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Certificate Level
📐 Accounting
📗 Assurance
🏅 Principles of Tax
🖥 Business, Technology & Finance
Management Information

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Certificate Level 1
 📐
Accounting
📝 Introduction to accounting
📝 The accounting equation
📝 Recording financial transactions
📝 Ledger accounting and double entry
📝 Preparing basic financial statements
📝 Errors and corrections to accounting records and financial statements
📝 Cost of sales and inventories
📝 Irrecoverable debts and allowances for receivables
📝 Accruals and prepayments
📝 Non-current assets and depreciation
📝 Company financial statements
📝 Company financial statements under IFRS standards
📝 Statement of cash flows
📝 Company financial statements under UK GAAP
📝 Sole trader and partnership financial statements under UK GAAP

Accounting 1
 📝
Introduction to accounting
The purpose of accounting information
What is the purpose of accounting?

To accurately record, analyse and summarise the transactions of an entity

What are the 3 main types of legal business entities?

Sole trader

Partnership

Limited company

Who are the typical users of accounting information?

Shareholders

Lenders

Managers

Customers

Suppliers

Employees

HMRC

The government

What is the objective of preparing financial statements?

To aid economic decision making and to appraise managers stewardship of

the company's resources aswell as predicting future cash flows of an
organisation

What is a sole trader?

💡 Sole trader: A business which is managed by its owner

Introduction to accounting 1
 What is a partnership?

💡 Partnership: An unincorporated entity which is owned by 2 or

more partners

What is a limited company?

💡 Company: A business which is a separate legal entity to its

owners and holds all the liability

Why is cash important to a business?

To pay employees and suppliers

To meet interest payments

To repay loans

To pay owners

Why would lenders be interested in a company's financial information?

To ensure the company is able to meet its interest payments as they fall
due

Why are the shareholders interested in a company's financial information?

To assess the level of risk to their capital and the return they would obtain
for that risk

The regulation of accounting

Which act must all UK companies comply with?
The UK Company's Act

In the UK which formats must all formally prepared financial information

comply with?

Introduction to accounting 2
 UK GAAP or IFRS

What important characteristic must all financial information hold?

It must give a true and fair view of the performance and position of the
company

What is another name for the statement of financial position?

The balance sheet

What is another name for the statement of profit or loss?

The income statement

The main financial statements

What are the main financial statements that need to be reported every year
under IAS 1?

Statement of financial position Balance sheet)

Statement of profit or loss and other comprehensive income Income

statement)

Statement of changes in equity SOCIE

Statement of cash flows Cash flow statement)

Notes on the accounting policies and other explanatory information

(the notes)

What is the statement of financial position?

💡 Balance sheet: A snapshot taken at a single point in time

outlining the assets controlled by the business and the liabilities
owed by a business at a certain point of time

What is equity?

Introduction to accounting 3
 💡 Equity: The residual amount left over after the assets of a
business are deducted from the liabilities. Equity represents the
shareholders ownership in the business

What is the statement of profit or loss?

💡 Income statement: A periodic account of the income,

expenditure and profit generated by a company over a 12 month
period

Capital and revenue items

What is the difference between a capital and revenue expense?

💡 CAPEX Expenditure which results in the purchase of non-current

assets or an improvement to an existing asset

💡 Revenue expenditure: Expenditure incurred for trading purposes

(this includes selling & admin expenses, salaries, distribution
costs, financing costs) or to maintain the quality of existing assets

To remember the difference revenue expenditure is anything you would find

in the P&L, CAPEX is not found in the P&L

What is the difference between capital and revenue income?

💡 Capital revenue: Proceeds from the sale of assets

Introduction to accounting 4
 💡 Revenue expenditure: Income from the sale of goods or services,
or interest and dividend income

Qualitative characteristics of useful accounting

information
What are the two fundamental qualitative characteristics of useful financial
information?

Relevance - Affected by materiality

Faithful representation - Unbiased and free from error

What are the four enhancing qualitative characteristics of useful financial

information?
Comparability - Data can be prepared against previous years
Verifiability - Can be proven and traced back somewhere

Timeliness - Prepared in time for useful economic decisions to be made

Understandability - Be able to understand by a non-expert

Accounting concepts and conventions

What does IAS 1 concern?

The presentation of financial statements

What is a going concern?

Introduction to accounting 5
 💡 Going concern: An entity that will continue to trade for at least
the next 12 months

What must the accountant disclose in the financial statements if he does

not view the business as a going concern?

The basis on which the financial statements have been prepared

The reasons why the entity is not a going concern

What is the accruals basis of accounting?

💡 Accruals basis: Accounting for income, expenses, assets and

liabilities when they earned, incurred, acquired or disposed rather
than when the cash is received

What is the cash basis of accounting?

The opposite of the accruals basis, transactions are recorded only when
the cash has transferred

What is materiality?

💡 Materiality: Information is considered material if its omission

could distort economic decision making on the back of reviewing
financial statements

What is offsetting?
Offsetting is the process of deducting expenses from income and liabilities
from assets. Offsetting is not allowed to this degree under IAS 1

Ethical considerations
What are the 5 fundamental ethical principles that make-up PIPCO?

