ACCA F3 - FA Support Material by FBT

FBT PUBLISHING ACCA F3 Financial Accounting Page

ACCA F3

FINANCIAL ACCOUNTING International Stream

TUITION

CLASS NOTES


Appendix The following notes are suitable for both the international and UK streams. There will some terminology differences between the two streams. These are summarised below:

International UK

Statement of comprehensive income Profit and loss account

Statement of financial position Balance sheet

Non-current assets Fixed assets

Inventory Stock

Trade receivables Debtors

Non-current liabilities Long term liabilities

Trade payables Creditors

Irrecoverable debts Bad debts


Contents

Paper background

Session 1 Introduction to accounting

Session 2 Financial statements

Session 3 Double entry book keeping

Session 4 Non-current assets

Session 5 Inventory

Session 6 Irrecoverable Debts

Session 7 Control Accounts

Session 8 Bank Reconciliations

Session 9 Accruals and prepayments

Session 10 Limited Company accounts

Session 11 Statements of cash flow

Session 12 Incomplete records

Session 13 Partnerships


Paper background

Aim

The aim of this paper is to develop knowledge and understanding of the underlying principles and concepts relating to financial accounting and technical proficiency in the use of double-entry accounting techniques including the preparation of basic financial statements.

Main capabilities

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

Explain the context and purpose of financial reporting

Define the qualitative characteristics of financial information and the fundamental bases of accounting

Demonstrate the use of double-entry and accounting systems

Record transactions and events

Prepare a trial balance (including identifying and correcting errors)

Prepare basic financial statements for incorporated and unincorporated entities

The assessment

The exam can be sat either written or computer based, both methods are 2 hours long.

Written

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

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

Computer based

40 x 2 mark questions Questions can be multiple choice, multiple response, matching or number entry

10 x 1 mark questions Multiple response (correctly identify two from three right answers)

The pass mark is 50%

SESSION 1 INTRODUCTION TO ACCOUNTING


Learning outcomes

Understand the purpose of accounting Identify the different types of businesses Indentify the users of accounts Explain the qualitative characteristics of financial statements Understand the underlying assumptions of financial statements

Introduction

WHAT IS ACCOUNTING?

Accounting is made up of two elements:

I. Recording business transactions - Book keeping II. Presenting the information

WHAT IS A BUSINESS?

A business is a commercial organisation which exists with a view to making a profit. There are different types of businesses which will fall into 3 categories:

Sole Trader

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

Partnership

This type of business is owned by several individuals, some of which will actively be involved in the business

Companies

This type of business is owned by shareholders and is operated on their behalf by a nominated board of directors. Companies will be covered in greater detail in later sessions


Users of accounts

The users of accounts will depend on the type of accounts that are produced. There are two main types of accounts:

Management accounts Financial accounts

Management accounts

These are produced as often as a business wants them (usually monthly). They are produced for internal use and will not, usually be seen by external people. Management accounts can be prepared using the company’s own internal policies.

Financial accounts

These accounts are usually produced annually. They are based on historical information and are rarely used internally. Financial accounts are used by external users for several reasons:

Investors

Lenders

Employees

Government

Public


SESSION 2 FINANCIAL STATEMENTS

Learning outcomes

After completing this chapter, you should be able to:

Identify the layout of a Statement of Financial Position for a sole trader and a company Identify the layout of a Statement of Comprehensive income for a sole trader and a

company Understand the principles and layout for a Statement of Changes in Equity

Introduction

There are four key financial statements:

Statement of Financial Position

This financial statement lists the assets and liabilities of a business at a point in time. It is a snapshot of the company’s position “AS AT A POINT IN TIME”

Statement of Comprehensive Income

This statement is a summary of the income and expenditure of the business for a “PERIOD OF TIME”.

Statement of Changes in Equity

This statement links the statements of comprehensive income and financial position.

Statement of Cash Flow

The statement of cash flow reports the cash generation and cash absorption for a “PERIOD OF TIME”.

The starting point in the preparation of the financial statements is to produce a TRIAL BALANCE. The trial balance is basically a list of ledger balances. A business will use a trial balance as an INDICATION that all accounting entries have been recorded and all entries are correct.

A trial balance MUST balance. If there is an imbalance, this indicates an error in the initial entries. In this case a suspense account is created until the errors can be detected.


Proforma set of financial statements for a sole trader.

Statement of Financial Position as at 31 December 2007

Non – current assets Cost Dep’n NBV Buildings 150,000 (12,000) 138,000 Fixtures and fittings 45,000 (11,250) 33,750 Motor vehicles 26,000 (13,260) 12,740 221,000 (36,510) 184,490 Current assets Inventory 13,777 Trade receivables 12,775 Prepayments 2,800 Cash 3,400 32,752 Total assets 217,242 Opening capital 152,465 Profit 51,787 Drawings (35,900) 168,352 Non – current liabilities Loan 20,000 Current liabilities Trade payables 12,445 Accrued Loan interest 1,000 Other accruals 15,445 28,890 Total liabilities 217,242


Statement of Comprehensive Income for the year ended 31 December 2007

Revenue 233,000 Less: Cost of sales Opening inventory 12,332 Purchases 119,098 Carriage inwards 1,009 132,439 Closing inventory (13,777) 118,662 GROSS PROFIT 114,338 Discounts received 5,111 Other income 4,000 123,449 Less: Expenses Discounts allowed 3,444 Depreciation 10,710 Gas and electricity 14,122 Irrecoverable debts 7,134 Loan interest 4,000 Carriage outwards 5,666 Water rates 8,444 Advertising 15,000 Other expenses 3,142 71,662 NET PROFIT 51,787

FBT PUBLISHING ACCA F3 Financial Accounting Page 10

Proforma set of financial statements for a limited company or Plc

Statement of financial position as at 31 December 2007

Non – current assets Note Intangible assets 6 200,000 Tangible assets 7 187,999 Current assets Inventory 8 88,432 Trade receivables 9 97,455 Cash 13,400 199,287 Total assets 587,286 Equity and liabilities Share capital 100,000 Retained earnings 220,497 Revaluation reserve 7 38,000 358,497 Non – current liabilities Interest bearing borrowings 10 100,000 Current liabilities Trade payables 77,789 Taxation 5 51,000 128,789 Total liabilities 587,286


Statement of comprehensive income for the year ended 31 December 2007

Note Revenue (Sales) 385,000 Cost of sales 1 188,000 GROSS PROFIT 197,000 Distribution costs 2 38,500 Administration expenses 3 37,700 PROFIT FROM OPERATIONS 120,800 Finance costs 8,000 PROFIT BEFORE TAX 112,800 Income tax 53,000 PROFIT FOR THE PERIOD 59,800

Statement Of Changes In Equity for the year ended 31 December 2007 (SOCIE)

Share Retained Revaluation Capital Earnings Reserve Total Balance as at 1 Jan 2007 100,000 188,697 40,000 328,697 Profit for the period 59,800 59,800 Surplus depreciation (not impt for F 3) 2,000 (2,000) Dividend paid (30,000) (30,000) Closing balance 100,000 220,497 38,000 358,497

The format for company accounts is laid down in I.A.S. 1 Presentation of Financial Statements. This structured format aids comparability and makes information more useful.

Notes detailing the balances in the financial statements are provided giving a detailed breakdown of the balance.


SESSION 3 DOUBLE ENTRY BOOK KEEPING

Learning outcomes

When you have completed this chapter, you should be able to:

Understand the principles of double entry bookkeeping Apply double entry bookkeeping to a list of transactions Prepare financial statements for a sole trader

Introduction

Bookkeeping is “the recording of monetary transactions” of a business.

Double entry bookkeeping

Double entry bookkeeping is the fundamental concept underlying accountancy. All accounting transactions should be recorded using the double entry system. There are some basic rules that we MUST follow:

1. Every debit must have a credit 2. A debit entry is an ASSET in the STATEMENT OF FINANCIAL POSITION or an EXPENSE in the

STATEMENT OF COMPREHENSIVE INCOME 3. A credit entry is a LIABILITY in the STATEMENT OF FINANCIAL POSITION or an INCOME in the

STATEMENT OF COMPREHENSIVE INCOME

T accounts

In order to assist us with the preparation of the financial statements we use T accounts for simplicity. The principles of T accounts are:

Every debit entry has a credit entry Every T account will belong to the statement of financial position or the statement of

comprehensive income The closing balance of a T account at the end of the period is entered into a trial balance


EXAMPLE 1

George commences business on 1 April 2006. The following transactions take place in his first two weeks of trading.

