CAT L1.1 INTRODUCTION TO FINANCIAL ACCOUNTING Revision Guide

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CAT
Certified Accounting Technicians Examination
Stage: Level 1 L1.1
Subject Title: Introduction to Financial
Accounting
Revision Guide
INSIDE COVER - BLANK
Page 1
CONTENTS
Title
Page
Study Techniques
3
Examination Techniques
4
Assessment Strategy
9
Learning Resources
10
Sample Questions and Solutions
11
Page 2
BLANK
Page 3
STUDY TECHNIQUE
What is the best way to manage my time?
• Identify all available free time between now and the examinations.
• Prepare a revision timetable with a list of “must do” activities.
• Remember to take a break (approx 10 minutes) after periods of
intense study.
What areas should I revise?
• Rank your competence from Low to Medium to High for each topic.
• Allocate the least amount of time to topics ranked as high.
• Allocate between 25% - 50% of time for medium competence.
• Allocate up to 50% of time for low competence.
How do I prevent myself veering off-track?
• Introduce variety to your revision schedule.
• Change from one subject to another during the course of the day.
• Stick to your revision timetable to avoid spending too much time on one topic.
Are study groups a good idea?
• Yes, great learning happens in groups.
• Organise a study group with 4 – 6 people.
• Invite classmates of different strengths so that you can learn from one another.
• Share your notes to identify any gaps.
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EXAMINATION TECHNIQUES
INTRODUCTION
Solving and dealing with problems is an essential part of learning, thinking and intelligence.
A career in accounting will require you to deal with many problems.
In order to prepare you for this important task, professional accounting bodies are placing
greater emphasis on problem solving as part of their examination process.
In exams, some problems we face are relatively straightforward, and you will be able to deal
with them directly and quickly. However, some issues are more complex and you will need to
work around the problem before you can either solve it or deal with it in some other way.
The purpose of this article is to help students to deal with problems in an exam setting. To
achieve this, the remaining parts of the article contain the following sections:
• Preliminary issues
• An approach to dealing with and solving problems
• Conclusion.
Preliminaries
The first problem that you must deal with is your reaction to exam questions.
When presented with an exam paper, most students will quickly read through the questions
and then many will … PANIC!
Assuming that you have done a reasonable amount of work beforehand, you shouldn’t be
overly concerned about this reaction. It is both natural and essential. It is natural to panic in
stressful situations because that is how the brain is programmed.
Archaeologists have estimated that humans have inhabited earth for over 200,000 years. For
most of this time, we have been hunters, gatherers and protectors.
In order to survive on this planet we had to be good at spotting unusual items, because any
strange occurrence in our immediate vicinity probably meant the presence of danger. The
brain’s natural reaction to sensing any extraordinary item is to prepare the body for ‘fight or
flight’. Unfortunately, neither reaction is appropriate in an exam setting.
The good news is that if you have spotted something unusual in the exam question, you have
completed the first step in dealing with the problem: its identification. Students may wish to
use various relaxation techniques in order to control the effects of the brain’s extreme
reaction to the unforeseen items that will occur in all examination questions.
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However, you should also be reassured that once you have identified the unusual item, you
can now prepare yourself for dealing with this, and other problems, contained in the exam
paper.
A Suggested Approach for Solving and Dealing with Problems in Exams.
The main stages in the suggested approach are:
1. Identify the Problem
2. Define the Problem
3. Find and Implement a Solution
4. Review
1. Identify the Problem
As discussed in the previous section, there is a natural tendency to panic when faced with
unusual items. We suggest the following approach for the preliminary stage of solving and
dealing with problems in exams:
Scan through the exam question
You should expect to find problem areas and that your body will react to these items.
PANIC!!
Remember that this is both natural and essential.
Pause
Take deep breaths or whatever it takes to help your mind and body to calm down.
Try not to exhale too loudly – you will only distract other students!
Do something practical
Look at the question requirements.
Note the items that are essential and are worth the most marks.
Start your solution by neatly putting in the question number and labelling each part of your
answer in accordance with the stated requirements.
Actively reread the question
Underline (or highlight) important items that refer to the question requirements. Tick or
otherwise indicate the issues that you are familiar with. Put a circle around unusual items that
will require further consideration.
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2. Define the Problem
Having dealt with the preliminary issues outlined above, you have already made a good start
by identifying the problem areas. Before you attempt to solve the problem, you should make
sure that the problem is properly defined. This may take only a few seconds, but will be time
well spent. In order to make sure that the problem is properly defined you should refer back
to the question requirements. This is worth repeating: Every year, Examiner Reports note that
students fail to pass exams because they do not answer the question asked. Examiners have a
marking scheme and they can only award marks for solutions that deal with the issues as
stipulated in the question requirements. Anything else is a waste of time. After you have re-
read the question requirements ask yourself these questions in relation to the problem areas
that you have identified:
Is this item essential in order to answer the question?
Remember that occasionally, examiners will put ‘red herrings’ (irrelevant issues) into the
question in order to test your knowledge of a topic.
What’s it worth?
Figure out approximately how many marks the problem item is worth. This will help you to
allocate the appropriate amount of time to this issue.
Can I break it down into smaller parts?
In many cases, significant problems can be broken down into its component parts. Some parts
of the problem might be easy to solve.
Can I ignore this item (at least temporarily)?
Obviously, you don’t want to do this very often, but it can be a useful strategy for problems
that cannot be solved immediately.
Note that if you leave something out, you should leave space in the solution to put in the
answer at a later stage. There are a number of possible advantages to be gained from this
approach:
1) It will allow you to make progress and complete other parts of the question that you are
familiar with. This means that you will gain marks rather than fretting over something
that your mind is not ready to deal with yet.
2) As you are working on the tasks that you are familiar with, your mind will relax and you
may remember how to deal with the problem area.
3) When you complete parts of the answer, it may become apparent how to fill in the
missing pieces of information. Many accounting questions are like jigsaw puzzles: when
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you put in some of the parts that fit together, it is easier to see where the missing pieces
should go and what they look like.
3. Find and Implement a Solution
In many cases, after identifying and defining the problem, it will be easy to deal with the
issue and to move on to the next part of the question. However, for complex problems that
are worth significant marks, you will have to spend more time working on the issue in order
to deal with the problem. When this happens, you should follow these steps:
Map out the problem
Depending on your preferred learning style, you can do this in a variety of ways including
diagrams, tables, pictures, sentences, bullet points or any combination of methods. It is best
to do this in a working on a separate page (not on the exam paper) because some of this work
will earn marks. Neat and clearly referenced workings will illustrate to the examiner that you
have a systematic approach to answering the question.
