2016 BPP PASSCARD F3

ACCA APPROVED CONTENT PROVIDER FIA Passcards FIA FFA / ACCA Paper F3 Financial Accounting Passcards for exams from 1 September 2015 – 31 August 2016

FIA FFA ACCA Paper F3 Financial Accounting

First edition 2011 All rights reserved. No part of this publication may be Fourth edition March 2015 reproduced, stored in a retrieval system or transmitted, ISBN 9781 4727 3543 0 in any form or by any means, electronic, mechanical, eISBN 9781 4727 2876 0 photocopying, recording or otherwise, without the prior written permission of BPP Learning Media. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by Printed in the United Kingdom by BPP Learning Media Ltd RICOH UK Limited BPP House, Aldine Place Unit 2 142-144 Uxbridge Road Wells Place London W12 8AA Merstham RH1 3LG www.bpp.com/learningmedia Your learning materials, published by BPP Learning © Media Ltd, are printed on paper obtained from traceable BPP Learning Media Ltd sustainable sources. 2015

Preface Contents Welcome to BPP Learning Media's new FIA FFA/ACCA F3 Passcards. They save you time. Important topics are summarised for you. They incorporate diagrams to kick start your memory. They follow the overall structure of BPP Learning Media's Interactive Texts, but BPP Learning Media's new Passcards are not just a condensed book. Each card has been separately designed for clear presentation. Topics are self contained and can be grasped visually. Passcards are still just the right size for pockets, briefcases and bags. Passcards focus on the exam you will be facing. Run through the complete set of Passcards as often as you can during your final revision period. The day before the exam, try to go through the Passcards again. You will then be well on your way to completing your exam successfully. Good luck! Page iii

Preface Contents Page Page 1 Introduction to accounting 1 12 Irrecoverable debts and allowances 67 2 The regulatory framework 7 13 Provisions and contingencies 71 3 The qualitative characteristics of financial 14 Control accounts 75 information 11 15 Bank reconciliations 81 4 Sources, records and books of prime 16 Correction of errors 85 entry 19 5 Ledger accounts and double entry 25 17 Preparation of financial statements for sole traders 91 6 From trial balance to financial 33 18 Incomplete records 93 statements 7 Sales tax 41 19 Introduction to company accounting 101 8 Inventory 45 20 Preparation of financial statements for companies 107 9 Tangible non-current assets 51 21 Events after the reporting period 113 10 Intangible non-current assets 59 22 Statements of cash flows 117 11 Accruals and prepayments 63

Page 23 Introduction to consolidated financial statements 123 24 The consolidated statement of financial position 127 25 The consolidated statement of profit or loss and other comprehensive income 133 26 Interpretation of financial statements 137 Page v

Notes

1: Introduction to accounting Topic List This chapter looks at why financial statements are prepared, the different types of business entities and the The purpose of financial reporting users of financial statements. Types of business entity Users We also look at the main financial statements: the Governance statement of financial position and the statement of profit The main financial statements or loss.

The purpose of Types of Users Governance The main financial reporting business entity financial statements The purpose of financial reporting A business has a number of functions, the most prominent is to make a profit for the owners Profit is the excess of income over expenditure Financial Books of Ledger Trial Financial data prime entry accounts balance statements

The purpose of Types of Users Governance The main financial reporting business entity financial statements Types of business entity Personally responsible for debts of business Sole traders –Rrefers to ownership, sole traders can have employees Partnerships – Two or more people working together to earn profits Limited liability company – Owners have liability limited to the amount they pay for their shares – A limited liability company has a separate legal identity from its owners Page 3 1: Introduction to accounting

The purpose of Types of Users Governance The main financial reporting business entity financial statements Users of accounts The larger the entity, the greater the interest from various groups Managers of the company of people Shareholders of the company Trade contacts Different users have different Providers of finance to the company needs Taxation authorities Employees of the company Financial analysts and advisors Government and their agencies The public

