2016 BPP PASSCARD F3

Nature and collection of Accounting for sales tax sales tax c Cash sales d Cash purchases (i) Include gross receipts in cash book; show sales (i) Include gross payments in cash book: show tax separately sales tax separately (ii) Exclude sales tax element from statement of (ii) Exclude recoverable sales tax from statement of profit or loss profit or loss (iii) Credit sales tax control account with output (iii) Include irrecoverable sales tax in statement of sales tax element of cash sales profit or loss (iv) Debit sales tax control account with recoverable input sales tax element of cash purchases

8: Inventory Topic List This is an important chapter, it covers a standard (IAS 2) and the complexities surrounding the inventory figure. Cost of goods sold Accounting for opening and closing Remember, the inventory figure affects both the inventories statement of financial position and the statement of profit Counting inventories or loss. Valuing inventories IAS 2

Cost of Accounting for opening Counting Valuing IAS 2 goods sold and closing inventories inventories inventories Formula for the cost of goods sold Carriage inwards Opening inventory value $ Cost paid by purchaser of having goods Add: purchases (or production costs) X transported to his business X Added to cost of purchases Less: closing inventory value X Cost of goods sold (X) Carriage outwards X Cost to the seller, paid by the seller, of having goods transported to customer Is a selling and distribution expense

Cost of Accounting for opening Counting Valuing IAS 2 goods sold and closing inventories inventories inventories Entries during the year During the year, purchases are recorded by the The exact reverse entry is made for the closing following entry. inventory (which will be next year's opening inventory): DEBIT Purchases $ amount bought CREDIT Cash or payables $ amount bought DEBIT Inventory $ closing inventory The inventory account is not touched at all. CREDIT SPL $ closing inventory Entries at year-end The balance on the inventory account is still the opening inventory balance. This must also be The first thing to do is to transfer the purchases transferred to the statement of profit or loss: account balance to the statement of profit or loss: DEBIT SPL $ total purchases DEBIT SPL $ opening inventory CREDIT Purchases $ total purchases CREDIT Inventory $ opening inventory Page 47 8: Inventory

Cost of Accounting for opening Counting Valuing IAS 2 goods sold and closing inventories inventories inventories Counting inventories In order to make the entry for the closing inventory, we need to know what is held at the year-end. We find this out not from the accounting records, but by going into the warehouse and actually counting the boxes on the shelves. Some businesses keep detailed records of inventory coming in and going out, so as not to have to count everything on the last day of the year. These records are not part of the double entry system.

Cost of Accounting for opening Counting Valuing IAS 2 goods sold and closing inventories inventories inventories Valuation Cost Inventories must be valued at the lower of: Can use per IAS 2: Cost FIFO Net realisable value (NRV) Average cost (both periodic weighted average and continuous weighted average) Page 49 LIFO is not permitted. NRV Expected selling price X Less costs to get items (X) ready for sale (_X_) selling costs X 8: Inventory

Cost of Accounting for opening Counting Valuing IAS 2 goods sold and closing inventories inventories inventories IAS 2 Inventories are assets: Held for sale in the ordinary course of business; Inventories should be measured at the lower of cost and In the process of production for such sale; or net realisable value – the comparison between the two In the form of materials or supplies to be should ideally be made separately for each item consumed in the production process or in the rendering of services. Cost is the cost incurred in the normal course of business in bringing the product to its present location Net realisable value is the estimated selling price and condition, including production overheads and costs in the ordinary course of business less the of conversion estimated costs of completion and the estimated costs necessary to make the sale. Inventory can include raw materials, work in progress, finished goods, goods purchased for resale FIFO and average cost are allowed LIFO is not allowed Note. Inventory excludes construction contracts in progress (IAS 11), financial instruments (IASs 32 and 39), agricultural products (IAS 41) and mineral ores.

