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A – Level Accounting Year 2
Revision Guide
Unit 3:
1) Incomplete Records:
If asked a question on incomplete records, it will either be an income statement or balance sheet (or both)
...
Below are the processes required for these types of
questions:
1
...
Remember there may be cash sales in addition to these
...
Cost of Sales Calculation:
Allows you to work out the purchases, goods for own use and closing inventory
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3
...
Remember there may be cash purchases in addition to these
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Inventory Reconciliation:
This will allow you to work ‘back’ or ‘to’ a closing inventory figure
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Disposal of a NCA Account:
Gain or loss on disposal
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6
...

7
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Can be used simultaneously with No 2
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Gross Profit Mark-up:
‘Crate of cost’ technique
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Inventory Turnover Ratio:
Can be used to work out any missing or stolen inventory
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Cash Account:
This enables you to work out any missing cash items, such as cash expenses, stolen cash or unknown drawings
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‘Any Expense’ Account:
Gives the income statement figure for any expenses that are either accrued or prepaid
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Bank Reconciliation:
Gives the bank account figure for the balance sheet
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a
...

c
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Statement of Affairs:
Work out the opening capital
Work out closing capital
Work out difference between a & b
This gives the profit for the year

TIP: use the accounting equation – (opening assets – opening liabilities = opening capital)
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‘Opening to Closing Balance’ Technique:
This works with any missing number in any ledger account:
Opening Bal + Additions – Subtractions = Closing Bal
Opening NBV + Purchases – Disposal – Depreciation = Closing NBV

2) Inventory Valuation – Inventory Reconciliation:
Inventory reconciliation is understanding the difference between actual stock and book stock (inventory value held on
the accounting system)
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1
...
Purchases post period end
3
...
Sales returns post period end
5
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Write down of inventory (damaged/stolen goods)
7
...
Free samples

Always come up

May come up

1
...
This means that in order to get back to
the inventory figure, you need to add back these sales
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2
...
This means in order to get back to
the closing inventory figure, you will need to minus these purchases
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2

3
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Therefore, it will be reducing the value of inventory and will need to
be added back to get the actual closing inventory figure
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Sales Returns Post the Period End:
This is when a customer returns goods to a business
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This means
that it needs to be subtracted from the closing inventory figure to get the value before the end of the period
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Goods Bought on a ‘Sale or Return’ Basis:
Goods on a ‘SoR’ basis remain in the inventory of the sending company until it is sold to the end customer
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However, they should be included in the sending company’s inventory if the goods haven’t been sold
yet
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Write Down of Inventory (Damaged and Stolen Goods):
Damaged or stolen good will reduce the value of the inventory
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7
...
Therefore, it must be added back to get the closing inventory
figure
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Free Samples:
Free samples should be valued at zero inventory, as they have no cost to the business
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3) Inventory Valuation – Introduction to Inventory Valuation:
IAS 2 ‘Inventories’:
The International Accounting Standards (IAS) are effectively the ‘rules of the game’ when it comes to accounting
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Inventory can be valued in many different
forms such as the following:
-

Raw Materials
Work-in-progress (WIP)
Finished goods (could be manufactured or bought from a supplier)

IAS 2 applies to all types of inventory
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– links to the concept of prudence
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The NRV is selling price less any costs to get the goods to a saleable condition
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No other method is acceptable
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However, different methods of valuing (FIFO or AVCO) can be used even within the same business
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This means that some items maybe valued at cost or NRV, therefore, the lower of
all these figures should be added together to get the total inventory figure
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Advantages:
-

It gives a realistic view of the value
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Easy to calculate – you don’t have to work out any averages (compared to AVCO)
Inventory valuation comprises the actual cost at which items have been bought
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It is one of two methods IAS 2 allows businesses to use
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Disadvantages:
-

Costs at which the goods are issued aren’t always the actual value of the goods, they may not represent the
current prices
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Method is ‘cumbersome’ as a list of different costs must be maintained
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Advantages:
-

Over a number of accounting periods, the profits are ‘smoothed’ out, both high and low profits are avoided
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It is logical
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The closing inventory value is closer to the market value (in times of rising prices it will be below the market
value)
Calculations can be computerised more easily when using this method
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It is suitable for tax purposes
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Because they are calculated, the figures obtained are often figures that never existed
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6) Sources of Finance:
1
...

2
...