1 April He invests $50,000 in to a business 1 April He purchases $5,000 worth of goods on credit 2 April He sells half of the inventory for $6,000 cash 5 April He issues a cheque to pay for the goods he received on credit 4 April Pays his rent for April of $450 by cheque 7 April He sells his remaining stock for $6,000 on credit 10 April Purchased goods on credit for $7,000 14 April He purchases a delivery van for $7,000 cash

Required

For the first two weeks of trading prepare:

The T accounts for George (State if the account is Position or Income) The trial balance The Statement of Comprehensive Income The Statement of Financial Position


EXAMPLE 2

Tina starts her business on 1 January 2007. The following transactions take place in her first month of trading:

1 Jan She invests $65,000 in to the business 2 Jan She purchases $8,000 worth of goods on credit 2 Jan She sells a quarter of the inventory for $4,000 cash 3 Jan Issues a cheque to pay for half of the goods she received on credit 14 Jan Pays her insurance for January by issuing a cheque for $75 15 Jan She sells the remaining inventory for $12,000 on credit 16 Jan Purchases inventory at a cost of $10,000 on credit 18 Jan Purchases some office equipment for $3,000 cash 20 Jan Pays her rent for January by cheque $150 21 Jan Sells half her inventory for $10,000 cash 25 Jan Withdraws $100 for petty cash 31 Jan Purchases office supplies worth $30 from petty cash

Required

For the first month of trading prepare:

The T accounts for Tina (state if the account is Position or Income) The trial balance The Statement of Comprehensive Income The Statement of Financial Position


ANSWER TO EXAMPLE 1 GEORGE

Bank Account

Dr Cr 1 April Capital 50,000 5 April Trade Payables 5,000 2 April Sales 6,000 4 April Rent 450 14 April Delivery Van 7,000 Carried Forward 43,550 56,000 56,000 Bought Forward 43,550

Capital Account

Dr Cr 1 April Bank 50,000

Purchases

Dr Cr 1 April Trade Payables 5,000 10 April Trade Payables 7,000 Carried Forward 12,000 12,000 12,000 Bought Forward 12,000

Trade Payables

Dr Cr 5 April Bank 5,000 1 April Purchases 5,000 Carried Forward 7,000 10 April Purchases 7,000 12,000 12,000 Bought Forward 7,000


Sales

Dr Cr 2 April Cash 6,000 Carried Forward 12,000 7 April Trade Receivables 6,000 12,000 12,000 Bought Forward 12,000

Rent

Dr Cr 4 April Bank 450

Trade Receivables

Dr Cr 7 April Sales 6,000

Delivery Van

Dr Cr 14 April Bank 7,000


George Trial Balance

Statement Dr Cr Bank Account FP 43,550 Capital Account FP 50,000 Purchases CI 12,000 Trade Payables FP 7,000 Sales CI 12,000 Rent CI 450 Trade Receivables FP 6,000 Delivery Van FP 7,000 Total 69,000 69,000


George Statement of Comprehensive Income 2 Week Period Ended 14 April 2007

Sales 12,000 Cost of sales Opening inventory 0 Purchases 12,000 12,000 Closing inventory (7,000) 5,000 GROSS PROFIT 7,000 Less expenses Rent 450 NET PROFIT 6,550


George Statement of Financial Position

as at 14 April 2007 Non Current Assets Delivery Van 7,000 Current Assets Inventory 7,000 Trade Receivables 6,000 Bank Account 43,550 56,550 TOTAL ASSETS 63,550 Capital 50,000 Profit 6,550 56,550 Non Current Liabilities 0 Current Liabilities Trade Payables 7,000 63,550


ANSWER TO EXAMPLE 2 TINA

Bank Account

Dr Cr 1 Jan Capital 65,000 3 Jan Trade Payables 4,000 2 Jan Sales 4,000 14 Jan Insurance 75 21 Jan Sales 10,000 18 Jan Office Equipment 3,000 20 Jan Rent 150 25 Jan Petty Cash 100 c/f 71,675 79,000 79,000 b/f 71,675

Capital Account

Dr Cr 1 Jan Bank 65,000

Purchases

Dr Cr 2 Jan Trade Payables 8,000 16 Jan Trade Payables 10,000 c/f 18,000 18,000 18,000 b/f 18,000

Trade Payables

Dr Cr 3 Jan Bank 4,000 2 Jan Purchases 8,000 c/f 14,000 16 Jan Purchases 10,000 18,000 18,000 b/f 14,000


Sales

Dr Cr 2 Jan Bank 4,000 15 Jan Trade Receivables 12,000 c/f 26,000 21 Jan Bank 10,000 26,000 26,000 b/f 26,000

Insurance

Dr Cr 14 Jan Bank 75

Trade Receivables

Dr Cr 15 Jan Sales 12,000

Office Equipment

Dr Cr 18 Jan Bank 3,000

Rent


Dr Cr

20 Jan Bank 150

Petty Cash

Dr Cr 25 Jan Bank 100 31 Jan Office Supplies 30 c/f 70 100 100 b/f 70

Office Supplies

Dr Cr 31 Jan Petty Cash 30


Tina Trial Balance

Statement Dr Cr Bank Account FP 71,675 Capital Account FP 65,000 Purchases CI 18,000 Trade Payables FP 14,000 Sales CI 26,000 Insurance CI 75 Trade Receivables FP 12,000 Office Equipment FP 3,000 Rent CI 150 Petty Cash FP 70 Office Supplies CI 30 Totals 105,000 105,000


Tina Statement of Comprehensive Income

For January 2007 Revenue 26,000 Cost of sales Opening inventory 0 Purchases 18,000 18,000 Closing inventory (5,000) GROSS PROFIT 13,000 Less expenses: Insurance 75 Rent 150 Office supplies 30 255 NET PROFIT 12,745


Tina Statement of Financial Position

as at 31 January 2007 Non Current Assets Office Equipment 3,000 Current Assets Inventory 5,000 Trade Receivables 12,000 Bank Account 71,675 Petty Cash 70 88,745 TOTAL ASSETS 91,745 Capital 65,000 Profit 12,745 77,745 Non Current Liabilities 0 Current Liabilities Trade Payables 14,000 91,745


SESSION 4 NON CURRENT ASSETS

Learning outcomes


Define a non current asset Distinguish between tangible and intangible non-current assets Explain the differences between capital and revenue expenditure Understand the concepts of I.A.S. 16 Accounting for non-current assets Compile a non current asset register Calculate and account for depreciation Record the accounting entries for disposals of non-current assets

Introduction

A non-current asset is intended for “continued use” in a business. This would generally mean for more than one accounting period. Non-currents assets can be either TANGIBLE or INTANGIBLE. ACCA F3 concentrates on tangible non-current assets, however a knowledge of intangible non current assets is needed.

Tangible non-current assets

These are assets that have physical substance. Examples of tangible non-current assets would be:

Land and buildings

Plant and equipment

Motor vehicles

Computers

Fixtures and fittings

Intangible non-current assets

These assets have no physical substance. An example of an intangible non-current asset would be:

Goodwill

Development


Non-current assets are normally of substantial value and their accounting can have a material impact on the financial statements. As a result of this there are large numbers of accounting standards that help the preparers of financial statements to account for them.

The key accounting standard relevant at this level is I.A.S. 16 Non-Current Assets

Non-current asset register

The majority of companies will own a number of non-current assets, and it is imperative that effective control is kept over them. In order to ensure management are aware exactly where each item is located and that they are adequately maintained and serviced, a non current asset register is maintained.

A non-current asset register is generally maintained in the finance department. Companies can purchase specifically designed packages or a register can simply be maintained on an Excel spreadsheet.

A register would include the following information:

Item code Date of purchase Item description Cost Estimated useful life Residual value (if any) Depreciation method Location Disposal details


Capital and revenue expenditure

One of the key areas of accounting for non-current assets is deciding whether expenditure incurred is CAPITAL or REVENUE expenditure.

If it is capital expenditure it will be capitalised in the statement of financial position and then depreciated over the useful economic life of the asset. If it is revenue expenditure it will be expensed through the statement of comprehensive income.

We need to classify expenditure incurred as either capital or revenue in order to ensure appropriate accounting entries are made.

Capital expenditure is expenditure likely to increase the future earning capacity of the organisation whereas revenue expenditure is regarded as maintaining the organisation’s present earning capacity.

Per I.A.S. 16 the following costs may be capitalised on acquisition of a non-current asset:

Initial cost Delivery costs Non-refundable import taxes Installation costs Any costs incurred in bringing the asset into intended use Initial training costs Subsequent expenditure that ENHANCES the performance of the asset

Costs that are regarded as revenue expenditure and may not be capitalised per I.A.S. 16 are:

Insurance costs Repairs Maintenance

EXAMPLE 1

Capital Revenue Purchase of a motor vehicle Purchase of a tax disc Fuel Insurance C D player Alloy wheels New tyre Early settlement discount

Depreciation


Depreciation is the charge to the statement of comprehensive income to reflect the consumption of an asset in a period.

By applying depreciation charges, we are consistent with the ACCRUALS / MATCHING CONCEPT i.e. applying the cost of using the asset to the statement of comprehensive income for the same period.

All tangible non-current assets should be depreciated on a systematic basis per I.A.S. 16, with the exception of land. This is because land is seen to appreciate in value.

Intangible non-current assets are amortised over their useful economic life (this is just another term for depreciation).

Depreciation policies

Calculating depreciation in a given period are common questions in this paper. The main methods of calculating depreciation are:

Straight line Reducing balance

Straight line depreciation

Depreciation is charged on a straight line basis over the life of the non-current asset. Thus an equal amount is charged in every accounting period over the life of the asset.

To calculate the depreciation charge the following formula is used:

Depreciation per annum = Original cost – estimated residual value Estimated useful Life


EXAMPLE 2

Company A purchased a non-current asset on 31st July for $150,000. The asset has an expected useful life of 5 years and a residual value of $20,000.

Calculate the depreciation charges for the year ended 31st December on the basis:

i. A full year’s charge is made in the year of acquisition and none in the year of disposal. ii. The company’s policy is to time-apportion depreciation charges.

EXAMPLE 3

Company B purchases a machine for $23,000. They expect to use it for four years and then sell it for $3,000.

What is the annual depreciation charge?

Reducing balance

This method of depreciation is generally used for assets which tend to lose more value in the initial years and require greater maintenance in the later years. A good example would be a brand new motor vehicle. Motor vehicles tend to depreciate rapidly in the earlier years and require very little maintenance.

A fixed percentage is charged to the net book value on an annual basis. Hence, as the book value of an asset reduces, the depreciation charge reduces accordingly.