9: Tangible non-current assets Topic List Non-current assets are held by the entity for a number of years use. Capital and revenue expenditure IAS 16 You must be able to account for revaluations and Depreciation disposals and to discuss IAS 16's main requirements. Non-current asset disposals Revaluations Disclosure The asset register

Capital and IAS 16 Depreciation Non-current Revaluations Disclosure The asset revenue expenditure register asset disposals You may be asked to explain the capital/revenue expenditure distinction in layman's terms Capital expenditure results in the Revenue expenditure is incurred for acquisition of non-current assets, the purpose of trade or to maintain or an increase in their earning the existing earning capacity of the capacity non-current assets

Capital and revenue IAS 16 Depreciation Non-current Revaluations Disclosure The asset expenditure register asset disposals IAS 16 Initial measurement – at cost Components of cost – Purchase price (incl. import duties, excl. trade discount, recoverable sales tax) – Initial estimate of dismantling and restoration costs – Directly attributable costs, eg (i) Site preparation (iv) Delivery and handling costs (ii) Installation and assembly costs (v) Costs of testing whether working properly (iii) Prof. fees Subsequent expenditure – Added to carrying amount if improves condition beyond previous performance Repairs and maintenance costs are expensed. Page 53 9: Tangible non-current assets

Capital and revenue IAS 16 Depreciation Non-current Revaluations Disclosure The asset expenditure asset disposals register Depreciation – accruals concept The double entry for depreciation is as follows. DEBIT Depreciation expense (SPL) Is a process of spreading the original cost of a CREDIT Accumulated depreciation (SOFP) non-current asset over the accounting periods in which its benefit will be felt. Change in expected life Two methods If after a period of an asset's life it is realised that the original useful life has been changed, then Straight line the depreciation charge needs to be adjusted. Dep'n = cost RV The revised charge from that date becomes: useful life CV at revised date Remaining useful life Reducing balance Dep'n = carrying value × RB%

Capital and revenue IAS 16 Depreciation Non-current Revaluations Disclosure The asset expenditure asset disposals register Disposal Double entry for a disposal On disposal of an asset a profit Eliminate cost or loss will arise depending on whether disposal proceeds are DEBIT Disposals greater or less than the carrying CREDIT Non-current assets value of the asset. Eliminate accumulated depreciation If proceeds > CV = profit If proceeds < CV = loss DEBIT Provision for depreciation CREDIT Disposals Page 55 Account for sales proceeds DEBIT Cash CREDIT Disposals or if part exchange deal DEBIT Non-current assets CREDIT Disposals with part exchange value Transfer balance on disposals account to the statement of profit or loss 9: Tangible non-current assets

Capital and revenue IAS 16 Depreciation Non-current Revaluations Disclosure The asset expenditure asset disposals register IAS 16 allows a choice between Keeping asset at cost Revaluing to fair value Fair value may give fairer view on business Revaluation A revaluation is recorded as follows. DEBIT Non-current asset (revalued amount less original cost) DEBIT Accumulated depreciation (total depreciation to date) CREDIT Revaluation surplus (revalued amount less carrying value)

Capital and revenue IAS 16 Depreciation Non-current Revaluations Disclosure The asset expenditure register asset disposals Disclosure Land and Plant and With regard to disclosure, a Total buildings equipment proforma non-current asset $ 000 note is shown here. $ 000 $ 000 160 Page 57 Cost or valuation 20 100 60 At 1 January 20X7 50 20 – Revaluation surplus (45) 30 20 Additions in year 185 (15) (30) Disposals in year 135 50 At 31 December 20X7 30 7 20 10 Depreciation (3) 52 At 1 January 20X7 34 – (3) Charge for year 25 9 Eliminated on disposals 151 At 31 December 20X7 110 41 130 80 50 Carrying value At 31 December 20X7 9: Tangible non-current assets At 1 January 20X7

Capital and revenue IAS 16 Depreciation Non-current Revaluations Disclosure The asset expenditure register asset disposals The asset register contains details of each non-current asset owned by the business. Asset register data Asset number (internal reference) Purchase date Serial number (manufacturer's reference) Cost Description Depreciation method Location Estimated useful life Department that 'owns' Carrying amount ('current book value') The asset register should be reconciled to the relevant nominal ledger accounts.

