There may be items in the bank statement that have not been processed through the cash
book e.g. BACS transfer, standing orders, direct debits, dishonoured cheques and bank
charges.
Proforma bank reconciliation
Balance per bank statement 65,455
Less : Unpresented cheques (1,950)
Add: Outstanding lodgements 1,700
Balance per cash book 65,205
Preparing a bank reconciliation
1. Compare the cash book and bank statement and tick matching items
2. Post corrections to the cash book i.e. items on the bank statement that have not been
processed through the ledger
3. Put in items that are in the cash book that have yet to be presented to the bank as a
reconciling item.
UNLESS OTHERWISE TOLD, ASSUME FIGURES ON THE BANK STATEMENT ARE CORRECT.
Example 1
Cash Book
01/04/07 b/d 14,500 01/04/07 1437 450

03/04/07 27 3,650 01/04/07 1438 600
05/04/07 28 1,200 01/04/07 1439 750
12/04/07 29 1,100 01/04/07 1440 150
29/04/07 30 3,000 12/04/07 1441 250
12/04/07 1442 350
27/04/07 1443 395
27/04/07 1444 165
27/04/07 1445 245
30/04/07 c/d 20,095
23,450 23,450
30/04/07 b/d 20,095
Bank Statement
Date Details Payment Receipt Balance
01/04/07 Opening balance 14,500

04/04/07 1437 450 14,050
05/04/07 1438 600 13,450
08/04/07 27 3,650 17,100
10/04/07 28 1,200 18,300
11/04/07 Standing Order – P.S.L. 750 17,550
12/04/07 1439 750 16,800
14/04/07 Direct Debit – Direct Line 750 16,050
17/04/07 1441 250 15,800
17/04/07 BACS (Bank Automated Clearance
System) Transfer 3,500 19,300
18/04/07 1442 350 18,950
20/04/07 29 1,100 20,050
24/04/07 Bank Charges 500 19,550
Solution
Cash Book
30/04/07 b/d 20,095 11/04/07 Standing Order 750

17/04/07 BACS 3,500 14/04/07 Direct Debit 750
24/04/07 Bank Charges 500
30/04/07 c/d 21,595
23,595 23,595
30/04/07 b/d 21,595
Bank Reconciliation
Balance per bank statement 19,550
Less: unpresented cheques 1440 150

1443 395
1444 165
1445 245 (955)
Add: Outstanding lodgements 30 3,000
21,595
Example 2
The assistant accountant of Rainbow is trying to prepare a bank reconciliation as at 30th November
2007. The cash book has a credit balance of $2,400 and the bank statement at that date has an
overdrawn balance of $1,550.
As his manager he has asked you for help with the following items:
1. He has discovered cheque number 100678 has been entered into the cash book twice for
$459.
2. A direct debit of $225 has been taken from the account and not been entered into the cash
book
3. There are unpresented cheques totalling $5,840.
4. There are outstanding lodgements of $8,390.
5. A cheque receipt for $1,450 has been dishonoured by the bank.
6. Bank charges of $1,400 have been charged by the bank.
7. A BACS transfer of $6,196 has been received by the bank and not been accounted for in the
cash book.
8. He has entered cheque payment number 100600 into the cash book as $1,680, when the
correct amount is $1,860.
Required:
Correct the cash book with the above and prepare a bank reconciliation.
Solution:
Cash Book
30/11/07 Chq 100678 (1) 459 30/11/07 b/d 2,400

30/11/07 BACS 6,196 30/11/07 Direct Debit (2) 225
30/11/07 Dishonoured
Cheque (5) 1,450
30/11/07 Bank Charges (6)
1,400
30/11/07 Chq 100600 (8) 180
30/11/07 c/d 1,000
6,655 6,655
30/11/07 b/d 1,000
Bank Reconciliation
Balance per bank statement (1,550)
Less : Unpresented cheques (3) (5,840)
Add: Outstanding lodgements (4) 8,390
1,000
SESSION 9 ACCRUALS AND PREPAYMENTS
Learning Outcomes
• Explain why adjustments are necessary when preparing financial statements

