KEY AREAS

Question 1

Expense

Answer 1

A decrease in assets or increase in liabilities
Costs incurred in effort to generate revenues

Question 2

Revenue

Answer 2

Gross inflow of economic benefits during the period

Question 3

Liabilities

Answer 3

Present obligation arising from past events, settlement resulting in an outflow

Question 4

Assets

Answer 4

Resource controlled by the entity as a result of past events which future economic benefits are expected to arise

Question 5

Partnership attributes

Answer 5

Owners receive all profits and have unlimited liability
Capital account will only change when a partner joins/leaves
Current account includes share of profit or loss each partner is entitled to less personal drawings

Question 6

Going concern

Answer 6

Statements prepared assuming entity is a going concern and will continue to operate for next 12 months

Question 7

Materiality and aggregation

Answer 7

Item is material if its omission is likely to change understanding of users
Aggregation of similar items e.g. trade receivables is permitted

Question 8

Prudence

Answer 8

Not overstating or understating which introduces bias

Question 9

Substance over form

Answer 9

Economic reality must be accounted for e.g. redeemable preference shares although in legal form they are shares there is an obligation to repay shareholders so they are a debt

Question 10

Frameworks and bodies related to financial reporting

Answer 10

Overall structure

IFRS foundation
Supervisory for IAS board
Objective to develop standards and convergence of standards

IAS board
Independent standard setting body
Represented by national accounting boards

IFRS advisory council
Advisory to the board and foundation

IFRS interpretations committee
Reviews widespread issues along with national boards

ISSB sustainability board
Deliver baseline of sustainability standards

Question 11

Business Documentation

Answer 11

Quotation
Quantity and description of goods required to cross refer to purchase requisition

Sales order
Quantity and description of goods required by a customer including price etc – generated by the supplier and will be cross checked with the purchase order placed by the customer

Purchase order
Details of supplier, quantity, price and description and terms of payment – sent to supplier as a request to supply based upon purchase requisition

Goods received note
Quantity and description of goods received by the customer produced by the customer

Goods despatched note
Details of goods despatched by supplier issued by the supplier to check against goods received and purchase order

Sales invoice
Details of goods, price, tax etc issued by supplier

Supplier (purchase) invoice
Details of goods, value, tax etc received by customer

Supplier statement
Details of supplier and invoices/payments – issued by supplier

Credit note
Details of supplier and terms of credit – issued by supplier

Debit note
Details of supplier sales tax, terms of credit etc produced by customer cross referenced to credit note issued by supplier

Remittance advice
Raised by customer and contains details of payment made to supplier

Receipt
Details of payment received

Question 12

Order of business documentation

Answer 12

Quotation - from supplier to customer hypothetical detailing price/quanitity
sales order - similar to quote but definite price/quantity required by customer
purchase order - sent from customer to supplier as request to supply goods/services
goods despatched/goods received note matched against PO
sales invoice (issued by supplier)/purchase invoice (received by customer)
Supplier statement with invoices on account
credit note (issued by supplier)/debit note (issued by customer)
Remittance details payment made to supplier
receipt confirms payment received

Question 13

Carriage inward/outward

Answer 13

Carriage inwards is the shipping and handling costs incurred by a company that is receiving goods from suppliers - direct expense

Carriage outwards is the shipping and handling costs incurred by a company that is shipping goods to a customer - cost of sales

Question 14

how to balance and close the general ledger accounts at the year end

Answer 14

When all transactions for a period have been recorded, it is necessary to establish the balance on each ledger account (likely done automatically by accounting system)
Manual procedure is as follows
Total both sides of the T account and find the larger total
Insert larger total in the total box on both the debit and credit side
Insert a balancing figure to the side of the T account which does not currently add up to the amount in the total box – call the balancing figure balance c/f or c/d
Carry the balance down diagonally and call it balance b/f or b/d

Question 15

Contra

Answer 15

A contra entry is an entry that is recorded when both the debit and credit affect the same account and which results in a net-zero effect on the account.

Question 16

capital

Answer 16

Capital can be defined as being the residual interest in the assets of a business after deducting all of its liabilities (ie what would be left if the business sold all of its assets and settled all of its liabilities). In the case of a limited liability company, capital would be referred to as ‘Equity’.

