ACCA Paper F3 - ACCA'S APPROVED CONTENT - ACCA'S
FOR MORE FREE ACCA MATERIAL VISIT WWW.ACUTEACCA.TKACCA Paper F3Financial Accounting(INT)Class NotesJune 2011
The Accountancy College Limited January 2011All rights reserved. No part of this publication may be reproduced, stored in aretrieval system, or transmitted, in any form or by any means, electronic,mechanical, photocopying, recording or otherwise, without the prior writtenpermission of The Accountancy College Limited.2www.studyinteractive.org
ContentsPAGEINTRODUCTION TO THE PAPER5CHAPTER 1:INTRODUCTION TO FINANCIAL REPORTING9CHAPTER 2:FINANCIAL STATEMENTS13CHAPTER 3:DOUBLE ENTRY BOOKKEEPING19CHAPTER 4:INVENTORY39CHAPTER 5:NON-CURRENT ASSETS47CHAPTER 6:IRRECOVERABLE DEBTS AND ALLOWANCES61CHAPTER 7:ACCRUALS AND PREPAYMENTS69CHAPTER 8:SALES TAX77CHAPTER 9:BOOKS OF PRIME ENTRY81CHAPTER 10: CONTROL ACCOUNT RECONCILIATIONS91CHAPTER 11: CORRECTION OF ERRORS AND SUSPENSE ACCOUNTS97CHAPTER 12: BANK RECONCILIATIONS105CHAPTER 13: LIMITED COMPANY ACCOUNTS113CHAPTER 14: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS123CHAPTER 15: ACCOUNTING STANDARDS127CHAPTER 16: INCOMPLETE RECORDS135CHAPTER 17: PARTNERSHIPS145CHAPTER 18: STATEMENTS OF CASH FLOW155CHAPTER 19: CONCEPTUAL FRAMEWORK169APPENDIX:177SOLUTIONS TO EXERCISES AND EXAMPLESwww.studyinteractive.org3
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Introduction to thepaper
IN T R O D U C T I O N T O T H E P A P E RAIM OF THE PAPERThe aim of the paper is to develop a knowledge and understanding of theunderlying principles and concepts relating to financial accounting and technicalproficiency in the use of double-entry accounting techniques including thepreparation of basic financial statements.MAIN CAPABILITIESOn successful completion of this paper candidates should be able to:AExplain the context and purpose of financial reportingBDefine the qualitative characteristicsfundamental bases of accountingCDemonstrate the use of double-entry and accounting systemsDRecord transactions and eventsEPrepare a trial balance (including identifying and correcting errors)FPrepare basic financial statements for incorporated and EXAMINERThe examiner for paper F3 is Nicola Ventress. Nicola wrote the F3 pilot paper (inyour study manual, revision kit and available to download via the ACCA website).This gives us a good indication of how the syllabus areas will be examined.FORMAT OF THE EXAMThis exam can be sat as a written or computer based exam.The exam is 2 hours long with no reading time.50 questions with 90 marks available.These 90 marks are split down as 40 two mark questions and 10 one markquestions.Both computational and non-computational questions.Questions can be tested as multiple choice, multiple response, multiple responsematching, or (most commonly) number entry.All questions are compulsory.Pass mark is 50%.6ww w. st u d yi n t e ra ct i v e . or g
IN T R O D U C T I O N T O T H E P A P E RINTERNATIONAL AND UK STREAMSThe following notes are suitable for both the International and UK streams. Thereis some terminology differences between the two streams. These are summarisedbelow:InternationalUKStatement of comprehensive incomeProfit and loss accountStatement of financial positionBalance sheetNon-current assetsFixed assetsInventoryStockTrade receivablesDebtorsNon-current liabilitiesLong term liabilitiesTrade payablesCreditorsIrrecoverable debtsBad debtsww w. st u d yi n t e ra ct i v e . or g7
IN T R O D U C T I O N T O T H E P A P E RFOR MORE FREE ACCA MATERIAL VISIT WWW.ACUTEACCA.TK8ww w. st u d yi n t e ra ct i v e . or g
Chapter 1Introduction tofinancial reporting