• Compute the adjustments needed
Introduction
The matching concepts states that income and expenses incurred in the period should be accounted
for in that period, regardless of when invoices are raised or received.
The fundamental rule is that income and expenditure are recognised as they are earned or incurred,
not as money is received or paid.
In order to ensure income and expenditure is recorded in the correct period, it is often necessary to
adjust the financial statements.
Example 1 - Accruals
A sole trader receives his business gas bill quarterly in arrears. In the year ended 31st December
2007 the following bills were received and paid on the dates indicated.
• 30/04/07 $300
• 31/07/07 $310
• 31/10/07 $300
When preparing the accounts for the year end the accountant must adjust the Gas ledger account to
reflect that not all charges have been recorded. In this case charges for November and December
need to be included.
Accruals and prepayments will be the estimate of the adjustment needed. The adjustment is
calculated using the most up to date information available. In the example above this will be the
31/10/07 bill. Therefore the adjustment needed would be 2/3 x $300.
The entry needed would be:
Dr Gas account $200
Cr Accruals $200
The ledger account would therefore look like this:
Gas Account
30/04/07 Cash 300

31/07/07 Cash 310
31/10/07 Cash 300
31/12/07 Accrual 200 31/12/07 Inc Statement 1,110
1,110 1.110
01/01/08 Accrual b/d 200
It is important to remember to carry forward any accrual or prepayment to the next accounting
period.
(Assumption: business began on 1. 2. 07)
Example 2 - Prepayments
Julie starts her business on 1st August 2007, and pays her business insurance for the year to 31st July
2008 totalling $1,800. Her year end is 31st December each year.
What charges for insurance would be stated in the income statement for the period ended 31st
December 2007?
Insurance Account
01/08/07 Cash 1,800 31/12/07 Prepayment (7/12) 1,050

31/12/07 Inc Statement 750
1,800 1.800
01/01/08 Prepayment b/d 1,050
Assuming the insurance charge remains the same for the year ended 31st July 2009, the ledger
account would look like this:
Insurance Account
01/08/07 Cash 1,800 31/12/07 Prepayment (7/12) 1,050

31/12/07 Inc Statement 750
1,800 1.800

01/08/08 Cash 1,800 31/12/08 Prepayment (7/12 1,050
31/12/08 Inc Statement 1,800
2,850 2,850
SESSION 10 LIMITED COMPANY ACCOUNTS
Learning outcomes
• Prepare a statement of comprehensive income

• Prepare a statement of changes in equity
• Prepare a statement of financial position
Introduction
Many businesses are constituted in the form of limited companies. The owners of limited
companies are referred to as shareholders and are often different from the people that run the
company.
The shareholders have very little, if any involvement in the day to day running of the business and
employ directors to run it on their behalf.
Limited company financial statements have very strict requirements which must be followed by all
companies. These are governed by:
• Companies Act 2006 (or local country legislation)

• The International Accounting Standards Board
The format to be adhered to per I.A.S. must be the format we adopt in our studies. The proforma
financial statements for limited companies were given in session 2, however a copy is given below
for reference:
Proforma set of financial statements for a limited company or Plc
Statement of financial position as at 31 December 2007

Note
Intangible assets 6 200,000
Tangible assets 7 187,999
Current assets
Inventory 8 88,432
Trade receivables 9 97,455
Cash 13,400 199,287
Share capital 100,000

Revaluation reserve 7 38,000 358,497
Interest bearing borrowings 10 100,000
Current liabilities

Taxation 5 51,000 128,789
Statement of comprehensive income for the year ended 31 December 2007
Note
Revenue 385,000
Cost of sales 1 188,000
Distribution costs 2 38,500
Administration expenses 3 37,700
Finance costs 8,000
Income tax 53,000
Statement Of changes in equity for the year ended 31 December 2007
Share Retained Revaluation

Capital Earnings Reserve Total
Balance as at 1 Jan 2007 100,000 188,697 40,000 328,697
Profit for the period 59,800 59,800
Excess depreciation 2,000 (2,000)
Dividend paid (30,000) (30,000)
Closing balance 100,000 220,497 38,000 358,497
A limited company must file their statutory accounts with companies’ house. A full set of statutory
accounts will include:
1. Statement of comprehensive income
2. Statement of changes in equity
3. Statement of financial position
4. Cash flow statement
These statements are supported by notes explaining the balances in the financial statements.
One of the key differences between a company and a sole trader is that a company is classed as a
separate legal entity. This means that a company is deemed to be a person in its own right.
Therefore, a company can sue individuals and can also be sued. The name limited company comes
from the fact that the shareholders have limited liability, in other words their liability is restricted to
the amount they have paid for their shares.
Profits of a company are distributed by way of dividend payments. These payments are at the
directors’ discretion.
Example 1
Freedom Limited has 100,000 ordinary shares in issue. The nominal value (par value) is $1.00 and
the directors decide to pay a dividend of 75c per share.
If this is the case the company would pay $75,000 (100,000 x 0.75) in dividends
Preference shares
This type of share is known as a non-equity share, and gets a fixed return on the value of the share.
Preference share holders will receive their dividend every year providing the company has
distributable profit.
Ordinary share holders will receive a dividend if the directors decide to pay one.
Example 2
The following information relates to Voyager Limited
Year ended 31st December 2007 $
Share capital (25c shares) 100,000

