Acca Financial accounting

The Conceptual Framework's definition of income is

"increases in economic benefits during the accounting period arising in the form of inflows or enhancements of assets or decreases of liabililities that result in increases in equity, other than those relating to contributions from equity participants' A credit sale meet this definition as it will increase profit and therefore retained earnings and equity. A revaluation of a property also meets this definition as it will be recorded in other comprehensive income and therefore increase the revaluation surplus and equity. However, a share issue is a contribution from equity participants and therefore does not the definition of an asset. Repayment of a loan results in a reduction in an asset (cash) and a liability (loan) rather than income.

the standard lists types of cost which would not be included in cost of inventories . instead they should be recognised as an expense in the period they are incurred.

- abnormal amounts of wasted materials, labour or other production costs - storage costs , unless those costs are necessary in the production process before a further production stage - administrative overheads that do not contribute to bringing inventories to their present location and condition -selling costs

ias definition: inventories are assets:

- held for sale in the ordinary course of business - in the process of production for such sale,or - in the form of materials or supplies to be consumed in the production process or in the rendering of services

what are most likely situations when the nrv of inventories falls below cost?

- increase in costs or fall in selling price -physical detorioration of inventory -obsolescence - marketing strategy - errors in production or purchasing

if, at the end of an accounting period , a business still has goods in inventory which are either worthless or worth less than their original cost, the value of the inventories should be written down to:

- nothing , if they are worthless - the net realisable value, if this is less than their original cost

if going concern assumption is not followed that fact must be disclosed together with the following information

- the basis on which the financial statements have been prepared - the reasons why entity is not considered to be going concern

useful life is either

- the period over which an asset is expected to be available for use by an entity; or - the number of production or similar units expected to be obtained from the asset by an entity

A provision should be recognised:

- when an entity has incurred a present obligation - when it is probable that a transfer of economic benefits will be required to settle it - when a reliable estimate can be made of amount involved

IAS 2inventories lays out the required accounting treatment for inventories under Ifrs. the following items are excluded from the scope of the standard:

- work in progress under construction contracts(covered by ias 11 construction contracts) - financial instruments - livestock, agricultural and forest product , and mineral ores

making an allowance for receivables is an example of which concept?

fair presentation, as it shows the likely recoverability of receivables

capital expenditure is expenditure which

forms part of the cost off non-current assets. capital expenditure is expenditure which forms part of the cost of non- current assets. (a) capital expenditure is not charged as expense in sopl, although a deprecation or amortization charge will usually be made to write off the capital expenditure gradually over time. depreciation or amortization charges are expenses in sopl (b) capital expenditure on non- current assets results in the recognition of non- current asset in the sofp

Verifiability (def)

help assure users that information faithfully represents the economic phenomena it purports to represent. it means that different knowledgeable and independent observers could reach consensus although not necessarily complete agreement, that a particular depiction is a faithful representation.

the accounting treatment of tangible non- current assets is covered by

ias 16 property, plant and equipment

expenditure on research must be written off in the period

in which it is incurred(Ias 38)

A debit entry will:

increase an asset decrease a liability increase an expense

why is inventory not valued at expected selling price?

mainly because this would result in the business taking a profit before the goods have been sold

IAS 37 states that a provision should be recognised (which simply means 'included') as a liability in the financial when all three of following conditions are met.

-An entity has a present obligation (legal or constructive) as a result of past events. -It's probable (ie more than 50% likely) that a transfer of economic benefits will be required to settle the obligation. -A reliable estiamate can be made of the obligation.

What details about a non-current asset might be included in an asset register?

-date of purchase -description -original cost -depraciation rate and method -accumulated depreciation to date -date and amount of any revaluation

A credit note is

a document relating to returned goods or refunds when a customer has been overcharged. it can be regarded as a negative invoice

In a set of financial statements prepared in accordance with IAS 16, is it correct to say that the carrying amount figure in a statement of financial position cannot be greater than the market (net realisable) value of the partially used asset as at the reporting date?

Carrying amount can in some circumstances be higher than market value(net realisable value). IAS 16 Property, plant and equipment states that the value of an asset cannot be greater than its 'recoverable amount' as defined in IAS 16 is the amount for futher use. This may be higher than the market value. This makes sense if you think of specialised machine which could not fetch much on the second-hand market but which will produce goods which will produce goods which can be soldat aprofit for may years.

For issuing IFRSs responsible is

IASB

In the statement of financial position prepared in accordance with IAS 16 , what does the carrying amount represent?

In simple terms, the carrying amount of an asset is the cost of an asset less the 'accumulated depracetion'; that is, all depraciation charged so far. It should be emphasised that the main purpose of charging depreciation is to ensure that profits are fairly reported. Thus depraciation is concerned with the sopl rather than sofp. In the consequence , the carrying amount figure in the sofp can be quite arbitrary. In particular, it does not necessarily bear any relation to the market value of an asset and is of little use for planning and decision making.

What is an asset's carrying amount?

