Principles of Accounts: Assessment Scheme

Important Information

• Scheme of Assessment for Principles of Accounts includes two compulsory papers.
• Paper 1 carries 40% weighting and lasts for 1 hour, involving 3-4 compulsory structured questions totaling 40 marks.
• Paper 1 also includes 4 compulsory structured questions totaling 60 marks.
• Paper 2 carries 60% weighting and lasts for 2 hours.
• Paper 2 involves preparing financial statements for a business for one financial year worth 20 marks.
• Paper 2 also includes a scenario-based question worth 5 marks as part of one of the three remaining questions.
• Scenario-based questions require decision-making between two choices within a fictional business context, involving accounting and non-accounting information that requires 3 reasons to justify the decision.
• The business context for scenarios is based on Inventory, Trade Payables, or Trade Receivables.
• Marking for the scenario-based question: 1 mark for the decision, 2 marks for each piece of Evidence and Explanation, totaling 3 pieces.

Introduction to Accounting

• Trading businesses buy from suppliers and sell goods to customers.
• Service businesses render services directly to customers.
• Stakeholders: Users of accounting & non-accounting information for decision-making.
• Owners need to know whether to invest in or sell the business based on risks/returns.
• Managers need to find ways to improve business performance.
• Employees need to decide whether to continue working for the business, based on career prospects.
• Lenders need to know whether to grant loans based on the business's ability to repay.
• Suppliers need to decide whether to sell on credit based on the business's payment ability.
• Customers need to know whether to buy based on the business's ability to provide goods and services.
• Government needs to know whether the business complies with tax regulations.
• Competitors need to determine whether they are comparable and how to improve their performance.
• Owners and managers are interested in non-accounting information because accounting information may leave out important business-related factors.
• Accounting provides accounting information for decision-making by business owners and other stakeholders.
• Accountants act as stewards by managing business resources, setting up accounting systems, solving problems, and providing timely & credible information.

Professional Ethics

• Stakeholders trust accountants: therefore they require professional ethics, meaning they should not mislead users for poor decisions.
• Integrity: Being straightforward and honest.
• Objectivity: Not letting bias, conflicts of interest, or undue influence override professional judgment.

Accounting Theory

• Accounting Entity: Business activities are separate from the owner's actions, and all transactions are recorded from the business's viewpoint.
• Going Concern: Assumes the business has an indefinite economic life unless there is evidence to the contrary.
• Accounting Period: The business life is divided into regular time intervals.
• Monetary: Only transactions measurable in monetary terms are recorded.
• Objectivity: Accounting information must be supported by reliable evidence, remaining free from opinions and biases.
• Historical Cost: Transactions are recorded at their original cost.
• Prudence: Accounting treatment should least overstate assets/profits and least understate liabilities/losses.
• Matching: Expenses must match income in the same period to determine profit.
• Revenue Recognition: Revenue is earned when goods/services have been provided.
• Accrual Basis of Accounting: Business activities are recorded when they occur, regardless of cash payment or receipt.
• Consistency: Apply the same method across periods for meaningful comparison.
• Materiality: Report relevant information that could influence decision-making.

Accounting Information System

• Cash transactions: Payment is immediate.
• Credit transactions: Payment is postponed.
• Order of transaction processing: Source Document → Journal → Ledger → Trial Balance → Financial Statements.
• Source Documents: Provide proof of transactions.
• Journal: Records business transactions by date.
• Ledger: Consolidates all transactions relating to a specific account.
• Trial Balance: Lists all ledger accounts and their ending balances at a specific date.
• Financial Statements: Provides a report of financial performance and position.
• Source Documents provide transaction evidence in accordance with the objectivity theory and transaction details at original cost in accordance with historical cost theory.
• Invoice: Informs credit customers of the amount owed after a credit sale.
• Credit Note: Reduces the amount owed by credit customers previously overcharged or after returning goods.
• Debit Note: Increases the amount owed by credit customers previously undercharged.
• Receipt: Acknowledges payment received from customers post-sale.
• Payment Voucher: Processes and approves payments to credit suppliers.
• Remittance Advice: Informs credit supplier that payment by cheque for a specific invoice has been made.
• Bank Statement: Checks and tallies business records against the bank's cash account.