6% Preference shares 50,000
The directors propose an ordinary dividend of 75c per share.
Required:
Calculate the dividend payable.
Solution
Ordinary shares
100,000 / 0.25 = 400,000 shares in issue
400,000 x 0.75 300,000
Preference shares
50,000 x 6% 3,000
Total dividends paid 303,000
Share premium
If a company issues shares after the initial incorporation, it is unlikely they will issue them at a
nominal/par value. As the company has established itself, the net worth of the company would
increase. This would be reflected in the share price.
Example 3
The following relates to Radiance Limited
Capital and reserves
Share capital ($1.00) 200,000
Revaluation reserve 125,000
Say the market value price per share is $3.85 and the directors wish to issue a further 50,000 shares
for cash injection purposes.
Cr Share Capital (50,000 x $1.00) 50,000
Cr Share Premium (50,000 x $2.85) 142,500
Dr Bank (50,000 x $3.85) 192,500
The Capital and reserves would now be:
Share capital ($1.00) 250,000
Share premium 142,500
Revaluation reserve 125,000
Capital reserve
The share premium account is classed as a Capital reserve. This means that the account cannot be
used to pay out dividends. The use of capital reserves is very limited. The key use of the reserve
would be to finance a bonus issue of shares. This is when the directors distribute free shares to
existing shareholders.
The accounting entry for this would be:
Cr Share capital
Dr Share premium
Dividends
As we have seen previously in this chapter, dividend payments are used to distribute profit to
shareholders. In order that a dividend can be paid, the company must have reserves that are
distributable i.e. they cannot be paid out of any reserve that is not realised (Revaluation reserve).
Final dividends are paid after the year end; once the financial statements have been completed, and
the directors have decided the dividend amount.
An interim dividend can also be paid mid way through the year.
Example 4
Share capital (50c) 200,000
10% Preference shares 25,000
An interim dividend of 8c per share was paid during the year and the directors would like to propose
a final dividend of 9c per share.
Required:
Calculate the total dividend payable for the year ended 31st May 2007.
Solution
Ordinary shares
$200,000 /$ 0.50 = 400,000 shares in issue
Interim dividend (400,000 x 8c) 32,000
Final dividend (400,000 x 9c) 36,000
Preference shares
10% x $25,000 2,500
70,500
Taxation
All companies have to pay tax on the taxable profits. The tax charge is normally estimated at the
end of the financial year and charged to the statement of comprehensive income, and is paid in the
following year.
The accounting entry for taxation would be:
Dr Taxation Comprehensive income
Cr Taxation liability Financial position
Example 5
The trial balance of Jewel Limited as at 31st March 2007 was as follows:
Dr Cr
Share capital (50c) 100,000

6% Preference shares ($1.00) 50,000
Retained earnings at 01/04/06 234,666
Debenture 10% 100,000
Inventory at 01/04/06 32,000
Trade receivables 45,987
Receivables provision 5.987
Cash 73,958
Building cost account 150,000
Plant and machinery at net book value 422,987
Debenture interest 5,000
Administrative expenses 48,000
Distribution expenses 49,000
Profit on disposals 1,000
Purchases 69,666
Revenue 365,000
896,598 896,598
Notes
1. Depreciation on building is to be charged at 2%
2. Depreciation on plant and machinery is to be charged at 10% reducing balance
3. Closing inventory was valued at $28,990
4. A provision of 5% of receivables is to be maintained
5. Tax charge is estimated at $25,000
6. A final dividend of 15c per share has been proposed before the year end.
Required
Prepare the statement of comprehensive income, statement of changes in equity and the statement
of financial position for Jewel Limited for the year ended 31st March 2007.
Solution
Journals
Dr Cr
1. Dr Depreciation charge (150,000 x 2%) 3,000

Cr Accumulated depreciation - Buildings
3,000
2. Dr Depreciation charge (422,987 x 10%) 42,299

Cr Accumulated depreciation – P & M 42,299
3. Dr Closing inventory (comp income) 28,990