C H A P T E R 1 – I N T R O D U C T I O N T O F IN A N C I A L R E P O R T IN GCHAPTER CONTENTSWHAT IS FINANCIAL REPORTING? ------------------------------------ 11WHAT IS A BUSINESS?11TYPES OF ACCOUNTS AND THEIR USERS ----------------------------- 1210MANAGEMENT ACCOUNTS12FINANCIAL ACCOUNTS12ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 1 – I N T R O D U C T I O N T O F IN A N C I A L R E P O R T IN GWHAT IS FINANCIAL REPORTING?Recording:Presenting:DaybooksStatement of Comprehensive IncomeLedgersStatement of Financial PositionStatement in Changes in EquityStatement of Cash FlowWhat is a business?Sole traderThis is a business that is owned and operated by one person. The sole trader andthe business are legally the same entity and therefore the sole trader is personallyliable for any business debts.PartnershipThis is a business that is owned by two or more people, some of which will beactively involved in the business. The partners and the business are legally thesame entity and therefore the partners are jointly liable for any business debts.Limited liability companyThis type of business is owned by shareholders and run by a board of appointeddirectors.A company is a legal entity in its own right, and therefore theshareholders only have limited liability for any business debts.ww w. st u d yi n t e ra ct i v e . or g11
C H A P T E R 1 – I N T R O D U C T I O N T O F IN A N C I A L R E P O R T IN GTYPES OF ACCOUNTS AND THEIR USERSLarger businesses have many transactions; these transactions can be recorded intwo main types of accounts management accounts and financial accounts.Management accounts Frequency Legal requirement Format UsersFinancial accounts Frequency Legal requirement Format Users12ww w. st u d yi n t e ra ct i v e . or g
Chapter 2Financial statements
C H A P T E R 2 – F IN A N C I A L S T A T E M E N T SCHAPTER CONTENTSSTATEMENT OF COMPREHENSIVE INCOME (SOCI) ------------------ 15STATEMENT OF FINANCIAL POSITION (SFP) ------------------------- 16ACCOUNTING EQUATION ----------------------------------------------- 17DUAL EFFECT AND BUSINESS ENTITY PRINCIPLES17UNDERLYING ASSUMPTIONS ------------------------------------------- 1814ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 2 – F IN A N C I A L S T A T E M E N T SSTATEMENT OF COMPREHENSIVE INCOME (SOCI)The statement of comprehensive income shows a summary of all income andexpenses for a period of time (usually over a year).Statement of Comprehensive Income for the year ended 31 December2009 000Revenue 000233,000Less: Cost of salesOpening inventoryPurchasesCarriage inwards12,332119,0981,009132,439Closing inventory-13,777(118,662)Gross Profit114,338Discounts received5,111Other income4,000123,449Less: ExpensesDiscounts allowed3,444Depreciation10,710Gas and electricity14,122Irrecoverable debts7,134Loan interest4,000Carriage outwards5,666Water rates8,444Advertising15,000Other expenses3,142(71,662)Profit for the yearww w. st u d yi n t e ra ct i v e . or g51,78715
C H A P T E R 2 – F IN A N C I A L S T A T E M E N T SSTATEMENT OF FINANCIAL POSITION (SFP)This financial statement lists the assets, liabilities and capital at a point in time. Itis a snapshot of a business position at a particular date (usually the year end date).Statement of Financial Position as at 31 December 2009CostNon–current assetsPropertyPlant and machineryMotor vehiclesCurrent assetsInventoryTrade receivablesPrepaymentsCash at bank 000AccumulatedDepreciation 000CarryingValue ,8003,40032,752217,242Total assetsCapitalOpening on–current liabilitiesLoanCurrent liabilitiesTrade payablesAccruals20,00012,44516,44528,890Total capital andliabilitiesNote:16217,242The statement of cash flows and the statement in changes in equitycomplete the full set of financial statements, these will be covered indetail in later chapters.ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 2 – F IN A N C I A L S T A T E M E N T SACCOUNTING EQUATIONThe accounting equation is a simple expression of the fact that at any point in timethe assets of a business will be equal to its liabilities plus capital of the business.ASSETS CAPITAL LIABILTIESDual effect and business entity principlesDual effectEvery business transaction has an equal and opposite effect.Business entityFor the purpose of accounting for business transactions the owner of thebusiness is a separate entity for the business itself.Example 1Katy P is a sole trader and commences business on 1 July 2009.transactions took place in her first week of trading:The following1.7.2009Katy put 20,000 cash into the business.3.7.2009Katy purchased a motor vehicle for use within the business for 9,500.7.7.2009Katy takes out a five-year loan from the bank for 5,000.Required:Show the accounting equation for Katy P at the end of the week.ww w. st u d yi n t e ra ct i v e . or g17