3
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One the asset is gone, it is gone
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Share Capital – OSC/PSC, generated by the selling of shares – Ltd/plc
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Bank Loan – when a business borrows money from the bank and is paid back overtime with interest, can be
either secured or unsecured
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Debenture - Debentures are a long-term source of finance
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The debenture typically carries a fixed rate of interest over the course of
the loan
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Mortgage – this is a loan secured on property
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8
...
This must be paid back with interest
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This is because the majority of them can
only be done once such as a sale of a NCA
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However, internal sources could be considered to be more flexible as no
interest will need to be paid and the business can choose how much of that SoF it wants to use, for example retained
earnings
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- In the event of a ‘winding up’ of a company, the
PS are issued/paid out at par/face/nominal value
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-

No control is given away
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This
means that it is more of a risk
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- Can fund substantial amounts of cash
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- One vote per share, allows OSH to say their
opinion at AGM
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Share Capital
- Dividend payments are optional, the business
chooses when and how much is paid to
shareholders
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SH can have their opinion at AGM
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5

The topic of SoF is often a written question (W/Q) in the exam
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Also, make sure the SoF suits the situation, for example if a business wants to expand, don’t talk
about an overdraft as the is short term and not suitable
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7) Partnership Accounts (Changes):
Introduction:
Partnerships normally consist of 2-20 partners; the Partnership Act 1890 defines partnerships as ‘the relationship which
subsists between person carrying on a business in common with a view of profit’
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Below are the advantages and disadvantages of a
partnership:
-

-

Advantages
Cost can be split, therefore it can be cheap and
easy to set up this type of business
...
The business could also diversify
into new markets
...
This
can lead to expansion by purchases of new NCA
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-

-

Disadvantages
Decision making is on a joint basis, this may lead
to conflict between partners if they want
different things to occur
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Profits are split aswell as costs, this means that
there are less profits for each partner
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- Depending on the size of the partnership,
death/retirement of a partner could significantly
impact how the business operates, if it is still able
to operate
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- There is joint liability, unlimited liability means
that the partner’s personal possessions are up for
grabs in the event of a ‘winding up’ of a
company
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Partnerships will normally draw up a Deep of Partnership (DoP)
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This is a good aspect of a partnership as it will prevent conflict in the future
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Salaries of the partners
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Whether the partners pay interest on drawings, and is so at what rate
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However, if there isn’t a DoP in place, then the ‘fall-back’ option is the Partnership Act 1890 (PA)
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No partner is entitled to a salary
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Partners do not pay interest on drawings
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In the exam, if there is no DoP, then use the PA to prepare the partnership accounts
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However, a S/T will receive 100% of the profits
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See below the explanation of the appropriation account:
1- The appropriation account needs a title, this is laid out as the name of the partners, for the ‘year ended’ and
then the date at which the account is being prepared
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3- Interest on drawings may have to be calculated, if so, the calculation is as follows:
Amount of drawings x % x 12ths
4- If the partner is entitled to a salary, the calculation to work out the figure to be charged to the appropriation
account is as follows:
Amount of annual salary x 12ths
5- Interest on capital may need to be calculated, if so, the calculation is as follows:
Amount of capital x % x 12ths
6- The total available for distribution (Y) is calculated by adding the end columns, the calculation is as follows:
Net profit + interest on drawings – partners salaries – interest on capital = total available for distribution
7- Take ‘Y’ and multiply it by the %/Profit Sharing Ratio (PSR) that each partner is entitled to, then add them
together to ‘check’ your calculation
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Therefore, the partners would use separate capital accounts to record these items for each
partner
...
This is because the capital account is used to record
increase and decreases in capital of capital owed to each partner
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In most scenarios, businesses will use a ‘fixed’ capital account
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8

Normally, the partners balance B/D on the partner’s capital account is a credit
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This will occur when a partner has drawn out more than they are entitled to or took more profit than they are
entitled to
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In the I/S, the loan interest is added to expenses
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8) Dissolution of a Partnership:
A question in the exam on the dissolution of a partnership is often combined with a SoF question
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In all of these cases, the accounts of the business must be closed
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This account will show the
net gain or loss that is actually available to the partners
The PA 1890 states that ‘monies should be applied’ in the following order:
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To settle a firm’s debts e
...
Trade Payables, external loans etc
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The settle the partners’ capital and current accounts – to pay partners
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The Process:
1) Asset accounts (excluding cash and back) are closed by the realisation account:
Dr
Cr

Realisation A/C
Asset A/C
2) Proceeds from sales of assets are placed in the cash/bank account:

Dr
Cr

Cash/Bank A/C
Realisation A/C
3) If a partner takes over assets, the value will be deducted from the partner’s capital account:

Dr
Cr

Partner’s Capital A/C
Realisation A/C
4) As expenses are incurred, they are paid from cash/bank account and entered into the realisation account:

Dr
Cr

Realisation A/C
Cash/Bank A/C
5) Trade Payables are paid off:
a) Dr TP A/C with total
Cr Realisation A/C with total
b) Dr Realisation A/C with paid value
Cr Bank with paid value
6) The balance on the realisation account represents the profit/loss on the realisation and this is transferred to
the partners’ capital accounts in proportion to the PSR