Cr Closing inventory (financial position) 28,990
4. Dr Receivables provision account Work 3,688

1
Cr Administration expenses 3,688
5. Dr Taxation 25,000
Cr Taxation liability 25,000
6. Dr Pref Dividends 3,000

Cr Proposed Div (prefs) 3,000
7. Dr Dividends in SOCIE (100,000 / 0.5 x 15c)

30,000
Cr Proposed dividends 30,000
8. Dr Debenture interest (10,000 – 5,000) 5,000

Cr Debenture interest accrual 5,000
Working 1
Receivables Provision Account
01/04/06 b/d 5,987
31/03/07 Admin expenses

(written back to
I/S) 3,688
31/03/07 c/d (45,987 x 5%)

2,299
5,987 5,987
Jewel Limited
Year ended 31st March 2007
Revenue 365,000
Cost of sales (32,000 + 69666 – 28990) (72,676)
Distribution costs (49,000)
Administration expenses (48,000 + 3000 + 42,299 – 3688 + 1000)

(88,611)
Finance costs (10,000)
Income tax (25,000)
Jewel Limited
Statement of financial position
As at 31st March 2007
Tangible assets (150,000 + 422,987 – 3,000 – 42,299)

527,688
Current assets
Inventory 28,990
Trade receivables (45,987 – 2,299) 43,688
Cash 73,958
146,636
Ordinary share capital 100,000

Preference share capital 50,000
Retained earnings (234,666 + 119,713 – 30,000 –
3,000 Pref Div) 321,379
471,379
Debenture 100,000
Current liabilities

Debenture accrual 5,000
Proposed dividend 33,000
Taxation 25,000
102,945
Ordinary Preference Revaluation Retained Total
Shares Shares Reserve Earnings
Balance @ 01/04/06 100,000 50,000 234,666 384,666
Profit for the year 119,713 119,713
Dividends: ord (30,000) (30,000)

pref (3,000) (3,000)
Shares issued
Revaluation
Balance @ 31/03/07 100,000 50,000 321,379 471,379
SESSION 11 STATEMENTS OF CASH FLOW
Learning outcomes
• Explain the purpose of producing a cash flow statement
• Discuss the advantages of a cash flow statement
• Explain the principles of I.A.S. 7
• Produce a cash flow statement
Introduction
The cash flow statement is a primary financial statement and provides fundamental information to
the user of accounts. It highlights the key areas where a business has generated and spent physical
cash.
Good cash management ensures a business has sufficient cash to run its day to day operations.
Prior to this session we have focused on profit, but cash is equally vital for the success of a business,
especially in the short term. If a business has limited cash funds available it will struggle to survive in
the short term.
Advantages
• Cash flow balances are a matter of fact and are not distorted by accounting policies
• Cash flow balances are objective, unlike profit which is subjective
• Users of financial statements can establish exactly the cash generation of a business
• Users can identify exactly how this cash has been utilised
• Users can assess the liquidity of a business and assess its ability to repay debts as they fall
due
• Loans repaid and received are clearly listed in the cash flow statement
• Users can assess management attitude to capital expenditure
• Interest payments are highlighted in the cash flow
I.A.S. 7
I.A.S. 7 lays down the requirements of a cash flow statement. It gives us a detailed proforma and
certain definitions:
Cash
Cash that is available on demand. An example would be cash in the bank less any overdraft.
Cash equivalents
Short term, highly liquid investments (will be stated as current assets in Statement of Financial
Position)
I.A.S. 7 has three main headings. Students should familiarise the layout of a cash flow as questions
in the exam will test this area.
The three main headings are:
• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities
Proforma
Statement of Cash Flow for year to …….
$ $
Cash flows from operating activities
Profit before tax X
Adjustments for:
Interest payable X
Depreciation X
(Profit) / loss on the disposal of a non current asset (X) X
Operating profit before working capital changes X
Working capital changes
(Increase) / Decrease in inventories (X) X

(Increase) / Decrease in receivables (X) X
Increase / (Decrease) in payables X (X)
Cash generated from operations X
Interest paid (X)

Taxation paid (X)
NET CASH FROM OPERATING ACTIVITIES X
Proforma continued
$ $
NET CASH FROM OPERATING ACTIVITIES X
Cash flow from investing activities
Purchase of a non-current asset (X)

Disposal of a non-current asset X
Interest received X
Dividends received X
CASH FLOW FROM INVESTING ACTIVITIES X
Cash flow from financing activities
Proceeds from the issue of shares X