Professional behaviour: Not breaking the law

Integrity: Straightforward and honest in all communication

Introduction to accounting 6
 Professional competence and due care: Maintaining professional
knowledge, CPD
Confidentiality: Not disclosing confidential client info

Objectivity: Unbiased behaviour

Is the ICAEW Code of Ethics more of a rules based system or a principles

based system?

A principles based system

What are the benefits of using a principles based system over a rules based
system?

Puts the onus on the individual to consider their actions

Prevents individuals interpreting legal guidelines narrowly

Allows for consideration of individual circumstances

Better accommodates a rapidly changing environment

Can contain prohibitions

Introduction to accounting 7
 📝
The accounting equation
Assets, liabilities and the business entity concept
What is an asset?

💡 Asset: A present resource, under the control of an entity as a

result of past events, which will produce future benefits

What are some examples of assets?

Land

Buildings

Cash

Inventory

Trade receivables

Fixtures and fittings

What is the difference between current and non-current assets?

Current assets are held for the short term —- > Under 12 months
Non-current assets are held for the long term —- > Over 12 months

What is a liability?

💡 Liability: A present obligation, owed by an entity as a result of

past events, which will produce future outflows

What are some examples of liabilities?

Bank loan

Overdraft

The accounting equation 1

 Trade payables

Tax

What is the difference between current and non-current liabilities?

Current liabilities are due in the short term —- > Under 12 months
Non-current liabilities are due in the long term —- > Over 12 months

Under accounting rules are businesses treated as distinct from their

owners?
Yes for all types of businesses

Legally a sole trader and its owner are the same person

What is capital?
Capital is another name for equity

Capital is the amount the entity owes to its owners

The accounting equation

What is the accounting equation?

📊 Capital = Assets - Liabilities

This is also known as the balance sheet equation, as it needs to hold for a
balance sheet to balance

What is income?

💡 Income: Increases in assets or decreases in liabilities that result

in increases in equity

What is expenses?

The accounting equation 2

 💡 Expenses: Decreases in assets or increases in liabilities that
result in decreases in equity

What are drawings?

💡 Drawings: Money taken out of a business by its owner

Credit transactions
Who is a creditor?

💡 Creditor: Any person to whom a business owes money

What is a trade payable?

💡 Trade payable: An amount owed by a business to a third party.

This is categorised as a liability

Who is a debtor?

💡 Debtor: Any person to whom owes a business money

What is a trade receivable?

💡 Trade receivable: An amount owed to a business by a third party.

This is categorised as an asset

The accounting equation 3

 What is the matching principle?

💡 Matching principle: The principle of recognising income against

the expenses occurred earning it at the same time

The statement of financial position

What is the more detailed version of the accounting equation?

📊 Non current assets + current assets = Capital + profit - losses -

drawings + non current liabilities + current liabilities

What are net assets?

Net assets equal assets minus liabilities

What is the formula for the accounting equation using net assets?

📊 Net assets = Capital

What are some examples of NCAs?

Property plant & equipment

Goodwill

Long term investments

What is the difference between a tangible and intangible asset?

Tangible assets can be touched, intangible assets cannot be touched

What is depreciation?

The accounting equation 4

 💡 Depreciation: The process of spreading an assets cost out over
its useful life, to account for degradation

What are some examples of current assets?

Inventory

Trade receivables

Cash

Prepayments

Short term investments

What is a prepayment?

💡 Prepayment: When you pay for a service and are still awaiting the
service to be performed it is classed as a prepayment which is an
asset on the balance sheet

What are some examples of current liabilities?

Loans due within the next 1 months

Bank overdraft

Trade payables

Tax payable

Accruals

Preparing the statement of financial position

Example of a balance sheet

The accounting equation 5

 The statement of profit or loss
What is gross profit?

📊 Gross profit = Revenue minus cost of sales

What is net profit?

📊 Net profit = Gross profit minus all other expenses plus non trading
income

The accounting equation 6

 What is the formula for gross profit margin?

📊 Gross profit margin = 100 x gross profit / revenue

What does non trading income usually comprise?

Profit on sale of NCAs

Dividend income

Intrest income

Rental income

The accounting equation 7

 📝
Recording financial
transactions
Computerised accounting systems
What are computerised accounting systems?

Simple off the shelf programmes used by small businesses that record
transactions which can be processed by trained accountants

There are also fully integrated systems in place at the large listed complex
companies

How does a computerised accounting system operate?

 Inputs —- > Upload source documents and standing data

 Process —- > Process ledgers and journals

 Outputs —- > Produce reports, trial balances and financial statements

What is cloud accounting?

💡 Cloud accounting: Third party accounting software provided by a

service provider to process accounting transactions and reports
from multiple servers at once

What are the benefits of cloud accounting?

Access accounting records from any computer

Third party software so no need to purchase any sophisticated

equipment to run it

Software is maintained by the service provider

What are the drawbacks of cloud accounting?

Requires internet access

Recording financial transactions 1

 Server outages

Security issues

The company does not hold the back ups

Source documents for recording financial

transactions
What are some examples of credit sales documents?