Its cost less accumulated depreciation.

the recognition criteria are as follows. the entity must demonstrate:

P- how the intangible asset will generate Probable future economic benefits; customers have already placed advanced orders for the financial product after development I- its Intention to complete the intangible asset and use or sell it R-the availibility of adequate technical, financial and other Resources to complete the development and to use or sell the intangible asset A-its Ability to use or selll the intangible asset T-the Technical feasibility of completing the intangible asset so that it will be available for use or sale

debit note is

a document sent by a customer in respect of goods returned or an overpayment made. it is a formal request for the supplier to issue a credit note.

drawings are

amounts taken out of a business by its owner. drawings are relevant in sole traderships and partnerships. in Ltd the owner ie shareholders are paid dividends.

Imprest (zaliczkowy) system of operating petty cash

The exact amount of expanditure is reimbursed at intervals to maintain a fixed float.

What is posted from the day books to the nominal ledger?

The totals ( not the individuals amounts)

remittance advice

a document sent to a supplier with a payment,detailing which invoices are being paid and which credit notes offset. a remittance advice allows the supplier to update the customer's records to show which invoices have been paid and which are still outstanding. it also confirms the amount being paid, so that any discrepancies can be easily identified and investigated

accrued expenses (accruals )are expenses which relate to an accounting period but have not been paid for. they are shown in sofp as

a liability

a provision is

a liability of uncertain timing or amount. ias37 provisions, contingent liabilities and contingent assets views a provision as a liability.

a credit balance brought down denotes

a liability. an asset would be represented by a debit balance brought down

The IFRS Foundation is

a non-for-profit private organisation working in the public interest. It is governed by a board of trustees who appoint members to the IASB, the IFRS Advisory Council and IFRS Intepretations Committee. It also oversees the regulatory system and raises the finance necessary to suppport it.

a payable is

a person or organisation to whom business owes money

a liability according to ias 37 is

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

financial reports are prepared for users who have

a reasonable knowledge of business and economic activities and who review and analyse information diligently

the recognition of property, plant and the equipment depends on two criteria

a) it's probable that future economic benefits associated with the asset will flow to the entity b) the cost of the asset to the entity can be measured reliably

the ledger accounting entries for depreciation are as follows

a) there is an accumulated depreciation account for each separate category of non- current assets; for example, plant and machinery b) the depreciation charge for an accounting period is a charge against profit. it is accounted for as follows. debit depreciation expense(sofp) credit accumulated depreciation account (sopl) (c) the balance on the sofp depreciation account is the total accumulated depreciation. this is always a credit balance brought forward in the ledger account for depreciation. (d) the non current assets account are unaffected by depreciation. non current asset are recorded in these accounts at cost (or, if they revalued, at their revalued amount). (e) In the statement of financial position of the business, the total balance on the accumulated depreciation account is set against the value of non-current asset accounts (ie non-current assets at cost or revalued amount) to derive the carrying amount of the non-current assets.

ledger accounts sumarise

all the individual transactions listed in the books of prime entry

The drawing account is

an accounting record used in a business organized as a sole proprietorship or a partnership, in which is recorded all distributions made to the owners of the business. They are, in effect, "drawing" funds from the business

prepaid expenses (prepayments ) are expenses which have already been paid but relate to a future accounting period. they are shown in sofp as

an asset.

current assets are

assets that will be realised, consumed or sold in the normal operating cycle of the business or are assets held primarily for trading. Current assets include trade receivables and inventories.

The leadership style that least acknowledges contribution that subordinates have to make is

autocratic

Revenue expenditure cannot be

capitalised as part of the cost of a non-current asset and must be expensed in the sopl

capital expenditure is expenditure that can be

capitalised as part of the cost of a non-current asset.

a sole traders net profit for period we can calculate as

closing net assets+drawings-capital introduced- opening net assets

to be a faithful representation information must be

complete, neutral and free from error

Two characteristics given in the Conceptual Framework for Financial Reporting are

completeness and neutrality

from 2005 in The uk ifrs is to be used for

consolidated statements

Non-current assets are assets which are bought by the business for

continuing use

The major purpuse of IASB is to ensure consistency in

corporatel reporting

carriage inwards is included in the

cost of purchases. carriage outwards is a selling expense in the statement of profit and loss

a decrease in an asset (e.g. making a cash payment )is a

credit

an increase in revenue (e.g. a sale) or an increase in a liability(e.g. buying goods on credit) is a

credit

a decrease in a liability (eg paying a creditor) is a

debit

an increase in an expense (e.g. a purchase of stationery) or an increase in an asset (e.g. a purchase of office furniture ) is a

debit

how is closing inventory incorporated in the financial statements?

debit: inventory in hand(sofp) credit: closing inventory (income and expense account)

A credit entry will:

decrease an asset increase a liability increase income

if there has been a significant change in the expected pattern of economic benefits from those assets , the method of depreciation should be changed to suit this new pattern. when such a change in depreciation method takes place , the remaining carrying amount is

depreciated under the new method , ie only current and future periods are affected; the change is not retrospective

if the criteria laid down by ias 38 are satisfied, development expenditure must be capitalised as intangible asset. if it has a finite useful life , it should be then amortized over that life. if the criteria in ias 38 are not satisfied,

development expenditure must be written off in the period in which it is incurred.

capital expenditure is expenditure which forms part of the cost of non- current assets. revenue expenditure is

expenditure incurred for the purpose of the trade or to maintain non- current assets.

