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Notes FIA Paper FA2 Maintaining Financial Records

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ExPress Notes FIA FA2 Maintaining Financial Records

Contents

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About ExPress Notes

3

1.

Financial statements

7

2.

Objectives of financial reporting

14

3.

Principles and process of basic bookkeeping

17

4.

Inventory

22

5.

Receivables and payables

25

6.

Provisions

29

7.

Sales tax

30

8.

Accruals and prepayments

32

9.

Tangible non-current assets

35

10.

Reconciliations

38

11.

Trial balances and correction of errors

40

12.

Preparation of final accounts

44

13.

Partnerships

47

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

START About ExPress Notes

We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials:    

The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

ExP classroom course students will also have access to various online support materials, including:  

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The unique ExP & Me e-portal, which amongst other things allows “view again” of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Everybody in the World has free access to ACCA’s own database of past exam questions, answers, syllabus, study guide and examiner’s commentaries on past sittings. This can be an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.

How to get the most from these ExPress notes For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper. Your stage in study for each paper

These ExPress notes

ExP recommended course notes, or ExPedite notes

ExP recommended exam kit

ACCA online past exams

Prior to study, e.g. deciding which optional papers to take

Skim through the ExPress notes to get a feel for what’s in the syllabus, the “size” of the paper and how much it appeals to you.

Don’t use yet

Don’t use yet

Have a quick look at the two most recent real ACCA exam papers to get a feel for examiner’s style.

At the start of the learning phase

Work through each chapter of the ExPress notes in detail before you then work through your course notes.

Work through in detail. Review each chapter after class at least once.

Nobody passes an exam by what they have studied – we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this.

Don’t use at this stage.

Don’t try to feel that you have to understand everything – just get an idea for what you are about to study. Don’t make any annotations on the ExPress notes at this stage.

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Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.

Try to do at least one past exam question on the learning phase for each major chapter.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

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Your stage in study for each paper

These ExPress notes

ExP recommended course notes, or ExPedite notes

ExP recommended exam kit

ACCA online past exams

Practice phase

Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them.

Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand.

This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Don’t be tempted to fall into “passive” revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time.

Download the two most recent real exam questions and answers.

The night before the real exam

Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.

Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still don’t understand. It’s too late now.

Don’t touch it!

Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow.

At the door of the exam room before you go in.

Read quickly through the full set of ExPress notes, focusing on areas you’ve highlighted, key workings, approaches to exam questions, etc.

Avoid looking at them in detail, especially if the notes are very big. It will scare you.

Leave at home.

Leave at home.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

Read through the technical articles written by the examiner. Read through the two most recent examiner’s reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these!


ExPress Notes FIA FA2 Maintaining Financial Records

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Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 1

Financial statements

START The Big Picture Financial statements are a crucial part of managing a business and reporting to its owners. A set of financial statements will need to be produced at least annually for presentation to external stakeholders, but generally much more frequently for management control within the business. A full set of financial statements comprises a number of statements: 

  

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A statement of financial position - This lists all the assets and liabilities of the business plus the equity of the business (which explains where the assets and liabilities came from). A statement of comprehensive income -This shows all the income earned, the expenses incurred and the net profit for the period. A statement of cash flows, which shows the cash receipts and payments for the year. Notes to the financial statements, which give further detail to readers who want to know more than the summary story.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Statement of financial position of Sole Trader X at 30 June 20x1

ASSETS

$

$

Non-current assets Licence to operate

10,000

Land and buildings

35,000

Office equipment

20,000

Motor vehicles

30,000

Fixtures and fittings

10,000 105,000

Current assets Inventory

20,000

Trade receivables

13,000

Less: allowance for doubtful receivables

(1,000) 12,000

Prepayments

4,000

Cash at bank

3,000

Cash in hand

2,000

Total assets

146,000

EQUITY AND LIABILITIES Capital Initial capital introduced

30,000

Total cumulative comprehensive income at 1 July 20x0 Less: Cumulative withdrawals at 1 July 20x0

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85,700 (24,000)

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Total equity at 1 July 20x0

91,700

Total comprehensive income in the current period

16,000

Withdrawals in the current year

(8,000)

Total equity at 30 July 20x1

99,700

Non-current liabilities Bank loans

32,000

Current liabilities Bank overdraft

3,300

Trade payables

8,000

Accruals

3,000

Total liabilities

Total equity and liabilities

46,300

146,000

A SOFP may be rearranged into a number of ways. IAS 1 shows a SOFP as given above: Total assets = Equity + total liabilities.