Question 17

petty cash

Answer 17

Petty cash is the relatively small sums of coins and notes held by a business for the reimbursement of small out of pocket expenses incurred by staff on behalf of the business

Question 18

impress method

Answer 18

The amount in the account will be recorded and an amount is withdrawn from the bank account which is referred as a petty cash float – at the end of a period the petty cash float is topped up by withdrawing an amount from the bank to restore the float to its normal level known as the ‘imprest method’ of accounting for petty cash

Question 19

petty cash voucher

Answer 19

A petty cash voucher is a standard form used as a receipt whenever cash is withdrawn from a petty cash box. The voucher is typically purchased from an office supply store. It is a physically small form, since it must fit within the petty cash box or drawer

Question 20

Trade discounts

Answer 20

Trade discounts given by a supplier to increase sales reduces the unit price for the supplier by buying in bulk
Trade discounts are deducted at point of sale where the net amount will be recorded after the trade discount has been deducted

Question 21

discounts allowed (trade discounts and settlement discounts) to customers

Answer 21

An entity may receive a discount from its suppliers known as discount received where the reduction in payment to the supplier will be noted at the time the payment is made, it will be recorded as follows
Debit payables (to reduce total liability)
Credit discount received
Credit cash

When preparing the final accounts discount received is normally netted off against purchases to reduce COS
When an entity gives its customers a discount – discount allowed, this is a reduction in revenue

Question 22

Settlement discount

Answer 22

Settlement discount is different in nature to a trade discount where trade is a reduction in price, settlement is a reduction in the overall invoice price
If a settlement discount is offered to a credit customer there is no way of knowing at the point when the sales invoice is prepared whether the customer will use the discount terms offered so this is known as variable consideration – where the seller does not know if they will receive the discounted/full amount

Question 23

Receivables accounting treatment

Answer 23

receivables
trade receivables in gl account is the amount owed to a business by its customers following the sale of products/services on credit
dr
credit sales
bank - dishonoured cheques/refunds of credit balances e.g. a payment has been declined by customer bank/if a customer made an overpayment
interest charged on overdue amounts
balance bf closing balance at the end of period is the balance which will be included in the sofp
cr
sales returns
cahs at bank
irrecoverable debts
contra with payables ledger if a business sells and buys from the same business on credit terms
balance cf

Question 24

Disposal of NCAs

Answer 24

IAS 16 says the carrying amount of an item shall be derecognised on disposal or when no future economic benefits are expected from its use/disposal
when a tangible nca is disposed/derecognised there are a number of adjustments to record profit or loss
disposal for cash consideration
remove original cost of nca from nca account
dr disposals account
cr nca account
remove accumulated depreciation from depreciation account
dr depreciation account
cr disposals account
record the proceeds
dr bank account
cr disposals account

Question 25

sales returns vs purchase returns accounting

Answer 25

If there was a sales/purchase return transaction (credit) the accounting would be Sales Debit sales returns, credit receivables Purchases Debit payables, credit purchase returns

Question 26

sales tax definition

Answer 26

sales tax is levied on the final consumer of a product or service an entity that is registered to account for sales tax is essentially acting as the collection agent for the tax authority sales tax is charged and paid on purchases (input tax) by suppliers and charged and collected on sales (output tax) a business registered for sales tax will effectively pay over the sales tax it has added to its sales, and recover the sales tax it has paid on its purchases sales tax will be excluded from reported sales and purchases

Question 27

sales tax accounting entries

Answer 27

Accounting for sales tax Entries are amended slightly with the introduction of a sales tax ledger account – either a receivable/payable account balance Sales tax paid on purchases (input tax) Debit purchases (net cost) Debit sales tax (tax only) Credit payables/cash at bank (gross cost) Purchase account does not include sales tax because it is not an expense, it is recoverable Payables account does include sales tax as the supplier must be paid the full gross amount Sales tax charged on sales (output tax) Debit receivables/cash (gross selling price) Credit sales (net selling price) Credit sales tax (tax only) Sales account does not include sales tax because it is not income If sale is on credit terms, total amount is split between sales and tax accounts

Question 28

Payment of output tax to tax authority

Answer 28

Payment of output tax to tax authority If a business charges more output tax on sales than it suffers on its purchases, there will be a credit balance on the sales tax account Debit sales tax (liability) Credit cash Likewise with the opposite circumstances Debit cash Credit sales tax

