Suggested Study Notes
ACCA F3 Paper
Suggested Study Notes for F3 ACCA Examinations
REVIEW OF SOME KEY FUNDALMENTALS
1 Accounting Matrix
Trial Balance
Debit
Assets
Liabilities L
(+Capital) C
A
Expenses E
$
Credit
Gains
< totals must equal >
G
$
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 Know all accounting concepts and fundamentals terminology. E.G.
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.
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Suggested Study Notes
ACCA F3 Paper
2 Typical entries
Ensure you know if A, E, L, G, C for each ledger account. 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 $
Sales
Discounts Received
Discounts Allowed
Opening Stock
p&l
Closing Stock
p&l
Purchases
Carriage Inwards
Carriage Outwards
Salaries
Rent
Rates
Insurance
Selling commission
Bad Debts
Bad Debts recovered
Sundry Income
Depreciation of equipment
Equipment - cost
Accumulated Depreciation - Equipment
Investments
Stock
Debtors
Bad Debts Provision
Bank Deposit
Bank overdraft
Creditors
Bank Loan
Preference Shares
Ordinary Share Capital
Reserves - Opening
Credit $
161950
190000 G
200 G
E
E
6000 G
E
E
E
E
E
E
E
E
E
1000 G
3000 G
E
A
6000 L
A
A
A
1500 L
A
15000 L
3000 L
37000 L
100000 C
100 C
C
362800
362800
50
5000
60000
2000
4000
40000
10000
1000
3000
3800
3000
3000
30000
10000
6000
15000
5000
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<used for cost of sales
<used for cost of sales
<used for cost of sales
<used for cost of sales
Net total = p&l figure
= $65,350 profit
credits > debits
< PROVISION
< PROVISION
Loss b/f
Suggested Study Notes
ACCA F3 Paper
4 Be familiar of entries in a sales & purchase account
Sales Account
Bank - cash sales
Debtor - T Murphy
(credit note issued)
Profit & Loss a/c
30000
2000
Debtor - T Murphy
Debtor - J Smith
100000
62000
190000
192000
192000
Purchases Account
Creditor - S Pierce
Creditor - B Hoey
Bank - cash purchase
35000
20000
5300
Creditor - S Pierce
(credit note received)
Profit & Loss A/c
60000
60300
60300
5 The system for looking after petty cash is also known as an imprest system.
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
Bank
VAT
300
1000
1230
230
Purchase $600 goods inclusive of 23% VAT
Purchases
Bank
VAT
488 x 23%
488
600
112
Therefore the net VAT due is $118 (230-112). When paid the entry will be:
VAT
Bank
118
118
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Suggested Study Notes
ACCA F3 Paper
7 Learn the gross profit / (Loss) statement
Sales
190,000
Less: Cost of Sales
Opening Stock
Purchases
Carriage Inwards
Less: Closing Stock
5,000
60,000
2,000
(6,000)
Gross Profit
(61,000)
129,000
Questions can be given to work out the missing entry. Follow the format to solve.
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
item 1
item 2
item 3
cost
sales value
NRV
Stock Value
30
20
10
50
18
20
45
17
9
30
17
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)
Weighted Average
weighted average based on the stock inventory balance
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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
Accum. Deprec.
Profit & Loss a/c
10200
18000 9k x 2
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
Disposal of Motor Vehicle
Credit
1800
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.
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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
yr1
yr2
yr3
Light & Heat
Accruals
500
Light & Heat
Accruals
500
Light & Heat
Bank
1600
Accruals
Light & Heat
1000
Credit
500
500
1600
Pay
bill
1000
reverse
accrual
P&L Extracts:
Yr 1
Yr 2
Yr 3
Light & Heat
Light & Heat
Light & Heat
500
500
600
Balance Sheets Extracts:
Yr 1
yr 2
Yr 3
Accruals
Accruals
Accruals
500
1000
0
Ensure you know accounting for prepaids also.
Prepaids are an asset and shown under current assets.
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i.e. 1600 less 1500
Suggested Study Notes
ACCA F3 Paper
11 Know the entries for bad debts
Bad Debts Account
Increase in bad debts prov.