EXAMPLE 4

Company C purchases a motor vehicle for $25,000 and will depreciate it at a rate of 25%.

Calculate the depreciation for the first three years.

Once the depreciation charge has been calculated it should be entered into the accounts via a journal.

The journal for depreciation is:

Dr Depreciation expense (Statement of comprehensive income)

Cr Accumulated Depreciation (Statement of financial position)


Revaluations

When a non-current asset is purchased we record them at their initial cost. However, over time these values may materially differ from their market value.

For example, if a company purchased a property 20 years ago and therefore subsequently charged depreciation for 20 years, it would be safe to assume that the book value of the asset would be significantly different from today’s market value.

In order to overcome this issue I.A.S. 16 permits companies to reflect the market value in the statement of financial position. This policy may be adopted, and if so the following rules must be applied per the standard:

i. If a company chooses to revalue an asset they must revalue all assets in that category ii. Revaluations must be regular iii. Subsequent depreciation must be based on the revalued amounts iv. Gains from revaluations are not taken to the statement of comprehensive income, as no

gain as been realised. This is covered by the PRUDENCE concept.

EXAMPLE 5

Company X purchased a building for $45,000 15 year ago, and charges depreciation of 2% on a straight line basis.

The property has been valued by a qualified person at $150,000 during the current financial year. The directors would like to encompass these figures in the financial statements.

Required:

Complete the necessary journals to account for the revaluation.


Disposal of a non-current asset

When a business disposes of an asset it is unlikely that the sale proceeds will agree with the net book value. Therefore, a gain or loss will arise from the sale.

EXAMPLE 6

Company C has a motor vehicle with a book value of $6,000 (cost $22,000) and disposes of it for $8,000.

We can establish that there is a gain of $2,000 (proceeds – book value).

The accounting entries will need to follow three steps

1. Clear the cost from the cost account 2. Clear the depreciation from the accumulated depreciation account 3. Enter the proceeds

The entries are therefore:

Dr Disposal Account $22,000

Cr Motor vehicle cost account $22,000

Dr Accumulated depreciation $16,000

Cr Disposal Account $16,000

Dr Bank $8,000

Cr Disposal Account $8,000


ANSWERS TO EXAMPLE 1

Capital Revenue Purchase of a motor vehicle Purchase of a tax disc Fuel Insurance C D player Alloy wheels New tyre Early settlement discount

ANSWER TO EXAMPLE 2

i

150,000 - 20,000 = 26,000 5

Ii

26,000 x 5 = 10,833 12

ANSWER TO EXAMPLE 3

23,000 - 3,000 = 5,000 4

ANSWER TO EXAMPLE 4

Year 1 25,000 x 25% = 6,250 Year 2 25,000 - 6,250 x 25% = 4,688 Year 3 25,000 - 6,250 - 4,688 x 25% = 3,516


ANSWER TO EXAMPLE 5

Pre Revaluation Post Revaluation Building Cost

Account Accumulated Depreciation

Net Book Value

Building Cost Account

Accumulated Depreciation

Net Book Value

45,000 13,500 31,500 150,000 4,286 145,714

Accumulated depreciation pre revaluation

45,000 X 2% X 15 Years = 13,500

Accumulated depreciation post revaluation

150,000 / 35 Years = 4,286 pa

Journals Required

Dr Buildings Cost 105,000 Dr Accumulated Depreciation

13,500 Cr Revaluation Reserve 118,500 Dr Depreciation 4,286 Cr Accumulated Depreciation

4,286


SESSION 5 INVENTORY

Learning Outcomes

When you have completed this chapter you should be able to:

Explain the principles of I.A.S. 2 Inventories Explain and apply the different methods of inventory valuation including F.I.F.O., A.V.C.O.

and L.I.F.O. Understand and apply the double entry for inventory

Introduction

Inventory is the product we purchase and sell in a business.

In a business it is unlikely that all of the inventory will be sold at the end of an accounting period, therefore there will be an adjustment needed in the financial statements for the value of the closing inventory.

Opening and closing inventory needs to be included in the statement of comprehensive income in order to calculate the cost of the goods sold with-in a given period. The statement of financial position will show the value of the inventory at the end of the accounting period (the closing inventory).

I.A.S. 2 is the accounting standard that gives us detailed guidance on how to value our closing inventory.

RULE: Closing inventory should be valued at the lower of cost and net realisable value (N.R.V.)

By applying the I.A.S. 2 rule we ensure our inventory is never overstated in the statement of financial position, hence the PRUDENCE concept.

Valuation of closing inventory

We will cover three methods of valuing the closing inventory:

F.I.F.O. – First In First Out

The closing inventory consists of items purchased at the latest dates, as we assume the items that were purchased first were the items sold first.

In times of rising prices, closing inventory will have a higher cost and therefore profit will be higher.


Weighted average cost (AVCO)

Under this method we assume:

All units are issued at the current weighted average cost per unit

A new average cost is calculated whenever more items are purchased

L.I.F.O. – Last In First Out

The closing inventory consists of items purchased at the earliest date, as we assume the last item purchased is the first item to be sold.

In times of rising prices the closing inventory will have a lower value and therefore profit will be lower.

From a practical perspective it is unlikely last items purchased will be sold first, and as a result of this I.A.S. 2 does not permit L.I.F.O. method of stock valuation.

W.I.P. – Work in progress

In some cases, where a company has modified it’s inventory it is necessary to take the cost of that modification into account when valuing closing inventory.

Net realisable value

Net realisable value is the amount we can get from selling inventory less any further costs to be incurred.

Accounting Entries

The double entry to account for closing stock is:

Dr Inventory Statement of financial position

Cr Inventory Statement of comprehensive income


EXAMPLE 1

Navigator Office Supplies made the following purchases and sales in January:

Purchases

3rd 500 pens @ 4.00 = 2,000 12th 500 pens @ 4.60 = 2,300 16th 400 pens @ 4.75 = 1,900 22nd 700 pens @ 5.25 = 3,675 31st 900 pens @ 5.40 = 4,860 3,000 14,735

Sales

7th 300 pens @ 10.00 = 3,000 13th 400 pens @ 10.00 = 4,000 17th 300 pens @ 10.00 = 3,000 29nd 700 pens @ 10.00 = 7,000 1,700 17,000

Required

Assuming there is no opening inventories prepare the statement of comprehensive income using the following:

LIFO FIFO AVCO


ANSWER TO EXAMPLE 1

L.I.FO.

IN OUT BALANCE

Date No. Cost Total No. Cost Total No. Cost Total

03/01 500 4.00 2000.00 500 2000.00

07/01 300 4.00 1200.00 200 800.00

12/01 500 4.60 2300.00 700 3100.00

13/01 400 4.60 1840.00 300 1260.00

16/01 400 4.75 1900.00 700 3160.00

17/01 300 4.75 1425.00 400 1735.00

22/01 700 5.25 3675.00 1100 5410.00

29/01 700 5.25 3675.00 400 1735.00

31/01 900 5.40 4860.00 1300 6595.00

F.I.F.O

Total Purchases 3,000 pens

Total Sales 1,700 pens

Closing inventory 1,300 pens

Valuation

900 @ $5.40 each $4,860

400 @ $5.25 each $2,100

= $6,960


AVCO

IN OUT BALANCE

Date No. Cost Total No. Cost Total No. Cost Total

03/01 500 4.00 2000.00 500 2000.00

07/01 300 4.00 1200.00 200 800.00

12/01 500 4.60 2300.00 700 3100.00

13/01 400 3100 divided by 700

1771.00 300 1329.00

16/01 400 4.75 1900.00 700 3229.00

17/01 300 3229 divided by 700

1384.00 400 1845.00

22/01 700 5.25 3675.00 1100 5520.00

29/01 700 5520 divided

by 1100

3513.00 400 2007.00

31/01 900 5.40 4860.00 1300 6867.00

Therefore Income Statement is as follows:

All $ L.I.F.O. F.I.F.O. AVCO Revenue 17,000 17,000 17,000 Cost of sales Opening inventory 0 0 0 Purchases 14,735 14,735 14,735 Closing inventory -6,595 -6,960 -6,867 8,140 7,775 7,868 8,860 9,225 9,132


EXAMPLE 2

Radiance Kitchenware has the following items in their financial statements for the year ended 31st December 2007:

Inventory @ 01/01/07 $45,678

Purchases $98,000

Inventory @ 31/12/07 $42,800

Closing inventory includes the following damaged items:

A table was purchased for $500. Due to fire damage the maximum it can be sold for is $200 after a wax product costing $50 has been applied.

Four chairs costing $100 each were also damaged in the fire. They can be sold for $20.

Required

Calculate the cost of sales for 2007.

ANSWER TO EXAMPLE 2

Stock Valuation

Closing valuation 42,800 Less Damaged inventory Table 500 Chairs 400 900 Add NRV Table (200 – 50) 150 Chairs 80 230 42,130

Cost of Sales Opening inventory 45,678 Purchases 98,000 Closing inventory -42,130 101,548


SESSION 6 IRRECOVERABLE DEBTS AND PROVISION FOR DOUBTFUL DEBTS

Learning Outcomes


Explain the difference between a irrecoverable debt and a doubtful debt Compute the double entries required for irrecoverable debts and the provision for doubtful

debts

Introduction

The majority of companies sell their product on credit. The length of credit will vary between companies, but the most common length of credit is 30 days.

If however, someone fails to pay we need to be able to account for this is our ledgers. It would not be prudent to hold a receivable in our statement of financial position if we were aware that they are unlikely to pay.