Question 29

Inventory valuation

Answer 29

IAS 2 inventories Inventory is included in the sofp at the lower of: Costs All expenditure incurred including cost of purchase and conversion costs (direct costs and production overheads) Selling, storage, abnormal and admin costs are excluded Net realisable value Revenue expected to be earned in the future when the goods are sold, less any selling costs

Question 30

Inventory valuation FIFO and AVCO

Answer 30

Unit cost Actual cost of purchasing unit only used when items are individual and of high value Fifo First items of inventory received are assumed to be the first ones sold and the cost of closing inventory is the cost of the most recent purchases of inventory Avco Cost of an item of inventory is calculated by taking the average of all inventory held, can be calculated periodically or continuously

Question 31

Identify the impact of inventory valuation methods on profit and on assets.[s]

Answer 31

If inventory is overvalued then Assets are overstated in the sofp Profit is overstated in the statement of profit or loss If inventory is undervalued then it is the opposite

Question 32

Record opening and closing inventories

Answer 32

Record opening and closing inventories.[s]5 At year end 2 basic adjustments are required to recognise opening and closing inventories in the correct place Inventory brought forward from the previous year is assumed to have been used to generate assets for sale. It must be removed from inventory assets and recognised as an expense in the year Debit opening inventory in cost of sales Credit inventory assets The unused inventory at the end of the year is removed from purchase costs and carried forward as an asset into the next year Debit inventory assets Credit closing inventory in cost of sales Once these entries have been completed the cost of sales account contains both opening and closing inventory and the inventory ledger account shows the closing inventory for asset remaining at the end of the year

Question 33

Record the revaluation of a tangible non-current asset

Answer 33

IAS 16 states items can be accounted for using the revaluation model land and buildings may rise in value over time, so a company will revalue the asset to reflect its value in the sofp if an assets CA is increased after revaluation, the increase will be recognised in other income and accumulated in equity under the heading ‘revlauation surplus’ the gain is not recognised in p&l as it is unrealised and cannot be represented as profit hence ‘other comprehensive income’ is where it is recognised revaluation surplus = revalued amount - carrying amount

Question 34

depreciation of a revalued asset

Answer 34

when a nca has been revalued, depreciation charge should be based on the revalued amount and the remaining useful life of the asset the charge will be higher than depreciation prior to revaluation and will be charged to p&l as normal if an item is revalued the entire class of that asset will be revalued the excess of the new depreciation charge over the old charge may be subject of a transfer from revaluation surplus to retained earnings (annually) dr revaluation surplus

Question 35

disposal of a revalued asset

Answer 35

gain or loss arising from the derecognition of an item is the difference between net disposal proceeds and the CA of the item additionally, the revaluation surplus included in equity may be transferred directly to retained earnings when the asset is derecognised amount transferred to retained earning is disclosed in statement of changes in equity dr revaluation surplus cr retained earnings

Question 36

'research' and 'development' in accordance with IAS 38 Intangible Assets.

Answer 36

IAS 38 has requirements relating to accounting for R&D activities development is the application of research findings to plan or design for production accounting treatment expenditure incurred with intention of producing future economic benefits, the issue is whether these should be expensed or capitalised research expenditure should be expensed as it is incurrent in compliance with the prudence concept any expenditure on research equipment should be recognised as asset expenditure and depreciated as normal development must be capitalised as an intangible, if they meet the recognition criteria PIRATE probable inflow of economic benefit from the asset intention to complete/use/sell the asset reliable measurement of development costs adequate financial resources to complete the project technical feasibility to complete expected to be profitable if research has been treated as an expense it cannot be reinstated as an asset the asset should be amortised over the period it is expected to benefit, ensuring costs are matched to revenue amortisation should commence with commercial production each project should be reviewed to ensure it meets PIRATE criteria, if not then previously capitalised expenditure must be written off

Question 37

Apply the accrual basis of accounting to accruals, prepayments, accrued income and deferred income

Answer 37

to calculate profit for the period, all income and expenditure must relate to the period whether or not the cash has been received/paid provides a better basis for assessing financial performance sales revenue included in p&l when sales are made, when a sale is made on credit it is recognised when the agreement is made AR cost of sales amidst opening and closing inventory to ensure sales made in the period are matched with actual costs of those goods, any goods unsold are carried forward to the next period accrued expenditure will reduce profit on the p&l and create a current liability on the sofp

