study notes F3 ACCA v2 - City Colleges

1 Suggested study notes ACCA F3 Paper Suggested study notes for F3 ACCA Examinations REVIEW OF SOME KEY FUNDALMENTALS. 1 Accounting Matrix Debit Trial Balance Credit Assets A Liabilities L. (+Capital) C. Expenses E Gains G. $ < totals must equal > $. Comparing assets and liabilities, this statement is called the balance sheet. Comparing expenses and gains, this statement is called the profit & loss account. Follow the rule of double entry on any transaction. Buy a car for cash: Debt asset / credit bank Buy stationary on credit: Debit expense (stationary) and credit creditor (name of supplier). When you pay the supplier, you debit creditor account and credit bank account. Pay wages: Debit wages and credit bank. Make a sale on credit: Debit debtor (customer) and credit sales. Make a cash sale : Debit bank and credit sales.

2 2 Know all accounting concepts and fundamentals terminology. Going concern Normal assumptions that entity will continue for next 12mths. If not, then assets would then need to reviewed, show at "breakup value". Materiality Include all material items. If excluded, this could influence the decision on the users viewpoint of the financial statements Accruals Entries to reflect when they are incurred as opposed recorded or paid. Financial statement then report costs/revenues in the correct period. Supports the matching concept. Prudence Exercise caution. Ensure all costs and liabilities are correctly stated. If loss foreseen, it should be accounted for and provision made. Page 1 of 11. Suggested study notes ACCA F3 Paper 2 Typical entries Ensure you know if A, E, L, G, C for each ledger account.

3 This determines the accounting treatment and where the ledger account is shown and disclosed. Company XP Limited Trial Balance Year ending 31 December 20xx KEY. Debit $ Credit $. Sales 190000 G. Discounts Received 200 G. Discounts Allowed 50 E. Opening Stock p&l 5000 E <used for cost of sales Closing Stock p&l 6000 G <used for cost of sales Purchases 60000 E <used for cost of sales Carriage Inwards 2000 E <used for cost of sales Carriage Outwards 4000 E. Salaries 40000 E Net total = p&l figure Rent 10000 E = $65,350 profit Rates 1000 E credits > debits Insurance 3000 E. Selling commission 3800 E. Bad Debts 3000 E. Bad Debts recovered 1000 G. Sundry Income 3000 G. Depreciation of equipment 3000 E. Equipment - cost 30000 A. Accumulated Depreciation - Equipment 6000 L < PROVISION.

4 Investments 10000 A. Stock 6000 A. Debtors 15000 A. Bad Debts Provision 1500 L < PROVISION. Bank Deposit 5000 A. Bank overdraft 15000 L. Creditors 3000 L. Bank Loan 37000 L. Preference Shares 100000 C. Ordinary Share Capital 100 C. Reserves - Opening 161950 C Loss b/f 362800 362800. Page 2 of 11. Suggested study notes ACCA F3 Paper 4 Be familiar of entries in a sales & purchase account Sales Account Bank - cash sales 30000. Debtor - T Murphy 2000. (credit note issued) Debtor - T Murphy 100000. Debtor - J Smith 62000. Profit & Loss a/c 190000. 192000 192000. Purchases Account Creditor - S Pierce 35000 Creditor - S Pierce 300. Creditor - B Hoey 20000 (credit note received). Bank - cash purchase 5300. Profit & Loss A/c 60000. 60300 60300. 5 The system for looking after petty cash is also known as an imprest system.

5 Keep a pre-determined float and use vouchers to track costs and analysis. The expense total is refunded later to reinstate the float or imprest amount. 6 Understand sales tax or VAT (value added tax). Assume all cash transactions: DR CR. Sell $1000 goods + 23% VAT. Sales 1000. Bank 1230. VAT 230. Purchase $600 goods inclusive of 23% VAT. Purchases 488. Bank 600. VAT 488 x 23% 112. Therefore the net VAT due is $118 (230-112). When paid the entry will be: VAT 118. Bank 118. Page 3 of 11. Suggested study notes ACCA F3 Paper 7 Learn the gross profit / (Loss) statement Sales 190,000. Less: Cost of Sales Opening Stock 5,000. Purchases 60,000. Carriage Inwards 2,000. Less: Closing Stock (6,000) (61,000). Gross Profit 129,000. Questions can be given to work out the missing entry. Follow the format to solve.