Summarise what you know about the problem
Make sure that this is brief and that it relates to the question requirements. Put this
information into the working where you have mapped out the problem. Be succinct and
relevant. The information can be based on data contained in the question and your own
knowledge and experience. Don’t spend too long at this stage, but complete your workings as
neatly as possible because this will maximise the marks you will be awarded.
Consider alternative solutions
Review your workings and compare this information to the question requirements. Complete
as much of the solution as you can. Make sure it is in the format as stipulated in the question
requirements. Consider different ways of solving the problem and try to eliminate at least one
alternative.
Implement a solution
Go with your instinct and write in your solution. Leave extra space on the page for a change
of mind and/or supplementary information. Make sure the solution refers to your workings
that have been numbered.
4. Review
After dealing with each problem and question, you should spend a short while reviewing your
solution. The temptation is to rush onto the next question, but a few moments spent in
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reviewing your solution can help you to gain many marks. There are three questions to ask
yourself here:
Have I met the question requirements?
Yes, we have mentioned this already. Examiner Reports over the years advise that failure to
follow the instructions provided in the question requirements is a significant factor in causing
students to lose marks. For instance, easy marks can be gained by putting your answer in the
correct format. This could be in the form of a report or memo or whatever is asked in the
question. Likewise, look carefully at the time period requested. The standard accounting
period is 12 months, but occasionally examiners will specify a different accounting period.
Is my solution reasonable?
Look at the figures in your solution. How do they compare relative to the size of the figures
provided in the question?
For example, if Revenue were 750,000 and your Net Profit figure was more than 1 million,
then clearly this is worth checking.
If there were some extraordinary events it is possible for this to be correct, but more than
likely, you have misread a figure from your calculator. Likewise, the depreciation expense
should be a fraction of the value of the fixed assets.
What have I learned?
Very often in exams, different parts of the solution are interlinked. An answer from one of
your workings can frequently be used in another part of the solution. The method used to
figure out an answer may also be applicable to other parts of your solution.
Conclusion
In order to pass your exams you will have to solve many problems. The first problem to
overcome is your reaction to unusual items. You must expect problems to arise in exams and
be prepared to deal with them in a systematic manner. John Foster Dulles, a former US
Secretary of State noted that: The measure of success is not whether you have a tough
problem to deal with, but whether it is the same problem you had last year. We hope that, by
applying the principles outlined in this article, you will be successful in your examinations
and that you can move on to solve and deal with new problems.
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Stage: Level 1
Subject Title: Introduction to Financial Accounting
Examination Duration: 3 Hours
Assessment Strategy
Examination Approach
The examination seeks to test the students’ knowledge and understanding of the application
of accounting concepts and principles. Questions 1, 2 and 3 are compulsory and usually
involve the preparation and presentation of financial statements for sole traders, limited
companies, and other organisations in accordance with current standards and guidelines.
Other questions provide the opportunity for students to demonstrate their understanding of
the role, function and basic principles, (including double entry bookkeeping), of financial
accounting.
Emphasis in this examination is placed on proper layout and presentation as well as on
numerical accuracy. Students must demonstrate sound technical knowledge and presentation
skills and the ability to integrate learning from different parts of this and other syllabi, as
appropriate.
Examination Format
The examination is unseen, closed book and 3 hours’ in duration. Students are required to
answer 5 questions out of 7. Questions 1, 2 and 3 are compulsory and carry 20 marks each.
Students are required to answer 2 of the remaining 3 questions each carrying 20 marks.
Marks Allocation Marks
Compulsory questions 60
Choice of 2 questions out of 3
(20 marks allocated to each question) 40
TOTAL 100
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Learning Resources
Core Texts
Wood F and Sangster A / Business Accounting 1
and 2 11th ed / Pearson 2008 /
ISBN 0273712128 / ISBN 0273712136
Connolly / International Financial Accounting and
Reporting 3rd ed. / CAI 2011 / ISBN
9781907214646
Manuals
Institute of Certified Public Accountants of Rwanda – L1.1 Introduction to Financial
Accounting
Useful Websites
(as at date of publication)
www.icparwanda.com
www.ifac.org/ - The International Federation of
Accountants.
www.ifrs.org/ - The International Financial
Reporting Standards Foundation.
www.iasplus.com - Deloitte Touche Tohmatsu.
Summaries of International Financial Reporting
Standards (IFRS).
www.frc.org.uk/ - The Financial Reporting Council.
ASB - Accounting Standards Board.
www.frc.org.uk/pob/ - The Professional Oversight
Board.
http://ec.europa.eu/internal_market/accounting/ias/index_en.htm
www.ipsas.org
www.intosai.org
Page 11
INTRODUCTION TO
FINANCIAL
ACCOUNTING
Page 12
QUESTION 1
a) Outline four activities that accountants normally undertake within business
organisations.
(6 Marks)
b) Accounting provides useful information to a wide variety of user s. You are required
to:
i. List four users of accounting information.
ii. State the type of information that each user is interested in.
iii. State whether the user is internal or external to an organisation.
Note: one user must be internal.
(6 Marks)
c) Financial and management accounting are two different branches of accounting
that have developed over time to meet the informational requirements of the
users of financial information. You are required to:
i. Provide an appropriate definition of financial accounting and management
accounting.
(4 Marks)
ii. Outline four differences between management accounting and financial
accounting.
(4 Marks)
(Total 20 Marks)
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QUESTION 2
a) The following information is available for sole trader Mr Jalloh for the year ended 31
December 2011:
RWF
Opening receivables debit balances 487,900
Opening receivables credit balances 3,290
Credit sales 1,060,800
Credit sales returns 32,650
Cash received from customers (95% from 987,420
credit customers)
Irrecoverable debts 21,700
Irrecoverable debts previously written off
recovered 6,300
Opening allowance for receivables 25,000
Contra entry with balances on payables ledger 4,750
Refunds to receivables for over payment 2,780
You are required to:
i. With the aid of a receivables control account, calculate the closing receivables
figure as at 31 December 2011.
(8 Marks)
ii. Calculate the closing allowance for receivables assuming that Mr Jalloh wishes to set
the closing allowance for receivables at 5% of outstanding receivables as at 31
December 2011.
(2 Marks)
iii. Prepare appropriate income statement and statement of financial position extracts to
illustrate how the information above would be presented in the financial
statements of Mr Jalloh for the year ended 31 December 2011.
(6 Marks)
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b) Explain your understanding of the accounting concept ‘prudence’ and illustrate how
establishing an allowance for receivables can be considered as an application of the
prudence concept.
(4 Marks)
(Total 20 Marks)
QUESTION 3
Mr Keita is a sole trader with a small business. The trial balance extracted as at 31December
2011 failed to agree. The debits exceeded the credits by RWF4,120.
A detailed examination of the books was undertaken and the following matters were
uncovered:
1. The total in the sales day book was RWF42,100 - the figure used when posting sales
to the T accounts was RWF41,200.