Equally validly therefore: Total assets – total liabilities = Equity Given that equity = capital + cumulative profit – cumulative withdrawals, then the equation could be written in any number of ways such as: Total assets – total liabilities = Capital + cumulative profit – cumulative withdrawals Or Cumulative profit = Total assets – total liabilities – capital + cumulative withdrawals. This is sometimes called the “accounting equation”.

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© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Statement of comprehensive income for the year ended 30 June 20x1 $

Sales revenue

$

152,000

Cost of sales Opening inventory

30,000

Purchases of inventory

80,000

Delivery costs inwards

10,000

Closing inventory

(20,000) (100,000)

Gross profit

52,000

Sundry income

3,000

Discounts received

2,000 57,000

Less: Expenses

Delivery costs outwards

3,000

Depreciation

6,000

Discounts allowed to customers

1,000

Electricity

4,000

Irrecoverable and doubtful debts

2,500

Mobile phones Motor expenses

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500 2,500

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Rent

9,000

Telephone and internet

1,500

Wages and salaries

12,000 (42,000)

Profit for the period before tax

14,000

Other comprehensive income: Revaluation gain on property Total comprehensive income in the period

2,000 16,000

You may be required in the exam to calculate revenue, cost of sales, gross profit and total comprehensive income from given data.

KEY KNOWLEDGE Elements of financial statements There are five elements of financial statements, from which all financial statements are produced. Elements of the statement of financial position:

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An asset is a resource that is controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Equity is the residual interest in the assets of the entity after deducting all its liabilities. Depending on the type of business, this may be called

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

just capital (sole trader) or partners’ current account (partnership). This therefore explains the difference between what the net assets were when the share capital was originally paid in and what the net assets are at the reporting date. Elements of the statement of comprehensive income: 

Income is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

An expense is a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Note that income and expenditure are defined effectively as the reason that a change in net assets happened.

KEY KNOWLEDGE Relationship between the statements: the business equation An increase in net assets of a business will come from a mixture of these sources:

  

Total comprehensive income made in the period (a profit will increase net assets) New capital introduced by the owner (will always increase net assets) Withdrawals made in the period (will always reduce net assets).

This is sometimes called the accounting equation or the business equation. It is a frequent exam question and can be summarised:

Closing net assets =

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Opening net assets + total comprehensive income in the period + new capital introduced in the period – withdrawals in the period.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Remember that net assets = equity + liabilities, by definition. So net assets may be given in a question separately as equity and liabilities.

Sole traders and partnership - We’ll look at these in more detail in each chapter, but here’s a summary:

Number of investors Must produce accounts for the tax authority Must produce accounts to file with the commercial register Business name Can offer shares to the public? Equity part of the SOFP

Sole trader 1 (the sole trader!)

Partnership Normally limited to about 20

Yes

Yes

No

Maybe, normally not

Normally just the name of the owner “trading as” the name of the business

Often the names of the original partners. Few legal formalities

No

No

  

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profit withdrawals

Initial capital Cumulative Cumulative

 

Each partner’s capital account Each partner’s current account (i.e. cumulative share of profit less cumulative withdrawals)

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 2

Objectives of financial reporting

START The Big Picture Financial reporting involves collecting financial information, analysing, summarising and presenting it in a useful form to a wide range of different users. Different users will have different objectives and therefore slightly different needs. Financial statements are aimed at giving useful information to a wide range of different users, though the investor is the most significant user.

For financial information to be useful, it must exhibit a number of characteristics.

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Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

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Qualitative characteristic

Our definition

Going concern

The business is expected to trade into the foreseeable future. This means that assets will not have to be sold in a hurry, which would be likely to result in significant impairments in value.

Accruals

A key concept covered in chapter [x]. It means recording transactions in the period when they happened; not necessarily when the cash was settled. It also means matching costs and associated revenues.

Consistency

Items should be reported the same way between periods, so that it’s possible to make meaningful comparisons between years. Similar transactions must be reported the same way within the same accounting period.

Materiality

Materiality means large enough to influence the user’s opinion on the financial statements. Immaterial information should not be disclosed, as it’s a distraction. Material information must be presented accurately and fairly.

Relevance

Irrelevant information is a distraction and should not be presented.

Reliability

Information is useless if it’s not considered to be reliable. Eg an external valuation of property is more reliable than a biased director’s valuation.

Prudence

Conservatism. This is no longer a core concept in IFRS accounting, but broadly losses should be recognised more readily than gains.

Comparability

Financial statements this period should be presented using similar principles to previous years, so that valid comparisons may be made. Company accounts should be comparable with each other. This means that if a company changes its accounting policy, it must restate its previous years’ accounts using the new accounting policy, in order to facilitate comparison between years.

Understandability

Information should be presented in a way that users can understand. Excessive complication reduces usefulness.