The purpose of Types of Users Governance The main financial reporting business entity financial statements Responsible for Governance Duty of care to preparation of show reasonable financial statements Directors competence Main aim: Fiduciary to create wealth for position shareholders Must act honestly in best interests of company Page 5 1: Introduction to accounting

The purpose of Types of Users Governance The main financial reporting business entity financial statements Main financial statements Statement of financial position Statement of profit or loss A list of assets owned by the Total assets = Total liabilities A record of income generated entity and liabilities owed by the + capital and expenditure incurred over a entity on a particular date given period Amount invested by owner is capital Asset Liability Something valuable which an Something owed to somebody entity owns or has use of else Revenue Expenses Income generated by a business Costs of running a business

2: The regulatory framework Topic List This is a look at the regulatory system and the role played by the IASB. The regulatory system IASB

The regulatory IASB system National law Influences Other international upon issues Form and content of accounts financial may be regulated by national GAAP legislation. 'Fair presentation'. accounting Drawn from: Accounting Accounting concepts and Local company law standards individual judgement Accounting standards Statutory requirement in other The IASB produces standards. Can lead to subjectivity. countries Accounting standards developed Stock exchanges to address subjectivity.

The regulatory IASB system Monitoring Board IFRS Foundation IFRS Advisory Council IASB Appoints IFRS Interpretations Reports to Committee (IFRIC) Advises 2: The regulatory framework Page 9

The regulatory IASB system Objectives of IFRS Foundation are to: 1) Develop a single set of high quality, understandable, enforceable and globably accepted IFRSs through standard-setting body IASB 2) Promote use and rigorous application of these standards 3) Take account of the needs of emerging economies and SMEs 4) Bring about convergence of national accounting standards and IFRSs to high quality solutions

3: The qualitative characteristics of financial information Topic List Modern accounting is based on certain concepts and conventions. The IASB's Conceptual Framework Get to grips with these and you should be well equipped to discuss accounting standards and their strengths and weaknesses.

Underlying Assumption The IASB's Conceptual Framework Going concern Not an underlying assumption but The entity will continue in accounts should be prepared on operation for the foreseeable an accruals or matching basis future. There is no intention to put the entity into liquidation Accruals Revenue and costs must be recognised as they are earned or incurred, not as money is received or paid

Qualitative characteristics Conceptual Framework Qualitative characteristics make info in financial statements useful to users Two fundamental characteristics Relevance Faithful representation Page 13 3: The qualitative characteristics of financial information

The IASB's Conceptual Framework Relevance – Info is relevant when it influences decisions of users, affected by nature and materiality Materiality Info is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements Faithful representation – Financial information must faithfully represent the underlying economic phenomena – Complete, neutral, free from error

Enhancing characteristics: comparability; verifiability; timeliness; understandability Comparability – Users must be able to compare financial statements through time and with other entities – Disclose accounting policies – Disclose corresponding info for comparative periods Verifiability – Information that can be independently verified Timeliness – Information is available in time to be capable of influencing decisions Page 15 3: The qualitative characteristics of financial information

The IASB's Conceptual Framework Understandability – Users must be able to understand financial statements – Users assumed to have some economic, business and accounting knowledge – Complex matters should not be left out if relevant Reliability Info is reliable when it is free from material error and bias and can be depended upon to represent faithfully what it either purports to represent or could reasonably be expected to represent.

Business entity Other concepts Consistency concept Fair presentation Presentation and In accounting, the classification of items business is treated as Financial statements are should remain consistent separate to its owners. required to present fairly from one period to the in all material respects next. Not the same as limited the financial results and liability! position of the business. Compliance with IFRSs will achieve this. Page 17 3: The qualitative characteristics of financial information

Notes

4: Sources, records and books of prime entry Topic List This chapter covers the main sources of data and the function each source or record has. The role of source documents Sales and purchase day books We will see how the documents are recorded in books of Cash books original entry to reflect business transactions.