10: Intangible non-current assets Topic List Intangible non-current assets are long term assets with no physical substance. Intangible non-current assets Research and development costs

Intangible Research and non-current assets development costs Intangible non-current assets Non-current assets which have a value to the entity but no physical substance. Examples Goodwill Leases Patents and trade names Deferred development costs

Amortisation Disclosure Intangible assets must be amortised systematically Method of amortisation used over their useful life. An intangible asset with an Useful life of the assets or amortisation indefinite useful life is not amortised but should be rate used reviewed each year for impairment. Gross carrying value, accumulated amortisation and accumulated impairment losses at beginning and end of period Movements during the period Carrying amount of internally-generated intangible assets Page 61 10: Intangible non-current assets

Intangible Research and non-current assets development costs IAS 38 Intangible assets All costs written off as incurred Pure or basic research P – Probable future economic benefits I – Intention to complete the intangible asset Applied research and use or sell it Development expenditure must be R – the availability of Resources to complete capitalised if all criteria stated under IAS 38 can be demonstrated the development and use or sell A – Ability to use or sell Financial statements should show a T – Technical feasibility of completing the asset reconciliation of the carrying amount E – reliable measurement of Expenditure of intangible assets at the beginning and end of the period

11: Accruals and prepayments Topic List This chapter covers the adjustments which need to be made to expenses in order to reflect the true level of Accruals and prepayments profits for the accounting period.

Accruals and prepayments Accrual Prepayment Expenses charged against the profits of a period Payments made in one period but charged to the even though they have not yet been paid for later period to which they relate Prepayment Invoice received Debit Expenses account Payment made Credit Payables account Expense in Part that relates to Part that relates to Prepayment. An asset in the SPL current accounting later accounting SOFP, not charged as an period period expense in the SPL The amounted debited to the SOFP will hit the SPL in the next period.

Accruals Expense incurred – No invoice yet Part relating to current accounting period is an accrual Debit SPL Credit SOFP payables (liability) Remember that the financial statements are prepared on an accruals basis. Page 65 11: Accruals and prepayments

Notes

12: Irrecoverable debts and allowances Topic List This chapter looks at more adjustments required before the financial statements can be prepared. Irrecoverable debts and receivables allowances Accounting for irrecoverable debts and receivables allowances

Irrecoverable debts and Accounting for irrecoverable debts receivables allowances and receivables allowances Irrecoverable debts and receivables allowances A receivable should only be classed as an asset if it is recoverable. Irrecoverable debts Receivables allowances If definitely irrecoverable, it should be written off to If uncertainty exists as to the recoverability of the the statement of profit or loss as an irrecoverable debt, an allowance should be set up. This is offset debt. against the receivables balance on the statement of financial position. DEBIT Irrecoverable debt expense (SPL) CREDIT Trade receivables (SOFP) DEBIT Irrecoverable debt expense (SPL) CREDIT Allowance for receivables (SOFP) Allowances can either be specific, against a particular receivable, or general, against a proportion of all receivables not specifically allowed for.

Irrecoverable debts and Accounting for irrecoverable debts receivables allowances and receivables allowances General allowances Note. Only the movement in the general allowance When calculating the general allowance to be made, needs to be charged or credited to the SPL. the following order applies. $ $ Allowance required X Receivables balance per receivables control account X Existing allowance (X) Less irrecoverable debts written off (X) Increase/(decrease) required X/(X) amounts specifically allowed (X) Balance on which general allowance is calculated X Subsequent recovery of debts If a reduction in the receivables allowance is If an irrecoverable debt is recovered, having required, then: previously been written off, then: DEBIT Allowance for receivables (SOFP) DEBIT Cash (SOFP) CREDIT Irrecoverable debts expense (SPL) CREDIT Irrecoverable debts expense (SPL) Page 69 12: Irrecoverable debts and allowances

Notes

13: Provisions and contingencies Topic List This standard is a key area of the syllabus. Learn how to apply it. The most important thing you should do is learn IAS 37 to justify the treatment you adopt.

IAS 37 Provision Contingent Liability Contingent Asset A liability of uncertain timing A possible obligation that arises A possible asset that arises or amount from past events, whose existence from past events and whose will be confirmed by the occurrence existence will be confirmed Important or non-occurrence of future events by the occurrence of one or not wholly in the entity's control. more uncertain future events The amount recognised as a not wholly within the entity's provision should be the best A present obligation not recognised control. estimate of the expenditure because: required to settle that present obligation. It is not probable that settlement of the obligation will be required The amount cannot be measured

Start 13: Provisions and contingencies Present No Possible No obligation as a obligation? result of an obligating event? Yes Yes Probable No Remote? Yes outflow? Yes No Reliable No (rare) estimate? Yes Provide Disclose Do nothing Page 73 contingent liability