There are 2 types of debts that we need to consider:

Irrecoverable debt (bad debt) Doubtful debt

There is a clear distinction between irrecoverable and doubtful debts:

Irrecoverable Debt

This is a debt that you consider to be uncollectable. Circumstances where this would occur are if the company has been fraudulent, gone bankrupt or disappeared. Thus it is unlikely that we will receive the money due to us.

If this is the case we should not have this balance in our receivables, and would therefore write the debt off.

The double entry would be:

Dr Irrecoverable debts Statement of comprehensive income

Cr Trade receivables Statement of financial position

EXAMPLE 1


George has a small antiques business and at the end of the financial year ended 30th April 2007 has a receivables balance of $42,500. Included in the year end balance is $4,000 that is owed by Zippy Traders. George has heard that they have been closed down due to financial irregularities and that all the directors have disappeared.

Also included in the amount is $500 owed by Bungle who is George’s brother-in-law. Bungle has left George’s sister and George is not sure if he will pay his debt which is due in 2 weeks time.

Required

How should George account for these items?

Recovering debts written off

If a debt that has been written off is later recovered, we will need to adjust the ledgers to reflect this. The entry required would be:

Dr Bank

Cr Irrecoverable debts

Doubtful debt

A doubtful debt is a debt that is owed to a business, but they are dubious about its collectability. The distinguishing factor is that this debt could be collected as it is doubtful not bad. We therefore, make a provision for this amount.


Dr Irrecoverable debts Statement of comprehensive income

Cr Provision for doubtful debts Statement of financial position

This type of provision is called a specific allowance as we know exactly which debts the provision is for. As you can see the debt remains in the receivables ledger, as a result the company can still actively chase the debt. If or when the company pays the debt the double entry would be the normal entry for a receipt i.e.

Dr Bank

Cr Trade receivables

We would then reverse the provision we had for this debt.

General allowance


In order to apply the prudence concept we need to review our receivables at the end of the financial year and take a view of collectables. A large number of companies have a constant provision for receivables. This would be calculated as a percentage of the receivables balance.

EXAMPLE 2

For the year ended 31st December 2005 a company’s receivables balance was $150,000. They had a general allowance of 5%. At the year ended 31st December 2006 the company’s receivables are $135,000 – the company would like to maintain a 5% general allowance.

Required

What is the impact on the statement of comprehensive income and how will the receivables be presented in the statement of financial position?


ANSWER TO EXAMPLE 1

Zippy Traders

This debt should be treated as an irrecoverable debt. Therefore the entry needed would be:

Dr Irrecoverable debts $4,000

Cr Trade receivables $4,000

Bungle

This debt is neither an irrecoverable or doubtful debt at this stage. This is because the debt is not yet due and we know where Bungle lives. We also have no reason to suspect that Bungle cannot afford to repay the debt.

ANSWER TO EXAMPLE 2

31ST December 2005

General provision – 5% x $150,000 = $7,500

Double entry

Dr Irrecoverable debts 7,500

Cr Allowance for receivables 7,500

Extract from statement of financial position:

Current assets Receivables 150,000 General Allowance -7,500 142,500


31st December 2006

General Provision – 5% x $135,000 = $6,750

Provision bought forward = $7,500

Therefore overprovision = $750 (7,500 – 6,750)

Double entry

Cr Irrecoverable debts 750

Dr Allowance for receivables 750

Current assets Receivables 135,000 General Allowance -6,750 128,250


SESSION 7 CONTROL ACCOUNTS AND CORRECTION OF ERRORS

Learning outcomes


Understand the principles of control accounts Prepare the control accounts for trade receivables and trade payables Explain the function of a suspense account Prepare nominal ledger accounts Prepare journal entries

Introduction

In session 3 we prepared financial statements from T accounts. The number of transactions was limited, and therefore the process was simple to follow. If an error had been made it would have been easy to detect.

However, in the real world of business the number of transactions is large, and to help us detect errors we use control accounts. Therefore, daily entries are normally made in a number of “Prime Entry” books and then a summary total is transferred to the nominal ledger periodically. This could be done daily, weekly or even monthly.

The following have a large volume of transactions on a daily basis and are used as prime entries:

Sales day book Purchase day book Sale returns day book Purchase returns day book Cash book Petty cash book Journal entries

The transactions are recorded in the prime entry books. They are then transferred to the nominal (general) ledger and we then extract a trial balance in order to prepare our financial statements.


Sales day book

This book records all the sales we make on credit. Sales should be recorded net of trade discount but before cash (settlement) discount.

Purchase day book

This book of prime entry records all purchases we make on credit.

Sale returns day book

If a credit customer returns goods, this will be recorded in the sales returns day book.

Purchase returns day book

This book will record all the credit purchases that we return to suppliers.

Cash book

This book will record all the money that we will pay into the bank account, and any payments we make from the bank account. This will also record any cash (settlement) discounts we allow or receive.

Petty cash book

This records all the small sundry transactions occurring in a business on a day to day basis.

Journal entries

These are used for ad hoc entries that do not fall into any of the above categories. They are also used to correct errors, both temporary and permanent.


EXAMPLE 1

L & M had the following transactions during the first week in December 2007.

1st December 2007

Purchased goods on credit from A Ltd for $595 receiving a trade discount of 9.5% Purchased goods on credit for $795 from KP Ltd Sold goods on credit to JK Ltd for $999

3rd December

Returned KP Ltd goods as they were defective Sold goods on credit to A Jones for $995

5th December

Sold goods on credit to A Jones for $795 Purchased goods on credit from A Ltd for $995, again with a 9.5% trade discount

NB Sales tax is 17.5%

SOLUTION

SALES DAY BOOK

DATE INV NO. CUSTOMER NET SALES TAX TOTAL @17.5%

01/12 100555 J K Limited 999.00 174.82 1173.82 03/12 100556 A Jones 995.00 174.12 1169.12 05/12 100557 A Jones 795.00 139.12 934.12

2789.00 488.06 3277.06

PURCHASE DAY BOOK

DATE INV NO. SUPPLIER NET SALES TAX TOTAL @17.5%

01/12 999241 A Limited 538.47 94.23 632.70 01/12 867544 K P Limited 795.00 139.12 934.12 05/12 999242 A Limited 900.47 157.58 1058.05

2233.94 390.93 2624.87


PURCHASE RETURNS DAY BOOK

DATE INV NO. SUPPLIER VALUE SALES TAX TOTAL

03/12 867544 K P Limited 795.00 139.12 934.12 795.00 139.12 934.12


EXAMPLE 2

The following are the balances on Explorers’ ledger accounts in the month of January

Opening receivables balance 22,500 Sales day book 88,650 Cash sales 23,950 Sale returns day book 5,555 Refunds to customers 3,325 Discounts allowed 6,786 Irrecoverable debts 4,455 Increase in provision 500 Purchase ledger contra 1,200

Required

Calculate total cash received from customers in January

Solution

RECEIVABLES CONTROL ACCOUNT

Dr Cr All Jan All Jan

Opening balance 22,500 Returns book 5,555 Sales day book 88,650 Discounts allowed 6,786 Refunds 3,325 Irrecoverable debts 4,455 Contra 1,200 Closing balance 18,650 Receipts (bal fig) 77,829 114,475 114,475

Feb Opening balance 18,650


EXAMPLE 3

The following are the balances on a company’s ledger accounts in the month of March:

Opening payables balance 12,785 Purchase day book 44,999 Returns outwards daybook 3,950 Returns inwards day book 2,300 Cheques paid to suppliers 37,500 Discounts received 1,400 Sales ledger contras 900

Required

Calculate the closing balance for the payables account at the end of March.

Solution

PAYABLES CONTROL ACCOUNT

Dr Cr All March All March

Returns outwards 3,950 Opening balance 12,785 Payments 37,500 Purchase day book

44,999 Discounts received 1,400 Contra 900 Closing bal (bal fig)

14,034

57,784 57,784 April Opening balance 14,034

Reconciling the control accounts


Normally at the end of each month we check to ensure our control accounts reconcile to the individual balances on our ledger accounts. We do this by:

Checking our list of individual balances tie into the control account balance. If there is an imbalance then it must be investigated. The main discrepancies are due to:

Casting error in the day books Posting error A one sided contra An entry that has been made in the individual account but not in the control accounts An entry being omitted from the control account

EXAMPLE 4

At the financial year end 31 December 2007 Explorer Rain Wear had a balance on the payables control account of $22,550. The balance on their purchase ledgers was $20,650. The management accountant found the following discrepancies:

1. An invoice of $1,200 had been omitted from the control account 2. The purchase day book total was overstated by $1,000 3. Goods returned of $1,590 had not been recorded in the control account 4. Discounts received of $10 had not been posted 5. Contra entries of $500 need to be recorded in the control account

After these adjustments are made, the control account should balance.

Solution

Until a full knowledge of double entry is known, the easiest way to tackle this question is to identify where the error has occurred and amend accordingly. In this case:

Error No. Location of Error Amend

1 Control Account Control Account 2 Control Account Control Account 3 Control Account Control Account 4 Control Account Control Account 5 Control Account Control Account


Dr Cr


All Dec All Dec Error 2 1,000 Original balance 22,550 Error 3 1,590 Error 1 1,200 Error 4 10 Error 5 500 Amended balance 20,650 23,750 23,750 Jan Opening balance 20,650

Balancer per list 20,650

EXAMPLE 5

Hippo Manufacturing had the following balances on their payables / receivables for the financial year ended 30 June 2006.