Information has a quality of faithful representation when

it is complete, neutral and free from material error.

Non-current assets may be revalued art the discretion of management. once revaluation has occurred

it must be repeated regularly for all non- current assets in a class.

if intangible asset is considered to have an indefinite useful life,

it should not be amortized but should be subjected to annual impairment review

Information is material if

its omission or misstatement could affect the decisions of the users of accounts.

most business keep petty cash on the premises, which is topped up from the main bank account. under the imprest system, the petty cash is

kept at an agreed sum so that each topping up is equal the amount paid out in the period

once decided , the useful life should be reviewed at

least each financial year- end and deprecation rates adjusted for the current and future periods if expectations vary significantly from the original estimates. the effect of the change should be disclosed in the accounting period in which the change takes place.

a trial balance is a

list of ledger balances shown in debit and credit columns

intangible assets are

non- current assets with no physical substance

when is an inventory account used?

only at the end of accounting period

the cost of goods sold is calculated as

opening inventory +purchases- closing inventory

Research is:

original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding

the balance brought forward on the bank account is a credit figure. this means that the balance is

ovedrawn

IFRS are designed primarily for

profit-oriented entities.

what is included in the cost of purchase of inventories

purchase price plus import duties (and other taxes ) plus transport costs less trade discounts

individual customer accounts are kept in the

receivables ledger

goods received notes(grns)

record a receipt most commonly in a warehouse. they may be used in addition to suppliers advice notes.

The owner's transactions must be kept separate from the business' so when the owner withdraws cash, it must be

recorded as drawings. Debits increase drawings and expenses. Cash is an asset balance sa a credit is required to reduce it.

Financial reporting is a way of

recording, analysing and summarising financial data

the conceptual framework states that qualitative characteristics are the attributes that make the information provided in financial statements useful to the user. the two fundamental characteristics are

relevance and faithful representation. enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability.

relevance

relevant financial information is capable of making a difference in the decisions made by users. financial information is capable of making a difference in decisions if it has predictive value, confirmation value or both

The substance over form convention means

that transactions are accounted for in accordance with their substance and not merely their legal form.

The reducing balance method of depreciation calculates

the annual detorioration charge as a fixed percentage of the carrying amount of the asset , as at end of the previous accounting period

development is

the application of research findings or other knowledge to a plan or design for the production of new substantially improved materials , devices , products, processes , systems or services prior to the commencement of commercial production or use

Credit sales are recorded in the sales day book. Cash sales, discounts allowed and receipts from credit customers would all be recorded in

the cash book.

depreciable amount is

the cost of an asset or other amount substituted for historical cost, less its estimated residual value

the residual value of an asset is

the estimated amount that an entity would currently obtain from disposal of the asset , after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life.

ias definition net realisable value is

the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated cost necessary to make the sale

IAS 16 allow entities to transfer an amount equal to the excess depreciation from the revaluation surplus to retaining earnings in the equity section of sofp, if they wish to do so. this transfer between the revaluation earnings is shown in

the financial changes in the statement of changes in equity.

the principal accounts are contained in a ledger called

the general or nominal ledger. the nominal ledger is an accounting record which summarises the financial affairs of the business

inventory should be valued at

the lower of cost and net realisable value

when non current asset is sold, there is likely to be a profit or loss on disposal. this is the difference between

the net sale price of the asset and its carrying amount at the time of disposal

what is the purpose of depreciation?

the purpose of depreciation is to spread the cost of a non- current asset over its useful life in order to match the cost of the asset over the full period during which the business consumes economic benefits from the asset. changing depreciation is an application of the accruals concept.

Revenue expenditure is expenditure incurred for

the purpose of the trade or to mantain non-current assets. Revenue expenditure is expenditure which is incurred for either of the following reasons. (a) For the purpose of the trade of the business. This include expenditure classified as selling and distribution expenses, administration expenses and finance charges. (b) To maintain the existing earning capacity of non- current assets.

the journal is

the record of prime entry for transactions which are not recorded in any of the other books of prime entry the journal keeps a record of unusual movement between accounts. it's used to record any double entries made which do not arise from the other books of prime entry,ie non- routine transactions. for example, journal entries are made when errors are discovered and need to be corrected.

Equity is

the residual interest in the assets after deducting all of its liabilities

Think of capital expenditure as expenditure that provides that provides long term benefits ( eg a building , item of machinery) and revenue expenditure as trading costs relating to

the short-term (eg electrity, wages). Also, the term 'capital' in capital expenditures should not be confused with the capital invested in business.

the gain on revaluation cannot go to the statement of profit and loss, as it has not been realised. instead, it's recognised in

the sopl and other comprehensive income. From here, the 'gain' is transferred to a revaluation surplus (sometimes called a revaluation reserve), part of capital in sofp.

IAS 16 requires that when an item of property, plant and equipment is revalued,

the whole class to which it belongs should be revalued.

IASB Conceptual Framework's six qualitative characteristics of financial information are

timeliness, verifiability, comparability, faithful representation, relavance , understandability.