Business entity concept

Even if there is no separate legal entity, as with a sole trader, the business is still considered to be separate to its owners for accounting purposes.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Historical accounting Accounting is derived from recording information about transactions that have happened. This means that assets are recorded at their historical cost; ie what the business paid for them.

KEY KNOWLEDGE Regulation of financial reporting Some entities have to report under regulated accounting standards. Different countries may have their own systems of GAAP (generally accepted accounting practice) or may follow International Financial Reporting Standards (IFRS) or IFRS for SMEs (SME means smaller and medium sized enterprises). There are a number of bodies that you need to be aware of for the Paper FA2 exam. Their roles are given below.

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IASCF: the International Accounting Standards

This has recently been renamed the IFRS Foundation. The Foundation is made up of trustees, who appoint the members of the bodies below.

IASB: International Accounting Standards Board

The IASB issues International Financial Reporting Standards and the IFRS for SMEs. It employs a permanent staff to draft new accounting standards and amendments considered necessary to extant accounting standards.

SAC: Standards Advisory Council

This has recently been renamed the IFRS Advisory Council. It is made up of a cross section of advisors from different user groups. It advises the IASB on the IASB’s work programme.

IFRIC: International Financial Reporting Interpretations Committee

This has recently been renamed the IFRS Interpretations Committee. This body is designed to respond quickly where there are significant differences in interpretation of an extant IFRS. For example, it issued guidance on how to account for loyalty programmes, where users were uncertain to follow the extant accounting standard on revenue recognition, or provisions.

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 3

Principles and process of basic bookkeeping

START The Big Picture Bookkeeping means recording appropriately classified monetary transactions in the financial records of an entity. It involves maintaining a chronological record of transactions as they occur. Every transaction will be classified according to its type (sales, purchases, etc) and will be recorded in the books of original entry. Periodically a list of the results of all recorded transactions is produced. This is done by extracting each account and its final balance. The list is called a trial balance and is the basis from which financial statements are produced for both internal and external users. Document Quotation

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Purpose To give a potential customer an indication of what a product or service would be likely to cost. It may be a binding quote or just an indicative quote.

Often feeds the accounting information on.... Nowhere. At this stage, there has been no transaction to record; it’s still at the state of being a prospective transaction.

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Sales order

Purchase order Goods received note

Goods dispatched note Invoice Statement

Credit note

Debit note

Remittance advice

Receipt

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To record an order from a customer. Signing a booking form for an ExP classroom course is a sales order that ExP will then process. To record an order placed with a supplier. It may require preauthorisation to be valid. To record that an order for inventory for resale has been received. It will normally only be produced once the goods have been inspected at the point of delivery to ensure that they are correct in description and quality. To record that an order from a customer has been sent out. A request for payment from a supplier. Sent by the supplier to the customer. A summary of transactions recorded by a supplier with a customer, including amounts received from the customer. Sent by the supplier to the customer.

Acknowledgement from a supplier that the customer has overpaid and is entitled either to a refund or free goods/ services in the future. To cancel a credit note that previously existed, eg if goods were ordered, paid for and then returned there would initially be a credit note. The refund made would be accompanied with a debit note. Normally included with an invoice. A document that is included with the payment (eg if paid by cheque) with details that will allow the recipient of the funds to match the payment to the customer’s account. Issued by the supplier for goods, to acknowledge payment of a debt.

Sales (revenue).

Purchases, normally of inventory for resale. Purchases of inventory for resale and payables.

Sales (revenue) and possibly also inventory management, depending on how the accounting system is set up. Payables. Does not generally instigate any recording of a transaction, since all transactions on the statement will have been recorded when goods were ordered. But useful for cross-checking our records with the supplier’s records. Payables.

Receivables.

Receivables.

Receivables, payables and purchases.

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Books of prime entry

Alternatively called books of prime entry, these will be the bridge between the raw data (eg receipt for cash purchase of some building materials) and the accounting system. They may be written up by the accountant, or by a semi-trained member of staff within the client’s business. The most commonly used books of prime entry are:

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Book of prime entry:

Used to record data on:

Data typically used to feed:

Cash in book

Cash received into the business bank account.

All sorts of things! Anything that may generate cash for the business.

Cash payments book

Cash paid from the business bank account. All sorts of things! Anything that results in cash being paid out of the business.

Petty cash book

Cash in and out of the balance of cash held in notes and coins by the business (normally small). This is often controlled using the imprest system (see later).

Typically, small expenses (eg Friday cakes for staff!) and sundry income.

Sales day book

Sales on credit. Note that sales immediately settled in cash will be recorded in either the cash book (if paid directly into the bank account) or petty cash book (if received in notes and coins).

Sales revenue.

