Revision Flashcards
Depreciation - What to remember about the diminishing balance method
Ignore residual value.
Suspense account - remember …
Think about the Trial Balance columns.
If the Debit side is less then put the difference in the Debit side of the Suspense account (and vice versa).
EG. If bank balance is too low… the correction will involve a JE something like: Dr Bank Cr Suspense … which will clear out the suspense account and increase the Bank balance.
Statement of Profit or Loss - how is the top section laid out ?
Sales Revenue …
Less Sales Returns …
Net Sales …
(Gross) Margin.
Best to draw out diagram showing the proportions making up the selling price 100 and calculate from that.
Irrecoverable debt journal ?
How does it show on P&L and Bal sheet ?
Dr Irrecoverable debt / Cr Trade Receivables (in adjustments of ETB)
The Irrecoverable debt amount goes to P&L as an expense.
The NET amount of Trade Receivables goes to Balance sheet so you don’t see the irrecoverable debt separately on the Balance sheet
Accounting principles -
Principles Underlie the maintaining of financial records and the preparation of financial statements.
The principles are … ?
The principles help to ensure the financial records and statements are … ?
Business Entity
Materiality
Going concern
Accruals
Relevant
Reliable
Comparable
Comprehensible
Ethical Principles:
Accountants must apply these so that ?
The ethical principles are ?
.. users can be assured that the highest professional standards..
Integrity (don’t accept bogus expense)
Professional competence and due care (maintain knowledge and skill)
Objectivity (don’t allow bias, conflict of interest, undue influence to override professional or business judgements)
Professional behaviour (deal with pressures of familiarity and authority)
Confidentiality (no disclosure to third parties)
Income minus expenses =
Profit or Loss (Don’t forget ‘or loss’)
Office equipment is an example of a
Non-current asset. (Going to use more than a year)
Errors not affecting trial balance
Omission Commission (or mispost) Principle Original entry Reversal of Entries ****
Compensating
Discounts allowed - which side of TB
Debit
Discounts received - which side of TB
Credit
Owner takes goods for own use..
ETB adjustment: DR drawings CR Purchases
If given profit for year and asked to adjust for DD and/or ID what to remember?
Watch out for sneaky question where the starting figure is a loss!!
Explain the accounting concept of Materiality
The accounting concept of materiality means that some items in accounts are of such a low monetary that it is not worthwhile recording them separately. Ie they are not ‘material’
The materiality principle states that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a user of the statements would not be misled.
Examples of 3 situations where the concept of materiality is applicable
Small expenses grouped into Sundry expenses
EOY stationery
Expensing low cost non-current assets in the statement of profit or loss instead of classing them as cap ex
Explain accounting concept of Going Concern
The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.
Explain accounting concept of Business Entity
The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organization that completely exclude the assets and liabilities of any other entity or the owner.
Explain accounting concept of Accrual
The accrual principle is the concept that you should record accounting transactions in the period in which they actually occur, rather than the period in which the cash flows related to them occur. The accrual principle is a fundamental requirement of all accounting frameworks, such as Generally Accepted Accounting Principles and International Financial Reporting Standards.
Upholding Professional behaviour ethic what pressures might face
Familiarity
Authority
Professional behaviour is about not being influenced or intimidated
IAS 2 Inventories states that inventories are to be valued at
The lower of cost and NET realisable value
Fundamental qualitative accounting characteristics
■ relevance – financial information that is useful to users of the financial statements (note that for information to be relevant, it must also be material – see the accounting principle of materiality on the previous page)
■ faithful representation – financial information must correspond to the effect of transactions or events, and, as far as possible, should be complete, neutral, and free from error
The following four accounting characteristics support relevance and faithful representation:
■ comparability – financial statements can be compared with those from previous years and with similar businesses
■ verifiability – users of financial statements are assured that the information given is faithfully represented, eg inventory valuations
■ timeliness – users of financial statements receive information in time to enable decisions to be made
■ understandability – financial information is presented clearly and concisely so that users can understand the information given
Material misstatement can be defined as ‘when information contained in the financial statements is untrue - whether accidentally or intentionally – and could influence the economic decisions of users’.
Examples of material misstatement are:
Examples of material misstatement and the economic consequences include:
■ profit is overstated – may encourage investors to buy a stake of the business
■ assets are overvalued – a lender may find that security for a loan is less than expected
■ profit is understated – a lower amount of tax is paid to HM Revenue & Customs than should be paid
■ sales turnover is overstated – more VAT is paid to HM Revenue & Customs than should be paid
When dealing with COS remember…
The closing inventory should comply with IAS 2 so watch out for being given a NRV as this would apply if lower
Do legal fees for purchase of premises count in cap ex
Yes
When doing T accounts
Accounts that balance (eg Accounts where balance is pushed to P & L) …… just draw single line under each side.