C H A P T E R 2 – F IN A N C I A L S T A T E M E N T SUNDERLYING ASSUMPTIONS Going concernAccounts are normally prepared on the going concern basis. This means thatthey are prepared on the assumption that a business will continue for theforeseeable future, assumed to be a year.Non-current assets and liabilities can only be included in financial statementswhich are prepared on the going concern basis. AccrualsThe financial statements are prepared on the accruals basis, meaning thattransactions are reported in the period to which they relate, regardless ofwhen cash is received or paid.18ww w. st u d yi n t e ra ct i v e . or g
Chapter 3Double entrybookkeeping
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GCHAPTER CONTENTSINTRODUCTION -------- 21LEDGER ACCOUNTS2021ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GINTRODUCTIONIn chapter 2 we looked at two principles of recording transactions, the dual effectand separate entity principles. We used these principles to help us prepare theaccounting equation. In reality, re-writing the accounting equation each time atransaction occurs is time consuming. What we use instead is double entrybookkeeping and ledger accounts to record the dual effect of each transaction.Double entry bookkeeping is “the recording of monetary transactions” of abusiness.Double entry bookkeeping is the fundamental concept underlying accountancy. Allaccounting transactions should be recorded using the double entry system.Ledger accountsIn order to assist us with the preparation of the financial statements we use ledgeraccounts for simplicity. There is a ledger account for each asset, liability, incomeand expense item.Each ledger account has two sides, the debit side (on the left) and the credit side(on the right)Name of accounte.g. bank, capitalDebit (Dr)DateNarrative DateCredit (Cr)Narrative The principles of ledger accounts are: Each transaction must have an EQUAL and OPPOSITE effect. To record this dual effect a DEBIT entry must have a corresponding CREDITentry. A ledger account will be created for each item that appears in the statementof comprehensive income and statement of financial position.You must learn what a DEBIT entry is and what a CREDIT entry prehensive Income)Liabilities(Financial Position)Assets(Financial Position)Income(Comprehensive Income)Drawings(Financial Position)Capital(Financial Position)NOTE: To decrease these types of account the debits and credits will bereversed.ww w. st u d yi n t e ra ct i v e . or g21
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1George commences business on 1 April 2009. The following transactions take placein his first two weeks of trading.1.4.2009He invests 50,000 into a business.2.4.2009He purchases 5,000 worth of goods on credit.3.4.2009He sells half of the inventory for 6,000 cash.4.4.2009He issues a cheque to pay for the goods he received on credit.5.4.2009He pays his rent for April of 450 by cheque.6.4.2009He sells his remaining inventory for 6,000 on credit.7.4.2009He purchased goods on credit for 7,000.8.4.2009He purchases a delivery van for 7,000 cash.Required:For the first two weeks of trading prepare:1.The journal entries (recording the dual effect) for each transaction2.The ledger accounts3.The trial balance4.The statement of comprehensive income5.The statement of financial position22ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1 .20096.4.20097.4.20098.4.2009ww w. st u d yi n t e ra ct i v e . or g23