Purchases day book

Purchases of inventory for resale on credit. Purchases of inventory for Note that purchases settled immediately in resale. cash will be recorded immediately in the cash payments book or petty cash book.

Journal book

Anything not covered by any of the other books of original entry.

Often, this is the book maintained by the accountant, in which “period 13” adjustments like depreciation and bad debts are recorded.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Books of prime entry may be recorded in paper form, or using a spreadsheet.

KEY KNOWLEDGE Journal book The journal book is the book of prime entry that captures transactions not covered by other books of original entry. Often, it includes adjustments and correction of errors and omissions in the other books of original entry. The journal book records double entry records (see later), with an explanation of the reason. We’ll see an example of it after tackling double entry bookkeeping.

KEY KNOWLEDGE Double entry bookkeeping

Double entry bookkeeping is the term used to describe how businesses record transactions in their books or accounts. The concept is based upon the fact that every financial transaction involves the simultaneous receiving and giving of value, and is therefore recorded twice. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry accounting system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited.

KEY KNOWLEDGE Building up the rules Here are the core concepts that you need to be happy with:   

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An asset, or an increase in an asset, is a debit. The opposite of an asset is a liability. The opposite of a debit is a credit. So a liability is a credit. If you have more assets (debit assets), the explanation will be to credit income.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Here’s a table to summarise the rules. Review this and then try to produce is yourself, using the logic of explaining movements in net assets and things being opposites (eg a liability is a credit because an asset is a debit).

Debits mean

Credits mean

What happens to net assets: An increase in assets

A decrease in assets

A decrease in liabilities

An increase in liabilities

And the reason for that increase in net assets: An item of expenditure

An item of income

If you’re asked to record a transaction, the first step is to identify what assets and/ or liabilities are in question. Decide one of these first (it’s often easiest at first to start with cash if it’s a cash transaction) and decide if this is a debit or a credit. Then work out the explanation why. Let’s put the double entry into practice in the next chapters!

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ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 4

Inventory

START The Big Picture For most businesses, inventory will be a very short lived asset, which is expected to be sold (or possibly thrown away or stolen!) by the end of the accounting period. When inventory is received, purchases account is used to record this transaction. Based on whether the transaction is settled immediately or not the following journal entries are made: Dr Purchases

$1,000

Cr Cash/Payables

$1,000

It is normal for businesses to return unwanted goods to suppliers. The double entry arising will depend on whether or not the goods or acquired for cash: Dr Cash/Payables

$200

Cr Purchases returns

$200

Based on the above transactions all inventory purchased during the accounting period is expensed as part of cost of sales. According to the matching concept unsold purchases by the end of the accounting period must be carried forward to be “matched” with future sales.

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ExPress Notes FIA FA2 Maintaining Financial Records

Adjustments for inventory in the financial statements Opening inventory must be included in cost of sales as these goods are available for sale at the beginning of the accounting period by recording the following transaction: Dr: Inventory (profit or loss)

$x

Cr: Inventory (SOFP)

$x

Closing inventory must be deducted from cost of sales, since these goods have not been sold yet. The following accounting entry will be made: Dr: Inventory (SOFP) Cr: Inventory (profit or loss)

KEY KNOWLEDGE Valuing inventory The purchase price of inventory is normally fairly simple. It will include costs necessary in order to bring the inventory into saleable condition, so including:   

Cost paid to the supplier Irrecoverable taxes (e.g. import duties) Costs of delivery inwards (sometimes called carriage inwards).

Where inventory is work-in-progress in a manufacturing process it will also include fair costs of conversion (e.g. labour costs, production overhead costs).

Valuation methods Methods used to value inventory are:  

Page | 23

FIFO (first in, first out); AVCO (average cost) which can be computed periodically or continuously.

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ExPress Notes FIA FA2 Maintaining Financial Records

Maximum value: lower of cost and NRV An asset is only an asset if it is expected to generate an inflow of benefits. This means that if inventory is expected to sell for net proceeds below cost, the maximum valuation of that item of inventory in the SOFP will be the net amount that its sale is expected to generate (called its net realisable value or NRV).  

Any costs incurred up to the date of the accounts might be included within the determination of cost. Any revenues and future costs to be incurred to enable sale will be included within the determination of NRV.

The final valuation for each item of inventory will be the lower of cost and NRV. This has to be estimated on a stock line by stock line basis, so that realised losses on some stock do not mask unrealised expected gains on others.

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ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 5

Receivables and payables

START The Big Picture Credit sales are often made to encourage sales. The problem with extending credit is that not all receivables will pay. This means that some will become irrecoverable. Before being written off as irrecoverable, some will also look like they may not pay (perhaps by being a month overdue for payment). These are doubtful debts. Remember that an asset is a resource that is expected to give an inflow of benefits. Logically therefore if a receivable is not expected to pay, it cannot be shown as an asset. The SOFP of the receivables cannot exceed the neutral estimate of how much cash is actually expected to be received.