Credit sales 450,000 Cash sales 22,000 Credit purchases 300,000 Cash purchases 4,500 Returns inwards 17,000 Returns outwards 14,000 Discounts allowed 11,000 Discounts received 12,000 Irrecoverable debts 2,500 Payments made to payables 263,100 Cash received from receivables 438,580 Contra’s 17,500

Balance at 1 July 2005:

Payables 53,500 Receivables 51,500 Provision for doubtful debts 3,400

Bad debt provision is to be maintained @ 1.5% of credit sales

Required:

Compute the receivables and payables control account and extract the closing balances for the financial year end.


SOLUTION

This is a common CBA question. It is designed to ensure you know exactly what should go into control accounts and also your knowledge of double entry. Again until you are comfortable with debits and credits it is easier to write exactly where things will go before attempting to balance the accounts. In this case:

Receivables / Payables Debit / Credit Credit sales Receivables Debit Cash sales Neither n/a Credit purchases Payables Credit Cash purchases Neither n/a Returns inwards Receivables Credit Returns outwards Payables Debit Discounts allowed Receivables Credit Discounts received Payables Debit Irrecoverable debts Receivables Credit Payments made Payables Debit Cash Received Receivables Credit Contra Receivables / Payables Credit / Debit


Dr Cr

Returns outwards 14,000 Opening balance 53,500 Discounts received 12,000 Credit purchases 300,000 Payments 263,100 Contra 17,500 Closing bal (bal fig) 46,900 353,500 353,500


RECEIVABLES CONTROL ACCOUNT

Dr Cr

Opening balance 51,500 Returns inwards 17,000 Credit sales 450,000 Discounts allowed 11,000 Irrecoverable debts 2,500 Cash received 438,580 Contra 17,500 Closing bal (bal fig) 14,920 501,500 501,500

Correction of errors

At the end of an accounting period we extract a trial balance, and use this as a basis for preparing the financial statements.

The following are the main purposes of a trial balance:

Account balances are reviewed to check for obscurities Reconcile all control account balances with the individual ledgers Ensure debits equal the credits.

If there is an imbalance a SUSPENSE ACCOUNT will be created. Therefore, a suspense account may have a debit or credit balance.

Errors that will cause a difference in the trial balance are:

Transposition error – Entering figures the wrong way round Single entries – Only one side of the transaction has been posted Both entries entered on the same side of the ledger account Casting error – An account has been incorrectly added

Although extracting a trial balance proves the above, there are certain errors that a trial balance will not identify. These are:

Error of principle – An entry has been entered in the wrong financial statement. Errors of omission – A transaction has been missed out. Errors of commission – Entering an amount in the wrong account, but in the correct financial

statement. Compensating errors – Where two or more errors cancel each other. This is extremely rare.

Journals


Journals are used for several reasons:

Post unique, one off transactions Transfer items between accounts Adjust balances that are incorrect Correct items that have been incorrectly posted

Journals should have a unique number and should be clearly labelled.

Example 6

Correct the following errors using journals:

1. A sales day book has been under cast by $1,000. 2. Inventory purchased for $1,000 has been posted to stationery 3. A non-current asset has been purchased for $7,000 on credit, but has not been recorded.

Solution

Account Name Description Debit Credit Sales Revenue SDB under cast 1,000 Trade Receivables 1,000 Stationery Incorrectly coded 1,000 Purchases 1,000 Non-current asset Capital purchased 7,000 Other payables 7,000

Example 7


Peter has the following balances on its trial balance at the end of the financial year:

Debit $213,852

Credit $212,390

A suspense account has been created for the difference.

The following errors have been identified by the accountant; after these errors have been corrected the balance on the suspense account should be removed.

1. A payment for stationery for $440 was debited to stationery as $780. 2. Discounts allowed of $1,310 have been recorded as a credit. 3. Other income of $3,742 has only been recorded in the cash book.

Required

Correct the entries and clear the suspense account.

Solution

Account Name Description Debit Credit Suspense Incorrect total posted 340 Stationery 340 Discounts allowed Posting to incorrect side 2,620 Suspense 2,620 Suspense One sided entry 3,742 Other income 3,742

Suspense Account Journal 1 340 Opening Balance 1,462 Journal 3 3,742 Journal 2 2,620 4,082 4,082


SESSION 8 BANK RECONCILIATIONS

Learning Outcomes


Prepare cash and bank accounts Prepare a bank reconciliation

Introduction

Within the ledger account is a bank account ledger, and it is important that the balance in the ledger reconciles to the balance on the actual bank statement. We call this exercise a bank reconciliation.

Dependant on the size of the company, this can be done on a weekly or monthly basis, and in some larger companies even daily.

Preparing a bank reconciliation has many advantages. They include:

Provides a check on accuracy of recordings in the cash book Highlights any errors Assists in the day to day cash management Any differences can be identified quickly

Debits and Credits

On a bank statement the balances will be from the perspective of the bank not that of the business. Therefore, if a bank statement shows a credit balance, the bank has a creditor. In other words the bank owes the business money and is therefore in a positive position.

If the bank statement shows a debit balance this indicates the business is overdrawn. i.e. it is an asset from the bank’s point of view.

Reconciling Items


It is extremely unlikely that the balance on the ledger account and the balance on the bank statement will agree. This can be due to the following reasons:

Cheques issued by the company are immediately entered into the cash book, but they will not appear on the bank statement until they are presented to the bank. These are called unpresented cheques.

Receipts by the business are immediately entered in the cash book and then banked. This can take a number of days to clear.

There may be items in the bank statement that have not been processed through the cash book e.g. BACS transfer, standing orders, direct debits, dishonoured cheques and bank charges.

Proforma bank reconciliation

Balance per bank statement 65,455 Less : Unpresented cheques (1,950) Add: Outstanding lodgements 1,700 Balance per cash book 65,205

Preparing a bank reconciliation

1. Compare the cash book and bank statement and tick matching items

2. Post corrections to the cash book i.e. items on the bank statement that have not been processed through the ledger

3. Put in items that are in the cash book that have yet to be presented to the bank as a reconciling item.

UNLESS OTHERWISE TOLD, ASSUME FIGURES ON THE BANK STATEMENT ARE CORRECT.


Example 1

Cash Book 01/04/07 b/d 14,500 01/04/07 1437 450 03/04/07 27 3,650 01/04/07 1438 600 05/04/07 28 1,200 01/04/07 1439 750 12/04/07 29 1,100 01/04/07 1440 150 29/04/07 30 3,000 12/04/07 1441 250 12/04/07 1442 350 27/04/07 1443 395 27/04/07 1444 165 27/04/07 1445 245 30/04/07 c/d 20,095 23,450 23,450 30/04/07 b/d 20,095

Bank Statement Date Details Payment Receipt Balance

01/04/07 Opening balance 14,500 04/04/07 1437 450 14,050 05/04/07 1438 600 13,450 08/04/07 27 3,650 17,100 10/04/07 28 1,200 18,300 11/04/07 Standing Order – P.S.L. 750 17,550 12/04/07 1439 750 16,800 14/04/07 Direct Debit – Direct Line 750 16,050 17/04/07 1441 250 15,800 17/04/07 BACS (Bank Automated Clearance

System) Transfer

3,500

19,300 18/04/07 1442 350 18,950 20/04/07 29 1,100 20,050 24/04/07 Bank Charges 500 19,550


Solution

Cash Book 30/04/07 b/d 20,095 11/04/07 Standing Order 750 17/04/07 BACS 3,500 14/04/07 Direct Debit 750 24/04/07 Bank Charges 500 30/04/07 c/d 21,595 23,595 23,595 30/04/07 b/d 21,595

Bank Reconciliation Balance per bank statement 19,550 Less: unpresented cheques 1440 150 1443 395 1444 165 1445 245 (955) Add: Outstanding lodgements 30 3,000 21,595


Example 2

The assistant accountant of Rainbow is trying to prepare a bank reconciliation as at 30th November 2007. The cash book has a credit balance of $2,400 and the bank statement at that date has an overdrawn balance of $1,550.

As his manager he has asked you for help with the following items:

1. He has discovered cheque number 100678 has been entered into the cash book twice for $459.

2. A direct debit of $225 has been taken from the account and not been entered into the cash book

3. There are unpresented cheques totalling $5,840. 4. There are outstanding lodgements of $8,390. 5. A cheque receipt for $1,450 has been dishonoured by the bank. 6. Bank charges of $1,400 have been charged by the bank. 7. A BACS transfer of $6,196 has been received by the bank and not been accounted for in the

cash book. 8. He has entered cheque payment number 100600 into the cash book as $1,680, when the

correct amount is $1,860.

Required:

Correct the cash book with the above and prepare a bank reconciliation.


Solution:

Cash Book 30/11/07 Chq 100678 (1) 459 30/11/07 b/d 2,400 30/11/07 BACS 6,196 30/11/07 Direct Debit (2) 225 30/11/07 Dishonoured

Cheque (5)

1,450 30/11/07 Bank Charges (6)

1,400 30/11/07 Chq 100600 (8) 180 30/11/07 c/d 1,000 6,655 6,655 30/11/07 b/d 1,000

Bank Reconciliation Balance per bank statement (1,550) Less : Unpresented cheques (3) (5,840) Add: Outstanding lodgements (4) 8,390 1,000


SESSION 9 ACCRUALS AND PREPAYMENTS

Learning Outcomes


Explain why adjustments are necessary when preparing financial statements Compute the adjustments needed

Introduction

The matching concepts states that income and expenses incurred in the period should be accounted for in that period, regardless of when invoices are raised or received.

The fundamental rule is that income and expenditure are recognised as they are earned or incurred, not as money is received or paid.

In order to ensure income and expenditure is recorded in the correct period, it is often necessary to adjust the financial statements.

Example 1 - Accruals

A sole trader receives his business gas bill quarterly in arrears. In the year ended 31st December 2007 the following bills were received and paid on the dates indicated.

