F3a B C

FINANCIAL ACCOUNTING
1
SYLLABUS
2
A. THE CONTEXT AND PURPOSE OF FINANCIAL REPORTING
INTRODUCTION 1
2 THE REGULATORY
FRAMEWORK
3
1 INTRODUCTION
4
DEFINITION OF ACCOUNTING
5
TYPES OF BUSINESS ENTITY
SOLE TRADER • Controls, manages and Simple

owns business
• Legally, person and
business are same
• Bears all financial risks
PARTNERSHIPS • 2+ people
• Profits shared by
agreement
LIMITED LIABILITY • Separate legal entity

COMPANIES • Owned by shareholders
• Run by appointed
directors Complex
• Subject to company law
6
FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING
7
USERS OF THE INFORMATION STATEMENTS
8
STATEMENT OF FINANCIAL POSITION
• Reports assets, liabilities and equity at a date

• A statement of carrying amounts
• Vertical format
• All items have monetary value
9
PROFORMA : STATEMENT OF FINANCIAL POSITION AS AT
10
STATEMENT OF COMPREHENSIVE INCOME
• Either:
• Single statement of comprehensive income
• Two statements: (i) profit or loss; (ii) other
comprehensive income
11
STATEMENT OF PROFIT OR LOSS (P&L)

Summarises financial operations for a period of time
PROFORMA: Statement of profit or loss for the year ended …
12
STATEMENT OF CHANGES IN EQUITY
13
INTER-RELATIONSHIP BETWEEN SOFP AND SOCI
• SOFP: a snapshot
• SOCI: a movie
CAPITAL AND REVENUE EXPENDITURE
CAPITAL EX REVENUE EX
SOFP P&L
Acquiring non-current assets Incurred in daily running of
business
Increases revenue – earning
capacity
14
SUMMARY
15
2 THE REGULATORY SYSTEM
16
THE REGULATORY FRAMEWORK
17
18
SUMMARY
19
B. THE QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
THE IASB’s CONCEPTUAL FRAMEWORK

BASIS FOR PREPARING FS
GOING CONCERN ACCRUAL BASIS
Is not an underlying
Is the underlying
assumption
assumption for financial
But FS should be prepared
framework
on accrual basis
20
B. THE QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
THE QUALITIVE CHARACTERISTICS OF FINANCIAL INFORMATION
FUNDAMENTAL ENHANCING
QUALITATIVE QUALITATIVE
CHARACTERISTICS CHARACTERISTICS
Relevance Comparability
Faithful
Verifiability
representation
Timelineness
Understandability
21
C. THE USE OF DOUBLE ENTRY AND ACCOUNTING SYSTEMS
SOURCES, RECORDS
AND BOOKS OF PRIME 1
ENTRY
2 LEDGER ACCOUNTS
AND DOUBLE ENTRY
FROM TRIAL BALANCE TO

FINANCIAL STATEMENTS 3
22
1 SOURCES, RECORDS AND

BOOKS OF PRIME ENTRY
23
OVERVIEW
24
TYPES OF BUSINESS DOCUMENTATION
25
26
27
28
MATCHING TRANSACTIONS WITH RELEVANT DOCUMENTS
1. Credit sale a. Bank - in - slip

2. Cash sales b. Credit note from supplier
3. Purchases c. Sales invoice
4. Deposit with bank d. Payment voucher
5. Payment of salary e. Payroll sheet/Pay slip
6. Payment of rental f. Cash receipt/memo
7. Return of goods to supplier g. Supplier’s invoice
8. Payment of expenses h. Receipt from landlord
29
ACCOUNTING RECORDS
30
BOOKS OF PRIME ENTRY
31
SALES DAY BOOK
32
PURCHASES DAY BOOK
33
SALES RETURNS DAY BOOK
34
PURCHASES RETURNS DAY BOOK
35
EXAMPLE
Mr Kipper-Ling runs a business providing equipment for bakeries. He always makes a

note of sales and purchases on credit and associated returns, but he is not sure how they
should be recorded for the purposes of his accounts.
Write up the following credit transactions arising in the first two

weeks of August 20X6 into the relevant day books.
1 August Mrs Bakewell purchases cake tins at a cost of $500.