Sales orders

Delivery notes

Sales invoices

What are some examples of credit purchases documents?

Purchase orders

Goods received notes

Sales invoices from suppliers

What is a credit note?

A document issues to a customer in relation to goods they are returning. In

substance it is a negative invoice

Recording bank transactions

What are the benefits of using electronic banking?

Allows transaction reports to be downloaded for use in computerised

accounting systems

Recording financial transactions 2

 Petty cash book
What is the petty cash book?

💡 Petty cash book: A record of all payments out and receipts into
petty cash

What is petty cash?

💡 Petty cash: The notes and coins an entity keeps on site for
incidental expenditure

The payroll
What is the purpose of the payroll?

To record employee wages and salaries

What are the components of an employees gross pay?

PAYE income tax

Employee NIC

Employee pension contributions

What are the additional employee costs the employer pays?

Employer NIC

Employer pension contributions

What is the difference between gross pay and net pay?

Net pay is the amount the employee actually receives in their bank account
after deductions for income tax NIC and pension

Recording financial transactions 3

 What is the formula for total payroll cost?

📊 Total payroll cost = Gross pay + Employer NI + Employer pension

Recording financial transactions 4

 📝
Ledger accounting and double
entry
Ledgers
What are the 3 types of main ledger used in the accounting system?

 Nominal ledger

 Receivables ledger

 Payables ledger

The nominal ledger

What is the nominal ledger?

💡 Nominal ledger: The main accounting record in which financial

transactions are recorded. It contains a number of different
ledger accounts

What are some examples of ledger accounts contained in the nominal

ledger?

Plant and machinery

Wages and salaries

Sales

Rent

Trade receivables

Ledger accounting and double entry 1

 Trade payables

Inventory

What is found on the left and right hand side of a T account?

LHS Debit
RHS Credit

Double entry bookkeeping

What is the principle behind double entry bookkeeping?

For each transaction there are two accounting entries, a debit and a credit

What is the impact of a debit entry?

A debit increases assets and expenses, decreases liabilities, capital and
income

What is the impact of a credit entry?

A credit increases liabilities, capital and income and decreases assets and
expenses

What is an easy way to remember what increases as a result of a debit and

credit entry?

DEADCLIC

Debit increases — > Expenses, assets, drawings

Credit increases —- > Liabilities, income, capital

What is the journal entry for a cash sale?

📝 Dr Cash Cr Revenue

What is the journal entry for a cash purchase?

Ledger accounting and double entry 2

 📝 Dr Expense Cr Cash

What is the journal entry for a credit sale?

📝 Dr Trade Receivables Cr Revenue

What is the journal entry for a credit purchase?

📝 Dr Expense Cr Trade Payables

Journal entries
What are journal entries?

As I have outlined above they are the simple debit and credit entry for each
accounting transaction

Double entry for petty cash

How you treat petty cash that is used to fund expenditure on an accounting
basis?

You debit the relevant expense account and credit petty cash

Ledger accounting and double entry 3

 The receivables and payables ledgers
What is the receivables ledger?

The receivables ledger contains lots of individual ledger accounts, one for
each credit customer
The total receivables account is held in the nominal ledger, called trade
receivables

What is the payables ledger?

The payables ledger contains lots of individual ledger accounts, one for
each credit supplier
he total payables account is held in the nominal ledger, called trade
payables

Accounting for discounts

What is the difference between a trade discount and an early settlement
discount?

A trade discount is a percentage discount deducted from the list price

An early settlement discount is a discount a borrower gets for repaying a
debt within a pre-defined deadline

How are both of these types of discounts treated on an accounting basis?

We account for both sales and purchases net of trade discounts and early
settlement discounts only if the discount is expected to occur

Accounting for VAT

What is VAT?

Ledger accounting and double entry 4

 💡 VAT Value added tax is a tax that is accrued at each stage of the
production process. It is borne by the final consumer

It is paid to HMRC at each stage of the production process, however

producers as long as they are VAT registered can reclaim input VAT

What is the journal entry for VAT on sales?

📝 Dr Trade Receivables Cr VAT control account

What is the journal entry for VAT on purchases?

📝 Dr VAT control account Cr Trade payables

Ledger accounting and double entry 5

 📝
Preparing basic financial
statements
The trial balance
What is the trial balance?

💡 Trial balance: The TB is the starting point for the financial

statements, it is a list of the balances pulled together from all the
ledger accounts with the debits on one side and the credits on
the other

The total credit amount should equal the total debit amount

Why would adjustments to the TB be necessary before we build out the

financial statements?

To correct for any errors or omissions

To record prior period adjustments

Example trial balance

Preparing basic financial statements 1

 What types of errors can occur in a TB?

Transposition errors: Getting two digits the wrong way around e.g.
writing £123k as £132k

Omission errors: Leaving a transaction out entirely

Commission errors: Posting a debit incorrectly as a credit or vice versa

Compensation errors: An error on one side is incorrectly cancelled out

on the other side too

Errors of principle: Incorrectly treating an accounting adjustment ie

debiting an expense as an asset

Balancing off ledger accounts

What happens to the balancing amount when you balance off a T account?