30/04/07 $300 31/07/07 $310 31/10/07 $300

When preparing the accounts for the year end the accountant must adjust the Gas ledger account to reflect that not all charges have been recorded. In this case charges for November and December need to be included.

Accruals and prepayments will be the estimate of the adjustment needed. The adjustment is calculated using the most up to date information available. In the example above this will be the 31/10/07 bill. Therefore the adjustment needed would be 2/3 x $300.

The entry needed would be:

Dr Gas account $200

Cr Accruals $200


The ledger account would therefore look like this:

Gas Account 30/04/07 Cash 300 31/07/07 Cash 310 31/10/07 Cash 300 31/12/07 Accrual 200 31/12/07 Inc Statement 1,110 1,110 1.110 01/01/08 Accrual b/d 200

It is important to remember to carry forward any accrual or prepayment to the next accounting period.

(Assumption: business began on 1. 2. 07)


Example 2 - Prepayments

Julie starts her business on 1st August 2007, and pays her business insurance for the year to 31st July 2008 totalling $1,800. Her year end is 31st December each year.

What charges for insurance would be stated in the income statement for the period ended 31st December 2007?

Insurance Account 01/08/07 Cash 1,800 31/12/07 Prepayment (7/12) 1,050 31/12/07 Inc Statement 750 1,800 1.800 01/01/08 Prepayment b/d 1,050

Assuming the insurance charge remains the same for the year ended 31st July 2009, the ledger account would look like this:

Insurance Account 01/08/07 Cash 1,800 31/12/07 Prepayment (7/12) 1,050 31/12/07 Inc Statement 750 1,800 1.800 01/01/08 Prepayment b/d 1,050 01/08/08 Cash 1,800 31/12/08 Prepayment (7/12 1,050 31/12/08 Inc Statement 1,800 2,850 2,850 01/01/09 Prepayment b/d 1,050


SESSION 10 LIMITED COMPANY ACCOUNTS

Learning outcomes


Prepare a statement of comprehensive income Prepare a statement of changes in equity Prepare a statement of financial position

Introduction

Many businesses are constituted in the form of limited companies. The owners of limited companies are referred to as shareholders and are often different from the people that run the company.

The shareholders have very little, if any involvement in the day to day running of the business and employ directors to run it on their behalf.

Limited company financial statements have very strict requirements which must be followed by all companies. These are governed by:

Companies Act 2006 (or local country legislation) The International Accounting Standards Board


The format to be adhered to per I.A.S. must be the format we adopt in our studies. The proforma financial statements for limited companies were given in session 2, however a copy is given below for reference:

Proforma set of financial statements for a limited company or Plc

Statement of financial position as at 31 December 2007

Non – current assets Note Intangible assets 6 200,000 Tangible assets 7 187,999 Current assets Inventory 8 88,432 Trade receivables 9 97,455 Cash 13,400 199,287 Total assets 587,286 Equity and liabilities Share capital 100,000 Retained earnings 220,497 Revaluation reserve 7 38,000 358,497 Non – current liabilities Interest bearing borrowings 10 100,000 Current liabilities Trade payables 77,789 Taxation 5 51,000 128,789 Total liabilities 587,286


Statement of comprehensive income for the year ended 31 December 2007

Note Revenue 385,000 Cost of sales 1 188,000 GROSS PROFIT 197,000 Distribution costs 2 38,500 Administration expenses 3 37,700 PROFIT FROM OPERATIONS 120,800 Finance costs 8,000 PROFIT BEFORE TAX 112,800 Income tax 53,000 PROFIT FOR THE PERIOD 59,800

Statement Of changes in equity for the year ended 31 December 2007

Share Retained Revaluation Capital Earnings Reserve Total Balance as at 1 Jan 2007 100,000 188,697 40,000 328,697 Profit for the period 59,800 59,800 Excess depreciation 2,000 (2,000) Dividend paid (30,000) (30,000) Closing balance 100,000 220,497 38,000 358,497


A limited company must file their statutory accounts with companies’ house. A full set of statutory accounts will include:

1. Statement of comprehensive income 2. Statement of changes in equity 3. Statement of financial position 4. Cash flow statement

These statements are supported by notes explaining the balances in the financial statements.

One of the key differences between a company and a sole trader is that a company is classed as a separate legal entity. This means that a company is deemed to be a person in its own right. Therefore, a company can sue individuals and can also be sued. The name limited company comes from the fact that the shareholders have limited liability, in other words their liability is restricted to the amount they have paid for their shares.

Profits of a company are distributed by way of dividend payments. These payments are at the directors’ discretion.

Example 1

Freedom Limited has 100,000 ordinary shares in issue. The nominal value (par value) is $1.00 and the directors decide to pay a dividend of 75c per share.

If this is the case the company would pay $75,000 (100,000 x 0.75) in dividends

Preference shares

This type of share is known as a non-equity share, and gets a fixed return on the value of the share. Preference share holders will receive their dividend every year providing the company has distributable profit.

Ordinary share holders will receive a dividend if the directors decide to pay one.


Example 2

The following information relates to Voyager Limited

Year ended 31st December 2007 $

Share capital (25c shares) 100,000 6% Preference shares 50,000

The directors propose an ordinary dividend of 75c per share.

Required:

Calculate the dividend payable.

Solution

Ordinary shares 100,000 / 0.25 = 400,000 shares in issue 400,000 x 0.75 300,000 Preference shares 50,000 x 6% 3,000 Total dividends paid 303,000


Share premium

If a company issues shares after the initial incorporation, it is unlikely they will issue them at a nominal/par value. As the company has established itself, the net worth of the company would increase. This would be reflected in the share price.

Example 3

The following relates to Radiance Limited

Capital and reserves

Share capital ($1.00) 200,000 Retained earnings 233,456 Revaluation reserve 125,000

Say the market value price per share is $3.85 and the directors wish to issue a further 50,000 shares for cash injection purposes.


Cr Share Capital (50,000 x $1.00) 50,000

Cr Share Premium (50,000 x $2.85) 142,500

Dr Bank (50,000 x $3.85) 192,500

The Capital and reserves would now be:

Share capital ($1.00) 250,000 Share premium 142,500 Retained earnings 233,456 Revaluation reserve 125,000


Capital reserve

The share premium account is classed as a Capital reserve. This means that the account cannot be used to pay out dividends. The use of capital reserves is very limited. The key use of the reserve would be to finance a bonus issue of shares. This is when the directors distribute free shares to existing shareholders.

The accounting entry for this would be:

Cr Share capital

Dr Share premium

Dividends

As we have seen previously in this chapter, dividend payments are used to distribute profit to shareholders. In order that a dividend can be paid, the company must have reserves that are distributable i.e. they cannot be paid out of any reserve that is not realised (Revaluation reserve).

Final dividends are paid after the year end; once the financial statements have been completed, and the directors have decided the dividend amount.

An interim dividend can also be paid mid way through the year.

Example 4

Share capital (50c) 200,000 10% Preference shares 25,000

An interim dividend of 8c per share was paid during the year and the directors would like to propose a final dividend of 9c per share.

Required:

Calculate the total dividend payable for the year ended 31st May 2007.


Solution

Ordinary shares $200,000 /$ 0.50 = 400,000 shares in issue Interim dividend (400,000 x 8c) 32,000 Final dividend (400,000 x 9c) 36,000 Preference shares 10% x $25,000 2,500 70,500

Taxation

All companies have to pay tax on the taxable profits. The tax charge is normally estimated at the end of the financial year and charged to the statement of comprehensive income, and is paid in the following year.

The accounting entry for taxation would be:

Dr Taxation Comprehensive income

Cr Taxation liability Financial position


Example 5

The trial balance of Jewel Limited as at 31st March 2007 was as follows:

Dr Cr Share capital (50c) 100,000 6% Preference shares ($1.00) 50,000 Retained earnings at 01/04/06 234,666 Debenture 10% 100,000 Inventory at 01/04/06 32,000 Trade receivables 45,987 Receivables provision 5.987 Trade payables 39,945 Cash 73,958 Building cost account 150,000 Plant and machinery at net book value 422,987 Debenture interest 5,000 Administrative expenses 48,000 Distribution expenses 49,000 Profit on disposals 1,000 Purchases 69,666 Revenue 365,000 896,598 896,598

Notes

1. Depreciation on building is to be charged at 2%

2. Depreciation on plant and machinery is to be charged at 10% reducing balance

3. Closing inventory was valued at $28,990

4. A provision of 5% of receivables is to be maintained

5. Tax charge is estimated at $25,000

6. A final dividend of 15c per share has been proposed before the year end.

Required

Prepare the statement of comprehensive income, statement of changes in equity and the statement of financial position for Jewel Limited for the year ended 31st March 2007.