IAS 37 Disclosures required for provisions 1 2 Details of the change in carrying For each class of provision, disclosure amount from the beginning to the of the background to the making of end of the year the provision and the uncertainties affecting its outcome

14: Control accounts Topic List Control accounts are 'total accounts' that represent the total of many individual 'memorandum' accounts. What are control accounts? Discounts The operation of control accounts The purpose of control accounts

What are control Discounts The operation of The purpose of accounts? control accounts control accounts What are control accounts Most businesses operate control accounts for trade receivables and payables, but such accounts may be A control account is a total account. useful in other areas too, eg sales tax. Its balance represents an asset or a liability With regard to the double entry relating to which is the grand total of many individual receivables and payables, note the following: assets or liabilities. The accounts of individuals are maintained for These individual assets/liabilities must be memorandum purposes only. separately detailed in subsidiary accounting records, but their total is conveniently available Entering a sales invoice, say, in the account of in the control account ready for immediate use. an individual receivable is not part of the double entry process.

What are control Discounts The operation of The purpose of accounts? control accounts control accounts Two types Accounting treatment Trade discount – reduction in cost Received: deduct from purchases of goods eg regular customers, bulk Allowed: deduct from sales discounts Received: included as other income Cash/settlement discount – Allowed: included as expenses reduction in amount payable, eg for cash or prompt payment Page 77 14: Control accounts

What are control Discounts The operation of The purpose of accounts? control accounts control accounts The invoices in the sales day book are totalled Similarly, the total of cash receipts from receivables periodically and the total amount is posted as is posted from the cash book to the credit side of the follows. receivables control account. DEBIT Receivables control account In the same way, the payables control account is credited with the total purchase invoices logged in CREDIT Sales account the purchase day book and debited with the total of cash payments to suppliers.

What are control Discounts The operation of The purpose of accounts? control accounts control accounts Reasons for maintaining control accounts RCA Check on the accuracy of the personal accounts Balance b/d X Cash rec'd X in the receivables ledger Sales X Discounts allowed X Dishonoured cheques X Returns inwards X The control accounts provide a convenient total Interest charged on late X Irrecoverable debts X which can be used immediately in extracting a accounts X trial balance or preparing accounts Contra with payables X Balance b/d Balance c/d X A reconciliation between the control account total X and the receivables ledger will help to detect errors, thus providing an important control X Page 79 14: Control accounts

What are control Discounts The operation of The purpose of accounts? control accounts control accounts PCA Reconciling control a/cs with memorandum ledgers Cash paid X Balance b/d X Discounts received X Purchases X Step 1 – Correct the total of the balances from Contra with rec'ables X Interest on overdue X the memorandum ledger Returns outwards X accounts Balance c/d X X Step 2 – Correct the control a/c balance X X Note. The corrected control a/c balance appears Balance b/d in the final accounts. Possible reasons for credit balances on receivables ledger accounts, or for debit balances on payables ledger accounts Overpayment of amount owed Return of goods Payment in advance Posting errors

15: Bank reconciliations Topic List It is very likely that you will get a question on bank reconciliations in your exam. With a small amount of Bank statement and cash book practice you should be able to tackle any bank Bank reconciliation reconciliation thrown at you.

Bank statement Bank and cash book reconciliation Bank reconciliation The bank reconciliation is an important financial control. The bank reconciliation will invariably show a difference. A comparison of a bank statement with the cash book. Differences on bank reconciliation Errors: more likely in the cash book. Omissions: items on the bank statement not in the cash book (eg bank charges). Timing differences: eg cheques issued and entered in the cash book but not yet presented at the bank.

Bank statement Bank and cash book reconciliation Proforming a bank reconciliation 2 Reconcile to the bank statement 1 Correct the cash book Proforma bank reconciliation Corrected cash book CASH ACCOUNT Balance b/f X Dishonoured cheque X Balance per bank statement $ Undercast error Bank charges X Less outstanding cheques X X Plus outstanding lodgements (X) in balance b/f X Standing orders X Plus/less bank errors X Direct debits X Balance per corrected cash book X/(X) Corrected balance b/f Balance c/f X X X X Corrected cash book balance is the cash balance that is shown in the SOFP. Page 83 15: Bank reconciliations

Notes

16: Correction of errors Topic List There will always be errors which need to be corrected before the final accounts can be prepared. Types of error in accounting The correction of errors It helps to know what kind of errors can be made in order that you can find them and then correct them.

