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REVISION NOTES ACCN3

3
...
Interest is paid
...
Security is needed
...
Interest is paid
...
Regular instalments
...

Advantages
Easy to budget
for as timing
and amount is
known
- May be flexible
in repayment
schedule
-

Disadvantages
Long-term
financial
commitment
- Security is needed
-

REVISION NOTES ACCN3

Bank Commercial Mortgage
A mortgage is an arrangement in which property is used
as security for borrowing
...
Interest is paid
...

Advantages
- Limited
companies can
potentially raise
more finance
than sole traders
or partnerships
- New share issue
can attract new
management
with valuable
skills and
expertise

Disadvantages
- Outside investors
can gain control
over the
company
- The finance is
never ‘paid off’
as dividend
payments are
always needed
- Ordinary
shareholders are
usually that last
to be paid if the
business goes
bust

Limited Company Preference Shares
Most shares issued are ordinary shares
...
Claim
priority on the profits ahead of other shareholders
...

Advantages
Preference
shares are unable
to vote at
shareholders’
meetings
- Fixed percentage
rate makes
budgeting easier
-

-

Disadvantages
If profits are low,
ordinary
shareholders
may receive
nothing as
preference
shares have to
be paid first

Limited Company Ordinary Shares
When a limited company stats up for the first time or
expands its operations, it obtains finance through
issuing ordinary shares to its owners and other
investors
...

Usually receiving a regular dividend payment
...

Advantages
Disadvantages
- Potentially raise
- New investors
more finance
can gain a
than sole trader
control of the
or partnerships
...
Only
relates to the loan and does not give any rights of
ownership
...
May require security
...
2 INCOMPLETE RECORDS
Types of incomplete records tasks
-

Preparations of accounts from information in the task
Theft of cash
Theft or destruction of inventory
Estimated figures
Calculation of capital by means of net assets
Calculation by profit by P=increase in net assets plus drawings minus increase in capital
THE STATEMENT OF AFFAIRS
Assets
Liabilities
Capital/Net Assets

X
(X)
X

OPENING CAPITAL/NET ASSETS
CAPITAL INTRODUCED
PROFIT
DRAWINGS
CLOSING CAPITAL/NET ASSETS

X
X
X
(X)
X

OPENING CAPITAL/NET ASSETS
CAPITAL INTRODUCED
DRAWINGS
CLOSING CAPITAL/NET ASSETS
PROFIT

(X)
(X)
X
X
X

REVISION NOTES ACCN3

3
...

The capital amount is normally fixed, and only alters if a permanent increase or decrease in capital contribution by
the partner takes place
...
4 CHANGES IN PARTNERSHIPS
Goodwill – the difference between the value of a business and the net value of its separate assets and liabilities
...

The procedures on admission of a new partner are:
-

Agree a valuation for goodwill
Old partners: Goodwill created
Old partners + New partners: Goodwill written off
Dr

Goodwill
(IN with the OLD)
Partner 1
Partner 2

Cr
(OUT with the NEW)
Partner 1
Partner 2
Partner 3

Retirement of a Partner
When a partner retires, it is necessary to calculate how much is due to the partner in respect of capital and profits
...

Death of a Partner
The procedures on the death of a partner are like those for a partner’s retirement
...

Changes in Profit-Sharing Ratios
A change in profit-sharing ratio involves establishing a figure for goodwill, to establish how much goodwill was built
up while they shared profits in their old ratios
...

Revaluation of Assets
Dr
Revaluation Account
Reduction in the value of an asset
Increase in the value of an asset

Cr

Increase in provision for
Reduction in provision for
depreciation/doubtful debts
depreciation/bad debts
After these adjustments, have been recorded in the books of account, the balance of the revaluation account is
divided among the partners in their profit-sharing ratios
...

The Rule in Garner V Murray
When a partnership is dissolved, any partner with a debt balance remaining on capital account must pay in monies
from private funds to clear the balance
...
(Balance of the capital account before dissolution)

REVISION NOTES ACCN3
The Dissolution of a Partnership
The Partnership Act 1890 requires that monies realised from the sale of assets are to be applied in the following
order:
-

In settlement of the firm’s debt, other than those to partners
In settlement to partners’ loans
In settlement of partners’ capital and current account
Dr
Asset Accounts
Realisation expenses

Realisation Account
Asset sold accounts
Partners taking over assets

BALANCE OF THE RELISATION ACCOUNT
(PROFIT)
Steps to close the books of partnership

Cr

BALANCE OF THE REALISATION ACCOUNT
(LOSS)

1
...
As assets are sold, the proceeds are placed to cash/bank account and the sum recorded in the realisation
account
3
...
As expenses of realisation incurred, they are paid from cash/bank account and entered in to the realisation
account
5
...
The balance of the realisation account, presents the profits/loss on the realisation and is transferred to the
partners’ capital accounts
7
...
Partner’s current accounts are transferred to the capital accounts
9
...
5 PUBLISHED ACCOUNTS OF LIMITED COMPANIES
The annual report and accounts is available to every shareholder and contains the main elements of published
accounts:
-