Receipt of loans X
Repayment of loans (X)
Dividends paid (X)
CASH FLOW FROM FINANCING ACTIVITIES X
NET CASH FLOW X
Cash and cash equivalents at the beginning of the period

X
Cash and cash equivalents at the end of the period X
Example 1
Radiance Limited
As at 31 December 2007
2006 2007
Non-current assets
Cost 180 220
Accumulated depreciation (78) (92)
102 128
Current assets
Inventory 12 17
Trade receivables 2 10
Bonds 10 10
Cash 3 16
129 181
Capital and reserves
Share capital 45 65
Share premium 10 12
Accumulated profits 24 68
Non-current liabilities
Loan 30 20
Current liabilities
Payables 19 13
Tax 1 3
129 181
Notes
The tax charge in the statement of comprehensive income is $6,000.
Loan was repaid at the end of the financial year.
Required
Prepare the cash flow statement for the year ended 31st December 2007.
Solution
$ $
Cash flows from operating activities
Profit before tax (68 – 24) + 6 50
Adjustments for:
Interest payable -
Depreciation (92 – 78) 14
(Profit) / loss on the disposal of a non current asset -
Operating profit before working capital changes 64
Working capital changes
(Increase) in inventory (17 – 12) (5)

(Increase) in receivables (10 – 2) (8)
(Decrease) in payables (19 – 13) (6)
Cash generated from operations 45
Interest paid -
Taxation paid (working 1) (4)
NET CASH FROM OPERATING ACTIVITIES 41
$ $
NET CASH FROM OPERATING ACTIVITIES 41
Cash flow from investing activities
Purchase of a non-current asset (220 – 180) (40)

Disposal of a non-current assets -
Interest received -
Dividends received -
NET CASH USED IN INVESTING ACTIVITIES (40)
Cash flow from financing activities
Proceeds from the issue of shares (65 – 45) + (12 – 10) 22

Receipt of loans -
Repayment of loans (10)
Dividends paid -
CASH FLOW FROM FINANCING ACTIVITIES 12
NET CASH FLOW 13
Cash and cash equivalents at the beginning of the period (10+3)

13
Cash and cash equivalents at the end of the period (10+3)

26
Working 1
Taxation Liability
01/01/07 b/d 1
Cash paid (Bal Fig) 4 31/12/07 Charge for year 6
31/12/07 c/d 3
7 7
01/01/08 b/d 7
Direct Method
The direct method involves adding together the cash inflows and deducting the cash outflows.
Example 2
The following information relates to Empress Limited:
Cash sales 55,000

Cash received from customers 44,000
Cash paid to suppliers 12,000
Cash expenses 11,000
Cash wages and salaries 20,000
Required:
Calculate the cash generation for Empress Limited
Solution
Cash sales 55,000

Cash received from customers 44,000
Total cash received 99,000

Cash paid to suppliers 12,000
Cash expenses 11,000
Cash wages and salaries 20,000
Total cash paid 76,000
Cash generated 23,000
SESSION 12 INCOMPLETE RECORDS
Introduction
As the name suggests, incomplete records are any form of accounting records other than the full
double entry system.
In reality, accountants come across incomplete records almost daily. This is because their clients are
not likely to fully understand the double en try system. We still however, need to prepare a set of
financial statements for the client.
During the exam, students will often come across incomplete records. The main reason is often due
to a flood or fire at the business premises.
Calculating profit
If a business has very little information about its transactions, it may only be possible to calculate its
net profit for the year. This can be done by using the accounting equation (this is very important).
The accounting equation can be written as:
Net Assets = Capital + Profit - Drawings
Or
Change in net assets = Capital introduced + Profit – Drawings
You may realise that this is very similar to the statement of financial position.
Example 1
A sole trader’s statement of financial position at 31st December 2006 shows that the business has
net assets of $5,000. The statement of financial position at 31st December 2007 shows that the
business has net assets of $8,000. The owner’s drawings for the year amounted to $2,500 and he
didn’t introduce any further capital in the year
Required
Calculate the profit for the year ended 31st December 2007.
Solution:
Change in Capital Profit for Drawing in

net assets introduced the year period
3,000 = 0 + ? - 2,500
This can be written as:
3,000 - 0 + 2,500 = Profit
Profit = 5,500
As you can see it is impossible to know the make-up of the net profit figure due to lack of
information.
Preparing financial statements from incomplete records
In the majority of cases a small business will keep limited amount of records.
In these types of questions you will be given information regarding the opening and closing balances
of assets and liabilities of the business. You will also be given information about certain transactions
during the period; this is usually a summary of the cash book.
There are two main techniques used in incomplete records:
1. Balancing figures in ledger accounts
2. Ratios for mark-up (based on cost) or margin (based on selling price)
Balancing figures
The balancing figure approach is commonly used the following way:
Ledger Account Missing Figure