Question 38

Calculate the adjustments needed for accruals, prepayments, accrued income and deferred income when preparing financial statements

Answer 38

accruals - where expenses of the business relating to the year have not been paid by year end the adjustment will reduce profit for the year dr expense account cr accrual account prepaid expenditure arises where some of the following years expenses have been paid in current year - increase profit on p&l and creates a current asset remove part of expense not relevant to the year dr prepayment cr expense account accrued income income has been earned within the period but not yet received necessary to record extra income in p&l and create asset in sofp which will increase overall profits dr accrued income cr income prepaid income arises when income has been received in the period but relates to the next period necessary to remove income from p&l and create liability in sofp, reducing income for the period dr income cr prepaid income accruals and PP in sofp PP classified within trade and other receivable within current assets in sofp accruals classified within trade and other payable within current liabilities in the sofp

Question 39

Prepare the journal entries to write off an irrecoverable debt

Answer 39

irrecoverable debt where leads to loss of income, and also means that it may have an asset in the sofp it is unlikely to be able to collect these are to be written off by removing them from the gl and the receivable account it is prudent to remove from accounting records and recognise as an expense for irrecoverable debts in the p&l dr irrecoverable debts expense cr trade recievables if there is hope that at least some of the debt can be recovered an allowance is created, these items are left in the gl and customer account, but a separate and opposite account is set up that offsets the asset if the amount is eventually paid the allowance can be easily reduced or removed as appropriate

Question 40

Record an irrecoverable debt recovered

Answer 40

if the debt is unexpectedly recovered after accounting entries, the credit entry cannot be taken to trade receivables as the debt has already been removed from that account a manual journal adjustment is required to transfer unexpected receipt of cash as a credit entry to irrecoverable debts expense account to reduce the account dr receivables cr irrecoverable debts expense

Question 41

Prepare the journal entries to create and adjust an allowance for receivables

Answer 41

it is prudent to recognise the possible expense of not collecting the debt in the p&l, but the receivable must remain in the accounts in case the customer does settle the amount outstanding an allowance is set up which is a credit balance, netted off against trade receivables in the sofp to give a net figure for receivables that are probably recoverable should be known amounts relating to customer account, invoice disputes etc accounting for allowance for receivables dr irrecoverable debts expense cr allowance for receivables if there is already an allowance for receivables in the gl the movement is is charged to the p&l (closing balance less opening balance) steps to calculate and account for movement in allowance for receivables write of irrecoverable debts calculate trade receivables balance after ascertain allowance required for (year end cf) compare new allowance required with bf allowance account for change to determine the expense or credit to p&l deduct closing allowance from trade receivables balance

Question 42

Define 'provision', 'contingent liability' and 'contingent asset' in accordance IAS 37

Answer 42

provisions a liability of uncertain timing or amount contingent liabilities a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the entity or, a present obligation that arises from past events but is not recognised because: it is not probable that an outflow of resources will be required to settle the obligation the amount of the obligation cannot be measured with sufficient reliability contingent asset a possible asset that arises from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events

Question 43

Illustrate the different methods of accounting for provisions, contingent liabilities and contingent assets

Answer 43

provisions estimate potential cost and recognising it immediately, the amount will be settled at a future date so corresponding liability is recorded dr expenses cr provisions contingent liability recognise provision or if a reliable estimate cannot be made, disclose a contingent liability in the notes to the financial statements contingent asset disclose contingent asset in note to financial statements basic principle that contingents are not recognised in financial statements until it is certain to arise where it is then no longer contingent virtually certain > 95% probable 51-95% possible 5-50% remote <5%

Question 44

ordinary shares

Answer 44

this is equity as the directors are under no obligation to repay investors or pay dividends evidence of a share of ownership and shareholders receive residual interest in the business when it ceases to trade directors may choose to offer dividends but this is not a deduction from profit, it is a distribution of profit

Question 45

preference shares (redeemable and irredeemable)

Answer 45

can be classified as debt or equity, if there is an obligation to repay then this is a debt shown as liabilities in sofp and dividends paid are treated as finance charges irredeemable preference shares do not have to be repaid, they are therefore equity

Question 46

borrowings

Answer 46

loan notes directors required to pay the loan holder an annual interest payment and repay full debt at a later point, appears as a debt and interest treated as a finance charge

Question 47

retained earnings

Answer 47

due to ordinary shareholders of the company, they should be presented as part of the company's liability to the shareholder Retained earnings are listed under liabilities in the equity section of your balance sheet. They're in liabilities because net income as shareholder equity is actually a company or corporate debt. The company can reinvest shareholder equity into business development or it can choose to pay shareholders dividends.