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ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Irrecoverable debts If a debt is not going to pay, for example if a person has died bankrupt, then it must be written out of the accounting records as the receivable is no longer an asset. Removing an asset reduces net assets and so generates an expense, which is normally called irrecoverable debts expense, hence:

Dr Irrecoverable debts expense

$x

Cr Receivables

$x

KEY KNOWLEDGE Recovery of debts written off If a debt is unexpectedly paid having previously been written off, it is likely that the cash received will initially be recorded in the cash received book as a receipt from a debtor. This means that the journal to record the cash will be automatically generated thus:

Dr Bank

$800

Cr Receivables

$800

However, the balance is no longer in receivables, as it was written off. In order for the journal to work, it is then necessary to reinstate the balance that was previously written off. This is a change in accounting estimates, since the estimate last period was there was no realistic chance of the debt being recovered:

Page | 26

Dr Receivables

$800

Cr Irrecoverable debt expense

$800.

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ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Doubtful debts It is likely that some receivables will not pay, even if they have not yet been written off. The business will continue to chase the receivables for full payment and may eventually even sue for the full balance. The amount cannot be written out of debtors, as credit control will need the records of the debt in full to know how much to chase for payment. However, if it’s estimated that there is a 20% chance that a debt will not pay, it would fail to give a true and fair view on the face of the SOFP to show the full amount as an asset. The solution is to create an allowance account, which reduces the value of net receivables on the face of the SOFP without corrupting the records of the actual debtor balance that will be needed to try to obtain payment. Creating, or increasing, an allowance will reduce net assets. This therefore creates an expense. The allowance account itself is a SOFP account, so just like assets and liabilities it will remain on the balance sheet until it is removed.

KEY KNOWLEDGE Discounts There are two types of discount that you may encounter: trade discounts and settlement discounts. Trade discounts are those given to customers at the point of sale, perhaps because the customer buys in large volumes or is a member of staff. These discounts are not subject to any uncertainty at the time of sale – it is known for sure that the customer will never pay the list price of the goods or services. The accounting is therefore very simple: they are simply ignored. The sale is recorded at the amount net of the trade discount. A settlement discount is an incentive for customers to pay you earlier than they otherwise naturally would. For example, a discount of 5% may be offered on the invoice sent to customers if payment is received within seven days of the invoice being sent. If payment is not received within that period, the offer of the discount lapses. Settlement discounts are uncertain at the point of sale. The actual amount of the debt is gross of the settlement discount, i.e. before its deduction, since this is the amount that the customer will eventually be chased for if they don’t pay early. If the settlement discount is taken up by the customer the following transaction will be recorded:

Page | 27

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Dr: Discounts allowed (expense)

$X

Cr: Receivables

$X

Discounts allowed are settlement discounts that we allow to customers. They are therefore partial write off of debts receivable by us. They are therefore an expense in our books. Discounts received are settlement discounts that our suppliers allow to us. They are therefore partial forgiveness of debts that we owe to other people. They are therefore a source of income in our books.

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Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 6

Provisions

START The Big Picture A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A reliable (which in practice means meaningful) estimate of the outflow should be made in order to recognize the liability. A provision is simply a liability of uncertain timing or amount. Accruals may be a form of provision, if there is no firm data on which to base the estimate of the amount expected to be paid. Ledger accounting If an entity grants warranties for goods sold a provision will be recorded as follows: Dr Expense

$x

Cr Provision for warranties

$x

The provision is categorised on the SOFP within current liabilities or non-current liabilities, depending upon whether it is expected to be settled within 12 months of the reporting date or longer.

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Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 7

Sales tax

START The Big Picture In many countries certain organisations are required to charge a sales tax or Value Added Tax (VAT). The sales tax rate varies between countries and also varies between the nature of goods and services supplied. The sales tax collected does not belong to the organisation that collects it and therefore must be remitted to the tax authorities on a regular basis. Sales tax received can be referred to as “output” sales tax. The double entry bookkeeping records need to show the goods sold and the sales tax value separately. Assuming 20% sales tax rate a sale transaction will be recorded as follows: Dr: Cash/Receivables Cr: Sales Cr: Sales tax

$2,400 $2,000 $ 400

The organisation may also have to pay sales tax itself on goods and services bought. This sales tax paid can normally be reclaimed. Even though the organisation has to pay the

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© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

supplier the full amount, if the sales tax is reclaimable then it does not affect the value of the item purchased. The sales tax paid is referred to as “input” sales tax. The double entry bookkeeping records need to show the goods sold and the sales tax value separately. Assuming a tax rate of 20% a purchase transaction will be recorded as follows: Dr: Purchases Dr: Sales tax Cr: Payables/Cash

$1,000 $ 200 $1,200.