Elements of Financial Statement and the Accounting Equation

• Asset: Resource a business owns that will provide future benefit.
• Liability: Obligation a business owes to others that will be settled in the future.
• Equity: The owner's claim on the business's net assets.
• Capital: Resources contributed by the owner for business use.
• Drawings: Assets taken from the business for the owner's personal use.
• Income: Amounts earned through the activities of the business.
• Expense: Costs incurred to earn income.
• Basic Accounting Equation: Assets = Liabilities + Equity
• Expanded Accounting Equation: Assets = Liabilities + Capital - Drawings + (Income – Expense)

Double-Entry Recording

• The summary provides a list of common business transactions and their corresponding debit and credit entries. Some key examples include:
  • Owner's Contribution:
  • Initiating a business with cash Dr. Cash at bank, Cr. Capital
  • Introducing a vehicle Dr. Motor vehicles, Cr. Capital
  • Borrowings:
  • Taking out a bank loan Dr. Cash at bank, Cr. Bank loan Repaying the bank loan Dr. Bank loan, Cr. Cash at bank
  • Non-current Assets:
  • Acquiring furniture via cheque Dr. Fixtures & Fittings, Cr. Cash at bank
  • Purchasing a computer on credit from Lee Dr. Office equipment, Cr. Trade payables - Lee
  • Accounting for motor vehicle depreciation Dr. Depreciation expense, Cr. Accumulated depreciation
  • Suppliers:
  • Buying goods with cash Dr. Inventory, Cr. Cash in hand
  • Purchasing goods on credit from Dan Dr. Inventory, Cr. Trade payables - Dan
  • Returning faulty goods Dr. Trade payables - Dan, Cr. Inventory
  • Making cash payments to Dan Dr. Trade payables - Dan, Cr. Cash in hand
  • Making full settlement Dr. Trade payables - Dan $600 , Cr. Cash at bank $550 and Discount received $50
  • Customers:
  • Selling goods for cash Dr. Cash in hand [SP], Cr. Sales revenue [SP] and Inventory [CP] and Cost of sales [CP]
  • Selling goods to Ellen on credit Dr. Trade receivables - Ellen [SP], Cr. Sales revenue and Cost of sales [CP] and Inventory CP
  • Ellen returning defective goods Dr. Sales returns and Inventory [CP], Cr. Trade receivables - Ellen and Cost of sales [CP]
  • Receiving money from Ellen Dr. Cash in hand, Cr. Trade receivables - Ellen
  • Receiving money with a discount Dr. Cash at bank $650 and Discount allowed $50 Cr. Trade receivables - Ellen $700
  • Dishonored Cheque Dr. Trade receivables - Ellen $700, Cr. Cash at bank $650 and Discount allowed $50
  • Other Transactions:
  • Amount owing from Ellen written off Dr. Allowance for impairment of trade receivables, Cr. Trace receivables - Ellen
  • Increase: Dr. Impairment loss on trade receivables, Cr. Allowance for impairment of trade receivables
  • Decrease: Dr. Allowance for impairment of trade receivables, Cr. Impairment loss on trade receivables
  • Received cheque for commission Dr. Cash at bank, Cr. Commission income
  • Commission not yet received Dr. Commission income receivables, Cr. Commission income
  • Commission received in advanced Dr. Commission inccome, Cr. Commission income received in advance
  • Paid rent with cheque Dr. Rent expense, Cr. Cash at bank
  • Prepaid rent Dr. Prepaid rent, Cr. Rent expense
  • Interest expense not yet paid Dr. Interest expense, Cr. Interest expense payable
  • Write down of inventory Dr. Impairment loss on inventory, Cr. Inventory
  • Owner withdrew cash for own use Dr. Drawings, Cr. Cash in hand
  • Transfer of drawings to capital a/c Dr. Capital, Cr. Drawings
  • Transfer of profit/loss to capital a/c Dr. is Income summary and Cr. is Capital

Trial Balance & Financial Statements.