Income Statement
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity
Notes to the Financial Statements, including a statement of the company’s accounting policies
Directors’ Report
Auditors’ Report

Income Statement
-The main elements needed in the income statement are
the revenue, finance costs and tax expenses
-It shows the profit and loss of the period relevant to the
shareholders

Cash Flow Statement
-Its required by IAS to include a cash flow statement
-It has an overall view of the money flowing in and out of
the business
-It helps to link the profit with changes in assets and
liabilities

Balance Sheet
-Property, plant and equipment
-Investment property
-Intangible assets
-Inventory
-Trade payables and receivables
-Cash and any cash equivalents
-Tax liabilities
-Issued capital and reserves
Statement of Changes in Equity
-It shows the profit and unrealised profit from the
revaluation of assets
-The following must be shown:
1
...
Opening and closing balances of retained earnings
and any changes during the period
3
...
The auditor’s report contains three main elements:
-

Respective responsibilities of director’s and auditors
The basis of their opinion – the way in which the audit was conducted, other assessments and the way in
which the audit was planned and performed
Opinion – the auditors view of the company’s accounts

An unqualified report
-

The financial statements have been prepared properly
The accounts give a true and fair view of the company’s affairs in accordance with company law
The information given in the director’s report coincides with the financial statements

The Limitations of Published Financial Accounts
-

Annual accounts can become out of date as companies change greatly over the year
The regulatory framework means that companies only must publish the basics of their accounts
...
There are no real methods of
predicting future financial performance purely based on the past

User of the Published Accounts
User
Shareholders

What they are
interest in
-Dividends
-Profits

Loan Stock
Holders,
Debentures
Holders

-Total Loans
-Interest Paid
-Profit

Managers
and
Employees

-Profits
-Net Assets

Investors

-Profits
-Sales
-Profit Margins
-Current Assets
-Current Assets
-Non-Current
Assets
-Profit

Credits

Why they are interested
-To compare with previous year of their business (Better/Worse)
-Analyse the security of their investment
-To see the total profit retained that are not given out as dividends
-To assess whether the business has other outstanding loans which could hinder
the repayment of the loan being given
-To ensure interest payment is paid on time
-To assess the performance of the business to evaluate the likelihood of receiving
interest payment and loan repayments
-To assess whether the business can pay for staff rises
-To consider the net assets of the company, which show its financial strength to
indicates the future employment prospects
-Also, employees can get a general ideal of the performance of the business
-To assess the likelihood of a return of investment and an indication of the level of
return to expect
-To consider whether the business is suitable for investment
-To Assess the liquidity of the business in case of the failure to pay its debts
-To predict potential future orders

REVISION NOTES ACCN3
Schedule of Non-Current Assets

This is a summary of the non-current assets and any new non-current assets bought, sold and the
depreciation attached to the disposal and the depreciation charge for this year
...

Land and Buildings

Plant and Machinery

Fixtures and Fittings

Cost (or valuation)
At beginning of year
Additions
Revaluation
Disposals
At end of year
Depreciation
At beginning of year
Disposals
Charge for the year
At end of year
Net Book Value
At end of year
At beginning of year
Steps for completion:
1
...
Has there been a revaluation? If so, make sure you include this
...
Disposals, these need to be removed at the price paid for them, the cost
4
...
You can now calculate the closing balance of the top half of the schedule which shows the closing cost of noncurrent assets
6
...
This represents all the depreciation to date for the assets which
the company still owns
7
...
Calculate the depreciation for this year and this will be added
9
...
Finally, the net book values are calculated – the cost at the end of the year less the depreciation at the end of the
year

REVISION NOTES ACCN3

3
...
It concentrates on the liquidity of the
business, which is the main reason for business failure
The company cash flow statement links profit with changes in cash
...
7 ACCOUNTING STANDARDS
When preparing, and presenting financial statements for limited companies, accountants follow the same set of
rules – this enabling comparisons to be made between the financial results of different companies
...
6)
IAS 1 – PRESENTATION OF FINANCIAL STATEMENTS
Published accounts of limited companies must comply with the following accounting concepts:
-

Going concern, financial statements are prepared on the basis that the company will continue to operate in
the foreseeable future
Accruals, financial statements are prepared on the based that income and expenses occurring in the same
accounting period are matched
Consistency, presentation and classification of information shown in financial statements from one period to
the next should remain the same
Materiality, some items of expenditure are so low in value that to record them separately would be
inappropriate

REVISION NOTES ACCN3
IAS 2 – INVENTORIES
Companies often have inventories in various forms:
-

Raw materials
Work-in-progress
Products bought for resale by a retailer
Service items
Inventories are to be valued at ‘the lower of cost and net realisable value’

Cost – the purchase price plus any other costs incurred to bring the product to its present location and condition
Net realisable value – estimated selling cost minus the estimated costs to get the product into a condition necessary
to complete the sale
IAS 8 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting
financial statements’
-

Accounting principles, are the board concepts that are applied in the preparation of financial statements
(going concern, accruals, consistency)
Accounting bases are the methods used for applying accounting principles to financial statements, which are
intended to reduce subjectivity

It defines errors as ‘emissions from, and misstatements in, the entity’s financial statements for one or more prior
periods arising from a failure to use, or misuse of, reliable information that’
IAS 10 – EVENTS AFTER THE REPORTING PERIOD
Events after the reporting period: those events, both favourable and unfavourable which occur between the end of
the reporting period and the date on which the financial statements are authorised for issue
Adjusting Events – events which provide evidence of conditions that existed at the end of the reporting period
...