Solution

Journals Dr Cr 1. Dr Depreciation charge (150,000 x 2%) 3,000 Cr Accumulated depreciation - Buildings

3,000 2. Dr Depreciation charge (422,987 x 10%) 42,299 Cr Accumulated depreciation – P & M 42,299 3. Dr Closing inventory (comp income) 28,990 Cr Closing inventory (financial position) 28,990 4. Dr Receivables provision account Work

1 3,688

Cr Administration expenses 3,688 5. Dr Taxation 25,000 Cr Taxation liability 25,000 6. Dr Pref Dividends 3,000 Cr Proposed Div (prefs) 3,000 7. Dr Dividends in SOCIE (100,000 / 0.5 x 15c)

30,000

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

Working 1

Receivables Provision Account 01/04/06 b/d 5,987

31/03/07 Admin expenses (written back to I/S)

3,688

31/03/07 c/d (45,987 x 5%)

2,299

5,987 5,987


Jewel Limited Statement of Comprehensive Income

Year ended 31st March 2007

Revenue 365,000 Cost of sales (32,000 + 69666 – 28990) (72,676) GROSS PROFIT 292,324 Distribution costs (49,000) Administration expenses (48,000 + 3000 + 42,299 – 3688 + 1000)

(88,611) PROFIT FROM OPERATIONS 154,713 Finance costs (10,000) PROFIT BEFORE TAX 144,713 Income tax (25,000) PROFIT FOR THE PERIOD 119,713


Jewel Limited Statement of financial position

As at 31st March 2007 Non – current assets Tangible assets (150,000 + 422,987 – 3,000 – 42,299)

527,688 Current assets Inventory 28,990 Trade receivables (45,987 – 2,299) 43,688 Cash 73,958 146,636 Total assets 674,324 Equity and liabilities Ordinary share capital 100,000 Preference share capital 50,000 Retained earnings (234,666 + 119,713 – 30,000 – 3,000 Pref Div)

321,379

471,379 Non – current liabilities Debenture 100,000 Current liabilities Trade payables 39,945 Debenture accrual 5,000 Proposed dividend 33,000 Taxation 25,000

102,945 Total liabilities 674,324


Ordinary Shares

Preference Shares

Revaluation Reserve

Retained Earnings

Total

Balance @ 01/04/06 100,000 50,000 234,666 384,666 Profit for the year 119,713 119,713 Dividends: ord (30,000) (30,000) pref (3,000) (3,000) Shares issued Revaluation Balance @ 31/03/07 100,000 50,000 321,379 471,379


SESSION 11 STATEMENTS OF CASH FLOW

Learning outcomes


Explain the purpose of producing a cash flow statement

Discuss the advantages of a cash flow statement

Explain the principles of I.A.S. 7

Produce a cash flow statement

Introduction

The cash flow statement is a primary financial statement and provides fundamental information to the user of accounts. It highlights the key areas where a business has generated and spent physical cash.

Good cash management ensures a business has sufficient cash to run its day to day operations.

Prior to this session we have focused on profit, but cash is equally vital for the success of a business, especially in the short term. If a business has limited cash funds available it will struggle to survive in the short term.

Advantages

Cash flow balances are a matter of fact and are not distorted by accounting policies

Cash flow balances are objective, unlike profit which is subjective

Users of financial statements can establish exactly the cash generation of a business

Users can identify exactly how this cash has been utilised

Users can assess the liquidity of a business and assess its ability to repay debts as they fall due

Loans repaid and received are clearly listed in the cash flow statement

Users can assess management attitude to capital expenditure

Interest payments are highlighted in the cash flow


I.A.S. 7

I.A.S. 7 lays down the requirements of a cash flow statement. It gives us a detailed proforma and certain definitions:

Cash

Cash that is available on demand. An example would be cash in the bank less any overdraft.

Cash equivalents

Short term, highly liquid investments (will be stated as current assets in Statement of Financial Position)

I.A.S. 7 has three main headings. Students should familiarise the layout of a cash flow as questions in the exam will test this area.

The three main headings are:

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities


Proforma

Statement of Cash Flow for year to …….

$ $ Cash flows from operating activities Profit before tax X Adjustments for: Interest payable X Depreciation X (Profit) / loss on the disposal of a non current asset (X) X Operating profit before working capital changes X Working capital changes (Increase) / Decrease in inventories (X) X (Increase) / Decrease in receivables (X) X Increase / (Decrease) in payables X (X) Cash generated from operations X Interest paid (X) Taxation paid (X) NET CASH FROM OPERATING ACTIVITIES X


Proforma continued

$ $ NET CASH FROM OPERATING ACTIVITIES X Cash flow from investing activities Purchase of a non-current asset (X) Disposal of a non-current asset X Interest received X Dividends received X CASH FLOW FROM INVESTING ACTIVITIES X Cash flow from financing activities Proceeds from the issue of shares X Receipt of loans X Repayment of loans (X) Dividends paid (X) CASH FLOW FROM FINANCING ACTIVITIES X NET CASH FLOW X Cash and cash equivalents at the beginning of the period

X Cash and cash equivalents at the end of the period X


Example 1

Radiance Limited Statement of Financial Position

As at 31 December 2007 2006 2007 Non-current assets Cost 180 220 Accumulated depreciation (78) (92) 102 128 Current assets Inventory 12 17 Trade receivables 2 10 Bonds 10 10 Cash 3 16 129 181 Capital and reserves Share capital 45 65 Share premium 10 12 Accumulated profits 24 68 Non-current liabilities Loan 30 20 Current liabilities Payables 19 13 Tax 1 3 129 181

Notes

The tax charge in the statement of comprehensive income is $6,000.

Loan was repaid at the end of the financial year.

Required

Prepare the cash flow statement for the year ended 31st December 2007.


Solution

$ $ Cash flows from operating activities Profit before tax (68 – 24) + 6 50 Adjustments for: Interest payable - Depreciation (92 – 78) 14 (Profit) / loss on the disposal of a non current asset - Operating profit before working capital changes 64 Working capital changes (Increase) in inventory (17 – 12) (5) (Increase) in receivables (10 – 2) (8) (Decrease) in payables (19 – 13) (6) Cash generated from operations 45 Interest paid - Taxation paid (working 1) (4) NET CASH FROM OPERATING ACTIVITIES 41


$ $ NET CASH FROM OPERATING ACTIVITIES 41 Cash flow from investing activities Purchase of a non-current asset (220 – 180) (40) Disposal of a non-current assets - Interest received - Dividends received - NET CASH USED IN INVESTING ACTIVITIES (40) Cash flow from financing activities Proceeds from the issue of shares (65 – 45) + (12 – 10) 22 Receipt of loans - Repayment of loans (10) Dividends paid - CASH FLOW FROM FINANCING ACTIVITIES 12 NET CASH FLOW 13 Cash and cash equivalents at the beginning of the period (10+3)

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

26


Working 1

Taxation Liability 01/01/07 b/d 1 Cash paid (Bal Fig) 4 31/12/07 Charge for year 6

31/12/07 c/d 3 7 7 01/01/08 b/d 7

Direct Method

The direct method involves adding together the cash inflows and deducting the cash outflows.

Example 2

The following information relates to Empress Limited:

Cash sales 55,000 Cash received from customers 44,000 Cash purchases 33,000 Cash paid to suppliers 12,000 Cash expenses 11,000 Cash wages and salaries 20,000

Required:

Calculate the cash generation for Empress Limited


Solution

Cash sales 55,000 Cash received from customers 44,000 Total cash received 99,000

Cash purchases 33,000 Cash paid to suppliers 12,000 Cash expenses 11,000 Cash wages and salaries 20,000 Total cash paid 76,000 Cash generated 23,000


SESSION 12 INCOMPLETE RECORDS

Introduction

As the name suggests, incomplete records are any form of accounting records other than the full double entry system.

In reality, accountants come across incomplete records almost daily. This is because their clients are not likely to fully understand the double en try system. We still however, need to prepare a set of financial statements for the client.

During the exam, students will often come across incomplete records. The main reason is often due to a flood or fire at the business premises.

Calculating profit

If a business has very little information about its transactions, it may only be possible to calculate its net profit for the year. This can be done by using the accounting equation (this is very important). The accounting equation can be written as:

Net Assets = Capital + Profit - Drawings

Or

Change in net assets = Capital introduced + Profit – Drawings

You may realise that this is very similar to the statement of financial position.

Example 1

A sole trader’s statement of financial position at 31st December 2006 shows that the business has net assets of $5,000. The statement of financial position at 31st December 2007 shows that the business has net assets of $8,000. The owner’s drawings for the year amounted to $2,500 and he didn’t introduce any further capital in the year

Required

Calculate the profit for the year ended 31st December 2007.


Solution:

Change in net assets

Capital introduced

Profit for the year

Drawing in period

3,000 = 0 + ? - 2,500

This can be written as: 3,000 - 0 + 2,500 = Profit Profit = 5,500

As you can see it is impossible to know the make-up of the net profit figure due to lack of information.

Preparing financial statements from incomplete records

In the majority of cases a small business will keep limited amount of records.

In these types of questions you will be given information regarding the opening and closing balances of assets and liabilities of the business. You will also be given information about certain transactions during the period; this is usually a summary of the cash book.

There are two main techniques used in incomplete records:

1. Balancing figures in ledger accounts

2. Ratios for mark-up (based on cost) or margin (based on selling price)

Balancing figures

The balancing figure approach is commonly used the following way:

Ledger Account Missing Figure Accounts receivable Sales Money received from accounts

receivable Accounts payable Purchases Money paid to accounts payable Cash at bank Drawings Money stolen Cash in hand Cash sales Cash stolen Example 2


Suppose that the opening balance on the accounts receivables ledger was $50,000, there had been receipts from account receivables in the year of $45,000, irrecoverable debts have been written off worth $5,000 and the closing balance was $55,000.

Required:

What were the credit sales for the year?

Account Receivables

Opening b/d 50,000 Receipts 45,000 Sales (Bal Fig) 55,000 Bad debts 5,000

Closing c/d 55,000 105,000 105,000

Example 3

Suppose that the opening accounts receivables balance was $30,000, there have been total receipts from customers of $55,000 of which $15,000 relates to cash sales and $40,000 relates to receipts from accounts receivables. Discounts allowed in the year totalled $3,000 and the closing balance was $37,000.

Required:

What are the total sales for the year?