It is brought down to be the balance brought forward in the next period

Preparing the statement of profit or loss

What are the 2 steps to preparing the P&L from ledger accounts?

 All income and expense accounts are transferred to a new ledger called
the P&L ledger

 The information in the P&L ledger is transferred into the P&L which is
made up of sales, CoS, gross profit etc

Preparing basic financial statements 2

 Preparing the statement of financial position
What are the 2 steps to preparing the SOFP from ledger accounts?

 All income and expense accounts are transferred to a new ledger called
the capital ledger

 The information in the capital ledger is transferred into the balance

sheet which is made up of assets, liabilities, equity

Preparing basic financial statements

What are the steps to preparing the P&L and SOFP together?

Calculate the balances in the nominal ledger

Prepare the TB

Check for any adjustments to get the final TB

Transfer income and expense balances to the P&L ledger and calculate
the P&L for the period

Transfer the P&L ledger and the drawings balance to the capital
account

Prepare the P&L statement

Prepare the SOFP

Preparing basic financial statements 3

 📝
Errors and corrections to
accounting records and
financial statements
Reconciling to external documents
What is one of the best ways that a company may verify the accuracy of
their computerised accounting records?
Using external documents to rec back what's in the system to identify any
errors
These documents are usually bank statements, customer statements and
supplier statements

Bank reconciliations
What is the cash at bank account?

It is one of the business' nominal ledger accounts, this account is either

recorded as an asset on the balance sheet as 'cash at bank' or as a liability
on the balance sheet as 'bank overdraft'

What is a bank statement?

💡 Bank statement: A record of transactions on the business's bank

account maintained by the third party bank in its own records

What is a bank reconciliation?

Errors and corrections to accounting records and financial statements 1

 Bank reconciliation: A comparison with a bank statement over a course of
time with the cash at bank account
A bank reconciliation works to identify any discrepancies between these
two records and why there is a difference
If there are any errors the cash at bank account is updated accordingly
using journal entries

What types of errors are usually uncovered during a bank reconciliation?

Errors in recording the transaction in the cash at bank account

Errors in the bank statement itself

Timing differences causing the discrepancies e.g. cheques in the mail

Types of error in accounting

What are the 5 broad types of errors in accounting?

 Transposition errors: 2 digits incorrectly recorded the wrong way round.

e.g. Recording £150k as £105k

 Errors of omission: Failure to record a transaction

 Errors of principle: Making an accounting error e.g. recording an asset

as an expense

 Errors of commission: Incorrectly recording a debit as a credit or vice

versa

 Compensating errors: Making an error on the debit side and removing

the accompanying credit or vice versa

Correcting errors

Errors and corrections to accounting records and financial statements 2

 How are accounting errors corrected?

Through journal entries

What is the 3 step approach to correcting an incorrect accounting entry in

an exam question?

 Identify the incorrect entry

 Identify what the correct entry should have been

 Make the adjusting entry

When should suspense accounts be used?

💡 Suspense accounts: Temporary hold accounts which are placed

when there is uncertainty in how to record one side of a
transaction

Can suspense accounts be used indefinitely?

No, suspense accounts are always temporary and should never be present
in formal financial statements, they should only be present until an error
has been resolved

Suspense accounts may contain several items, it may take a few

adjustments to get back to the correct adjustment

Adjusting the initial trial balance for errors

Can the initial trial balance be adjusted for errors that come to light after
the initial trial balance has been extracted?

Yes the best way to do this is by adding an adjustments column

Errors and corrections to accounting records and financial statements 3

 📝
Cost of sales and inventories
IAS 2, Inventories
Which accounting standard outlines the treatments for inventory?

IAS 2, Inventories

What is the definition of inventory?

💡 Inventory: Assets that are held for sale as part of business

activities, WIP for eventual sale, in the form of raw materials or
supply to be converted into final goods at a later date

What items can inventory include?

Goods purchased and held for resale

Finished goods

WIP

Raw materials

Cost of Sales
What is the formula for cost of sales?

📊 Cost of sales = Opening inventory + purchases + delivery inwards

- closing inventory

Cost of sales and inventories 1

 How does cost of sales fit into the P&L?

You deduct cost of sales from revenue to get gross profit

What is the difference between the cost of delivery inwards and the cost of
delivery outwards?
The cost of delivery inwards is included in purchases cost therefore
included in cost of sales and gross profit
The cost of delivery outwards is a distribution cost therefore is included in
operating expenditure so is not included in cost of sales

How do we treat goods that once sold would have formed part of CoS, if
they become lost or stolen or obsolete?

We remove them from CoS and treat them as expenses

What is the journal entry for the writing down of a piece of inventory that
has lost value?

📝 Dr Expense Cr Inventory

What do you write the inventory down to if it has lost value?

The greater of 0 or its net realisable value

What is the journal entry for a piece of inventory that has been lost
/destroyed and subject to an insurance claim?

We remove the total value of the inventory:

📝 Dr Expenses Cr purchase

We receive a % income amount of the inventory from the insurance claim:

📝 Dr Other receivables Cr Other income

Cost of sales and inventories 2

 Accounting for opening and closing inventories
How do you account for opening inventory?