6 Note that carriage outwards (freight costs for selling and shipping goods out to customers). is not part of this format. Carriage inwards is the freight cost for buying goods for resale, so part of cost of sales. 8 Stock valuation IAS2 states that inventory should be valued at the lower of cost and net realisable value (NRV). In stock cost sales value NRV Stock Value item 1 30 50 45 30. item 2 20 18 17 17. item 3 10 20 9 9. 60 88 71 56 = Ans. $56 is the answer and follows the rule. So if accounts are prepared using the wrong valuation, the auditor must adjust and ensure a provision is made to reflect the stock value per IAS2. Important to know the methods of stock valuation. FIFO first in first out (latest prices will value stock). LIFO last in last out (older prices will value stock).

7 Weighted Average weighted average based on the stock inventory balance Page 4 of 11. Suggested study notes ACCA F3 Paper 9 Depreciation Method of writing off the cost of tangible fixed assets (or non current assets) to the profit and loss account. Example: Motor car purchased for 30,000. Expected life 3 yrs Residual value expected in year 3 is 3,000. What is the depreciation charge? Ans: 30,000 less 3000 = 27,000. Divide by 3 = 9000 per annum If at end of year 2 the car was sold for 10,200, what is the profit / (loss) on disposal ? Disposal A/c - Motor Car Motor - cost 30000 Bank 10200. Accum. Deprec. 18000 9k x 2. Profit & Loss a/c 1800 loss to P&L. 30000 30000. Note: Net book value (NBV) of car in yr 2 is 12,000 (30k less 18k). Check Ans: 10,200 less 12,000 = 1,800 loss. Extract Trial Balance: Debit Credit Disposal of Motor Vehicle 1800.

8 Review period of accounting and dates. If purchased or sold mid year, then you will need to time apportion values. Ensure you know different methods: Straight line Reducing balance If an asset is revalued, depreciation is calculated on the revalued amount. (IAS 16). Depreciation is a non cash item. Relevant to cash flow statement, where always added back. Page 5 of 11. Suggested study notes ACCA F3 Paper 10 Accruals You use electricity for your business. You know the cost will be about 500 per year. You never got a bill until year 3 for 1600. Show the entries and p&l and balance sheet extracts. (assume all entries happen at end of year). Debit Credit yr1 Light & Heat 500. Accruals 500. yr2 Light & Heat 500. Accruals 500. yr3 Light & Heat 1600 Pay Bank 1600 bill Accruals 1000 reverse Light & Heat 1000 accrual P&L Extracts: Yr 1 Light & Heat 500.

9 Yr 2 Light & Heat 500. Yr 3 Light & Heat 600 1600 less 1500. Balance Sheets Extracts: Yr 1 Accruals 500. yr 2 Accruals 1000. Yr 3 Accruals 0. Ensure you know accounting for prepaids also. Prepaids are an asset and shown under current assets. Page 6 of 11. Suggested study notes ACCA F3 Paper 11 Know the entries for bad debts Bad Debts Account shown in the P&L A/c Increase in bad debts prov. 500. Profit & Loss 3000. Debtors 2500. (bad debts written off). 3000 3000. Bad Debts Provision (BDP) shown in B/S, under debtors Bal b/f 1000. Bad Debts Increase 500. Bal c/f 1500. 1500 1500. Bal b/f 1500. Bad Debts Recovered shown in the P&L A/c Bank 1000. Profit & Loss Account 1000. 1000 1000. Where a trade debtor will not pay or you assume the debt is doubtful to be received, you can 1) clear the account be writing off the ledger balance or 2) leave the ledger balance put make a provision in another account - called BDP above.

10 The BDP a/c can be general say 10% of the debtors total or specific to individual debtors. Any movement in the BDP a/c is shown in the bad debts account in the P&L account. Where a debt was written off (ledger balance = 0) and later received. We setup a new account called bad debts recovered. The entry goes straight there and shown separately in the p&l. This account highlights the fact that it was recovered after a decision was made to write off. Page 7 of 11. Suggested study notes ACCA F3 Paper 12 Bank Reconciliation Statement Understand format and what are debit and credit balances for the ledger and the bank. Balance per ledger (15,000) Cr credit balance in ledger=overdraft Less: bank charges not posted (100). Incl adj needed to our books Revised ledger balance (15,100). Balancer per bank statement at 31/12/xx (10,000) Dr If Cr bal.