1 August Mr Kipper-Ling purchases equipment at a cost of $2,000 from
wholesalers TinPot Ltd.
2 August Mr Kipper-Ling returns goods costing $150 to another
supplier, I Cook.
3 August Jack Flap buys equipment which cost $1,200.
3 August Mrs Bakewell returns $100 of the goods supplied to her.
4 August Victoria Sand-Witch buys a new oven for $4,000.
5 August Mr Kipper-Ling purchases baking trays for $500 rom regular
supplier TinTin Ltd.
8 August Mr Kipper-Ling purchases ovens costing $10,000 from Hot
Stuff Ltd.
8 August Mr Kipper-Ling returns equipment costing $300 to TinPot Ltd.
9 August Pavel Ova purchases goods costing $2,200.
11 August Mrs Bakewell buys some oven-proof dishes costing $600.
36
EXAMPLE
37
THE CASH BOOK
38
PETTY CASH BOOK
• A petty cash book is a cash book for small payments.

Ex: postage stamps, taxi fares, photocopies…
• An imprest system will be adopted for the petty cash book. An amount is
withdrawn from the bank account which is referred as a ‘petty cash float’.
This ‘float’ will be used to pay for the various sundry expenses. The petty
cash book cashier will record any payments.
THE JOURNAL
• records transactions which are not routine (and not recorded in any other
book of prime entry)
Ex: acquisitions and disposals of non-current assets , correction of errors …
39
STATE WHICH BOOKS OF PRIME ENTRY THE FOLLOWING TRANSACTIONS WOULD BE

ENTERED INTO
A. Your business pay A Brown (a supplier) $450.00

B. You send D Smith (a customer) an invoice for $650
C. Your accounts manager asks you for $12 urgently
in order to buy some envelopes
D. You receive an invoice from A Brown for $300
E. You pay D Smith $500
F. F Jones (a customer) returns goods to the value of
$250
G. You return goods to J Green to the value of $504
H. F jones pays you $500
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2 LEDGER ACCOUNTS AND

DOUBLE ENTRY
41
THE ACCOUNTING EQUATION
ASSETS = CAPITAL + LIABILITIES
ASSETS – LIABILITIES = CAPITAL
NET ASSETS = CAPITAL
INCREASE IN NET ASSETS = INCREASE IN CAPITAL
INCREASE IN NET ASSETS = CAPITAL INTRODUCED + PROFIT -

DRAWINGS
42
EXAMPLE
The transactions of a new business in its first five days
are as follows:
Day 1 Avon commenced business introducing $1,000

cash.
Day 2 Bought a motor car for $400 cash.
Day 3 Obtained a $1,000 loan.
Day 4 Purchased goods for $300 cash.
Day 5 Sold all of the goods purchased on day 4 for
$400 on credit.
Use the accounting equation to illustrate the position

of the business at the end of each day. (Ignore
inventory for this example).
43
Day 1: Avon commenced business introducing $1,000 cash
The dual effect of this transaction is:
(a) the business has $1,000 of cash

(b) the business owes the owner $1,000 – this is
capital/equity.
Assets = Equity + Liabilities

1,000 1,000 0
44
Day 2: Bought a motor car for $400 cash

(a) the business has an asset of $400

(b) the business has spent $400 in cash
This transaction changes the form in which the assets are

held.
1,000 1,000 0
400 – 400 0 0
––––– ––––– –––––
1,000 1,000 0 45
Day 3: Obtained a $1,000 loan

(a) the business has $1,000 of cash

(b) the business owes $1,000 to the bank.

1,000 1,000 0
1,000 0 1,000
––––– ––––– –––––
2,000 1,000 1,000
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Day 4: Purchased goods for $300 cash

The purchase represents the recognition of a new asset
(inventory) and a corresponding reduction in the bank
account, so there is no change in the accounting equation.

1,700 700 1,000
47
Day 5: Sold goods for $400 on credit

The inventory which cost $300 has now been sold for $400, which results
in a profit of $100
(a) The business has increased its assets by $100 - it should record a
receivable of $400 and also record the reduction in inventory of $300.
(b) The business has earned profit of $100 - this is an increase in equity.
The sales revenue will increase profits and will therefore increase
equity in the business.
2,000 1,000 1,000
400 – 300 100 0
––––– ––––– –––––
2,100 1,100 1,000 48
THE FORMAT OF LEDGER ACCOUNT
49
THE GENERAL RULES OF DOUBLE ENTRY
PEARLS
50
SUMMARY OF STEPS TO RECORD A TRANSACTION
(1) Identify the items that are affected.