Dr
Cr

Realisation A/C
Partners capital A/C

This is only for a profit, if the partnership has incurred a loss, the Dr & Cr will be the other way around
...
There are 3 common financial
statements, these are as follows:
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Income statement
Balance sheet
Cashflow statement

The ‘notes’ section of the published accounts gives stakeholders detail on each section of the statements
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This is known as the Schedule of NCA
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1) Title – SoNCA, Year Ended, Date
2) Opening balances – simply transfer numbers across, tick off as you go along
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b) Take out whatever depreciation is already there & put in new depreciation charge
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If necessary
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5) Column with 2 adjustments (addition and disposal) – add the cost and subtract the disposal
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13

6)
7)
8)
9)

Depreciation of disposal – work out the existing accumulated depreciation and take it out
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‘Time Apportioned’ – this means ‘month by month’

10) IAS 1 – Presentation of Financial Statements:
Introduction:
IAS (International Accounting Standards) are a statement, or rule, on how certain transactions or items are to be
treated in financial statements in order that the statements give a true and fair view
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True – if any of the statements states that a transaction has taken place then in reality it has
...

Purpose of Accounting Standards:
-

They set out the parameters the directions must follow when preparing the financial statements
...
g
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Ensures that the statements have been prepared in such a way, so they can be comparable and consistency
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Ensures that the statements are prepared in such a way that they can be compared with competitors
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g
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Duties of Directors:
The directors of companies are elected by shareholders
...
They also manage the
company for the shareholders as they are fulfilling the stewardship aspect of accounting information
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They have also been put in a position of trust by the shareholders
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Promote the success of the business
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Not accept benefits from 3rd parties – bribes
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Regulatory Framework:
The directors must prepare the financial statements within the regulatory framework
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IAS 1:
This sets out how the financial statements are to be presented
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IAS 1 states a full set of statements must consist of:
-

Income statement
Balance sheet
Cashflow statement
Statement of changes in equity
Statement of accounting policies and explanatory notes e
...
SoNCA

It also requires that:
-

Financial statements are clearly shown separately from other information in the corporate report
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The period covered by the financial statements is shown
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The Companies Act also requires certain documents that must be included in the published accounts
...
These documents are as follows:
-

Income statement
Balance sheet
Cashflow statements
Directors reports
Auditors reports

The directors and auditor’s reports tell you about the company
...
These
documents also must be filed with the Registrar of Companies
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Again, the Companies Act states that the documents must consist of a true and fair view
...

Accruals – financial statements are prepared on the basis that income and expenses and occurring in the period
to which the statements relate to
...

Materiality – items of lower cost shouldn’t be recorded separately
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Business entity – financial statements should not include personal transactions
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The following considerations should also be taken into account:
-

Incomes and expenses generally cannot be offset against each other
...

Comparative information from previous years is shown
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There are 2 types of dividends and these
are as follows:
-

Interim – these are paid part-way through the year on half-year profits
...
They will actually be paid in the early part of the next financial
period
...


The Auditors Report:

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Larger companies must have their published accounts audited, the auditors which are used are voted in by the
shareholders and the actual report is shown in the published accounts
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The basis of an audit opinion – description why the opinion has been given
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If the opinion is unqualified (what you want, no ‘buts’), the opinion of the auditors maybe as follows:
-

The statements have been prepared properly
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Information given in the directors report is consistent with the financial statements
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The Directors Report:
The directors report must be contained within the published accounts, so it can be presented to the shareholders
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A review of activities of the company over the last year
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E
...
factories
The names of directors and their shareholdings – if directors have a large number of shares then is can be:
a) Good: promotes the company
b) Bad: implies short-termism
Proposed dividends

Accounting Policies:
These are a statement of accounting policies and explanatory notes required by IAS 1
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However, if there is no standard, the managers and directors
must use their judgement to ensure that the information is relevant and reliable
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Changes to accounting policies will only occur if:
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There is a change required by the standards
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Notes to the Accounts:
Notes to the accounts provide lots of information, such as the following:
-

The basis of preparation used in the financial statements
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Any additional information that is relevant to the understanding of the financial statements
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Cash equivalents – short-term, high liquid investments that are easily convertible to cash
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Purpose:
The cashflow statement (CFS) uses information from the I/S and the B/S to show the overall view of money flowing in
and out of a business during the accounting period
...

It also provides a link between profit/loss on the I/S and cash and cash equivalents on the B/S
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Shows how a business has used its cash resources in the year
...

Highlight liquidity problems
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Shows sources of internal and external funding
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Users of CFS:
Shareholders:
-

Identify sources of cash and how it has been used over the last year
...