Question 48

other equity reserves

Answer 48

in addition to using loan and share capital, companies also use the capital created internally to generate wealth by reinvesting accumulated profits these capital sources represent the profits made and increase in value of tangible non current assets which have been accounted for and recognised in a revaluation surplus account referred to as other components of equity

Question 49

Record movements in the share capital and share premium accounts

Answer 49

share capital each share has a nominal or par value, often perceived as the shares minimum value remaining fixed - whereas the market value of the share fluctuates over time this value is often used to calculate dividends shares are sold in the first instance by a company at an issue price, this is at least equal to the nominal value of the share but often exceeds it after shares have been sold to the first shareholder they can then sell on privately, the value which the shares are sold at are the market value issued share capital number and nominal value of shares issued by the company to shareholders called up share capital the amount of the nominal value of issued shares paid by the shareholder plus any further amounts in agreement paid up share capital the amount of the nominal value which has been paid by the shareholders to the company at the current date accounting when a company issues shares at their nominal value dr cash (issue price x no of shares) cr share capital (nominal value x no of shares) in reality companies issue shares at a price above their nominal value dr cash cr share capital cr share premium (the difference between the issue price and premium nominal value x no of shares)

Question 50

Define a bonus (capitalisation) issue and its advantages and disadvantages

Answer 50

bonus issue the issue of new shares to current shareholders in proportion to their current shareholding - no cash is received by the company advantages issued share capital is divided into a larger number of shares, thus reducing the market value per share issued share capital is brought more into line with assets employed in the company by reducing stated reserves and increasing share capital disadvantages admin costs incurred when making the bonus issue accounting as no cash is received, the issue must be funded from reserves, any reserve can be used though a non distributable reserve such as a share premium account would be used in preference to reserves which can be distributed dr share premium or other reserve cr share capital

Question 51

Define a rights issue and its advantages and disadvantages

Answer 51

rights issue the offer of new shares to current shareholders in proportion to their existing shareholding at a stated price (normally below market value) advantages cheapest way for a company to raise finance through the issue of further shares a rights issue to current shareholders has a greater chance of success compared with a share issue to the public as shares are offered at a slightly lower price as an incentive disadvantages rights issue is more expensive than issuing debt it may not be successful in raising the finance required accounting exactly the same as a normal share issue just at a reduced price

Question 52

Calculate and record dividends in the general ledger accounts and the financial statements

Answer 52

dividends represent the distribution of profits to shareholders, usually expressed as an amount per share dividends on preference shares are usually based on a pre determined amount as a % of the nominal value dividends on ordinary shares a company may pay a mid year or interim dividend dr retained earnings cr cash at bank at the end of the year companies may propose or declare a dividend to the ordinary shareholders, this is a final dividend which must be approved by the shareholders at the AGM and until that point the company has no obligation to pay the dividend therefore proposed dividends at the end of the year that have not been approved by shareholders cannot be recorded as liabilities in the sifo

Question 53

Calculate and record finance costs in the general ledger accounts and the financial statements

Answer 53

loan notes a limited company can raise funds by issuing loan notes which are fixed term loans this simply refers to the document that is evidence of the debt and issued to the lender the loan note will have a set nominal value, the life of the loan note will be fixed and the company issuing them will pay back at an agreed time the issuer will also have to pay interest to the loan note holder, based on the nominal value, where interest will be included in finance costs of p&l accounting when the finance is raised and cash received the issuer must recognise the obligation to repay dr cash cr non current liability every year the business should recognise a finance charge dr finance charges cr cash/current liabilities

Question 54

Statement of changes in equity

Answer 54

A statement of change in equity (also referred to as statement of retained earnings) is a business' financial statement that measures the changes in owners’ equity throughout a specific accounting period. It covers the following elements: Net profit or loss. Dividend payments. Equity withdrawals. Effect of accounting policies changes. Effects of prior accounting period corrections. Accumulated reserves and retained earnings.