(2) Consider whether they are being increased or decreased.
(3) Decide whether each account should be debited or credited.
(4) Check that a debit entry and a credit entry have been made
and they are both for the same amount.
51
SUMMARY
52
3 FROM TRIAL BALANCE TO

FINANCIAL STATEMENTS
53
THE TRIAL BALANCE
A trial balance is a list of ledger balances shown in debit and credit

columns.
HOW TO CREATE A TRIAL BALANCE
STEP 1: COLLECT ALL LEDGER ACCOUNTS

STEP 2: BALANCE EACH ACCOUNT
• Draw total lines on both sides of the t-account
• Add up the bigger of the two sides and put this total on both
sides of the account
• Fill in the missing figure on the smaller of the two sides – this
figure is the balance on the account
• Carry forward this balance by also writing it on the opposite side
of the account, below the total line
STEP 3: COLLECT THE BALANCE OF EACH ACCOUNT AND PRESENT IN
THE FOLLOWING FORMAT
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EXAMPLE
The following are the transactions of Kristine’s business during her

first month of trading.
Record each transaction in t-accounts.
(a) Kristine starts a business and pays in $5,000 as capital
(b) The business buys a car for $1,000 cash
(c) They buy goods for resale for $500 cash
(d) They buy more goods for resale for $600 on credit from Mr A
(e) They pay rent of $200 cash
(f) They sell half the goods for $800 cash
(g) They sell the remaining goods on credit for $900 to Mrs X
(h) They pay $400 cash on account of the amount owing to Mr A
(i) They receive $500 from Mrs X
(j) Kristine withdraws $100 cash from the business
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Cash Capital
Car Purchases
57
Payables Rent
Sales Receivables
Withdrawals
58
Trial balance
Dr Cr
$ $
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FROM TRIAL BALANCE TO FINANCIAL STATEMENTS

THE STATEMENT OF FINANCIAL POSITION
THE STATEMENT OF PROFIT OR LOSS
60

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FINANCIAL ACCOUNTING

TYPES OF BUSINESS ENTITY

SOLE TRADER • Controls, manages and Simple

LIMITED LIABILITY • Separate legal entity

FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING

USERS OF THE INFORMATION STATEMENTS

STATEMENT OF FINANCIAL POSITION

• Reports assets, liabilities and equity at a date

PROFORMA : STATEMENT OF FINANCIAL POSITION AS AT

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF PROFIT OR LOSS (P&L)

STATEMENT OF CHANGES IN EQUITY

INTER-RELATIONSHIP BETWEEN SOFP AND SOCI

CAPITAL AND REVENUE EXPENDITURE

2 THE REGULATORY SYSTEM

THE REGULATORY FRAMEWORK

THE IASB’s CONCEPTUAL FRAMEWORK

GOING CONCERN ACCRUAL BASIS

THE QUALITIVE CHARACTERISTICS OF FINANCIAL INFORMATION

FROM TRIAL BALANCE TO

1 SOURCES, RECORDS AND

TYPES OF BUSINESS DOCUMENTATION

TYPES OF BUSINESS DOCUMENTATION

TYPES OF BUSINESS DOCUMENTATION

TYPES OF BUSINESS DOCUMENTATION

MATCHING TRANSACTIONS WITH RELEVANT DOCUMENTS

1. Credit sale a. Bank - in - slip

3. Purchases c. Sales invoice

4. Deposit with bank d. Payment voucher

5. Payment of salary e. Payroll sheet/Pay slip

6. Payment of rental f. Cash receipt/memo

7. Return of goods to supplier g. Supplier’s invoice

8. Payment of expenses h. Receipt from landlord

BOOKS OF PRIME ENTRY

SALES DAY BOOK

PURCHASES DAY BOOK

SALES RETURNS DAY BOOK

PURCHASES RETURNS DAY BOOK

Mr Kipper-Ling runs a business providing equipment for bakeries. He always makes a

Write up the following credit transactions arising in the first two

1 August Mrs Bakewell purchases cake tins at a cost of $500.

THE CASH BOOK

PETTY CASH BOOK

• A petty cash book is a cash book for small payments.

STATE WHICH BOOKS OF PRIME ENTRY THE FOLLOWING TRANSACTIONS WOULD BE

A. Your business pay A Brown (a supplier) $450.00

2 LEDGER ACCOUNTS AND

THE ACCOUNTING EQUATION

ASSETS = CAPITAL + LIABILITIES

ASSETS – LIABILITIES = CAPITAL

NET ASSETS = CAPITAL

INCREASE IN NET ASSETS = INCREASE IN CAPITAL

INCREASE IN NET ASSETS = CAPITAL INTRODUCED + PROFIT -

THE ACCOUNTING EQUATION

Day 1 Avon commenced business introducing $1,000

Use the accounting equation to illustrate the position

THE ACCOUNTING EQUATION

Day 1: Avon commenced business introducing $1,000 cash

The dual effect of this transaction is:

(a) the business has $1,000 of cash

Assets = Equity + Liabilities

THE ACCOUNTING EQUATION

Day 2: Bought a motor car for $400 cash