You treat it as a cost of sale and remove it from the inventory account

📝 Dr CoS Cr Inventory

How do you account for closing inventory?

You deduct it from CoS so it can be carried forward and matched against
revenue it earns in the next period

📝 Dr Inventory Cr CoS

Adjusting the trial balance

How do you adjust the TB to transfer opening inventories and purchases to
CoS and record closing inventory?

A new CoS line is added to the TB as a result of the journal entries posted

Counting inventories
What is the purpose of an 'inventory count'?

Inventory values are a balance sheet amount so must be recorded as a

snapshot amount so there are regular physical counts to maintain a record

Cost of sales and inventories 3

 of value

Valuing inventories
What is the basic approach to inventory valuation?

We record inventory at the lower of cost and net realisable value

What is the formula for NRV?

📊 NRV = Selling price - costs to be incurred through selling

What items are included in the total cost of inventory?

Purchase of raw materials

Delivery inwards

Import taxes and duties

Conversion costs

What are conversion costs?

💡 Conversion costs: Any costs associated with converting raw

materials into a final product, including labour, and appropriate
share of conversion related overheads

What is the difference between FIFO, LIFO and AVCO?

💡 FIFO Measures inventory value on a first in first out basis,

inventory remaining is therefore the more newly produced stock

Cost of sales and inventories 4

 💡 LIFO Measures inventory value on a first in first out basis,
inventory remaining is therefore the older stock

💡 AVCO Inventory is measured at the average cost of purchase

during the period

Example of FIFO, LIFO, AVCO inventory comps

Cost of sales and inventories 5

 Is LIFO allowed under IFRS?
No

What is the effect on cash flow during a period of rising prices for FIFO vs
LIFO?

No impact on cash flow regardless of FIFO or LIFO / rising or falling prices

What is the effect on working capital during LIFO and a period of rising
prices?
Inventory levels fall so working capital falls

Using mark-up/margin percentages to establish cost

What is the difference between a mark up and a margin?

A mark up is the profit expressed as a percentage of cost whereas a margin

is the profit expressed as a percentage of revenue

How would you calculate a selling price on a good with a profit of £40 with
a 20% margin
Selling price ? @ 100%

Cost ? @ 80%

Profit £40. @ 20%

Cost of sales and inventories 6

 If we take the £40 and divide by 20% we get out selling price of £200
If we need to we can also backsolve to get the cost of £160, which is the
difference between the selling price and the profit

How would you calculate a selling price on a good with a profit of £40 with
a 20% mark up
Selling price ? @ 120%

Cost ? @ 100%

Profit £40. @ 20%

If we take the £40 and divide by 20%/120% we get out selling price of
£240

If we need to we can also backsolve to get the cost of £200, which is the
difference between the selling price and the profit

Inventory drawings
What is the journal entry for an inventory drawing by the owner from the
business?

📝 Dr Drawing Cr Inventory

Cost of sales and inventories 7

 📝
Irrecoverable debts and
allowances for receivables
Irrecoverable debts
What is an irrecoverable debt?

💡 Irrecoverable debt: A debt that is not expected to be paid

What is the journal entry for writing off a bad debt?

📝 Dr Bad debt expense Cr Trade receivables

What is the journal entry for reversing the writing off a bad debt, that is
subsequently paid?

📝 Dr Cash Cr Bad debt expense

What is the journal entry for reversing a cash payment made by a customer
that is rejected by the bank?

📝 Dr Trade receivables Cr Cash

Irrecoverable debts and allowances for receivables 1

 Allowance for receivables
What is an allowance for trade receivables?

💡 Allowance for trade receivables: In an exam you will be given a

probability of non-payment of an outstanding customer balance,
you use this balance to reduce your trade receivables and set up
an allowance for trade receivables

What is the journal entry for setting up an allowance for trade receivables?

📝 Dr Bad debt expense Cr Allowance for trade receivables

What is the journal entry for reducing the size of an allowance for trade
receivables?

📝 Dr Allowance for trade receivables Cr Bad debt expense

Accounting for irrecoverable debts and allowance

for receivables
What is the journal entry for increasing the allowance for trade receivables?

📝 Dr Bad debt expense Cr Allowance for trade receivables

What is the journal entry for decreasing the allowance for trade
receivables?

Irrecoverable debts and allowances for receivables 2

 📝 Dr Allowance for trade receivables Cr Bad debt expense

Adjusting the trial balance for irrecoverable debts

and allowance for receivables
What is the journal entry to write off an irrecoverable debt?

📝 Dr Bad debt expense Cr Trade receivables

Irrecoverable debts and allowances for receivables 3

 📝
Accruals and prepayments
The principle behind accruals and prepayments
What is the accruals principle of accounting?

💡 Accruals principle: We match revenue with the expenses that are

incurred to generate the income in that period

What is an accrual?

💡 Accrual: An account for expenditure incurred before it is actually

paid for in cash. An accrual is a liability

What is a prepayment?