Shows liquidity of the business (short-term)
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Shows investments in NCA, this should flow through into increasing profits and share prices
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Shows the loans that have been raised
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Trade payables:
-

Shows liquidity of the company and the likelihood of being paid
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Shows how the business is being funded/is it ‘going bust’?
Shows flows of cash, it gives a good view on financial position
...

Pay increase
...


Layouts:

19

Assessing CFS:
20

-

Advantages
Identifies sources of cash flowing into the
company (this is the definition on CFS)
Shows how cash has been used in the company

-

Disadvantages
Only items with a money value are recorded in
the CFS
Effect on inflation when comparing one year with
another

What to look for:
-

Positive cash flows in ‘from operation activities section’ – interest and tax aren’t in control of the company
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Check the ‘working capital’ items for large increases
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Is it suitable?
In the financing activities section – how was the money used? For long-term projects or to cover short-term
debts?
Level of dividend paid – the net cash from operating activities should be sufficient to cover it
...


12) IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Accounting polices are ‘the specific principles and bases, conventions, rules and practices applied by an entity in
preparing and presenting and present financial statements’
...
g
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Accounting bases are the methods used for applying accounting principles to financial statements, which are intended
to reduce subjectivity by identifying the acceptable methods e
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if you use S/L depreciation, your bases is S/L
depreciation
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Once policies are adapted, they can only be changed if:
a
...

b
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Any changes in the accounting policies require that the figure for equity and other figures from the I/S and B/S to be
altered (‘restatement’) for previous financial statements so that comparisons can be made
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Was available when the financial statements for those periods were authorised for issue
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Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation and presentation of those statements
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The error depends on the size of the company
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In the exam questions, see whether the event falls within the ‘window’
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Once the
financial statements have been issued, no alterations can be made
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If the amount is material, then the amounts shown in the financial statements should be changed
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A trade receivable goes bust and there is a bad debt
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No adjustment is necessary in the financial statements
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This would explain the nature of the event
and if possible the likely consequences of the event
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Significant business commitments entered into after the B/S date
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14) IAS 16 – Property, Plant and Equipment (PPE):
Purpose:
The purpose of this standard is to set out the accounting treatment for PPE
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Definitions:
-

Depreciable amount – cost/valuation of asset, less any residual value
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Carrying amount – amount at which an asset is recognised on the B/S, after deduction and accumulated
depreciation or impairment losses
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(Capital
expenditure)

PPE:
For PPE to be classed as an asset, it must meet the following criteria:
-

Probable that future economic benefits will flow into the business
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(Concept of objectivity)

The 2 accounting methods that can be used as the accounting policy for PPE are as follows:
a
...
Revaluation – tangible asset is shown on the B/S at [revalued amount – (accumulated depreciation +
impairment losses)]
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It is defined as ‘the inflow of economic
benefits arising from the ordinary activities of the business’
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Payment and passing of legal title don’t
always happen at the same time e
...
a credit sale
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Sale of goods and services:
Revenue from the sale of goods and services is recorded when the following criteria is met:
a
...

c
...

e
...

Seller retains no effective control over the goods and services
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It is probable that the economic benefits will flow from buyer to seller
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Interest, royalties and dividends:
Revenue is recognised in the following way:
23

a
...
Royalties – accrual basis according to the royalty agreement
c
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If the recoverable amount of an asset is less than its carrying amount,
the carrying value is to be reduced
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Definitions:
-

Impairment loss – amount by which the carrying amount of an asset exceeds its recoverable amount
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Value in use – present value of the future cashflows from an assets continued use, including cash from its final
sale
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Fair value, less any selling costs
b
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They become impaired when the recoverable amount is less that the assets carrying amount
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Adverse effects on the asset of a significant reorganisation within the business
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Adverse effects on the business caused by technology, markets, economy and laws
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Process:
a
...
What is the assets recoverable amount? See diagram:

24

Recoverable amount

Higher of:
Fair value, less costs
of sale

Value in use

c
...
The amount of the impairment loss goes in the I/S as an expense
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17) IAS 37 – Provisions, Contingent Liabilities and Contingent Assets:
Purpose:
This standard is defined as ‘a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits’
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Definitions:
-

Provisions – liability of uncertain timing
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A reliable financial estimate
can be made
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Possible (<50%)
Contingent assets – possible asset arising from past events dependent on the uncertain future events
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Contingent liabilities – this is not shown in the financial statements but is disclosed in the notes to the
accounts
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Where a contingent asset or liability is considered ‘remote’ (almost 0% likelihood of occurring), then there is no discloser
in the notes to the accounts or financial statements
...
Examples are
listed below:
-

Patents
Copyrights
Customer lists
Licenses
Marketing rights

The 3 key elements are:
-

Able to be identified
Its controlled by the business
It gives future economic benefits

An intangible asset will either be purchased or internally generated
...

Intangible assets that are recorded are shown in the financial statements as a NCA in the B/S
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