Based on the above transactions the amount of tax payable to the government is 200, since the output sales tax (collected) is higher than the input sales tax (deductible).

Recoverable or irrecoverable? Some items will include sales taxes that under local law are not recoverable, as a matter of public policy. These might include business entertaining expenses or sales tax on cars. If an item includes irrecoverable sales tax, it is included within the recognised value of the asset or expense.

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© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 8

Accruals and prepayments

START The Big Picture One of the fundamental assumptions of accounting that we saw in chapter 2 was the accruals concept. There are two aspects to the accruals concept:  

Accruals

Prepayments

Where an expense has been incurred, but it’s not yet been paid. Often, an invoice hasn’t yet been received, so an estimate of expense incurred by the year-end will need to be made. This means there is a liability at the period end.

Where an amount has been paid in advance, but that cash payment gives a right to receive benefits beyond the current period end. This means that there is an asset at the period end, since there is a right to receive future benefits.

Examples:

Examples:

 

Page | 32

Matching costs to the associated revenues. Recognising transactions as they are incurred, not necessarily when the cash is paid.

Estimated

Estimated telephone charges for a traditional landline telephone at a month end.

Insurance paid in advance for a year’s insurance cover.

Prepaid balances on pay-as-you-go mobile telephones.

water and electricity used

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ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Accounting treatment at the year end Accruals

Prepayments

Estimate the cost of goods or services used by the year end but not invoiced. This might be done using typical levels of usage, or done after the period end using invoices that came in after the period end, but before the accounts are prepared.

Calculate the amount of the prepayment from cash paid before the year-end. Determining the amount of the prepayment is based on the actual cash payment before the period end.

Recognise this as a liability, since there is an obligation to pay this charge. Recognising the liability reduces net assets, so generates an associated expense:

Recognise the asset (the right to receive future benefits) at the period end. Doing this increases net assets so generates a source of income. In reality, this source of income will be a reduction in the expense recognised so far from posting cash $x payments from the cash book to expenses.

Dr Expense in SOCI (eg electricity) Cr Accruals in SOFP (liability)

$x Dr Prepayment in SOFP (asset) $x Cr Expense in SOCI (eg insurance)$x

KEY KNOWLEDGE Accounting treatment in the following period In the following period, it’s reasonable to assume at the start of the period that the prepayment asset will be used up (eg the benefit of insurance received) or the liability will be settled by payment of cash. It’s therefore normal at the start of the year to anticipate this by reversing the accrual liability or prepayment asset through profit.

Page | 33

Accruals

Prepayments

Recognise the discharge of the liability in the

Recognise the consumption of the asset in

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ExPress Notes FIA FA2 Maintaining Financial Records

following period. This increases net assets, so creates a credit to expenses. Reversing the accrual removes any chance of accidental double recognition of the expense.

the following period. This derecognises the asset that no longer exists by generating an expense. This will be an expense in period 2 of the cash payment not recognised as an expense in period 1.

Dr Accruals in SOFP (liability)

Dr Expense in SOCI (eg insurance)$x

$x

Cr Expense in SOCI (eg electricity) $x

Page | 34

Cr $x Prepayment in SOFP (asset) $x

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ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 9

Tangible non-current assets

START The Big Picture An asset is a resource controlled by an entity that is expected to give inflow of benefits. Many assets will have a period of expected benefit over more than one period. These are non-current assets.

KEY KNOWLEDGE Capital and revenue expenditure

Capital expenditure means any cash paid to acquire non-current assets, or an increase in the earning capacity of an existing asset. Revenue expenditure means money paid to maintain the existing earning capacity of an existing asset.

Page | 35

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Acquisition of a non-current asset The cost of a non-current asset that will initially consist of all the costs necessarily incurred in bringing the asset into its initial working condition, as long as those costs are expected to last more than a year. Any recoverable taxes (such as sales tax) will be excluded. Ledger accounting Acquisitions of non-current assets are recorded as follows, using a separate account for each type of asset: Dr: Non-current asset

$x

Cr: Bank/Payables/Cash

$x.

KEY KNOWLEDGE Depreciation All assets, with the sole exception of freehold land, wear out over time. This means that the total cost of ownership of the asset must be matched to the revenue stream that the asset generates. This is done by making an allowance for depreciation and charging depreciation. The depreciation method chosen for an asset should be the method that most closely matches the cost of the asset to the pattern of revenue that it generates. The SOFP will show the asset at its net book value (NBV). NBV is original cost less cumulative allowance for depreciation.