Types of error in The correction of accounting errors Types of error The main types of error are as follows Errors of transposition, eg writing $381 as $318 (the difference is divisible by 9) Errors of omission, eg receive supplier's invoice for $500 and do not record it in the books at all Errors of principle, eg treating capital expenditure as revenue expenditure Errors of commission, eg putting telephone expenses of $250 in the electricity expense account Compensating errors, eg both sales day book and purchases day book coincidentally undercast by $500

Types of error in The correction of accounting errors Correction of errors Errors can be corrected using the journal, but only those errors which required both a debit and an (equal) credit adjustment. Consider the following examples. Example Example Accountant omits to record invoice from supplier for Accountant posts car insurance of $800 to motor $2,000. This would be corrected by the following vehicles account. Correct as follows. journal entry. DEBIT Motor expenses $800 DEBIT Purchases $2,000 CREDIT Motor vehicles $800 CREDIT Payables $2,000 Correction of error of principle. A transaction previously omitted. Page 87 16: Correction of errors

Types of error in The correction of accounting errors A suspense account is a temporary account that is Example used in the following circumstances. Harry Perkins, sole trader, prepared his trial balance 1 The bookkeeper knows in which account to make for the year ended 30 June 20X5. To his dismay he found that debits exceeded credits by $7,452. the debit entry for a transaction but does not know where to make the corresponding credit entry He has discovered the following errors. (or vice versa) 1 Discounts allowed of $486 were posted to the The credit is temporarily posted to the suspense account until the correct credit entry is known discounts allowed account as $684 2 A difference occurs in the trial balance caused by 2 Credit sales totalling $7,500 had not been the incomplete recording of the double entry in posted to the sales account respect of one or more transactions 3 The balance on the accruals account of $404 The difference is recorded in the suspense account and included in the trial balance, so restoring equality had been omitted when the trial balance was prepared Any balance on a suspense account must be eliminated. It is never included in the final accounts. 4 In respect of telephone expenses of $650, the only entry to have been made was in the cash account

The balance would be cleared by writing up the suspense account as follows. SUSPENSE ACCOUNT Discounts allowed (i) $ B/d $ (ii) The correct entry: $$ Sales (ii) 198 Telephone (iv) 7,452 Accruals (iii) 7,500 DEBIT Receivables 7,500 404 650 CREDIT Sales 7,500 8,102 8,102 The actual entry: 7,500 7,500 DEBIT Receivables ∴ CREDIT Suspense 7,500 7,500 (i) The correct entry: $$ To correct: Suspense Sales 404 DEBIT Discounts allowed 486 DEBIT 404 CREDIT Receivables 486 CREDIT 650 The actual entry: (iii) To correct: 650 DEBIT Discount allowed 684 DEBIT Suspense 16: Correction of errors CREDIT Accruals CREDIT Receivables 486 ∴ CREDIT Suspense (balance) 198 (iv) To correct: To correct: Suspense 198 DEBIT Telephone Discounts allowed 198 CREDIT Suspense DEBIT CREDIT Page 89

Notes

17: Preparation of financial statements for sole traders Topic List A sole trader's accounts are prepared from the trial balance, making adjustments for things like accruals and Preparation of final accounts irrecoverable debts, as well as clearing a suspense account.

Preparation of final accounts Final accounts In addition, you should be able to deal with the following adjustments. You have now revised all areas necessary to prepare the final accounts of a sole trader. Areas you should Depreciation be totally familiar with are as follows. Inventory Accruals and prepayments Ledger accounts Irrecoverable debts Allowance for receivables Trial balance Profit/loss disposal of non-current assets Format of statement of profit or loss and statement of financial position

18: Incomplete records Topic List This area is a very good test of your accounts preparation knowledge. Incomplete records questions Accounting and business equations You need to know how the accounts fit together in order Credit sales, purchases and cost of to fill the blanks. sales Stolen or destroyed goods Cash book Accruals, prepayments and drawings