2. No entry had been made for expenses paid in cash from the petty cash tin, the
expenses paid in this manner were as follows:
i. Canteen supplies RWF75
ii. Postage stamps RWF35
iii. Present for retiring employee RWF170
3. Discounts allowed of RWF65 were credited to the discount received account. The
entry in the receivable’s personal account was correct.
4. A credit note for RWF770 for purchases returns was treated correctly in the supplier’s
account and debited to the purchases returns account as RWF880.
5. A cheque payment to a payable for RWF1,300 was treated appropriately in the
supplier’s account and debited to drawings.
6. Cash drawings by Mr Keita of RWF1,110 were treated as cash sales in error.
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7. An old motor vehicle was sold on December 15th for RWF3,700. The vehicle
originally cost RWF16,750 and had a balance in the accumulated depreciation
account of RWF14,100 at the time of sale. The only entry that has been made to
record the transaction is to debit bank and credit sales with RWF3,700.
(Ignore the effects of VAT and depreciation)
You are required to:
a) Prepare the journal entries, with the appropriate narratives, necessary to correct the
above errors.
(11 Marks)
b) Prepare a suspense account to clear the difference.
(5 Marks)
c) Prepare a working showing the effect on proprietor’s profit (if any) of correcting each
of the above errors.
(4 Marks)
(Total 20 Marks)
QUESTION 4
Write a briefing note on each of the following terms:
i) Objectives of financial statements
ii) Users of financial statements
iii) Ethical requirements of accountancy professionals
iv) Whistle blowing
(Total 20 Marks)
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QUESTION 5
The following trial balance was extracted from the books of Mr Ayim, a sole trader, on
31 December 2011:
RWF
RWF
Buildings at cost
550,000
Buildings accumulated depreciation
77,000
Fixtures and fittings at cost
71,200
Fixtures and fittings accumulated
depreciation
24,920
Motor vehicles at cost
52,000
Motor vehicles accumulated depreciation
20,500
Receivables
63,000
Payables
49,700
Bank
9,600
Cash
800
5% Loan
150,000
Inventories
29,400
Sales and purchases
241,050
410,000
Sales return
11,000
Light and heat
970
Telephone and internet
1,980
Discounts received and allowed
2,200
1,900
Carriage
15,400
5% Loan interest
7,500
Rental income
34,500
Wages and salaries
74,200
Insurance
14,230
Bank charges
410
Capital 1/1/11
371,820
Drawings
14,600
1,149,940
1,149,940
The following information, which has not been accounted for above, is also available:
1. The inventory take as at 31 December 2011 showed inventory items at cost of
RWF31,110. Included in this figure were inventories items with a cost price of
RWF6,100 and a net realisable value of RWF3,000.
2. During the year to 31 December 2011, Mr Ayim took RWF9,800 of inventory items
for his personal use.
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3. Depreciation is provided for at the following rates:
a) Buildings 2% straight line
b) Fixtures and fittings 10% straight line
c) Motor vehicles 15% reducing balance
4. An irrecoverable debt of RWF5,400 is to be written off as irrecoverable. Mr
Ayim is satisfied that the remaining receivables’ balances are all recoverable and that
no closing allowance for receivables is required.
5. 40% of carriage is carriage inwards and the remainder is carriage outwards.
6. An amount of RWF510 is prepaid in relation to insurance as at 31 December 2011.
You are required to prepare:
a) The income statement for the year ended 31 December 2011.
(11 Marks)
b) The statement of financial position as at that date.
(7 Marks)
(Presentation and format. 2 Marks)
(Total 20 Marks)
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QUESTION 6
The following information is available for Kigali Golf Club for the year to 31 December
2011.
Receipts and Payments Account
Details
RWF
Details
RWF
Balance c/d
??
Light and heat (50% relates to bar)
11,110
Clubhouse fixtures & fittings
7,580
Subscriptions received
186,320
Clubhouse rent
90,000
Proceeds from raffle
19,750
Barperson salary
17,500
Bar sales
201,790
Insurance (60% relates to bar)
22,000
Interest received
540
Raffle prizes & associated costs
4,620
Greenkeeper salary
31,500
Bar purchases
102,005
Club secretary & president expenses
9,000
Green maintenance
9,940
Bar cleaning
7,100
Closing bank balance c/d
109,730
422,085
422,085
Opening balance c/d
109,730
Other assets and liabilities of the club are as follows:
01/01/2011
31/12/2011
RWF
RWF
Clubhouse fixtures and fittings (NBV)
30,150
???
Clubhouse rent prepayment
15,000
???
Bar inventory
19,060
17,005
Bar purchases payables
9,710
8,090
Subscriptions in advance
9,730
6,330
Subscriptions in arrears
2,670
10,440
Accruals green maintenance
115
80
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Notes:
1. Depreciation on fixtures and fittings is to be provided for at a rate of 5% per annum
reducing balance method
2. Rent is paid every two months in advance, for example rent for January and February
2011 is paid on the 31 December 2010. The annual rent charge is RWF 90,000
You are required to:
i. Calculate the accumulated fund as at 1 January 2011.
(4 Marks)
ii. Prepare a bar trading account (income statement) for the year ended
31December 2011.
(4 Marks)
iii. Calculate the proceeds from the raffle.
(2 Marks)
iv. Prepare the club’s income and expenditure account for the year end 31 December
2011.
(8 Marks)
(Presentation and format. 2 Marks)
(Total 20 Marks)
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QUESTION 7
The following trial balance was extracted from the books of Mr Magoro on the 31 December
2011.
The trial balance of Mr Magoro as at 31 December 2011
Dr
Cr
RWF
RWF
Bank
63,000
Capital
1,308,000
Cash
6,000
Creditors
75,000
Debtors
54,000
Drawings
24,000
Fixtures
48,000
Motor Expenses
78,000
Motor Vehicles
93,000
Repairs to fixtures
12,000
Premises
1,200,000
Purchases
300,000
Salaries
375,000
Sales
900,000
Stock 1/1/11
30,000
2,283,000
2,283,000
You are provided with the following additional information:
Ignore depreciation
Stock at 31 December 2011 is RWF 45,000.
You are required to:
Prepare the Trading Profit & Loss account for the year ended 31 December 2011 and the
Balance Sheet as at 31 December 2011.
(8 Marks)
After preparing the Trading Profit & Loss account and balance sheet for 31 December 2011
the following information came to light:
i. A motor vehicle purchases for RWF42,000 had been entered in the motor expenses
account in error
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ii. Included in Premises is RWF15,000 posted from Repairs to Premises in error
iii. Motor expenses included a charge of RWF5,000 incurred by Mr Magoro personally
(annual holiday)
Requirement
You are now required to:
a) Prepare journals to correct these errors
(3 Marks)
b) Prepare the Trading Profit & Loss account for the year ended 31 December 2011 and
the Balance Sheet as at 31 December 2011 after the journals
(8 Marks)
c) Explain what impact journalising these adjustments had on both the Trading Profit &
Loss account and the Balance Sheet for Mr Magoro
(1 Mark)
(Total 20 Marks)
QUESTION 8
The Debtors Ledger control account of ABC as at 31st December 2011 showed the following
balances RWF79,266 Dr. and RWF1,332 Cr.