Question 55

Identify the main reasons for differences between the bank general ledger account and the bank statement

Answer 55

unrecorded items interest received or paid bank charges dishonoured cheques timing differences these items have been recorded in the cash gl account, but the bank transaction hasnt cleared errors in cash gl entries, or at bank statement level bank statement or cash gl wil need to adjusted accordingly

Question 56

debit/credit balance on bank account vs cash at bank ledger account

Answer 56

bank statement - debit balance = overdrawn - credit balance = cash at bank cash at bank ledger account - debit = cash balance current asset - credit = overdrawn current liability

Question 57

Unpresented cheque

Answer 57

An unpresented cheque simply means that a cheque has been written and accounted for, but it has not yet been paid out by the bank from which the money is being drawn. current liability

Question 58

lodgement

Answer 58

an amount of money that is paid into a bank account, or the act of paying money into a bank account - debit entry in cash at bank GL

Question 59

bank errors accounting treatment

Answer 59

Sometimes banks make errors by depositing or taking money out of your account in error you will not record any entries in your records because the bank error is unrelated to your records

Question 60

Account for discounts received

Answer 60

Trade discounts given by a supplier to increase sales reduces the unit price for the supplier by buying in bulk Trade discounts are deducted at point of sale where the net amount will be recorded after the trade discount has been deducted Debit payables (to reduce total liability) Credit discount received Credit cash

Question 61

incomplete records - accounting equation

Answer 61

if a business has recorded little info, it may only be possible calculate net profit for the year assets = equity + liabilities total assets = share capital + retained earnings + other reserves + total liabilities retained earnings needs to be expanded closing RE = prior years RE +/- this years profit (or loss) - dividends

Question 62

incomplete records - balancing figure approach

Answer 62

balancing figure approach - GL accounts and possible missing figures below receivables credit sales, receipts from credit customers payables credit purchases, payments to credit suppliers cash at bank drawings, money stolen cash in hand cash sales, cash stolen

Question 63

incomplete records - use of cash and/or bank summaries

Answer 63

use of bank summaries similar to ledger account approach, it assumes that whilst data may be missing from GL and entity can reconstruct its cash inflows/outflows using other info such as bank pay in slips or statements

Question 64

incomplete records - use of profit percentages to calculate missing figures

Answer 64

gross profit can be expressed as a percentage of either sales or cost of sales gross profit margin gross profit/sales x 100 mark up gross profit/cost of sales x 100

Question 65

Main debit/credit entries

Answer 65

Debits and credits Individual transaction recorded in the general ledger using double entry to reflect the duality concept, supported by a general ledger coding system Left and right side are referred to as debit and credit respectively in a T account duality means each transaction will affect at least 2 ledger accounts equally debited and credited debit increases expenses, assets, drawings/dividends credit increases liabilities, income/revenue, capital/equity therefore a decrease in an expense requires an credit entry in an expense account, and a decrease in a liability account requires a debit entry in the ACCA exam you may be presented with accounting info presented in a T account, and be asked to complete or identify missing info

Question 66

Describe the purpose of a trial balance

Answer 66

at the end of the year when all gl accounts have been balanced off, the closing balances are summarised on a list of balances all the closing debit balances are summarised in one column and closing credit balance in the other totals of both columns should agree with double entry, if not the difference will go to the suspense account the tb may contain any number of gl account balances

Question 67

Explain the purpose of a suspense account

Answer 67

an account which debits and credits are held temporarily until sufficient info is available for them to be posted to the correct accounts why suspense account may be created in an accounting system when a bookkeeper is recording a transaction and is not sure where to post one side of the entries, the suspense account can be used until you know for sure balance may be a debit or credit balance must be cleared before final accounts can be prepared, the tb may include a suspense account

Question 68

Calculate revenue, cost of sales, gross profit, profit from operations, profit before tax, profit for the year and total comprehensive income from given information

Answer 68

revenue = total turnover cost of sales = cost per unit x units produced gross profit = revenue - COS profit from operations = gross profit - overheads profit before tax = profit from operations - investment income/finance costs net profit = profit before tax - tax total comprehensive income = net profit + other comprehensive income (items that will not be reclassified to profit or loss in future periods e.g. gain/loss on property revaluation in the year this can be on a separate statement from standard p&l