Due to the information given in the question we can approach this in 2 different ways. We can calculate credit sales as above and then add on cash sales, or we can use the ledger account to calculate total sales. Both methods are shown below:

Solution 1 - Total sales

Account Receivables (Total Sales a/c)

01/01/07 b/d 30,000 31/12/07 Total receipts 55,000 31/12/07 Total sales (Bal fig)

65,000 31/12/07 Discounts allowed 3,000

31/12/07 c/d 37,000 95,000 95,000

Solution 2 - Separate sales

Account Receivables


01/01/07 b/d 30,000 31/12/07 Credit receipts 40,000 31/12/07 Credit sales 50,000 31/12/07 Discounts allowed 3,000 31/12/07 c/d 37,000 80,000 80,000 Credit sales 50,000 Cash sales 15,000 Total sales 65,000

Example 4

The opening balance on the accounts payable ledger was $30,000. Payments made to account payables during the year were $33.000, discounts received are $4,000 and the closing balance was $26,000.

Required:

What was the total purchases figure for the year?

Solution:

Payables Control a/c

31/12/07 Payments 33,000 01/12/07 b/d 30,000 31/12/07 Discounts received 4,000 31/12/07 c/d 26,000 31/12/07 Purchases 33,000 63,000 63,000


Example 5

Suppose the opening accounts payable balance is $15,000, the total payments made to suppliers was $14,000 of which $10,000 related to credit purchases. Discounts received were $500 and the closing balance was 11,000.

Required:

What was the total purchases figure for the year?

Solution:

Total Purchases a/c (Account Payables)

31/12/07 Total payments 14,000 01/12/07 b/d 15,000 31/12/07 Discounts received 500 31/12/07 c/d 11,000 31/12/07 Purchases 10,500 25,500 25,500

Example 6

The following information relates to the rent and rates for Susan for the year ended 31st December 2007.

Opening balance Rent prepaid 300 Rates accrued 500 Cash paid during the year Rent and rates 4,100 Closing balance Rent prepaid 350 Rates accrued 450

Solution:

Rent and Rates

01/01/07 Rent b/d (Prepaid) 300

01/01/07 Rates b/d (Accrued)

500

31/12/07 Cash paid 4,100 31/12/07 Charge (Bal Fig) 4,000 31/12/07 Rates accrued 450 31/12/07 Rent prepaid 350 4,850 4,850


Example 7

On 1st January the bank is overdrawn by $1,367, payments in the year totalled $8,536 and on 31st December the closing balance was a positive balance of $2,227.

Required:

What is the total receipts figure for the year?

Solution:

Cash Book

31/12/07 Receipts 12,130 01/01/07 b/d 1,367 31/12/07 Payments 8,536 31/12/07 c/d 2,227

12,130 12,130

Example 8

Scott has a cash float at the beginning of the year of $900. During the year cash of $10,000 was banked, $1,000 was paid out for drawings and wages of $2,000 was paid. Scott decided to increase the float to $1,000 at the end of the year.

Required:

How much cash was received from customers during the year?

Solution:

Cash Account

01/01/07 b/d 900 31/12/07 Banked 10,000 31/12/07 Drawings 1,000

31/12/07 Receipts 13,100 31/12/07 Wages 2,000 31/12/07 c/d 1,000

14,000 14,000


Ratios – Mark-up and Margin

The gross profit of a company can be expressed as a percentage. This percentage can be calculated based on the sales figure or the cost of sales figure.

Gross Profit Mark-up Based on Cost of Sales

Gross Profit Margin Based on Sales

If we look at the following trading account:

Sales REvenue 5,000 Cost of sales 4,000 Gross profit 1,000

Gross profit mark-up 1,000 / 4,000 x 100 = 25%

Gross profit margin 1,000 / 5,000 x 100 = 20%

Example 9

Margin 25% Sales $1,000

Required:

What is the gross profit and cost of sales?

$ % Sales 1,000 100% Cost of sales (1,000 / 100 x 75) (Bal fig) 750 75% Gross profit 250 25%


Example 10

Mark-up 25% Cost of sales $600

Required:

What is gross profit and sales?

Sales (600 / 100 x 125) 750 125% Cost of sales 600 100% Gross profit 150 25%

Example 11

Mark-up 10%

Sales $6,600

Opening inventory $300

Closing inventory $500

Required:

Complete a trading account from the above information.

Sales 6,600 110% Cost of sales Opening inventory 300 Purchases (Balancing Figure) 6,200 Closing inventory (500) 6,000 100% Gross profit (6,600 / 110 x 10) 600 10%


Example 12

Margin 5%

Purchases $2,840

Opening inventory $800

Closing inventory $600

Required:


Sales (3,040 / 95 x 100) 3,200 100% Cost of sales Opening inventory 800 Purchases 2,840 Closing inventory (600) 3,040 95% Gross profit 160 5%

Cost of lost inventory

In incomplete record questions, it is likely that inventory has been lost due to the infamous fire or flood.

Closing inventory that has not been lost is subtracted in cost of sales because by definition, the inventory has not been sold in the year.

Lost inventory has also not been sold in the year and therefore also needs subtracting within cost of sales.

Therefore, to work out the cost of lost inventory, complete the trading account from the information given and then lost inventory can be calculated as a balancing figure.


Example 13

Margin 20%

Sales $100,000

Opening inventory $10,000

Closing inventory (after fire) $3,000

Purchases $82,000

Required:


Sales 100,000 100% Cost of sales Opening inventory 10,000 Purchases 82,000 Closing inventory (3,000) Inventory lost in fire (balancing figure) (9,000) 80,000 80% Gross profit (100,000 / 100 x 20) 20,000 20%


SESSION 13 PARTNERSHIPS

Definition

“The relationship which subsists between persons carrying on a business in common with a view to profit”

A partnership therefore has two or more partners or owners. In the same way as for a sole trader, the profits of the business are owned by the partners. This makes it necessary to share the profits of the business amongst the partners.

A partnership will usually have a “Partnership Agreement” which will state how the profits are to be shared amongst other things.

THE SHARING STORY

A partnership has four partners – Jason, Howard, Gary and Mark. In the year to 30th June 2007 the partnership has made profits totalling $106,250.

Jason is rich but stupid. He was made a partner because he could invest $100,000 into the partnership. He withdrew $30,000 from the business on 1st July 2006.

Howard is poor but clever and could only invest $20,000 into the partnership. Due to him being clever and completing work quicker than the other partners he took responsibility for hiring and firing staff in the business. He withdrew $30,000 on 30th June 2007.

Gary invested $50,000 into the partnership. He has a liking for designer clothes and fast cars. Consequently he withdrew $25,000 on 1st July 2006 and a further $25,000 on 1st January 2007.

Mark also invested $50,000 and withdrew $30,000 on 1st July 2006. Mark’s wife has just had a baby and he would therefore like to have a guaranteed share of the profits.

The partners have decided that profits should be distributed at a ratio of 2 : 1 : 3 : 4 (Jason : Howard : Gary : Mark)

How do you think the profits should be shared amongst the partners?


Interest on capital

To reward partners who have invested more into the business, the partnership may allocate some of the profits based on the level of capital invested. This is called interest on capital.

Salaries

To reward those partners who take on extra responsibilities with-in the business, they may receive a salary. A partners’ salary is not a business expense like the salary of an employee, but a way in which profits are allocated.

Interest on drawings

To penalise those partners who take out more drawings from the business, the partnership may charge interest on drawings. Interest on drawings results in a reduction in the amount of profit the partner is allocated.

Profit sharing ratio

This is the ratio in which any remaining profits should be shared amongst the partners after they have been allocated interest on capital, salaries and interest on drawings.

Guaranteed minimum profit share

A partner may be guaranteed a minimum share of the profits. If the partner has not received this share after allocating profits in accordance to the above, the shortfall should be given to the partner. The short fall is then taken from the other partners in accordance with the profit sharing ratio.

Example 1

Using the amounts detailed in the sharing story, allocate the profits of the business in accordance with the following partnership agreement:

a) Interest on capital is 5% per annum

b) Howard is to receive a salary of $5,000

c) Interest on drawings is 10% per annum

d) Profit sharing ratio is as stated 2 : 1 : 3 : 4

e) Mark has a guaranteed minimum profit share of $42,500


Appropriation of Profit Account

Jason Howard Gary Mark Total Profit 106,250 Interest on capital 5,000 1,000 2,500 2,500 (11,000) Salaries - 5,000 - - (5,000) Interest on drawings (3,000) - (3,750) (3,000) 9,750 100,000 P.S.R. 2 : 1 : 3 : 4 20,000 10,000 30,000 40,000 (100,000) 22,000 16,000 28,750 39,500 - Guaranteed share (1,000) (500) (1,500) 3,000 21,000 15,500 27,250 42,500

Financial statements for a partnership

The format of the financial statements for a partnership will be the same as for a sole trader except for the capital section of the statement of financial position.

Each partner will have a capital account and a current account.

Capital account

This will record the assets that have been introduced into the partnership. The account will remain fixed unless more assets are introduced. The capital account will have a credit balance.

Capital Accounts A B C A B C

Balance b/d X X X Bank X X X Balance c/d X X X X X X X X X


Current account

The current account will record the partners’ share of profits and drawings. The current account will usually have a credit balance but may have a debit balance indicating that they have withdrawn more than the profits they are entitled to.

Current Accounts A B C A B C

Balance b/d X X X Share of profits X X X Drawings X X X Loan interest X X X Balance c/d X X X X X X X X X

The capital section of the statement of financial position will look like:

Capital Accounts A X B X C X X Current Accounts A X B X C X X

ACCA F3 - FA Support Material by FBT

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