These balances did not agree with the list of debtors balances extracted on that date
RWF74,790.
An examination of the books of ABC revealed the following:
1. ABC had accepted returns of RWF1,200 from a customer and entered them correctly
in the books. He subsequently decided that a restocking charge of 12% was to be
charged to the customer. This restocking charge was posted to the credit of the
customer’s personal account only.
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2. A credit note was sent to a customer for RWF732. The only entry made in the books
was RWF132 debited to the customer’s account.
3. Cash sales RWF300 and credit sales RWF600 posted correctly in the Sales book but
both had been entered by ABC on the credit of a debtors account.
4. ABC had charged a customer interest on an overdue account amounting to RWF279.
The only entry made in the books was a credit of RWF117 to the debtors account.
After a discussion with the debtor and payment in full of the original balance the
interest charge was reduced to RWF150. No entry was made in respect of this
reduction in the books.
5. A cheque for RWF1,200 received from a debtor in full settlement of a debt of
RWF1,430 had been entered in the books, however the cheque was dishonoured. No
record had been made in the books regarding the dishonoured cheque.
6. ABC had sent an invoice to a customer for RWF1,650. This had been entered in the
appropriate day book as RWF1,515, when posting from this book to the ledger. No
entry had been made in the personal account.
Requirement
You are required to show the following:
a) Adjusted debtors ledger control account
(10 Marks)
b) Adjusted schedule of debtors.
(10 Marks)
(Total 20 Marks)
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QUESTION 9
KIGALI TRANSPORT prepares its financial accounts to 31 December each year. The
company's policy is to depreciate its vehicles from the month of purchase to the month
preceding the month of sale/disposal.
Depreciation rate used by KIGALI TRANSPORT is 20% straight line.
On the 1st January 2011 KIGALI TRANSPORT had the following vehicles.
Vehicle Date of purchase Residual value Cost
RWF RWF
No. 1 1st January 2009 0 80,000
No. 2 1st July 2009 15,000 75,000
No. 3 1st December 2010 0 96,000
You have been provided with the following information by KIGALI TRANSPORT:
(i) On the 1st July 2011 Vehicle No. 1 was traded in for RWF32,000 against a new
vehicle costing RWF93,000, (no residual value). Vehicle No. 1 had modifications
done to it on 1st January 2010 costing RWF15,000, (no residual value). These
modification had been depreciated at a rate of 40% in year one and thereafter at a rate
of 20% Straight Line.
(ii) On the 1st September 2011 Vehicle No. 3 was crashed and traded in against a new
vehicle costing RWF120,000 (no residual value). KIGALI TRANSPORT claimed
against its insurance policy and recouped compensation to the value of RWF25,000.
The amount paid by cheque for the new vehicle was RWF80,000.
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Requirement
You are required to show with workings for each of the years 2009, 2010 and 2011:
a) Vehicle Account
(6 Marks)
b) The Provision for Depreciation account
(6 Marks)
c) The Vehicle Disposal Account.
(8 Marks)
(Total 20 Marks)
QUESTION 10
Write a short note to a client dealing with the following points:
1. The qualitative characteristics of Financial Statements
(4 Marks)
2. The historical cost accounting convention/system
(4 Marks)
3. Briefly outline the role of the International Accounting Standards Board
(4 Marks)
4. Briefly explain what is meant by the business entity concept
(4 Marks)
5. Explain what is meant by an Imprest System of Petty Cash
(4 Marks)
Page 25
SUGGESTED SOLUTIONS
SOLUTION 1
a)
The accountant’s role in the organisation can be analysed as follows:
1. Preparation and presentation of timely accurate financial/management accounts to
management to help management interpret the financial information.
2. Identification of areas of inefficiency and wastages of resources in the business.
3. Treasury functions: The accountant also plays the role of treasury functions in such a
way that they raise finance, cash management, etc.
4. Setting up an effective system of internal and accounting controls.
5. Preparation of feasibility reports: These reports assist management in assessing the
viability/profitability or otherwise proposed capital expenditure such as the opening of
a new factory or branch.
6. Investigation of the performance/operations of competing business organisations to
assist management in policy formulation.
7. Investigation of fraud within the organisation, this is a key role of the accountant in
preparation of an audit at year-end.
Any other reasonable answers will be accepted.
b)
Any four of the following are acceptable – however one must be internal.
Investors/Owners
Investors are concerned about risk and return in relation to their investments. They require
information to decide whether they should continue to invest in a business. They also need to
be able to access whether a business will be able to pay dividends, and measure the
performance of the business’ management overall.
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The key accounting information for an investor is therefore:
• Information about growth, sales, volumes
• Profitability (profit margins, overall level of profit)
• Investment (amounts invested, assets owned)
• Business value (share price)
• Comparative information of competitors.
They are usually considered external but in private limited companies with a small number of
investors they can be considered internal.
Lenders
Banks and loan stockholders who lend money to a business require information that helps
them determine whether loans and interest will be paid when due.
The key accounting information for lenders is therefore:
• Cash flow
• Security of assets against which the lending may be secured
• Investment requirements in the business.
Payables
Suppliers and trade payables require information that helps them understand and assess the
short-term liquidity of a business. Is the business able to pay short-term debt when it falls
due?
The key accounting information for payables is therefore:
• Cash flow
• Management of working capital
• Payment policy.
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Receivables
Customers and trade receivables require information about the ability of the business to
survive and prosper. As customers of the company’s products, they have a long-term
interest in the company’s range of products and services. They may even be dependent on
the business for certain products and services.
The key accounting information for receivables is therefore:
• Sales growth
• New product development
• Investment in the business (e.g. production capacity).
Employees
Employees (and organisations that represent them – e.g. trade unions) require information
about the stability and continuing profitability of the business. They are crucially interested
in information about employment prospects and the maintenance of pension funding and
retirement benefits. They are also likely to be interested in the pay and benefits obtained by
senior management.
The key accounting information for employees is therefore:
• Revenue and profit growth
• Levels of investment in the business
• Overall employment data (numbers employed, wages and salary costs)
• Status and valuation of the company pension schemes/levels of company
contributions.
Government
There are many government agencies and departments that are interested in accounting
information. For example, the revenue authority needs information on business profitability
in order to levy and collect Corporation Tax. Customs and Excise need accounting
information to verify Value Added Tax (VAT) returns; local government need similar
information to levy local taxes and rates. Various regulatory agencies (i.e. the Environment
Management Authority) need information to support decisions about grants, for example.