Question 69

Qualitative characteristics of useful financial information

Answer 69

Fundamental qualitative characteristics Relevance Relevant if it can influence economic decisions and provided in time Info that is relevant has predictive or confirmatory value Threshold quality means there is a cut off point if info does not pass meaning it is not material and doesn’t need to be considered Faithful representation Completeness of info with descriptions and estimated amounts where not absolute precision is not possible Neutrality of info e.g. free from bias Info must be free from error Enhancing qualitative characteristics Comparability Must be able to compare statements over time and across entities There therefore must be consistency and disclosure Verifiability Verification can be direct or indirect Direct verification means through direct observation e.g. counting cash. Indirect means checking the inputs to a model or formula Timeliness Having information available to decision makers in time to influence their decisions Understandability The way in which info is presented and the capabilities of users

Question 70

Explain the use of journal entries and how journal entries are posted into general ledger accounts

Answer 70

Journals are records of accounting entries to record non routine transactions and to correct errors Irrecoverable debts written off Adjustments, accruals, prepayments Depreciation and amortisation charges Closing inventories Clearing balance on the suspense account

Question 71

Closing Profit or loss ledger accounts

Answer 71

All income and expense account balances are closed off to prepare p&l statement Do not show balances b/f or c/f but put the balancing figure on the smallest side and label it profit/loss Ledger account balance will then be nil and ready to be used in the next accounting period

Question 72

Closing Statement of financial position accounts

Answer 72

Asset, liability and equity/capital account balances will be carried forward as the opening balances at the start of the net accounting period Those balances will also be classified and arranged to prepare the statement E.g. bank ledger account balances at the end of one day will be the opening balance the following day

Question 73

Record sales returns and purchase returns in the general ledger accounts.

Answer 73

If there was a sales/purchase return transaction (credit) the accounting would be Sales Debit sales returns, credit receivables Purchases Debit payables, credit purchase returns

Question 74

Describe the principles of the operation of a sales tax

Answer 74

sales tax is levied on the final consumer of a product or service an entity that is registered to account for sales tax is essentially acting as the collection agent for the tax authority sales tax is charged and paid on purchases (input tax) by suppliers and charged and collected on sales (output tax) a business registered for sales tax will effectively pay over the sales tax it has added to its sales, and recover the sales tax it has paid on its purchases sales tax will be excluded from reported sales and purchases

Question 75

gross profit

Answer 75

When calculating gross profit, we match the revenue generated from the sales of goods, with the cost of manufacturing those goods The costs of the unused inventories should not be included in this figure These costs are carried forward where they will be used to manufacture goods that are sold in the next period Goods carried forward are assets on the sofp Essentially, inventory costs are matched to the revenues they help to generate

Question 76

Record the acquisition and disposal of tangible non-current assets in the general ledger accounts in accordance with IAS 16 Property, Plant and Equipment

Answer 76

IAS 16 says the carrying amount of an item shall be derecognised on disposal or when no future economic benefits are expected from its use/disposal when a tangible nca is disposed/derecognised there are a number of adjustments to record profit or loss disposal for cash consideration remove original cost of nca from nca account dr disposals account cr nca account remove accumulated depreciation from depreciation account dr depreciation account cr disposals account record the proceeds dr bank account cr disposals account

Question 77

part exchange agreement NCA accounting

Answer 77

arises when an old asset is provided in part payment for a new one along with the remaining cash similar treatment to cash disposal record part exchange allowance as proceeds dr nca (part cost of new asset) cr disposals account (sale proceeds of old asset) record cash paid for new asset dr nca cr bank account

Question 78

Calculate the gain or loss on disposal of a revalued tangible non-current asset

Answer 78

revaluation surplus = revalued amount - carrying amount depreciation of a revalued asset when a nca has been revalued, depreciation charge should be based on the revalued amount and the remaining useful life of the asset the charge will be higher than depreciation prior to revaluation and will be charged to p&l as normal if an item is revalued the entire class of that asset will be revalued the excess of the new depreciation charge over the old charge may be subject of a transfer from revaluation surplus to retained earnings (annually) dr revaluation surplus disposal of a revalued asset gain or loss arising from the derecognition of an item is the difference between net disposal proceeds and the CA of the item additionally, the revaluation surplus included in equity may be transferred directly to retained earnings when the asset is derecognised amount transferred to retained earning is disclosed in statement of changes in equity dr revaluation surplus cr retained earnings