Accounts receivable • Sales
• Money received from accounts
receivable
Accounts payable • Purchases
• Money paid to accounts payable
Cash at bank • Drawings
• Money stolen
Cash in hand • Cash sales
• Cash stolen
Example 2
Suppose that the opening balance on the accounts receivables ledger was $50,000, there had been
receipts from account receivables in the year of $45,000, irrecoverable debts have been written off
worth $5,000 and the closing balance was $55,000.
Required:
What were the credit sales for the year?
Account Receivables
Opening b/d 50,000 Receipts 45,000

Sales (Bal Fig) 55,000 Bad debts 5,000
Closing c/d 55,000
105,000 105,000
Example 3
Suppose that the opening accounts receivables balance was $30,000, there have been total receipts
from customers of $55,000 of which $15,000 relates to cash sales and $40,000 relates to receipts
from accounts receivables. Discounts allowed in the year totalled $3,000 and the closing balance
was $37,000.
Required:
What are the total sales for the year?
Due to the information given in the question we can approach this in 2 different ways. We can
calculate credit sales as above and then add on cash sales, or we can use the ledger account to
calculate total sales. Both methods are shown below:
Solution 1 - Total sales
Account Receivables (Total Sales a/c)
01/01/07 b/d 30,000 31/12/07 Total receipts 55,000

31/12/07 Total sales (Bal fig) 31/12/07 Discounts allowed 3,000
65,000
31/12/07 c/d 37,000
95,000 95,000
Solution 2 - Separate sales
Account Receivables
01/01/07 b/d 30,000 31/12/07 Credit receipts 40,000
31/12/07 Credit sales 50,000 31/12/07 Discounts allowed 3,000
31/12/07 c/d 37,000
80,000 80,000
Credit sales 50,000

Cash sales 15,000
Total sales 65,000
Example 4
The opening balance on the accounts payable ledger was $30,000. Payments made to account
payables during the year were $33.000, discounts received are $4,000 and the closing balance was
$26,000.
Required:
What was the total purchases figure for the year?
Solution:
Payables Control a/c
31/12/07 Payments 33,000 01/12/07 b/d 30,000

31/12/07 Discounts received 4,000
31/12/07 c/d 26,000 31/12/07 Purchases 33,000
63,000 63,000
Example 5
Suppose the opening accounts payable balance is $15,000, the total payments made to suppliers
was $14,000 of which $10,000 related to credit purchases. Discounts received were $500 and the
closing balance was 11,000.
Required:
What was the total purchases figure for the year?
Solution:
Total Purchases a/c (Account Payables)
31/12/07 Total payments 14,000 01/12/07 b/d 15,000

31/12/07 Discounts received 500
31/12/07 c/d 11,000 31/12/07 Purchases 10,500
25,500 25,500
Example 6
The following information relates to the rent and rates for Susan for the year ended 31st December
2007.
Opening balance Rent prepaid 300

Rates accrued 500
Cash paid during the year Rent and rates 4,100
Closing balance Rent prepaid 350
Rates accrued 450
Solution:
Rent and Rates
01/01/07 Rent b/d (Prepaid) 01/01/07 Rates b/d

300 (Accrued) 500
31/12/07 Cash paid 4,100 31/12/07 Charge (Bal Fig) 4,000
31/12/07 Rates accrued 450 31/12/07 Rent prepaid 350
4,850 4,850
Example 7
On 1st January the bank is overdrawn by $1,367, payments in the year totalled $8,536 and on 31st
December the closing balance was a positive balance of $2,227.
Required:
What is the total receipts figure for the year?
Solution:
Cash Book
31/12/07 Receipts 12,130 01/01/07 b/d 1,367

31/12/07 Payments 8,536
31/12/07 c/d 2,227
12,130 12,130
Example 8
Scott has a cash float at the beginning of the year of $900. During the year cash of $10,000 was
banked, $1,000 was paid out for drawings and wages of $2,000 was paid. Scott decided to increase
the float to $1,000 at the end of the year.
Required:
How much cash was received from customers during the year?
Solution:
Cash Account
01/01/07 b/d 900 31/12/07 Banked 10,000