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1 SolutionMain Ledger24ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1 Solutionww w. st u d yi n t e ra ct i v e . or g25
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1 Solution26ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1 SolutionTrial balanceAccount nameFinancial Statement BankCapitalPurchasesTrade payablesSalesRentTrade receivablesMotor vehiclesTotalClosing Inventory Journalww w. st u d yi n t e ra ct i v e . or g27
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1 SolutionGeorge Statement of Comprehensive Income for the two weeks ended 14April 2009 SalesLess: Cost of salesOpening inventoryPurchasesClosing inventoryGross profitOther incomeLess: expensesRentProfit for the year28ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 1 SolutionGeorge Statement of Financial Position as at 14 April 2009Cost AccumulatedDepreciation CarryingValue Non–current assetsMotor vehiclesCurrent assetsInventoryTrade receivablesCash at bankTotal assetsCapitalOpening capitalProfitDrawingsNon–current liabilitiesCurrent liabilitiesTrade payablesTotal capital and liabilitiesww w. st u d yi n t e ra ct i v e . or g29
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2Tina starts business on 1 January 2010. The following transactions take place inher first month of trading.1.1.2010She invests 65,000 into a business.2.1.2010She purchases 8,000 worth of goods on credit.7.1.2010She sells a quarter of the inventory for 4,000 cash.8.1.2010She issues a cheque to pay for half of the goods she received oncredit.14.1.2010 She pays her insurance for January by issuing a cheque for 75.15.1.2010 She sells her remaining inventory for 12,000 on credit.16.1.2010 She purchased goods on credit for 10,000.18.1.2010 She purchases some computer equipment for 3,000 cash.20.1.2010 She pays her rent for January by cheque for 150.21.1.2010 She sells half her inventory for 10,000 cash.25.1.2010 She withdraws 100 from the bank and put it into the petty cashtin (this is cash in hand).31.1.2010 She purchases some stationery worth 30 taking money from thepetty cash tin.Required:For the first month of trading prepare:301.The journal entries (recording the dual effect) for each transaction.2.The ledger accounts.3.The trial balance.4.The statement of comprehensive income.5.The statement of financial position.ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 1.201015.1.201016.1.201018.1.201020.1.2010ww w. st u d yi n t e ra ct i v e . or g31
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 Solution21.1.201025.1.201031.1.2010Main Ledger32ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 Solutionww w. st u d yi n t e ra ct i v e . or g33
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 Solution34ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 Solutionww w. st u d yi n t e ra ct i v e . or g35
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 SolutionTrial balanceAccount nameFinancial Statement BankCapitalPurchasesTrade payablesSalesInsuranceTrade receivablesComputer equipmentRentPetty cashStationeryTotalClosing Inventory Journal36ww w. st u d yi n t e ra ct i v e . or g
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 SolutionTina Statement of Comprehensive Income for the month ended 31 January2010 SalesLess: Cost of salesOpening inventoryPurchasesClosing inventoryGross profitOther incomeLess: expensesInsuranceRentStationeryProfit for the yearww w. st u d yi n t e ra ct i v e . or g37
C H A P T E R 3 – D O U B L E E N T R Y B O O K - K E E P IN GExample 2 SolutionTina Statement of Financial Position as at 31 January 2010Cost AccumulatedDepreciation CarryingValue Non–current assetsComputer equipmentCurrent assetsInventoryTrade receivablesCash at bankPetty cashTotal assetsCapitalOpening capitalProfitDrawingsNon–current liabilitiesCurrent liabilitiesTrade payablesTotal capital and liabilities38ww w. st u d yi n t e ra ct i v e . or g