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Method

Annual depreciation calculated as

Straight line

(Cost – estimated residual value)/ expected useful life.

Reducing balance (also known as diminishing balance)

NBV at start of the period x annual depreciation %

Example where suitable estimate of revenue generated Office furniture, buildings This is the most commonly used method of depreciation. Motor vehicles used by a taxi company. Older cars generate less net revenue as they break down more than new cars and require more maintenance.

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ExPress Notes FIA FA2 Maintaining Financial Records

Ledger accounting Depreciation is charged each year by creating an expense and an allowance for depreciation account. The allowance for depreciation is maintained as a separate account rather than crediting the asset account itself. Dr Depreciation expense (SOCI)

$x

Cr Allowance for depreciation (SOFP)

$x

KEY KNOWLEDGE Disposal When an asset is eventually disposed, it will generate a gain or a loss. If sales proceeds > NBV then a profit on disposal will be recognised If sales proceeds < NBV then a loss on disposal will be recognised. In effect, a profit or loss on disposal is a correction to the estimated figures each year for depreciation. This means that this is reported in profit or loss, just as depreciation is.

KEY KNOWLEDGE Non-current asset register Non-current assets are also recorded for control purposes in a register. Typical non-current asset register will be maintained in electronic form and contain the following information:         

code number of the asset the date of purchase; the name and address of the asset’s supplier; the location and description of the asset; the cost of the asset; method of depreciation; useful life of the asset; accumulated depreciation; details of disposal.

Chapter 10

Page | 37

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ExPress Notes FIA FA2 Maintaining Financial Records

Reconciliations

START The Big Picture Accounting reconciliation is a process of comparing two sets of data and is a critical part of the entity’s internal control system. Since data entry errors or other type of mistakes may occur it is important to identify and correct them before financial statement s are published. There are several types of reconciliation than can be carried out: 

bank reconciliations, where the cashbook is reconciled with the bank statement;

  

Page | 38

supplier reconciliations, where ledger account is reconciled with supplier statements; reconciling groups of ledger accounts with a control account; producing a trial balance.

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ExPress Notes FIA FA2 Maintaining Financial Records

Bank reconciliation The purpose of this reconciliation is to check the accuracy of an entity’s bank account record by comparing it with the bank statement. Bank reconciliation should be performed at least monthly as part of control procedures over cash. When performing the reconciliation there are three main differences:   

unrecorded items like bank charges; timing differences like outstanding cheques; errors either in the cash book or in the bank statement.

Errors can be almost infinitely varied and can be made by either the bank or the company. If errors are made by the bank, the company will need to notify them, so that the bank can correct their records. If errors are made by the company, the company will need to amend its own records, using the journal book.

Supplier reconciliations Many suppliers send monthly statements to their customers, showing the both balance and ageing of that customer account in their records. A reconciliation of payable balance to supplier statement will be carried out exactly in the same way as a bank reconciliation in order to identify any errors.

Control account reconciliations A control account contains exactly the same information as in individual account in the ledger that it controls, using totals rather than individual transactions. Common control accounts include the sales/receivable ledger control account and purchase/payables ledger control account. The control account must be checked on a regular basis against the total of balances in the relevant ledger and any arising difference between the two must be investigated. Any discrepancies found may be due to:   

Page | 39

errors in the individual ledger accounts; errors in the control account; errors in both the control account and ledger account.

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ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 11

Trial balances and correction of errors

START The Big Picture After recording all transactions of a sole trader a list of all the balances on their accounts at the end of the period is extracted. This is called an initial trial balance. Dr Cash

16,140

Capital Purchases

15,000 3,000

Payables

2,040

Sales income

4,140

Staff costs

Page | 40

Cr

50

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ExPress Notes FIA FA2 Maintaining Financial Records

Non-current assets

540

Telephone

60

Receivables

1,240

Withdrawals

150

Totals

21,180

21,180

The fact that the total debits equal the total of the credits gives us a considerable amount of comfort that the bookkeeping has been done accurately. It does not mean that no errors have taken place. These types of errors will not be picked up in a trial balance: 

Errors of omission – having totally ignored a transaction or necessary adjustment

Compensating errors – two errors happening to cancel each other out

Errors of principle – treating an expense as an asset, income as liability, or vice versa

Errors of commission – recording the correct journal, but at the wrong amount.

If total debits does not equal total credits a suspense account is opened to make the debits and credits equal. The balance on this account is cleared after all errors are identified and corrected. Typical errors where the trial balance does not balance are:      

Page | 41

single sided entry: a credit has been entered without a corresponding debit; debit and credit entry have been made for different amounts; two entries have been entered on the same side; miscasting; opening balances ignored; extracting errors.