Page 28
Analysts
Investment analysts are an important user group – specifically for companies quoted on the
Stock Exchange. They require very detailed financial and other information in order to
analyse the competitive performance of a business and its sector. However, additional
accounting information is usually provided to analysts via informal company briefings and
interviews.
Public at large
Interest groups, formed by various groups of individuals who have a specific interest in the
activities and performance of businesses, will also require accounting information.
c)
i. Financial Accounting
This is the process of summarising financial information in order to prepare the company’s
financial statements. The financial statements of an organisation are the Income Statement,
Statement of Financial Position, Statement of Cash Flow and Explanatory Notes. These
statements are primarily of interest to external users of accounting information. Financial
statements are historical in nature in that they are prepared on a semi-annual/annual basis and
are concerned primarily with the financial performance of the company in the income
statement and the financial position of the company reported in the statement of financial
position. Therefore from the perspective of management the information contained therein is
not timely being six months or a year out of date by the time it is reported.
Financial accounting is thus the manner in which an organisation communicates financial
information, namely performance, position and cash flow to the outside world. It represents a
report on the directors’ stewardship of the funds entrusted to them by the shareholders.
The financial statements are public documents they are easily accessible, normally under the
investor relations section on the company’s website. A copy of the financial statements must
also be filed with the Office of Registrar General (OFG) where they can be publicly accessed.
Therefore they would not reveal details about, for example, an individual products’
profitability. That information would be contained in the management accounts of the
business.
Page 29
Management Accounting
This is the process of providing detailed information to management on current and planned
events. This information assists managers in their roles of planning, controlling and making
decisions. Usually management accounts are only available to internal users of accounting
information. Management accounting will contain information such as department budgets,
product profitability, information on production costs etc.
ii) The differences between management and financial accounting can be assessed under
the following headings:
Legal Requirements
Limited companies are required by law to prepare on an annual basis the financial
statements for the company. While most companies will have a management accounting
function within the business there is no legal requirement to do so.
Users
The users of financial information are external to the business whereas the users of
management accounts are internal to the business. Indeed within an organisation,
management accounting information for example how profitable an individual product line is
may only be available to senior management.
Audit Process
In some cases the financial statements of the company must be audited by an independent
audit company before the information is released to shareholders. The function of the audit
process is to give those who rely on the financial statements of the company assurance that
the information contained therein represents a true and fair view of the company. The
management accounts of a company do not have to be audited and indeed in many cases will
contain information which may only be approximate (think for example of a budget which
will contain estimates of future levels of income and expenditure). They are prepared
internally and used internally within the company – thus there is no need for an audit as there
does not exist the same conflict of interest which exists when financial accounts are being
prepared.
Page 30
Professional Regulations
The financial statements of a company must comply with all relevant professional standards
(International Financial Reporting Standards or IFRS). Management accounts do not have
any such regulation to be complied with. The formats of accounts is at the management’s
discretion as is the manner in which the figures are calculated and the assumptions which are
made.
Timeliness
The main drawback of financial accounting is that the information contained in the financial
statements is out of date by the time the financial statements are published to shareholders in
the annual report. The emphasis in financial accounting is upon accuracy as opposed to
timeliness. For example the financial statements for year ended 31 December 2011 may not
be published to the public until March 2012, thus the information is largely out of date. In
management accounting, while accuracy is important, receiving the information in a timely
manner is essential if the information is to be of any use to managers in the decision making
process. There is no point in receiving information about a decision after the decision has
been made.
Time Line
Financial accounting deals with information that is historic, all the figures shown have
already happened in the past. Management accounting can deal with figures in the past,
present and future. In addition financial information is prepared quarterly, semi-annually or
annually whereas management accounting is prepared whenever it is required by managers.
Scope
Financial statements deal with the organisation as a whole, in that the financial statements are
reporting on the financial performance, position and cash flow of the whole company.
Management accounts tend to examine segments of the business and individual products, for
example a departmental budget or the costing of a particular product line.
Detail
The information contained in financial accounting tends to aggregate numbers and therefore
some detail has been lost. This aggregation is essential as without it the financial statements
would become very cluttered and difficult to understand. The notes to the financial
statements attempt to add detail to the aggregated information in the financial statements.
Managers involved in the day-to-day running of the organisation require much more detailed
information than that contained in the financial accounts of the organisation. Thus
management accounts tend to be more detailed.
Page 31
SOLUTION 2
a)
i)
Receivables Control Account
Date
Details
RWF
Date
Details
RWF
01/01/2011
Balance b/d
487,900
01/01/2011
Balance b/d
3,290
Sales
1,060,800
Sales returns
32,650
Irrecoverable
debt
6,300
Cash receipts
938,049
recovered
Irrecoverable
debts
21,700
Refunds
2,780
Irrecoverable
debts
6,300
recovered
Contra
4,750
31/12/2011
Balance c/d
551,041
1,557,780
1,557,780
01/01/2012
Balance b/d
551,041
ii) Closing Allowance for Receivables:
RWF 551,041 * 5% = RWF27,552
iii) Mr Jalloh
Statement of Financial Position as at 31 December 2011 (Extract)
Current Assets
Receivables 551,041
Closing allowance for receivables (27,552)
523,489
Page 32
Mr Jalloh
Income Statement for the year ended 31 December 2011 (Extract)
Credit Sales 1,060,800
Credit Sales Returns (32,650)
Net Sales 1,028,150
Less Expenses
Irrecoverable debt recovered (6,300)
Irrecoverable debts 21,700
Increase in allowance for receivables 2,552
b)
Prudence
Prudence states that under conditions of uncertainty that assets are not overstated and that
liabilities are not understated.
The establishing of a closing allowance for receivables is an example of the
application of the prudence concept because as at the year-end a business will have a
receivable’s listing all of whom owe the business monies. However from past experience and
general economic environment knowledge the business owner realises, in all probability,
that all balances owed by receivables will not be received. However the business owner does
not have specific knowledge of what balances will turn out to be unrecoverable in the
future. Therefore a general allowance is established based on past experience and general
market knowledge to account for the fact that in all probability all receivables’ balances
will not be recovered. Therefore the balance for receivables that is presented in the
Statement of Financial Position is a realistic valuation of the year end receivables balance
under conditions of uncertainty regarding future payment by receivables.