500
Profit & Loss
Debtors
(bad debts written off)
3000
Bad Debts Provision (BDP)
Bal b/f
Bad Debts Increase
shown in B/S, under debtors
1000
500
1500
1500
Bal b/f
Bad Debts Recovered
Bank
Profit & Loss Account
3000
2500
3000
Bal c/f
shown in the P&L A/c
1500
1500
shown in the P&L A/c
1000
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. 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.
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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
Less: bank charges not posted
credit balance
in ledger=overdraft
(100)
Incl adj needed to
our books
Revised ledger balance
(15,100)
Balancer per bank statement at 31/12/xx
(10,000) Dr
Add: outstanding lodgements
2,000
Less: outstanding cheques
(also called unpresented cheques)
chq no.
00501
00502
00505
If Cr bal. then no
brackets.
2,100
1,000
4,000
(7,100)
Any adj here are
normally timing.
Delay in making
lodgement or
payee going to bank
an presenting the
cheque to their bank.
(15,100)
Typically the bank is normally right and our books would need to be adjusted for omissions etc.
Rarely will the bank be wrong, if so, you show the error under the bank statement line
noting it is an bank error and due to be reversed in the future.
NB:
Dr for bank statement = overdraft
Cr for bank statement = in funds, you have money
=>
=>
Our books = Cr balance
Our books = Dr balance
In any bank reconciliation, important to check if opening balances agree. If not you may need
to follow though this reconciliation first, so you can then finish the closing reconciliation.
Some entries may still be outstanding and so you will need to c/f again on your closing
reconciliation.
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Suggested Study Notes
ACCA F3 Paper
13 Share Capital - a few key points:
New shares
Debit Bank and Credit Share capital
Issue of new shares
Rights Issue
Asking existing shareholder for money in exchange
of some discount of the market value.
Share Premium
Price paid over the par value of the shares
Receive $5 for 1 share of 50c each.
entry:
Debit bank $5
Credit share premium $4.5
Credit share capital $.50
Bonus Issue
No cashflow involved.
Moving other reserves to share capital.
No dilution of existing shareholders.
Sometimes known as "free shares". However, as everyone
gets them on the same basis, the market value adjusts per
share to reflect the change.
Important to understand terminology and accounting entries.
14 Cashflow Statement
Understand format. To show cashflow movements only, thus explain the bank movement.
If you buy an asset this is a use or application of funds, so deduct.
Increase in debtors (an asset), is therefore deducted as a working capital adjustment.
An increase in creditors (a liability), gives you extra funds. You are getting more credit. So
you add to working capital adjustment.
The opposite is true for both debtors and creditors.
Depreciation and the disposal account is not a cashflow item, so you add back.
(if profit on disposal you deduct, if loss on disposal you deduct)
Do "T accounts" for the following balance sheet accounts to get the cash flow item for:
Purchase of fixed assets (non current assets)
Taxation paid
Dividends paid
=>
=>
=>
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Fixed Assets Account
Taxation Account
Dividends Account
Suggested Study Notes
ACCA F3 Paper
15 Consolidation
IAS27
Own over 50% or deemed to have control of an entity. You then consolidate results.
Understand the adjustments for the combined entity:
1) Inter-trading
2) Inter-trade debts
3) Remove unrealised profit from inter-trading
and:
Calculation of goodwill
Calculation of non controlling interest (NCI)
=>
=>
=>
Consol adj P&L
Consol adj B/S
Consol adj P&L & B/S
Review acquisition date as you may need to apportion the profit figures in various
workings.
In a combined entity the holding company share capital is always stated in
the consolidated balance sheet.
Add 100% of the subsidiary P&L results, you then deal with the non controlling interest
share of profits at the end.
Important to understand mark-up and margin. As you may need to work out the unrealised
profit element for the stock adjustment.
Mark-up is on cost
Margin on sales
500 over 1000 = 50% mark-up
500 over 1500 = 33% margin
Note same profit figure so question can be phrased in may ways.
sales
purchase
Profit
1,500
(1,000)
500
33%
100%
67%
33%
Note relationship of the profit between sales and purchase (cost).
Equity Accounting IAS 28
Investment in associate companies
Owing 20% or more and not more than 50% (i.e. control)
P&L: Add group share of profit and loss.
B/S: Cost of investment plus group share of profit (profit after tax)
If investment in a company is less than 20%, there is no consolidation of that company.
Show investment in the balance sheet at cost / fair value.
E.& O. E.
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Suggested Study Notes
ACCA F3 Paper
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