💡 Prepayment: An expense that has peen paid for but not yet
performed, hence why it is categorised as an asset

Accruals
What is the journal entry for an accrual?

📝 Dr Expense Cr Accrual

Accruals and prepayments 1

 Prepayments
What is the journal entry for a prepayment?

📝 Dr Prepayment Cr Expense

Accounting for accruals and prepayments

Are accruals and prepayments categorised as current or non current?

It depends they can be either depending on when they fall due

What is the journal entry for reversing an accrual?

📝 Dr Accrual Cr Expense

What is the journal entry for reversing a prepayment?

📝 Dr Expense Cr Prepayment

The accrual principle and income

What is the difference between accrued income and deferred income?

Accruals and prepayments 2

 💡 Accrued income: Revenue where you have fulfilled your
performance obligation but are yet to be paid in cash for it.
Accrued income is recognised as an asset on the balance sheet.

💡 Deferred income: Revenue where you have been paid in cash up

front but are yet to fulfil your performance obligation. Deferred
income is recognised as a liability on the balance sheet.

What is the journal entry for accrued income?

📝 Dr Accrued income Cr Revenue

What is the journal entry for deferred income?

📝 Dr Cash Cr Deferred income

Accruals and prepayments 3

 📝
Non-current assets and
depreciation
Tangible non-current assets and depreciation
What are the components that make up the cost of PPE?

Purchase price

Delivery costs

Taxes and duties

Irrecoverable VAT

Installation and assembly costs

Professional fees

Testing costs

What are some examples of costs not included in PPE?

General overheads

Administration costs

Training costs

Fuel

Repairs to maintain existing performance

Under what circumstances can future expenditure be capitalised as part of

existing PPE?

If the expenditure enhances or restores any benefits consumed

What is the UEL of land?

It is infinite

What is the purpose of depreciation?

Non-current assets and depreciation 1

 It allocates the cost of an asset less its residual value over its entire useful
life

What is residual value?

💡 Residual value: The amount a business could realistically sell an

asset for at the end of its useful life

The objective of depreciation

Where does the need to depreciate assets come from?

The accruals principle. If money is spend purchasing an asset, this amount

must at some time be charged against profits

Calculating depreciation
What is the formula for the carrying value of an asset?

📊 NBV = Original cost - accumulated depreciation

What is the formula for the annual depreciation expense on a straight line
basis?

📊 Annual depreciation expense = Original cost - Residual

value)/UEL

What is the formula for the monthly depreciation expense on a straight line
basis?

Non-current assets and depreciation 2

 📊 Monthly depreciation expense = Annual depreciation expense / 12

What is the formula for the annual depreciation charge on a reducing

balance basis?

📊 Annual depreciation expense = Carrying amount x percentage to

apply

What is accumulated depreciation?

💡 Accumulated depreciation: The total depreciation charged

against an asset since purchase

How would we go about reviewing and changing the depreciation method?

The depreciation method should be reviewed annually, if there are any

changes in the use of the asset then the method should be changed. We
apply the new method on a prospective basis, ie we do not alter the
historic application, only the future application

When should the UEL and residual value be changed?

When the current amounts are no longer appropriate

Again this is applied on a prospective basis

Accounting for depreciation

What is the accounting entry for a depreciation charge?

📝 Dr Depreciation expense Cr NCA

Non-current assets and depreciation 3

 Ie it reduces the profit in your P&L and the size of the asset on your balance
sheet

How would you adjust the trial balance for depreciation?

 Calculate the depreciation amount

 Prepare the year end journal to record the depreciation expense

 Enter the journal into the adjustment column

 Adjust the TB to take account of the adjustment

 Prepare the financial statements

Calculating impairment
When does an impairment occur?

💡 Impairment: When the carrying value of an asset exceeds its

recoverable amount

How do you work out the recoverable amount?

💡 Recoverable amount: The higher of an assets fair value less

costs of disposal and its value in use

How do you calculate the impairment loss?

📊 Impairment loss = Carrying amount less recoverable amount

What is the accounting entry for an impairment?

Non-current assets and depreciation 4

 📝 Dr Impairment expense Cr NCA

What are some indicators that an impairment has occurred?

Evidence of obsolescence

Physical damage

Evidence that economic performance will be worse than expected

A significant change in the technological, legal, political or economic

environment in which the assets are employed in

Non-current asset disposals

How do you calculate the profit on the disposal of an asset for accounting
purposes?

📊 Profit = Proceeds - carrying value

What is the journal entry for the sale of an asset?

📝 Dr Cash (sale proceeds) Cr NCA Carrying value) Cr/Dr

Profit/loss)

The asset register

What is the asset register?

Non-current assets and depreciation 5

 💡 Asset register: A register of all of the non-current assets within a
business

What details are held about each non-current asset in the asset register?

Internal reference number

Location of asset

Description of asset

NBV

Depreciation method

Purchase date

Department which uses the asset

Intangible non-current assets

What are some examples of intangible assets?

💡 Goodwill: The value created by acquiring a business for a value

above the value of its net assets primarily due to it having quality
reputation, customer base and staff

💡 Development costs: Costs incurred in the development of a new

product or technology that has value associated with it

How is goodwill depreciated?