The role of source Sales and purchase Cash books documents day books Source documents Books of prime entry Business transactions are nearly always recorded on The source documents are recorded in books a document. These documents are the source of the of prime entry. information in the accounts. Such documents include the following: Journal Quotation Journals are used to record source information Sales order that is not contained within the other books of Purchase order prime entry. They record the following: Invoice Credit note Period end adjustments Debit note Correction of errors Goods received note Large/unusual transactions

The role of source Sales and purchase Cash books documents day books Sales day book Purchases day book The sales day book is used to keep a list of all invoices This is used to keep a record of invoices which a sent out to credit customers each day. Here is an business receives for credit purchases. Here is example. an example. SALES DAY BOOK PURCHASES DAY BOOK Invoice Rec'bles Total Payables Total invoiced Date Supplier ledger ref. invoiced Date number Customer ledger ref. $ $ 3.3.X9 207 ABC & Co SL12 4,000 3.4.X9 RST Co PL31 215 208 XYZ Co SL59 1,200 10.4.X9 JMU Inc PL19 1,804 5,200 15.4.X9 DDT & Co PL24 758 2,777 Page 21 4: Sources, records and books of prime entry

The role of source Sales and purchase Cash books documents day books Cash book Cash receipts and payments are recorded in the cash book. Cash receipts are recorded as follows, with the total column analysed into its component parts. CASH RECEIPTS Date Narrative Total Discounts Rec'bles Cash $ allowed ledger sales Sundry 3.3.X9 Cash sale 150 Receivable: $$ $$ ABC & Co 1,000 150 (discount taken) 50 1,000 1,150 150 – 50 1,000 Cash payments are recorded in a similar way.

Petty cash book Petty cash payments and receipts are recorded in a petty cash book. Most businesses keep a small amount of cash on the premises for small payments, eg stamps, coffee. PETTY CASH BOOK RECEIPTS Total Date Narrative PAYMENTS Stationery Coffee etc Date Narrative $ 3.3.X9 Total $ $ $ 50 Paper $ 10 3.3.X9 Bank Coffee 10 5 50 5 10 5 15 Page 23 4: Sources, records and books of prime entry

The role of source Sales and purchase Cash books documents day books Petty cash imprest system Under the 'imprest system': $ X Cash still held in petty cash _X_ Plus voucher payments __X__ Must equal the agreed sum or float Reimbursement is made equal to the voucher payments to bring the float back up to the imprest amount.

5: Ledger accounts and double entry Topic List This chapter looks at ledger accounting. The nominal ledger Ledger accounts summarise all the individual transactions The accounting equation listed in the books of prime entry. Double entry bookkeeping The journal Day book analysis The receivables and payables ledgers

The nominal The accounting Double entry The journal Day book The receivables and ledger equation bookkeeping analysis payables ledgers Ledger accounting and double entry The nominal ledger Method used to summarise transactions in the Is an accounting record which summarises the books of prime entry. financial affairs of a business. A ledger account or 'T' account looks like this. Accounts within the nominal ledger include the following. NAME OF ACCOUNT Plant and machinery (non-current asset) $ $ Inventories (current asset) CREDIT SIDE Sales (income) DEBIT SIDE Rent (expense) Total payables (current liability)

The nominal The accounting Double entry The journal Day book The receivables and ledger equation bookkeeping analysis payables ledgers The accounting equation CAPITAL + LIABILITIES = ASSETS Capital Drawings Investment of funds with the intention Amounts withdrawn from the business of earning a return by the owner The accounting equation is based on the principle that an entity is separate from the owner, ie the business entity concept. Page 27 5: Ledger accounts and double entry

The nominal The accounting Double entry The journal Day book The receivables and ledger equation bookkeeping analysis payables ledgers Basic principles Double entry bookkeeping is based on the same idea Double entry bookkeeping as the accounting equation. The rules of double entry bookkeeping are Every accounting transaction has two equal but best learnt by considering the cash book. opposite effects A credit entry indicates a payment made Equality of assets and liabilities is preserved by the business; the matching debit entry is then made in an account denoting an In a system of double entry bookkeeping every expense paid, an asset purchased or a accounting event must be entered in ledger accounts liability settled. both as a debit and as an equal but opposite credit. A debit entry in the cash book indicates Debit Credit cash received by the business; the matching credit entry is then made in an An increase in an expense An increase in income account denoting revenue received, a An increase in an asset An increase in a liability liability created or an asset realised. A decrease in a liability A decrease in an asset

