FINANCIAL ACCOUNTING

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SYLLABUS

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING

INTRODUCTION 1

THE REGULATORY
2 FRAMEWORK

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING

1 INTRODUCT
ION

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
DEFINITION OF ACCOUNTING

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
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

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
USERS OF THE INFORMATION STATEMENTS

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
STATEMENT OF FINANCIAL POSITION

• Reports assets, liabilities and equity at a date

• A statement of carrying amounts
• Vertical format
• All items have monetary value

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
PROFORMA : STATEMENT OF FINANCIAL POSITION AS
AT

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
STATEMENT OF COMPREHENSIVE INCOME

• Either:
• Single statement of comprehensive income
• Two statements: (i) profit or loss; (ii) other
comprehensive income

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
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 …

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
STATEMENT OF CHANGES IN EQUITY

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
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

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SUMMARY

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING

2 THE REGULATORY
SYSTEM

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING
THE REGULATORY FRAMEWORK

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A. THE CONTEXT AND PURPOSE OF
FINANCIAL REPORTING

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SUMMARY

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B. THE QUALITATIVE CHARACTERISTICS OF
FINANCIAL INFORMATION
THE IASB’s CONCEPTUAL FRAMEWORK
BASIS FOR PREPARING FS

Is not an underlying
Is the underlying
assumption
assumption for
But FS should be prepared
financial framework
on accrual basis

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B. THE QUALITATIVE CHARACTERISTICS OF
FINANCIAL INFORMATION
THE QUALITIVE CHARACTERISTICS OF FINANCIAL
INFORMATION

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS

SOURCES,
RECORDS AND 1
BOOKS OF PRIME
ENTRY

2 LEDGER
ACCOUNTS AND
DOUBLE ENTRY

FROM TRIAL
BALANCE TO 3
FINANCIAL
STATEMENTS

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS

1 SOURCES, RECORDS
AND BOOKS OF
PRIME ENTRY

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
OVERVIEW

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
TYPES OF BUSINESS DOCUMENTATION

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
TYPES OF BUSINESS DOCUMENTATION

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
TYPES OF BUSINESS DOCUMENTATION

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
TYPES OF BUSINESS DOCUMENTATION

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
ACCOUNTING RECORDS

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
BOOKS OF PRIME ENTRY

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
SALES DAY BOOK

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
PURCHASES DAY BOOK

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
SALES RETURNS DAY BOOK

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
PURCHASES RETURNS DAY BOOK

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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.

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
EXAMPLE

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE CASH BOOK

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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 …

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS

2 LEDGER ACCOUNTS
AND DOUBLE ENTRY

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE ACCOUNTING EQUATION

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
C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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

(b) the business owes the owner $1,000 – this is
capital/equity.

Assets = Equity + Liabilities

1,000 1,000 0

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE ACCOUNTING EQUATION

Day 2: Bought a motor car for $400 cash

The dual effect of this transaction is:

(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.
Assets = Equity + Liabilities
1,000 1,000 0
400 – 400 0 0
––––– ––––– –––––
1,000 1,000 0 45
C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE ACCOUNTING EQUATION

Day 3: Obtained a $1,000 loan

The dual effect of this transaction is:

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

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

Assets = Equity + Liabilities

1,000 1,000 0
1,000 0 1,000
––––– ––––– –––––
2,000 1,000 1,000

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE ACCOUNTING EQUATION

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.

Assets = Equity + Liabilities

1,700 700 1,000

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 C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE ACCOUNTING EQUATION

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
The dual effect of this transaction is:
(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.
Assets = Equity + Liabilities
2,000 1,000 1,000
400 – 300 100 0
––––– ––––– –––––
2,100 1,100 1,000 48
C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE FORMAT OF LEDGER ACCOUNT

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
THE GENERAL RULES OF DOUBLE ENTRY

PEARLS
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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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.

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
SUMMARY

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS

3 FROM TRIAL
BALANCE TO
FINANCIAL
STATEMENTS

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
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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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
Cash Capital
       

Car Purchases
       

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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
Payables Rent
       

Sales Receivables
       

Withdrawals
   
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C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS

Trial balance
Dr Cr
$ $

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 C. THE USE OF DOUBLE ENTRY AND
ACCOUNTING SYSTEMS
FROM TRIAL BALANCE TO FINANCIAL STATEMENTS
THE STATEMENT OF FINANCIAL POSITION

THE STATEMENT OF PROFIT OR LOSS

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