Accounts which go to balance sheet (eg. Accum dep’n / bank) …… put balance c/d and total in double lines and balance b/d shown in new year.
If an account has a balance b/d …… even if there is no activity that year … show the balance c/d anyway and balance b/d in the new year.
Hire purchase
Agreement with finance company enabling
use of the equipment on payment of deposit
Finance co owns equipment. Company makes regular instalments to pay back interest plus cost
At end ownership passes to Company
Finance lease
An agreement where lessee has use of equipment which is owned by the finance co.
Regular payments over period of lease (eg 7 years).
Normally no provision for ownership of the asset to pass to lessee
Bank Rec …
Balance at bank as per bank statement…
Less Unpresented cheques
Add outstanding lodgements
Balance at bank as per (agreed to) cash book…
3 issues reconciling bank account and which ones need entries in cash book …
- Timing
- Omissions (yes need entry in cash book eg. DDs)
- Errors (yes need corrections in cash book eg. Wrong amount booked)
7 step bank rec
- Get statement & cash book
- Make template (unadjusted figs at top of 2 cols: bank and cash)
- Tick off matches
- Add adjustments for Timing difference items on bank side (deduct Unpresented cheques and add Outstanding lodgements)
- Add adjustments for omissions and errors on cash book side.
- Check totals match.
- Prepare JEs for adjustments to cash book. (Ignore timing issues)
Payroll control account
Think like other expense account like Purchases.
So Dr Wages exp acc Cr Payroll Control
(like Dr Purchases Cr Purchases control)
On the left go Bank (records making net payment to employees)
And also on the left the liabilities like pension and voluntary deds with the other side crediting those liability accounts
Then further bank payments Cr bank Dr Pension clear those.
I assume wages expense then goes to P&L and any balance outstanding in the liability accounts goes to Balance sheet?
Payroll if get a list …
Dr Wages expense / Cr Payroll control (Total amount)
Create a list of who gets what… then use it to construct the Debits to balance the Cr created above.
Employees - (work out net wages by deducting tax and Employee NI and employee pension and VCs)
HMRC - tax and both lots of NI
NEST - both lots of pension
Trade Union - just the TU fees if any.
Accruals and Prepayments… income and expenses … Drs or Crs on TB?
Accrued expenses …. Dr Exp acc Cr Acc exp (liability on BS)
Accrued Income is the opposite Cr Sales Dr AccInc (asset on BS)
Prepaid expenses CR exp Dr PP (asset on BS)
Prepaid income Dr Sales Cr PPinc (liability on BS)
Owner concerned carrying amount of an asset is lower than market val… what do you say
Dont change depn rate because purpose is to spread the cost over its life
Don’t say than depreciation rates can’t be changed
Deferred income is …
Money received that has not yet been earned (same as prepaid income)
Deferred expenses
Are prepaid expenses not yet in use
With accrued deferred income etc the amount to accrue defer is WITHIN the bank/cash figure …. write up the bank amount given and then make the accrued prepaid amount ..
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Things to check in exam
Names of accounts … I put disposals instead of @cost for a trade in amount in the disposals account
Brought down amounts. I sketched t accounts to deal with a disposal and put in the cost on both sides of the @cost T … I should have left the b/d amount as a question mark since it wasn’t given… later in the question when it was given I didn’t recognise that it should replace the notional debit amount I had sketched.
Be careful combining initial TB amounts and adjustments .. remember don’t always minus credits …
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6 errors are disclosed by TB
Calculation errors in ledger accounts
Single entry transactions
Recording 2 Drs or 2 Crs
Recording different amounts for the Dr & Cr
Errors transferring balances to the TB
Omission of a GL account in the TB
BKTN mock exam… 2 cheque stubs didn’t say anything about vat whereas a cash receipt stated it was included. I calculated vat for the cheque amounts also but this was marked incorrect..
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Accounting equation
Assets - Liabilities = Equity
Ethical principles
Integrity - Honest
Professional Competence and Due Care - Using Correct Skill Level
Objectivity - Not Bias
Professional Behaviour - Complying with Laws
Confidentiality
What are threats to the fundamental principles?
Intimidation Familiarity Advocacy Self Interest Self Review
What is the capitalisation policy?
The minimum level of expenditure for it to be capitalised
What is the materiality concept?
The principle that firms may disregard trivial matters, but they must disclose everything that is important.
What will authorising transactions ensure?
That assets aren’t bought unnecessarily
That assets are acquired at the best price and under the best terms
What are the 5 different methods of funding for NCAs?
Cash Purchase - Buying outright
Loan - A fixed amount borrowed to pay for the asset which will be repaid plus interest
HP - Paid for in instalments and you own the asset at the end
Part Exchange - An old asset is exchanged for the new one usually with a balancing payment
Finance Lease - A HP but don’t own the asset at the end
How do you account for the purchase of a NCA by Loan?