Non-Adjusting Events – events which are indicative of conditions which arose after the reporting period
...

(Disclose nature of event and an estimate of the financial effect in a note)
IAS 16 – PROPERTY, PLANT AND EQUIPMENT
Recognition
An item of property, plant and equipment is to be recognised as an asset when:
-

It is probable that future economic benefits will flow to the business and,
The cost of the asset can be measured reliable

Measurement of property, plant and equipment
-

Cost – the tangible asset is shown in the balance sheet at cost less accumulated depreciation and
impairment losses
Revaluation – the tangible asset is shown in the balance sheet at a revalued amount, being its fair value less
subsequent depreciation and impairment losses

Depreciation
-

Straight-line depreciation
Diminishing (reducing) balance depreciation

REVISION NOTES ACCN3
IAS 18 – REVENUE
Revenue is the inflow of economic benefits arising from the ordinary activities of a business
...

Carrying amount – is the amount at which an asset is recognised
after deducting any accumulated depreciation/amortisation and
accumulated impairment losses
Recoverable amount – is the higher of:
-

Fair value less cost of disposal
Value in use
IAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

PROVISIONS (>50%)
Probable
-Provision recognised in financial
statements as a liability
-Disclosure of provision in notes

Probable
-No assets recognised in financial
statements
-Disclosure of contingent asset in
notes

CONTINGENT LIABILITIES (<50%)
Possible
Remote
-No liability recognised in financial
-No liability recognised in financial
statements
statements
-Disclosure of contingent liability in
-No disclosure of contingent liability
notes
in notes
CONTINGENT ASSETS
Possible
Remote
-No asset recognised in financial
-No asset recognised in financial
statements
statements
-No disclosure of contingent asset in -No disclosure of contingent asset in
notes
notes
IAS 38 – INTANGIBLE ASSETS

An intangible asset is defined as ‘an identifiable non-monetary asset without physical substance’
...
8 INVENTORY VALUATION
Types of Inventory
-

Raw materials – for use in manufacturing business
Work-in-progress – (partly manufactured goods) and finished goods of a manufacturing company
Products brought for resale by a retailer
Service items – items brought for use within the business
Finished Goods – products for sale or despatch
Number of items held x Cost Per Item = Stock Value

Stock can either be valued at: The lower of these two value should be the stock valuation (IAS 2)
-

Cost, which means the purchase price
Net Realisation Value, estimated selling price minus estimates cost to get the product into a condition
necessary for resale

The Stock Take
A periodic basis involves carrying out a stock-take of all items held at regular intervals
...

Stock Reconciliation
Stock reconciliation is important progress because:
-

An accurate stock figure can then be used to value the stock
It will highlight any discrepancies which can then be investigated
FIFO – FIRST IN, FIRST OUT

Assumes:
-

Items issued/sold are the earliest purchases
Inventory comprises the most recent purchases
DATE
20-9
JAN
FEB

RECEIPTS
Quantity Cost
Total
Cost
Balance
40

5
...
00

MAR

60
10

Advantages
-Realistic, mirrors the actual movement of stock
-Easy to calculate
-Inventory comprises of the actual cost at which the
items were bought
-Allowed under IAS 2
-Acceptable for tax purposes
-In times of higher cost, FIFO will give higher profits
than AVCO

4
...
00

240
...
00

BALANCE
Quantity Cost
Total
Cost
60
4
...
00
60
240
4
...
00
100
440
30

5
...
00

Disadvantages
-In times of rapidly increasing prices, issues may be
made at an early price
-Cost of at which goods are issued are not necessary
the latest price

REVISION NOTES ACCN3
AVCO
Assumes:
-

After each purchase a weighted average cost per item is calculated
Inventory is valued at the average cost at the end of the year (IAS 2)
Total Cost of Items Held
Number of Units Sold

DATE

JAN
FEB
MAR

STORES LEDGER RECORD
RECEIPTS
ISSUES
Quantity Cost
Total
Quantity Cost
Total
Cost
Cost
Balance
40

5
...
00
70

Advantages
-Gives reasonably accurate values of closing inventory
and for issues
-Fluctuations in purchase costs are evened out
-Permitted under IAS 2
-Acceptable for tax purposes

4
...
00

Quantity
60
60
40
100
30

BALANCE
Cost
Total
Cost
4
...
00
4
...
00
5
...
00
4
...
00
4
...
00

Disadvantages
-A compromise on the valuation of inventory and issues
-The average price rarely reflects the actual purchase
price of the stock
-A new weighted average must be calculated after each
receipt

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