31/12/07 Drawings 1,000
31/12/07 Receipts 13,100 31/12/07 Wages 2,000
31/12/07 c/d 1,000
14,000 14,000
Ratios – Mark-up and Margin
The gross profit of a company can be expressed as a percentage. This percentage can be calculated
based on the sales figure or the cost of sales figure.
• Gross Profit Mark-up Based on Cost of Sales
• Gross Profit Margin Based on Sales
If we look at the following trading account:
Sales REvenue 5,000
Cost of sales 4,000
Gross profit 1,000
Gross profit mark-up 1,000 / 4,000 x 100 = 25%
Gross profit margin 1,000 / 5,000 x 100 = 20%
Example 9
Margin 25% Sales $1,000
Required:
What is the gross profit and cost of sales?
$ %
Sales 1,000 100%
Cost of sales (1,000 / 100 x 75) (Bal fig) 750 75%
Gross profit 250 25%
Example 10
Mark-up 25% Cost of sales $600
Required:
What is gross profit and sales?
Sales (600 / 100 x 125) 750 125%
Cost of sales 600 100%
Gross profit 150 25%
Example 11
Mark-up 10%
Sales $6,600
Opening inventory $300
Closing inventory $500
Required:
Complete a trading account from the above information.
Sales 6,600 110%
Cost of sales
Opening inventory 300

Purchases (Balancing Figure) 6,200
Closing inventory (500)
6,000 100%
Gross profit (6,600 / 110 x 10) 600 10%
Example 12
Margin 5%
Purchases $2,840
Opening inventory $800
Closing inventory $600
Required:
Sales (3,040 / 95 x 100) 3,200 100%
Cost of sales
Opening inventory 800

Purchases 2,840
Closing inventory (600)
3,040 95%
Gross profit 160 5%
Cost of lost inventory
In incomplete record questions, it is likely that inventory has been lost due to the infamous fire or
flood.
Closing inventory that has not been lost is subtracted in cost of sales because by definition, the
inventory has not been sold in the year.
Lost inventory has also not been sold in the year and therefore also needs subtracting within cost of
sales.
Therefore, to work out the cost of lost inventory, complete the trading account from the information
given and then lost inventory can be calculated as a balancing figure.
Example 13
Margin 20%
Sales $100,000
Opening inventory $10,000
Closing inventory (after fire) $3,000
Purchases $82,000
Required:
Sales 100,000 100%
Cost of sales

Purchases 82,000
Inventory lost in fire (balancing figure) (9,000)
80,000 80%
Gross profit (100,000 / 100 x 20) 20,000 20%
SESSION 13 PARTNERSHIPS
Definition
“The relationship which subsists between persons carrying on a business in common with a view to
profit”
A partnership therefore has two or more partners or owners. In the same way as for a sole trader,
the profits of the business are owned by the partners. This makes it necessary to share the profits of
the business amongst the partners.
A partnership will usually have a “Partnership Agreement” which will state how the profits are to be
shared amongst other things.
THE SHARING STORY
A partnership has four partners – Jason, Howard, Gary and Mark. In the year to 30th June 2007 the
partnership has made profits totalling $106,250.
Jason is rich but stupid. He was made a partner because he could invest $100,000 into the
partnership. He withdrew $30,000 from the business on 1st July 2006.
Howard is poor but clever and could only invest $20,000 into the partnership. Due to him being
clever and completing work quicker than the other partners he took responsibility for hiring and
firing staff in the business. He withdrew $30,000 on 30th June 2007.
Gary invested $50,000 into the partnership. He has a liking for designer clothes and fast cars.
Consequently he withdrew $25,000 on 1st July 2006 and a further $25,000 on 1st January 2007.
Mark also invested $50,000 and withdrew $30,000 on 1st July 2006. Mark’s wife has just had a baby
and he would therefore like to have a guaranteed share of the profits.
The partners have decided that profits should be distributed at a ratio of 2 : 1 : 3 : 4 (Jason : Howard
: Gary : Mark)
How do you think the profits should be shared amongst the partners?
Interest on capital
To reward partners who have invested more into the business, the partnership may allocate some of
the profits based on the level of capital invested. This is called interest on capital.
Salaries
To reward those partners who take on extra responsibilities with-in the business, they may receive a
salary. A partners’ salary is not a business expense like the salary of an employee, but a way in
which profits are allocated.
Interest on drawings
To penalise those partners who take out more drawings from the business, the partnership may
charge interest on drawings. Interest on drawings results in a reduction in the amount of profit the
partner is allocated.
Profit sharing ratio
This is the ratio in which any remaining profits should be shared amongst the partners after they
have been allocated interest on capital, salaries and interest on drawings.
Guaranteed minimum profit share
A partner may be guaranteed a minimum share of the profits. If the partner has not received this
share after allocating profits in accordance to the above, the shortfall should be given to the partner.
The short fall is then taken from the other partners in accordance with the profit sharing ratio.
Example 1
Using the amounts detailed in the sharing story, allocate the profits of the business in accordance
with the following partnership agreement:
a) Interest on capital is 5% per annum
b) Howard is to receive a salary of $5,000
c) Interest on drawings is 10% per annum
d) Profit sharing ratio is as stated 2 : 1 : 3 : 4
e) Mark has a guaranteed minimum profit share of $42,500
Appropriation of Profit Account
Jason Howard Gary Mark Total
Profit 106,250
Interest on capital 5,000 1,000 2,500 2,500 (11,000)