Page 33
SOLUTION 3
i)
Debit
Credit
RWF
RWF
1
Dr
Receivables
900
Cr
Sales
900
Being sales book undercast
2
Dr
Canteen
75
Dr
Postage
35
Dr
Entertainment
170
Cr
Petty Cash
280
Being an error of omission
3
Dr
Discount received
65
Dr
Discount allowed
65
Cr
Suspense
130
Being discounts allowed inappropriately recorded
4
Dr
Suspense
1,650
Cr
Purchases returns
1,650
Being purchases returns inappropriately recorded
5
Dr
Suspense
2,600
Cr
Bank
1,300
Cr
Drawings
1,300
Being cheque payments treated as drawings in error
6
Dr
Cash sales
1,110
Cr
Bank
1,110
Dr
Drawings
1,110
Cr
Bank
1,110
Being drawing treated as sales in error
7
Dr
Sales
3,700
Page 34
Cr
Disposals
3,700
Dr
Disposals
16,750
Cr
Non current assets at cost
16,750
Dr
Accumulated depreciation
14,100
Cr
Disposals
14,100
Dr
Disposals
1,050
Cr
Income statement
1,050
Being disposal of non-current asset
unrecorded
ii)
Suspense Account
Details
RWF
Details
RWF
Error 5
2,600
Balance
4,120
Error 4
1,650
Error 3
130
4,250
4,250
iii)
Proprietor’s Profit RWF
Error 1 900
Error 2 (280)
Error 3 (130)
Error 4 1,650
Error 5 -
Error 6 (1,110)
Error 7 (2,650)
(1,620)
Page 35
SOLUTION 4
i) Objectives of Financial Statements
The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of users in
making economic decisions.
Financial position reveals information about the economic resources that an entity controls, its
financial structure, its liquidity and solvency and its ability to change. This information is contained
in the balance sheet. Changes in financial position are revealed in a Cash Flow Statement.
Financial Performance means the return obtained on the resources which the entity controls. This
information can be extracted from the profit and loss account. In International Accounting the profit
and loss account is referred to as the Income Statement.
The Reporting Entity
Financial Statements report on all of the activities and resources under the control of the entity that
has prepared them whether it is a sole trader, a club or society or a limited company.
ii) Users of Financial Statements
Users of financial statements include the following:
a) Existing and potential shareholders
Information is required in relation to profit, dividends, trends and prospects in connection
with share price.
b) Loan Creditors
Information is required in relation to liquidity and to highlight the risk of non-payment.
c) Business Contact Group
i.e. suppliers, customers, competitors and merger/acquisition situations. Information is
required to ensure ability to pay debts, continuity of supply and trade information.
d) Analysts and investors
Information on performance, trends and prospects is required for clients
Page 36
e) Government
Information is required as a base for taxation and to ensure compliance with company law
f) Employees
Information about employment security and to assist with collective pay bargaining
g) Public
Any member of the public may require details of the contribution to the local and national
economy made by the company and the environmental impact.
iii) Ethical requirements of professional accountants
The conduct towards which an accountant should strive is embodied in six broad principles
stated as affirmative Ethical Principles:-
1. Independence, Integrity and Objectivity
An accountant should maintain his/her integrity and objectivity and, when engaged in the
practice of public accounting, be independent of those he/she serves
2. Competence and Technical Standards
An accountant should observe the profession's technical standards and strive continually to
improve this competence and the quality of his/her services
3. Responsibilities to Clients
An accountant should be fair and candid with his/her clients and serve them to the best of
his/her ability, with professional concern for their best interests, consistent with his/her
responsibilities to the public
4. Responsibilities to Colleagues
An accountant should conduct himself/herself in a manner, which will promote co-operation
and good relations among members of the profession
5. Other Responsibilities and Practice
An accountant should conduct himself/herself in a manner, which will enhance the stature of
the profession and its ability to serve the public
6. Responsibility of Members Not In Practice
An accountant not in practice must uphold the standards and etiquette of the profession
Page 37
iv) Whistle Blowing
A whistle blower is a person who alleges misconduct in the workplace and it covers all
methods of reporting by employees of any criminal practices within their company. Whistle
blowers make their allegations internally (e.g. to other people with the accused’s
organisation) or externally (to law enforcement agencies, to the media or to groups concerned
with the issues). This practice may cause discontent in the work place as it involves a clash
between loyalty and confidentiality.
Page 38
SOLUTION 5
Mr Ayim Income Statement for the year ended 31 December 2011
RWF
RWF
Sales
410,000
Sales returns
-11,000
Net sales
399,000
Cost of sales
Opening inventory
29,400
Purchases
231,250
Carriage inwards
6,160
266,810
Less closing inventory
-28,010
Cost of sales
-238,800
Gross Profit
160,200
Discount Received
1,900
Rental Income
34,500
Less Expenses
Carriage outwards
9,240
Light and heat
970
Bank charges
410
Insurance
13,720
Interest
7,500
Wages and salaries
74,200
Discount allowed
2,200
Depreciation of buildings
11,000
Depreciation of fixtures & fittings
7,120
Depreciation of motor vehicles
4,725
Irrecoverable debts
5,400
Telephone and internet
1,980
Total expenses
-138,465
Operating Profit
58,135
Page 39
Mr Ayim Statement of Financial Position as at 31 December 2011
2011
2011
2011
Non-current assets
Buildings
550,000
-88,000
462,000
Fixtures and fittings
71,200
-32,040
39,160
Motor Vehicles
52,000
-25,225
26,775
527,935
Current assets
Closing inventory
28,010
Receivables
57,600
Prepayments
510
Cash
800
86,920
Total Assets
614,855
Equity and Liabilities
Equity
Capital
371,820
Profit for 2011
58,135
Accumulated profits
429,955
Drawings
-24,400
405,555
Non-current liabilities
Term loan
150,000
Current liabilities
Payables
49,700
Bank overdraft
9,600
59,300
Total Equity and Liabilities
614,855
Workings 1
RWF
Closing inventory as per question:
31,110
Less write down of inventory
-3,100
28,010
Write down of inventory
Page 40
Cost
6,100
NRV of inventory
-3,000
Difference between cost and NRV
3,100
Workings 2
RWF
Purchases
241,010
Drawings
-9,800
Restated purchases
231,250
Drawings as per TB
14,600
Drawings
9,800
Restated drawings
24,400
Workings 3
RWF
Cost of buildings
550,000
Depreciation
2%
Depreciation
11,000
Cost of fixtures and fittings
71,200