The nominal The accounting Double entry The journal Day book The receivables and ledger equation bookkeeping analysis payables ledgers The Journal The journal is a book of prime entry The journal keeps a record of unusual movements between accounts Format of journal entries is as follows. Date Debit Credit $ $ DEBIT A/c to be debited X CREDIT A/c to be credited X Narrative to explain transaction Remember: the journal is used to keep a record of unusual movements between accounts Page 29 5: Ledger accounts and double entry

The nominal The accounting Double entry The journal Day book The receivables and ledger equation bookkeeping analysis payables ledgers Day book analysis Entries in the day books are totalled and analysed before posting to the nominal ledger. Note that day books are often analysed as in the following extract (date, customer name and reference not shown). Total invoiced Calculator sales Book sales $$$ 340 160 180 120 70 50 ___6_0_0 3_5_0_ _2_5_0 __1__,__0__6__0 __5__8__0 __4__8__0 To identify sales by product, total sales would be entered ('posted') as follows. DEBIT Receivables a/c $ $ CREDIT Sales: Calculators 1,060 580 Sales: Books 480 Other books of prime entry are analysed in a similar way.

The nominal The accounting Double entry The journal Day book The receivables and ledger equation bookkeeping analysis payables ledgers Trade accounts receivable and payable Trade account payable Trade account receivable A person to whom a business owes money (a liability) A customer who buys goods without paying for them straight away (an asset) Also known as a debtor. Also known as a creditor. Page 31 5: Ledger accounts and double entry

The nominal The accounting Double entry The journal Day book The receivables and ledger equation bookkeeping analysis payables ledgers Receivables and payables ledgers To keep track of individual customer and supplier Entries to the receivables ledger are made as follows. balances it is common to maintain subsidiary ledgers called the receivables ledger and the When making an entry in the sales day book, an payables ledger. Each account in these ledgers entry is then made on the debit side of the represents the balance owed by or to an individual customer's account in the receivables ledger. customer or supplier. When cash is received and an entry made in the These receivables and payables ledgers are usually cash book, an entry is also made on the credit kept purely for reference and are therefore known side of the customer's account in the receivables as memorandum records. They do not form part of ledger. the double entry system. The payables ledger operates in much the same way. However, some computerised accounting packages treat the receivables and payables ledgers as part of the double entry system, in which case separate control accounts are not kept.

6: From trial balance to financial statements Topic List The balances need to be extracted from the ledger accounts and entered into the trial balance. The trial balance The statement of profit or loss Double entry bookkeeping dictates that the trial balance Statement of financial position will have the same amount on the debit side as there is Preparing financial statements on the credit side.

The trial The statement of Statement of Preparing balance profit or loss financial position financial statements Balancing ledger accounts Trial balance At the end of an accounting period a balance is struck The balances are then collected in a trial balance. on each ledger account. If the double entry is correct, total debits = total credits. Total all debits and credits Debits exceed credits = debit balance Errors Credits exceed debits = credit balance A trial balance does not guarantee accuracy. An example of balancing a ledger account is shown It will not pick up the following errors. below. Compensating errors RECEIVABLES Errors of commission Errors of omission Sales $ Cash $ Errors of principle 10,000 Balance c/d 8,000 2,000 10,000 10,000 Balance b/d 2,000 This account has a debit balance of $2,000.