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ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Correction of errors As professional accountants, much time is spent dealing with correcting errors from draft records prepared by less experienced people. Knowing how to correct errors is therefore a critical skill for a chartered certified accountant. The easiest approach to take is to take three steps and resist the temptation to try to simplify them, as rushing into a simplification normally results in further complication and a poor trail for another person to review the work that you’ve done. So the approach to take is: 1. Work out what has been done to record a transaction and write down the journal that has been recorded, no matter how crazy it might be. 2. Work out what the journal entry should have been. 3. Compare the results from steps 1 and 2 to work out a correcting journal.

KEY KNOWLEDGE Extended trial balance

The purpose of preparing extended trial balance is to make corrections and period end adjustments like:      

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Depreciation; Accruals and prepayments; Closing inventory Irrecoverable debts Allowance for receivables Provisions

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ExPress Notes FIA FA2 Maintaining Financial Records

Company name: X trading Date:

31 December 20X1 EXTENDED TRIAL BALANCE

Account name

Ledger balances

Adjustments

Profit or loss

Statement of financial position

Dr

Cr

Dr

Cr

Dr

Cr

Dr

Cr

$

$

$

$

$

$

$

$

Opening inventory

10,000

10,000

Purchases

35,000

35,000

Sales

65,600

65,600

Rent

12,000

Administration expenses

6,000

6,000

Wages

9,000

9,000

Motor vehicle

22,000

22,000

Fixtures and fittings

15,000

15,000

Receivables

5,500

Cash and bank

2,100

Capital

12,000

500

2,100 48,000

Drawings

48,000

12,000

Payables

12,000 15,000

15,000

Closing inventory: profit or loss

12,500

Closing inventory: SOFP

12,500

12,500

Irrecoverable debts

12,500

500

Allowance for receivables

1,000

500 1,000

Net profit/loss

128,600

Page | 43

5,000

128,600

14,000

14,000

1,000

1,000

4,600

4,600

78,100

Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

78,100

68,600

68,600


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 12

Preparation of the final accounts

START The Big Picture As we have seen in the previous chapter the trial balance is a listing of all accounts and their balances at a certain point in time. It is an internal document that serves as a starting point in preparing financial statements to be distributed outside the organisation. A full overview of the process of producing a set of financial statements is described in the below diagram.

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Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Overview of stages in preparation of financial statements

â?ś

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Š 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Incomplete records It’s common for smaller businesses not to maintain perfect systems for capturing data that can then be used to produce the financial statements. In some situations as well, it’s common to have to construct financial information to find missing information about transactions that don’t get recorded in the system because of their nature, such as losses due to theft of inventory.

The key techniques to answer exam questions on this are:   

Cost structures of mark-up and margin Use of T accounts to find missing figures Use of the accounting equation/ business equation to find missing figures such as profit (this was covered in chapter 1).

KEY KNOWLEDGE Margin and mark-up There is a terminology distinction here that is important: Mark-up means that you start with the cost of a sale, then add the mark-up % to determine sales price. Margin means that you start with the sales price, of which a specified % will be gross profit.

Mark-up

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Margin

Sales revenue

120%

Sales revenue

100%

Cost of sales

100%

Cost of sales

80%

Gross profit

20%

Gross profit

20%

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

Chapter 15

Partnership accounting

START The Big Picture A partnership is “the relation which subsists between persons carrying on a business in common with a view of profit”. Think of it as a business which has two or more joint owners. A partnership will have a partnership agreement which will usually state the following:    

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Salaries –usually for partners that take extra responsibilities in the business; Interest on drawings –may be charged on all drawings or only drawings over a certain limit and will come out of the partner’s profit; Interest on capital –may be provided on capital invested in the business; Profit sharing ratio –the ration in which the remaining profit is split among the partners.

© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ExPress Notes FIA FA2 Maintaining Financial Records

KEY KNOWLEDGE Partnership SOFP and equity The ownership of a partnership is split between each partner’s capital, which records each partner’s “static” investment in the firm and is based on their initial cash introduced and each partner’s current account, which records each partner’s variable investment in the firm. In theory, each partner could withdraw their current account in full at any time. This means that if there are 20 partners, there will be 40 accounts within equity in the general ledger and in the presentation of the SOFP.

Partners’ capital accounts

$

Mr Rag

140,000

Mrs Tag

180,000

Miss Bobtail

$

26,000

Total capital

346,000

Partners’ current accounts Mr Rag

90,000

Mrs Tag

72,000

Miss Bobtail

(3,000)

Total current accounts

159,000

Total equity

505,000

(end of ExPress Notes)

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© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.


ACCA_FIA_FA2_notes