It isn't as it doesn't have a UEL, instead it is tested annually for impairment

Non-current assets and depreciation 6

 The non-current assets note to the statement of
financial position
What is the purpose of the note to the SOFP?
The note to the SOFP provides the details behind the single figure that is
detailed for the tangible NCA's in the SOFP

Non-current assets and depreciation 7

 📝
Company financial statements
The nature of a limited company
What is the difference between a public and a private limited company?

Private companies cannot issue their shares to the public whereas public
companies can

What are the advantages of operating through a limited company structure

rather than a sole trader or a partnership?
A limited company is legally distinct from its owner which is beneficial from
a liability perspective

What are some of the characteristics of a company that need to be

considered for accounting purposes?

Equity

Forms of debt capital

Provisions

Tax on profits

Dividends

Equity: share capital

What are the 2 components of share capital?

 Equity shares

 Irredeemable preference shares

What is defined as ordinary share capital on the balance sheet?

Company financial statements 1

 The ordinary equity share capital that entitles the owner to an ownership
stake in the company

What are the differences between preference shares and ordinary shares?

Preference shares entitle the owner to dividends whereas ordinary shares

do not necessarily

What is the difference between redeemable and irredeemable preference

shares?

The issuing company are entitled to redeem or buy back redeemable

preference shares which means we categorise them as liabilities on the
balance sheet
Whereas irredeemable preference shares cannot be called back by the
company so they are categorised as equity instruments

What is the journal entry when new shares are issued at par?

📝 Dr Cash Cr OSC

What is the journal entry when new shares are issued at a premium?

📝 Dr Cash Cr OSC (par value) Cr Share premium (the excess over

par)

Equity: retained earnings and other reserves

What are retained earnings?

Company financial statements 2

 💡 Retained earnings: Profits that have been retained within the
business that haven't yet been paid out to shareholders nor
reinvested back into the business

What are the elements of a company's reserves?

Retained earnings

Share premium

Other reserves

What is share premium?

💡 Share premium: The amount in excess of the par value that the
latest issue was raised at

Dividends
What is a dividend?

💡 Dividend: A fixed payment that a holder of a share in a company

is entitled to receive. The dividend amount may vary based on the
performance and dividend policy of a company

What takes priority, an ordinary dividend or a preference dividend?

A preference dividend

What is the formula to calculate retained earnings?

📊 Retained earnings = Opening RE + profit for the year - dividends

paid out in the year

Company financial statements 3

 Rights issues and bonus issues of shares
What is a rights issue?

💡 Rights issue: An issue of shares to existing shareholders at a

discount in proportion to their current shareholdings in order to
raise cash for the company

What is the journal entry for a rights issue?

📝 Dr Cash Cr OSC —- > at the price of the rights issue

What is a bonus issue?

💡 Bonus issue: An issue of a free share to existing shareholders, in

proportion to their existing shareholdings. There is no cash flow
involved in a bonus issue

What is the journal entry for a bonus issue?

📝 Dr Share premium or retained earnings Cr OSC

Assume share premium unless told otherwise

Non-current liabilities
What are some examples of NCLs?

Debentures

Company financial statements 4

 Loan stocks

Bonds

Bank loans

Redeemable preference shares

What is the journal entry for taking on an NCL?

📝 Dr Cash Cr NCL

What is the journal entry for repaying an NCL?

📝 Dr NCL Cr Cash

Provisions
What is a provision?

💡 Provision: Liabilities that are measured using estimation, so are

disclosed separately from other liabilities

What are the criteria that needs to be met to recognise a provision?

There is a present obligation to incur the expenditure

It is probable that the expenditure will be incurred (over 50%

probability)

What is the accounting entry for creating a provision?

Company financial statements 5

 📝 Dr Expense Cr Current liabilities

What is the accounting entry for incurring expenditure?

📝 Dr Expense Dr Current liabilities Cr Cash

What is the accounting entry for removing the excess provision?

📝 Dr Current liabilities Cr Expenses

Tax
Where will you find tax being presented in the financial statements?

As a deduction in the P&L

As a liability in the SOFP

What is the accounting entry when a tax liability arises?

📝 Dr Tax expense P&L Cr Tax payable SOFP

What is the accounting entry when a tax payment is made?

📝 Dr Tax payable Cr Cash

Company financial statements 6

 Revenue
What are some examples of revenue sources?

Sales

Turnover

Interest

Dividends

Royalties

What are the 5 steps of revenue recognition?

 Identify the contract

 Identify the separate performance obligations

 Determine the transaction price

 Allocate the transaction price to the performance obligations

 Recognise revenue when the performance obligations are satisfied

Company financial statements 7

 📝
Company financial statements
under IFRS standards
The statement of profit or loss
Example of the presentation of a P&L

What are the components of CoS?

Purchases

Delivery inwards

Opening inventory

Closing inventory

What are the components of distribution costs?

Wages of distribution staff

Sales commission

Distribution expenses

Depreciation of delivery vehicles

Marketing costs

What are the components of administrative expenses?