Salaries - 5,000 - - (5,000)
Interest on drawings (3,000) - (3,750) (3,000) 9,750
100,000
P.S.R. 2 : 1 : 3 : 4 20,000 10,000 30,000 40,000 (100,000)
22,000 16,000 28,750 39,500 -
Guaranteed share (1,000) (500) (1,500) 3,000
21,000 15,500 27,250 42,500
Financial statements for a partnership
The format of the financial statements for a partnership will be the same as for a sole trader except
for the capital section of the statement of financial position.
Each partner will have a capital account and a current account.
Capital account
This will record the assets that have been introduced into the partnership. The account will remain
fixed unless more assets are introduced. The capital account will have a credit balance.
Capital Accounts
A B C A B C
Balance b/d X X X
Bank X X X
Balance c/d X X X
X X X X X X
Current account
The current account will record the partners’ share of profits and drawings. The current account will
usually have a credit balance but may have a debit balance indicating that they have withdrawn
more than the profits they are entitled to.
Current Accounts
A B C A B C
Balance b/d X X X
Share of profits X X X
Drawings X X X Loan interest X X X
Balance c/d X X X
X X X X X X
The capital section of the statement of financial position will look like:
Capital Accounts A X
B X
C X
X
Current Accounts A X
B X
C X
X

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ACCA Paper F3

Statement of comprehensive income Profit and loss account

Statement of financial position Balance sheet

Non-current assets Fixed assets

Trade receivables Debtors

Non-current liabilities Long term liabilities

Trade payables Creditors

Irrecoverable debts Bad debts

Session 1 Introduction to accounting

Session 2 Financial statements

Session 3 Double entry book keeping

Session 4 Non-current assets

Session 6 Irrecoverable Debts

Session 7 Control Accounts

Session 8 Bank Reconciliations

Session 9 Accruals and prepayments

Session 10 Limited Company accounts

Session 11 Statements of cash flow

Session 12 Incomplete records

On completion of this paper, you should be able to:

Explain the context and purpose of financial reporting

Demonstrate the use of double-entry and accounting systems

Record transactions and events

Prepare a trial balance (including identifying and correcting errors)

Prepare basic financial statements for incorporated and unincorporated entities

40 x 2 mark questions Multiple choice A / B / C / D

10 X 1 mark questions Multiple choice A / B or A / B / C

The pass mark is 50%

SESSION 1 INTRODUCTION TO ACCOUNTING

Accounting is made up of two elements:

I. Recording business transactions - Book keeping

This is a business that is owned and operated by one person

Statement of Financial Position

Statement of Comprehensive Income

Statement of Changes in Equity

Statement of Cash Flow

Statement of Financial Position as at 31 December 2007

Non – current assets

Buildings 150,000 (12,000) 138,000

221,000 (36,510) 184,490

Total assets 217,242

Opening capital 152,465

Non – current liabilities

Trade payables 12,445

Total liabilities 217,242

Less: Cost of sales

Opening inventory 12,332

GROSS PROFIT 114,338

Discounts received 5,111

Other income 4,000

Discounts allowed 3,444

NET PROFIT 51,787

Statement of financial position as at 31 December 2007

Non – current assets

Total assets 587,286

Equity and liabilities

Share capital 100,000

Non – current liabilities

Interest bearing borrowings 10 100,000

Trade payables 77,789

Total liabilities 587,286

Cost of sales 1 188,000