FAF2 financial accounting

T-Account equation

ASSETS + EXPENSES = LIABILITIES + OPENING EQUITY + INCOME

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what doesn't trial balance account for

depreciation/ accruals/ prepayments/ outstanding invoices for purch or sales end of period

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Incomplete records: Trade receivables

opening balance + credit sales - cash received - bad debts - discounts allowed = closing balance

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Incomplete records: Trade payables

opening balance + credit purchases - cash payments - discounts received = closing balance

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Straight line depreciation equation

.

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reducing balance depreciation equation

.

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Sum of digits depreciation equation

.

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Physical usage depreciation equation

.

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writing off irrecoverable bad debts

Dr bad debt expense (inc expense/ IS) Cr TR (dec TR/ SOFP)

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provision for doubtful debts: specific/ irrecoverable

Dr doubtful debts inc/dec (inc expense/ IS) Cr bad debt provision (LESS: TR/ SOFP)

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Inventory cost flow assumptions: FIFO +ves/-ves

realistic, easy, actual purchase price, C/I most close to recent price /// COS out of date prices

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Inventory cost flow assumptions: LIFO +ves/-ves

easy, actual purchase price, COS recent price /// unrealistic, C/I out of date prices, when inv falls issues at very out of date prices

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Inventory cost flow assumptions: Weighted average

profits smoothed, logical in all identical items have same value /// valuation not prices which items bought at, COS out of date prices

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Control account: 3 +ves

1) detection of errors (have to equal) 2) Instant info (single account showing total amount owed/owing) 3) Prevention of fraud (2 separate duties in sales/purchase ledger + general ledger control account)

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Controle account: 5 -ves (errors)

1)error of omission (don't enter trans) 2)reverse entries (Dr/Cr) 3)Mispost/error of commission (enter wrong persons a/c) 4)Principle error (entry to wrong class of a/c e.g liab or cost) 5)Original entry error (undercast/overcast/transposition error)

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Statement of cash flows 3 sections

1) operating activities (revenue-producing activity) 2) investing activities (investments by business) 3) financing activities (way business funds operating and investing activities)

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SoCF headings under: operating activities (-ve)/+ve

note 1 / (income tax paid) / (dividends paid*) / (interest paid*)

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SoCF headings under: investing activities (-ve)/+ve

net capital expenditure not incl depreciation NCA / Interest received / investments made (and sold)

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SoCF headings under: financing activities (-ve)/+ve

(interest paid*) / (dividends paid*) / issue of shares / repayment of debentures

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Partnership 6 characteristics

1) no separation of ownership/control 2) financing opportunities (own/bank/new partner - no issue debt/equity) 3) cost of compliance (general) 4) reporting req. (only bank) 5) unlimited liab. (not just own cap.) 6) owners pay tax (not business)

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1890 partnership agreement 5 laws

1) profit/losses shared equally 2) capital contributed equally 3) partners not entitled to interest on cap. (not expense) 4) partners making loans in excess of cap allowed 5% interest 6) all take management/ not entitled to salary (drawn from profit)

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Capital account: definition/ Dr/ Cr

record amount of capital introduced/ Dr (bal c/fwd)/ Cr (bal b/fwd, contribution)

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Current account: definition/ Dr/ Cr

record balance of retained earnings for each partner/ Dr (drawings, bal c/fwd)/ Cr (bal b/fwd, salaries, interest on CAPITAL, share of profits)

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2 ways of adjusting equity for fairness

1) assets c/fwd at new revised value (revalue assets, credit former partners in old PSR) 2) assets c/fwd at old value (revalue assets, credit former in old PSR, write back revaluation debit in new PSR, gives bal c/fwd)

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Partnership adjustments needed when (5 examples)

1) sole trader takes on partner/ incorporates 2) change in PSR 3) partner dies/ leaves/ retires 4) two partnerships amalgamate/ new partner 5) partnership incorporates + converted to limited company

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7 steps of partnership question

1) fill in current a/c 2) fill in equity (SoFP) 3) fill in SoCI 4) fill in partnership appropriation a/c 5) add back profit share into current a/c 6) find gal c/fwd in current a/c 7) add into SoFP for each partner

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Partnership SoCI template

Revenue/ (COS)/ =gross profit/ (operating expenses)/ (interest on LOAN)/ =profit

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Partnership appropriation a/c template (Dr/Cr)

Dr (each partners salaries, each partners interest on capital, each partners share of profit)/ Cr (net profit)

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Goodwill definition

intangible asset arises when buyer acquires existing business/ assets that aren't separately identifiable

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Incorporation definition

purchase of partnership/ sole proprietor as going concern by any business/ assume business operating for future, implies bought for more than goodwill

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Incorporation 6 steps

1) All assets (Dr)+liab. (Cr) to realis. a/c 2) purch consideration (Dr newco /Cr realis.) 3) c/fwd profit on realis. + move to Cap. a/c (b/fwd + POR) *if selling stop* 4) keeping some of business Bank a/c + Cr Cap. 5) remove Newco (Cr) to cap. (Dr)

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Goodwill (intangible asset on purch) - price higher than value

total purch consideration - new asset value = +ve goodwill

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Goodwill (capital reserve on purch) - price lower than value

total purch consideration - new asset value = capital reserve (-ve goodwill)

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VAT characteristics

anyone liable / indirect / chargeable on G+S/ imported goods+acquisition of EU goods/

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VAT: exempt supplies

no tax charged/ not taken into account whether trader is taxable person + input tax not available for credit land, insurance, post, betting, education

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VAT: 0 rated supplies

taxable supply but at rate of 0/ taken into account whether trader is taxable + input tax available for credit (claim back if output tax 0 = difference)/ food, sewerage, water, SSSI, transport

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VAT: standard rate

20% G+S/ 5% gov. funded installation schemes

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Trader registered for VAT

value of taxable supplies > £82,000/annum

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Trader reregistered from VAT

value of taxable suppliers < £80,000/annum

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VAT: accounting for it

extra column in books of prime entry/ separate VAT control a/c for input + output tax / VAT control a/c c/fwd on Dr HM owes you, but c/fwd on Cr you owe HM

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VAT: payment periods for tax

traders pay within 3 months/ repayments 1 month/ tax returns returned 30 days of accounting period with tax due

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VAT on sales

LOWERS revenue = becomes more expensive

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VAT on purchases

LOWERS cost = becomes less expensive

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VAT 3 types of discounts

1)Unconditional discounts (tax=discounted amount) 2) Discounts for prompt payment (tax=discounted amount if not promptly paid, if instalment payments tax=reduced amount) 3) contingent discounts (tax=full amount, if earns discount, issue credit note)

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Input tax when non-deductible (use full amount)

1) private motor cars (not bought for resale 2) only 50% of input tax to leasing of all cars is deductible for VAT purposes 3) motor accessories 4) business entertainment expenses

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Debentures

debt claims on company (shares but rights to interest and capital repayments)

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Intangible assets

assets which do not have physical substance

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sales ledger

not part of double-entry, keep track of how much is owed by individual customers

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sales ledger control account

part of double-entry (TR), total amount owed to reporting entity by customers

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share capital

face value of shares issued by a company, gives holder part ownership, right to dividends + capital on a winding up

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share premium

difference between face value of shares issued and the value actually received by company at issue,

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FAF2 financial accounting

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