Chapter 4InventoryWWW.ACUTEACCA.TK
CHAPTER 4 – INVENTORYCHAPTER CONTENTSINTRODUCTION -------- 41VALUING CLOSING INVENTORY --------------------------------------- 4340FIRST IN FIRST OUT (FIFO)43WEIGHTED AVERAGE COST43LAST IN FIRST OUT (LIFO)43ACCOUNTING FOR CLOSING INVENTORY44NET REALISABLE VALUE (NRV)45ww w. st u d yi n t e ra ct i v e . or g
CHAPTER 4 – INVENTORYINTRODUCTIONInventory is the product we purchase and sell in the business.In a business it is unlikely that all of the inventory will be sold at the end of anaccounting period, this inventory left over is known as closing inventory.Closing inventory is an asset and appears in the statement of financial positionunder the heading current assets.Statement of Financial Position (extract) as at 31 December 2009Current Assets 000Inventory13,777Closing inventory alsocomprehensive ment of Comprehensive Income (extract) for theyear ended 31 December 2009 000Revenue 000233,000Less: Cost of salesOpening inventory12,332Purchases119,098Carriage inwards1,009132,439Closing inventory-13,777(118,662)Gross Profit114,338By deducting closing inventory from cost of sales at the end of the period it is anapplication of the accruals concept.Accruals conceptThis is sometimes referred to as the ‘matching’ concept because we aim to matchall income earned in the period with the expenditure incurred in generating thatincome.In other words, we must recognise income and expenditure on an earned/incurredbasis, irrespective of when cash is received or paid.ww w. st u d yi n t e ra ct i v e . or g41
CHAPTER 4 – INVENTORYExample 1Shay, a sole trader starts the year with inventory of 50,000. During the year Shaymakes sales of 300,000 and purchases goods for resale of 180,000. Shay hasinventory of 84,000 at the end of the year.Shay also incurred carriage inwards costs of 20,000, carriage outwards costs of 9,000 and other expenses of 68,000.Required:Prepare the statement of comprehensive income for Shay for the year.42ww w. st u d yi n t e ra ct i v e . or g
CHAPTER 4 – INVENTORYVALUING CLOSING INVENTORYIAS 2 is the accounting standard that gives detailed guidance on how to valueclosing inventory.Inventory must be valuedat the lower of:Net Realisable Value(NRV)CostFIFOWeightedAverageCostFirst in first out (FIFO)This method of inventory assumes that the closing inventory left at the end of theperiod is the newest inventory at its latest prices, as it assumes that itemspurchased first will be sold first.In time of rising prices (e.g. in periods of positive inflation), closing inventory willhave a higher cost and therefore a higher valuation in the financial statements.Weighted average costUnder this method assume all units are issued at the current weighted average costper unit which is recalculated each time more items are purchased. There are twomethods of calculating this, the periodic and continuous methods. Later examplesshow how these are calculated.Last in first out (LIFO)Under international accounting standards this is not an acceptable method ofinventory valuation.ww w. st u d yi n t e ra ct i v e . or g43
CHAPTER 4 – INVENTORYAccounting for closing inventoryOnce the value of closing inventory has been calculated it should be entered intothe accounts through the journal.The journal entry for closing inventory is:DrInventory (Asset)(Statement of financial position)CrInventory (Cost of sales)(Statement of comprehensive income)Example 2Navigator Office Supplies made the following purchases and sales in January:PurchasesDate3rdPensUnit costTotal500 4.00 2,00012th500 4.60 2,30016th400 4.75 1,90022nd700 5.25 3,67531st900 5.40 4,8603,000 14,735SalesDate7thPensUnit priceTotal300 10.00 3,000th400 10.00 4,00017th300 10.00 3,000th700 10.00 7,00013291,700 17,000Required:Assuming there is no opening inventories prepare the statement of comprehensiveincome using the following methods: FIFO. Weighted Average Cost.44ww w. st u d yi n t e ra ct i v e . or g