Debit Bank
Credit Loan
Debit - NCA Cost
Credit - Bank
What is depreciation?
Spreading the cost of the asset over its useful life
Accruals principle
What are the 3 main depreciation methods?
Straight Line
Diminishing Balance
Units of Production
Units of production depn
Work out depreciation amount (cost - residual)
Work out total number of units will be produced.
Work out a per unit rate and apply it.
What are the 2 options for depreciating an asset bought part of the way through the year?
Pro Rata
Charge depreciation in the year of acquisition and not disposal
What is a gain or loss on disposal?
When the scrap proceeds are less or more than the carrying amount when sold
What is the double entry for disposing of an asset?
Remove the cost of the asset:
Debit Disposals
Credit NCA Cost
Remove the accumulated depreciation charged to date:
Debit NCA Acc Depn
Credit Disposals
Account for the sales proceeds:
Debit Bank
Credit Disposals
Balance off the disposals account to determine the gain or loss on disposal
What account does a gain/loss on disposal go to?
Sundry
If an asset has been disposed of, what will the carrying amount be at the year end?
0
If depreciation is charged on a pro rata basis, the figure in the accumulated depreciation and carrying amount at the year end will be nil. True or False?
False
Does the NCA register form part of the general ledger?
No
What is the accruals concept?
Account for the services when they’re provided not when cash is received or paid
How are accruals and prepayments put in the accounts?
Journal
What do you do before posting the accruals for the current year?
Reverse the PY accruals
How do you approach tasks with accrued expenses?
Reverse the PY Accrual
Record Invoices Paid in the Year
Record the Accrued Expenses for this Year
What are current assets in regard to accruals and prepayments?
Accrued Income
Prepaid Expenses
What are current liabilities regarding accruals and prepayments?
Accrued Expenses
Prepaid Income
What is inventory?
Items which are held for sale or in the process of production for such a sale
What is the cost of goods sold?
Opening Inventory + Purchases + Carriage Inwards - Closing Inventory
What is carriage inwards?
The cost of transporting inventory to business premises
What is carriage outwards?
The cost of transporting inventory to customers (selling expense)
What is the double entry for recording closing inventory?
Debit Closing Inventory SOFP
Credit Closing Inventory SPL
What is the key rule when valuing inventory?
Inventories shall be measured at the lower of the cost and net realisable value
If inventories are expected to be sold at profit, value at cost and if inventories are expected to be sold at a loss, value at net realisable value. True or False?
True
What costs cannot be included in the ‘cost’ of inventory?
Storage costs of finished goods
Selling Costs
What is the net realisable value?
Net selling proceeds after deducting further costs to be incurred in order for the inventory to be sold
Estimated selling price - Estimated costs of completion - estimated selling and distribution costs
What does ‘no netting off’ mean?
You have to use the lower of cost and NRV for each inventory item by working it out line by line
What are the theoretical methods of estimating costs?
FIFO - First In, First out
LIFO - Last In, First Out
AVCO - Weighted Average Cost
Which method is prohibited by international accounting standards?
LIFO
How do you know how much inventory you have?
It must be counted, valued and reconciled regularly
Whats the double entry for an irrecoverable debt being paid?
Debit Bank
Credit Irrecoverable Debts
What are the 2 types of allowances for bad debts?
Specific - Provided against a specific customer
General - Percentage applied to the total on the SLCA after w/o bad debts and deducting specific allowances
Whats the double entry for specific doubtful debts allowance?
Debit - Allowance for doubtful debts adjustment
Credit - Allowance for doubtful debts SOFP
What are unrecorded lodgements?
Money paid into the bank which haven’t yet appeared as a recipt
What are unpresented cheques?
Money paid from the bank which haven’t yet appeared on the bank statement
How is a contra entry recorded?
Debit PLCA
Credit SLCA
What is PAYE?
Income tax
What are examples of statutory deductions?
PAYE
Employees NI
What is the cost of employing someone?
Net Pay \+ Statutory Deductions \+ Voluntary Deductions (Or total of above 3 which is gross pay) \+ Employers NIC \+ Employers Pension Contributions
Opening Inventory is a credit. True or False?
False - Debit on SPL
What happens to income and expense accounts at the year end?
They’re posted (transferred) to the profit or loss account
What happens to the balance in the P&L Account?
Transferred to the capital account
What is the double entry for if the business makes a loss?
Debit Capital
Credit P&L
The figure in drawings is also transferred to the P&L Account. True or False?
True (not sure about this)
Gross profit =
Sales minus COGs
Net profit =
Gross profit + operating income - operating expense
When calculating depreciation using the diminishing balance method, do you take into account the residual value?
No
IAS2
Inventories
IAS 16
PPE
Property plant and equipment
Set off entries (contra entries)..
It is the smaller of the 2 amounts that is the set-off amount
SPL forms part of the double-entry system
SFP does not
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