Depreciation
10%
Depreciation
7,120
Cost of MV
52,000
Depreciation
-20,500
31,500
Depreciation 15% RBM
15%
4,725
Workings 4
RWF
Receivables as per TB
63,000
Irrecoverable debts
-5,400
57,600
Workings 5
RWF
Insurance as TB
14,230
Prepayments
510
13,720
Workings 6
Page 41
RWF
Term loan as per TB
150,000
Interest
5%
7,500
Page 42
SOLUTION 6
i)
Receipts and Payments Account
Details
RWF
Details
RWF
Balance c/d
13,685
Light and heat (50% relates to bar)
11,110
Clubhouse fixtures & fittings
7,580
Subscriptions received
186,320
Clubhouse rent
90,000
Proceeds from raffle
19,750
Barperson salary
17,500
Bar sales
201,790
Insurance (60% relates to bar)
22,000
Interest received
540
Raffle prizes & associated costs
4,620
Greenkeeper salary
31,500
Bar purchases
102,005
Club secretary & president expenses
9,000
Green maintenance
9,940
Bar cleaning
7,100
Closing bank balance c/d
109,730
422,085
422,085
Opening balance c/d
109,730
2011
2011
RWF
RWF
Assets
Fixtures and fittings
30,150
Inventories
19,060
Prepayments (rent)
15,000
Subs in arrears
2,670
Bank
13,685
80,565
Liabilities
Payables
9,710
Accruals telephone
115
Subs in advance
9,730
-19,555
Proprietors capital
61,010
Page 43
ii) Kigali Golf Club
Bar Trading Account (income statement) for the year ended 31 December 2011
2011
2011
RWF
RWF
Sales
201,790
Cost of sales
Opening inventory
19,060
Purchases
100,385
119,445
Less closing inventory
-17,005
Cost of sales
-102,440
Gross profit
99,350
Less Expenses
Light and heat
5,555
Bar person salaries
17,500
Bar insurance
13,200
Bar cleaning
7,100
Total expenses
-43,355
Operating Profit
55,995
Payables Control A/C
RWF
RWF
Bank payments
102,005
Balance c/d
9,710
Balance c/d
8,090
Purchases
100,385
110,095
110,095
Balance b/d
8,090
Page 44
iii)
RWF
Proceeds of the raffle 19,750
Costs of the raffle (4,620
15,130
iv)
Subscriptions A/C
Details
RWF
Details
RWF
Opening subs in arrears
2,670
Opening subs in advance
9,730
I/S value for subs
197,490
Cash received for subs
186,320
Closing subs in advance
6,330
Closing subs in arrears
10,440
206,490
206,490
Opening subs in arrears
10,440
Opening subs in advance
6,330
Kigali Golf Club Income and Expenditure Account for the year 31 December 2011
RWF
RWF
Income
Subscriptions
197,490
Proceeds from raffle
15,130
Bar profits
55,995
Interest received
540
269,155
Expenditure
Rent
90,000
Light and heat
5,555
Green keeper salary
31,500
Depreciation
1,887
Insurance
8,800
Club secretary expenses
9,000
Green maintenance (9,940-115+80)
9,905
(156,647)
Excess of income over expenses
112,508
Depreciation of F&F
NBV of FF
30,150
Additions
7,580
37,730
Page 45
Depreciation 5% of RBM
5%
1,887
Rent Charge for PL
Rent prepaid as at 1/1/11
15,000
Rent paid
90,000
105,000
Rent prepaid as at 31/12/11
15,000
90,000
(Note: Closing Accumulated Fund not asked in the question – it is presented as a learning aid
only)
Kigali Golf Club Accumulated Fund as at 31 December 2011
2011
RWF
RWF
RWF
Non-current assets
Fixtures & fittings
35,843
Current assets
Closing inventories
17,005
Subs in arrears
10,440
Prepayments
15,000
Cash
109,730
152,175
Total assets
188,018
Equity and Liabilities
Accumulated fund
Accumulated fund 1/1/11
61,010
Excess of income over expenditure
112,508
173,518
Current liabilities
Payables
8,090
Subs in advance
6,330
Accruals
80
14,500
Total Equity and Liabilities
188,018
Page 46
SOLUTION 7
A)
Journals
Dr
Cr
Motor Vehicles
B/S
42,000
Motor Expenses
P&L
42,000
Repairs
P&L
15,000
Premises
B/S
15,000
Drawings
B/S
5,000
Motor Expenses
P&L
5,000
B)
Trading & Profit & Loss Account for the year ended 31 December 2011
Journals
Adjusted
RWF
RWF
Dr
Cr
RWF
RWF
Sales
900,000
900,000
Cost of Sales
Opening Stock
30,000
30,000
Purchases
300,000
300,000
330,000
330,000
Less Closing Stock
-45,000
285,000
-45,000
285,000
Gross Profit
615,000
615,000
Expenses
Motor expenses
78,000
47,000
31,000
Repairs
12,000
15,000
27,000
Salaries
375,000
465,000
375,000
433,000
150,000
182,000
Page 47
Balance Sheet as at 31 December
2011
Journals
Adjusted
RWF
RWF
RWF
Dr
Cr
RWF
RWF
RWF
Fixed assets
Premises
1,200,000
15,000
1,185,000
Fixtures
48,000
48,000
Motor Vehicles
93,000
42,000
135,000
1,341,000
1,368,000
Current Assets
Stock
45,000
45,000
Cash
63,000
63,000
Bank
6,000
6,000
Debtors
54,000
168,000
54,000
168,000
Current
Liabilities
Creditors
75,000
75,000
75,000
75,000
Net Current
Assets
93,000
93,000
Net Assets
1,434,000
1,461,000
Financed by:
Capital
1,308,000
1,308,000
Profit & Loss
150,000
182,000
Less Drawings
-24,000
5,000
-29,000
1,434,000
62,000
62,000
1,461,000
C)
1. Period profit rises by RWF32,000
2. Net assets increased by RWF27,000- (RWF42,000-RWF15,000)
3. This is balances by increased profit (Credit) of RWF32,000 & increased drawings (Debit)
of RWF5,000
Page 48
SOLUTION 8
A)
Debtors Control Account
Balance
79,266
Balance
1,332
Restocking Charge
W1
144
Credit Note
732
Interest Charge
W2
150
Dishonoured Cheque
W3
1,430
Adjusted balance
79,061
Understated Invoice
W4
135
81,125
81,125
W1
1200*12%
144
W2
Reduced int charge
279
(per note 4 in Q)
-129
150
W3
Dishonoured
Cheque
1,200
Discount on settling
230
1,430
W4
See note 6 in Q
1,650
-1,515
135
B)
Balance per
debtors
listing
74,790
288
Restocking Charge 144 posted as Credit should have been Debit
-132
Cancellation of Credit note posted as debit
-732
Correct credit note entered
300
Add back cash which does not relate to debtors
1,200
Sale RWF600 entered as Credit should have been debit (600+600)
279
Add original interest charge to customer account per Note 4 in Q
117
Debit (add back) original entry of RWF117 which was entered as credit
-129
Reduce interest charge from RWF279 to RWF150 as agreed with debtor
1,430
See W3
1,650
Invoice not posted to individual debtor's account per Note 6 in Q
Adjusted balance
79,061
Page 49
SOLUTION 9
A)
Vehicle Account
01/01/2009
Veh 1
80,000
31/12/2009
Balance c/d
155,000
01/07/2009
Veh 2
75,000
155,000
155,000
01/01/2010
Balance b/d
155,000
31/12/2010
Balance c/d
266,000
01/01/2010
Modification Veh1
15,000
01/12/2010
Additions Veh 3
96,000
266,000
266,000
01/01/2011
Balance b/d
266,000
01/07/2011
Disposal Veh 1
95,000
01/07/2011
Additions Veh 4
93,000
01/09/2011
Disposal Veh 3
96,000
01/09/2011
Additions Veh 5
120,000
31/12/2011
Balance c/d
288,000
479,000
479,000
01/01/2012
Balance b/d
288,000
B)
Vehicle 1
Vehicle 2
Vehicle 3
Vehicle 4
Vehicle 5
Totals
Purchase Date
01/01/200
9
01/07/200
9
01/12/201
0
01/07/201
1
01/09/201
1
Cost
80,000
75,000
96,000
93,000
120,000
464,000
Additions
1/01/10
15,000
15,000
Disposals
-95,000
-96,000
191,000
0
75,000
0
93,000
120,000
288,000
Accumulated dep'n
2009
16,000
6,000
22,000
2010
22,000
12,000
1,600
35,600
2011
9,500
12,000
12,800