Wages of administrative expenses

Company financial statements under IFRS standards 1

 Expense of substantial loss of inventory

Amortisation of intangible assets

Bad debt expenses

What are the components of other income?

Dividend income

Interest income

Property income

Insurance claim income

Profits on sale of assets

What are the components of finance costs?

Interest payable on bank loans and debt securities

The statement of financial position

Example of a balance sheet

Company financial statements under IFRS standards 2

 The statement of changes in equity
What does the statement of changes in equity show?
The SOCIE shows how the equity portion of the balance sheet changes in
the period. It links the equity at the beginning of the period to the equity at
the end of the period

Example of a SOCIE

Company financial statements under IFRS standards 3

Company financial statements under IFRS standards 4
 📝
Statement of cash flows
Statement of cash flows
What does the statement of cash flow show?

The movement of cash and cash equivalents in a period

Why is the statement of cash flows a useful addition to the other financial
statements?

The statement of cash flows concentrates on the sources and uses of cash
and is a useful indicator of liquidity and solvency

What are the 3 components of a cash flow statement?

Cash flow from operations

Cash flow from investing

Cash flow from financing

What are cash equivalents?

💡 Cash equivalents: Short-term, highly liquid investments that are

readily convertible into cash

Format of the statement cash flows

What are cash flows from operations?

💡 Cash flow from operations: Cash flows generated from the

principal revenue generating activities of the company

Statement of cash flows 1

 What are cash flows from investing?

💡 Cash flow from investing: Cash flows from the sale and
acquisition of non-current assets and businesses

What are cash flows from financing?

💡 Cash flow from financing: Cash flows from the changes in the
size and composition of equity and liabilities within the business

Which approach do IFRS prefer for presenting the cash flow statement?

There are two methods of presenting the cash flow statement, the direct
and the indirect method. Both approaches are permitted under IFRS.

The CFF and CFI are treated the same under both approaches. However
the CFO comp differs.

Outline the direct method?

💡 Direct method: Simply a P&L except with cash accounting used

for each line item, not accrual accounting.

Outline the indirect method?

💡 Indirect method: Starts at NI and backsolves to strip out all non-

cash transactions, gains and losses and changes in B/S accounts
resulting from accrual accounting errors.

Statement of cash flows 2

 Notice that the indirect method starts at the bottom of the P&L NI
whereas the direct method starts at the top (income)

What are the advantages of each approach?

Pros of Direct Method: Splits out the firms operating cash receipts and
payments, therefore provides more information than the indirect method

Pros of Indirect method: The indirect approach focuses on the difference

between net income and CF from operations, provides a useful link from

Statement of cash flows 3

 the income statement to the CF statement allowing for easier future cash
flow estimation

What are some of the typical components of the CFI?

Dividends received

Interest received

Acquiring an NCA

Selling an NCA

Acquiring an equity or debt instrument

Selling an equity or debt instrument

What are some of the typical components of the CFF?

Proceeds from share issues

Movement in borrowings

Dividends paid

Statement of cash flows 4

 📝
Company financial statements
under UK GAAP
What is UK GAAP?
What are the constituents of UK GAAP?

Company law

UK accounting standards

The effects of stock exchange listing requirements

The effects of IFRS standards

Published accounts
What are the rules all companies must follow when publishing financial
statements?

Must be published annually

File them with the Registrar of companies

Must present a true and fair view of the performance

Listed companies are required to apply IFRS standards to their

published accounts, unlisted companies can choose to just use UK
standards

Company financial statements under UK GAAP 1

 UK GAAP terminology and formats
What are some of the difference in naming conventions between UK GAAP
and IFRS?

Company financial statements under UK GAAP 2

 📝
Sole trader and partnership
financial statements under UK
GAAP
Sole trader financial statements
What are the differences between sole trader and company accounts
prepared under UK GAAP?

Tax is not included in sole trader accounts

No formal requirements as to headings in the P&L

No requirement to produce a SOCIE

Sole traders do not have share capital or reserves, instead they are
made up of opening capital, capital introduced in the period, net profit
in the period, drawings

Partnerships
What is a partnership?

💡 Partnership: An unincorporated business that is run by two or

more people together

How do partners appropriate partnership profits?

They can do so via a combination of fixed salaries and profit sharing

arrangements

Sole trader and partnership financial statements under UK GAAP 1

 What are some of the components of a partnership agreement?

Capital amounts

Interest on capital

Partner salaries

Profit sharing arrangements

Guaranteed minimum profit shares

Drawings

Preparing partnership accounts

How does accounting for partnerships differ from accounting for sole
traders?

The ownership interest of each partner must be shown

The net profit must be appropriated between the partners and shown in
the accounts

What is the difference between a capital account and current account?

The current account is made up of the appropriated profit, less drawings. It

essentially shows the profit retained in the business by each partner

The capital account records the initial capital contributions

Accounting for changes in partnership structure

What happens when a partner dies or retires?

The remaining parties normally carry on the business, buying out the
departing partners share of the net assets including goodwill

Profits are appropriated to the date of change

Share out goodwill in old PSR

Remove goodwill in new PSR

Sole trader and partnership financial statements under UK GAAP 2