An example of a trial balance, incorporating the above receivables balance, is shown below. ABC TRADERS $ $ TRIAL BALANCE AS AT 30 JUNE 20X7 35,000 13,000 Sales 2,000 1,500 Purchases 10,000 Receivables 10,000 10,000 Payables Cash 4,000 56,500 Capital 3,500 Loan 1,000 Rent 5,000 Sundry expenses 18,000 Loan interest 56,500 Drawings Fixtures and fittings Page 35 6: From trial balance to financial statements

The trial The statement of Statement of Preparing balance profit or loss financial position financial statements Statement of profit or loss First open up a ledger account for the statement of profit or loss. Continuing our example for ABC Traders this ledger account is shown below, together with the rent account to illustrate how balances are transferred to it at the end of the year. STATEMENT OF PROFIT OR LOSS RENT Purchases $ $ Cash $ $ Rent 13,000 Sales 35,000 4,000 SPL 4,000 Sundry expenses 4,000 4,000 4,000 Loan interest 3,500 1,000

This could be rearranged as follows to arrive at the financial statement with which you are familiar. ABC TRADERS STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 JUNE 20X7 $ $ 35,000 Sales 13,000 22,000 Cost of sales (here = purchases) 8,500 Gross profit 13,500 Expenses Rent 4,000 Sundry expenses 3,500 Loan interest 1,000 Net profit Page 37 6: From trial balance to financial statements

The trial The statement of Statement of Preparing balance profit or loss financial position financial statements Statement of financial position DRAWINGS The statement of financial position is prepared by following these steps. $$ Balance off the accounts relating to assets Cash 5,000 Capital 5,000 and liabilities following the receivables example shown above STATEMENT OF PROFIT OR LOSS Transfer the balances on the drawings account and the statement of profit or loss Purchases $ Sales $ ($13,500) to the capital account as follows Rent 13,000 35,000 Sundry expenses 4,000 Loan interest 3,500 35,000 Capital a/c 1,000 13,500 35,000 CAPITAL Drawings $ Cash $ Balance c/d 5,000 SPL 10,000 18,500 13,500 23,500 23,500

Prepare the statement of financial position as follows. ABC TRADERS STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X7 Non-current assets $$ Fixtures and fittings 18,000 Current assets 2,000 Receivables _1_0_,_0_0_0 Cash _1_2_,0_0_0_ Proprietor's capital __3__0__,0____0_0_ 18,500 Current liabilities 1,500 Payables _1_0_,0_0_0_ Loan _1_1_,_50_0_ __3__0__,0__0__0__ Page 39 6: From trial balance to financial statements

The trial The statement of Statement of Preparing balance profit or loss financial position financial statements Accounting process overview Invoice Receipt/Payment Invoice This diagram summarises the topics you have Receivables Sales Cash Purchase Payables revised so far. Look at it just before your exam ledger – everything should fall into place. ledger day book book day book Dr Cr Dr General Dr ledger Cr Cr Journal Preliminary trial balance eg closing Dr inventory Cr Clear income and expenditure balances to SPL Clear profit and drawings balances to capital account Prepare statement of financial position

7: Sales tax Topic List A sales tax is a general consumer expenditure tax. It is likely to be examined as part of another topic. Nature and collection of sales tax Accounting for sales tax

Nature and collection of Accounting for sales tax sales tax Administered by tax Sales tax Can have a number authorities of rates, eg standard Is an indirect tax levied on the rate, reduced rate sale of goods and services Output sales tax Greater than input? Input sales tax Pay difference to tax Sales tax charged by the authorities Sales tax on purchases made by business on goods/services the business Greater than output? Refund due to business

Nature and collection of Accounting for sales tax sales tax a Credit sales b Credit purchases (i) Include sales tax in sales day book; analyse it (i) Include sales tax in purchases day book; analyse separately it separately (ii) Include gross receipts from receivables in cash (ii) Include gross payments in cash book; no need to book; no need to show sales tax separately show sales tax separately (iii) Exclude sales tax element from statement of (iii) Exclude recoverable sales tax from statement of profit or loss profit or loss (iv) Credit sales tax control account with output sales (iv) Include irrecoverable sales tax in statement of tax element of sales invoices profit or loss (v) Debit sales tax control account with recoverable input sales tax element of credit purchases Page 43 7: Sales tax