• Trial Balances facilitate the preparation of financial statements and ensure arithmetic accuracy in recording.
• Trial Balances are not an absolute proof of accuracy; as there may be errors not revealed by a trial balance.
• Non-Current Assets: Benefit lasts beyond one financial year and is not easily coverted to cash.
• Current Assets: Benefit is used within one financial year and is easily converted to cash.
• Non-Current Assets are valued at book value with cost less accumulated depreciation.
• Inventories are valued at the lower of cost and net realisable value.
• Trade Receivables are valued at trade receivables less allowance for impairment of trade receivables.
• Non-Current Liabilities: Due to be paid beyond one financial year.
• Current Liabilities: Due to be paid within one financial year.
• Net assets equals total assets minus total liabilities, also known as equity, which the owner claims on the assets of the business.

Income

• Revenue is recognized when goods are sold and delivered, or when services have been provided as part of the revenue recognition theory.
• Service fee revenue and other income has to be recognized in the period that services have been provided, regardless of whether payment has been received or not as part of accrual basis of accounting

Expenses

• Costs incurred during business operations has to be matched against income earned in the same accounting period in order to determine profit as part of matching theory.
• Expenses has to be recognized in the period that services have been used, regardless of whether they have been paid or not as part of accrual basis of accounting.

Cash

• Causes of Dishonored Cheques: Expiry, post-dating, differing signature, insufficient funds, or frozen payer's bank account.
• Internal Controls safeguard assets and ensure that business transactions are recorded accurately and in compliance with laws.
• Ways to Safeguard Cash:
  • Segregation of duties with different employees handling cash and recording.
  • Secure cash and checks in locked storage.
  • proper approvals and supporting documents are needed for all payments.
  • bank reconciliation must be conducted for the business against the back
• Reasons for bank reconciliation: Differences between the cash at bank balance and the balance in the bank statement as a form of internal control, updating the cash at bank account and check for recording errors.
• Timing differences and recording errors cause a difference between bank statements.

Inventory

• Businesses keep sufficient goods in order to avoid out-of-stock situations and loss of sales.
• Businesses records all changes, ensures a physical inventory is in a warehouse and buys insurance.
• Cost of inventory purchased must include purchase price, custom duties, transit insurance, shipping fees, wages, and packing materials.
• Matching theory states Cost incurred to buy the inventory must be matched against the sales revenue in the same accounting period to determine the gross profit for that period

Trade Receivables

• Due diligence is needed for credit risk and to make allowances for any possible impairments.
• This supports the prudence theory.
• Use impairment loss to determine profit in the right period based on the theory.

Non-Current Assets

• The application of materiality states that if the amount spent on a NCA is insignificant to decision-making then it should be reported as an expense instead.
• Matching and prudence is needed in order to determine the correct depreciation, profits and ensure assets are not overstated.

Trade Payable

• Trade discount is a reduction to list price.
• Cash Discount is a reduction to the invoice price.
• Neither of which are recorded in the ledger but are considered when buying supplies.
• Local or overseas is a consideration for selecting suppliers. Consider overseas takes longer to ship and will incur additional costs such as shipping and import duties.
• Whether customers can see and touch products and determine if they meet their expectations and terms/conditions are important factors when selecting suppliers/
• After-sales service, Customer support and free readily available helpline are key customer service attributes when selecting suppliers.

Long-term Borrowing

• How does Bank Loan arise - Business borrows a fixed amount which is then transferred to the bank account.
• How does Bank Overdraft arise- Business becomes overdrawn on its bank deposits, up to the limit which was agreed upon.
• How to repay Bank loans -Business makes regular cash payment in equal instalments over the loan period.
• How to repay Bank Overdraft -Business deposits cash into the bank account within the year to reduce the overdraft.
• Presentation Bank loans- Presented as “Long-term borrowings" under non-current liabilities.
• Presentation of Bank Overdraft- Presented as "Bank overdraft" under current liabilities.
• Accouting includes interest expense and matching the income earned
• Accouting includes accrual basis