9,300
8,000
51,600
Disposals
2009
0
2010
0
2011
-47,500
-14,400
-61,900
0
30,000
0
9,300
8,000
47,300
Net book value
0
45,000
0
83,700
112,000
240,700
Page 50
Disposals
Trade in
Bank
01/07/2011
95,000
Veh 1
32,000
Veh 1
32,000
Veh 1
acc dep'n
47,500
Veh 3
25,000
Loss
15,500
P&L Account
Insurance
25,000
Veh 1
Loss
15,500
01/09/2011
96,000
Claim
Trade In
40,000
Veh 3
Loss
16,600
Veh 3
Acc dep'n
14,400
Loss
16,600
191,000
191,000
C)
Provision (Accumulated) Depreciation Account
31/12/2009
Balance c/d
22,000
31/12/2009
Annual Charge
22,000
22,000
22,000
01/01/2010
Balance b/d
22,000
31/12/2010
Balance c/d
57,600
31/12/2010
Annual Charge
35,600
57,600
01/07/2011
Disp Veh 1
47,500
01/09/2011
Disp Veh 3
14,400
01/01/2011
Balance b/d
57,600
31/12/2011
Balance c/d
47,300
31/12/2011
Annual Charge
51,600
109,200
109,200
01/01/2012
47,300
Page 51
SOLUTION 10
1) The qualitative characteristics of Financial Statements
In deciding what information should be included in financial statements, when it should be
included and how it should be presented, the aim is to ensure that financial statements yield
useful information. Financial information is useful if it is:
Relevant
-
If it has the ability to influence the economic decisions of users and is
provided in time to influence those decisions
Reliable
-
Reliability is characterised by:
• Faithful representation
• Substance over form recognition of the economic substance of a
transaction over its legal form
• Neutrality - free from bias
• Prudence - a degree of caution in making estimates in conditions
of uncertainty
• Completeness - an omission can cause information to be false or
misleading
Comparable
-
It enables users to discern and evaluate similarities in, and differences
between, the nature and effects of transactions and other events over
time and across different reporting entities.
Understandable
-
Its significance can be perceived by users who have a reasonable
knowledge of business and economic activities and accounting and a
willingness to study with reasonable diligence the information
provided.
If a conflict arises between these characteristics, a trade-off needs to be found that still
enables the objective of financial statements to be met. For example, if the information that
is the most relevant is not the most reliable and vice versa, it will usually be appropriate to
use the item of information that is the most relevant of those that are reliable.
Financial information with the above characteristics will be most useful to the users of
financial statements. In deciding whether to present financial information separately in the
financial statements the accountant must assess the information’s ability to influence
economic decisions it is considered to be material and should be presented separately in the
financial statements.
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2) Historical Cost Accounting Convention/System
Conventionally, financial accounts are based on historical cost – which is assets/liabilities
recorded in the balance sheet at their cost of acquisition. Expenses are charged against
revenues in determining profit based upon historic cost of assets used in generation of the
revenues.
Advantages of Historical Cost Accounting:
(a) Consistent with fundamental accounting concepts
(b) Objective and the information it produces is easily verified.
(c) Simple and inexpensive to record the information.
(d) Easily understood by the users of financial statements.
Disadvantages of Historical Cost Accounting:
(a) Assets values unrealistic, in particular land and buildings.
(b) Comparisons over time meaningless.
(c) Maintenance of the physical substance of business ignored.
3) Role of the International Accounting Standards Board (IASB)
International Accounting Standards Board (IASB): In April 2001 the International
Accounting Standards Board was formed to take over the work of the International
Accounting Standards Committee (IASC).
The International Accounting Standards Committee was set up in 1973. The role of this body
was to formulate and publish accounting standards to be observed in the presentation of
financial statements and to promote their world-wide acceptance and observance and to work
for the improvement and harmonisation of regulations, accounting standards and procedures
relating to the presentation of financial reporting.
Objectives of the IASB
The objectives of the IASB are set out in its mission statement:
• “To develop, in the public interest a single set of high quality, understandable and
enforceable global accounting standards that require high quality transparent and
comparable information in financial statements.”
• To promote the use of rigorous application of these standards.
• To work actively with actual standard-setters to achieve conveyance of accounting
standards around the world.
Page 53
4) The Business Entity Concept
An organisation or part of an organisation that for accounting purposes stands apart as a
separate economic unit.
Usually a business entity is regarded as separate from its owners and accounting information
should be restricted to the transactions that affect the entity itself.
A business entity treats transactions with its owners in an arms length way as monies and
assets introduced into a business by the owners is recorded as a liability of the business and
recorded as capital while goods, cash or assets taken from the business are recorded as
drawings and reduce the capital introduced and thereby the liability of the business to the
owners.
5) Imprest system of petty cash
An imprest system of petty cash means that the Petty Cash general ledger account will remain
at a set amount from period to period. For example, if the petty cashier is entrusted with
RWF100, then the Petty Cash account will always report a debit balance of RWF100.
The RWF100 is the imprest balance. When the money in the petty cash box is low the petty
cashier will request a fund replenishment. Since the funds are drawn on the organisation’s
bank account, the bank account (not the petty cash account) is credited. The debits will go to
the expense accounts indicated by the petty cash receipts i.e. postage, supplies, etc.
Under the imprest system, the petty cashier should have a combination of coins, currency and
petty cash receipts equal to the imprest amount of RWF100.
Control over petty cash involves review of the petty cash receipts attached to each cheque
request for replenishment. Occasional spot checks on the petty cash box also ensures that the
items in the petty cash add up to the imprest amount.

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