CHAPTER 4 – INVENTORYNet realisable value (NRV)The net realisable value is the amount of proceeds we can receive from sellinginventory less any costs to sell.Usually this is higher than cost if the business wants to make a profit. However, itmay be the case that inventory cannot be sold for a profit because it may havebecome damaged or obsolete.Example 3Radiance Kitchenware has the following items in their financial statements for theyear ended 31 December 2009:Inventory at 1 January 2009PurchasesInventory at 31 December 2009 45,678 98,000 42,800Closing inventory includes the following damaged items: A table was purchased for 500. Due to fire damage the maximum it can besold for is 200 after a wax product costing 50 has been applied. Four chairs costing 100 each were also damaged in the fire.sold for 20 each.They can beRequired:Calculate the cost of sales for inclusion in the statement of comprehensive incomefor the year ended 31 December 2009.WWW.ACUTEACCA.TKww w. st u d yi n t e ra ct i v e . or g45
CHAPTER 4 – INVENTORY46ww w. st u d yi n t e ra ct i v e . or g
Chapter 5Non-current assets
CHAPTER 5 – NON-CURRENT ASSETSCHAPTER CONTENTSINTRODUCTION -------- 49CAPITAL AND REVENUE EXPENDITURE ------------------------------- 50CAPITAL EXPENDITURE50REVENUE EXPENDITURE50DEPRECIATION -------- 51ACCOUNTING FOR DEPRECIATION51METHODS OF DEPRECIATION52DISPOSAL OF NON-CURRENT ASSETS --------------------------------- 54ACCOUNTING FOR A DISPOSAL54REVALUATIONS -------- 56ACCOUNTING FOR REVALUATIONS57NON-CURRENT ASSET REGISTER -------------------------------------- 58INTANGIBLE ASSETS -- 5948RESEARCH AND DEVELOPMENT59SUBSEQUENT TREATMENT59ww w. st u d yi n t e ra ct i v e . or g
CHAPTER 5 – NON-CURRENT ASSETSINTRODUCTIONAn asset can be defined as: A resource controlled by the entity as a result of past events where future economic benefits are expected to flow.A non-current asset is an asset that is intended for continued use in a business(generally for more than one accounting period). They are shown at the top of thestatement of financial position.Tangible non-current assets are assets that have a physical substance. Examplesinclude: Land Buildings Plant and machinery Motor vehicles Computer equipment Fixtures and fittings.ww w. st u d yi n t e ra ct i v e . or g49
CHAPTER 5 – NON-CURRENT ASSETSCAPITAL AND REVENUE EXPENDITURECapital expenditureCapital expenditure is the costs of acquiring non-current assets. Per I.A.S. 16 thefollowing costs may be capitalised in the statement of financial position onacquisition of a non-current asset:oInitial costoDelivery costsoNon-refundable import taxesoInstallation costsoAny costs incurred in bringing the asset into intended use.Capital expenditure may also be subsequent expenditure that enhances theperformance of the asset, therefore increasing the economic benefits that assetbrings.Revenue expenditureRevenue expenditure is expenditure on maintaining the earning capacity of noncurrent assets. Costs that are regarded as revenue expenditure and shown as anexpense in the statement of comprehensive income and may not be capitalised perI.A.S. 16 are:oInsurance costsoRepairsoMaintenanceExample 1Classify the following costs as capital or revenue expenditure:CapitalRevenuePurchase of a new motor vehiclePurchase of a tax discFuelInsuranceCD PlayerAlloy wheelsNew tyre50ww w. st u d yi n t e ra ct i v e . or g
CHAPTER 5 – NON-CURRENT ASSETSDEPRECIATIONDepreciation is the charge to the statement of comprehensive income to reflect theconsumption of an asset in a period.By applying depreciation charges, we are consistent with the ACCRUALS CONCEPTi.e. applying the cost of using the asset to the statement of comprehensive incomefor the same period.All tangible non-current assets should be depreciated on a systematic basis perI.A.S. 16, with the exception of land. This is because land is seen to appreciate invalue.Accounting for depreciationOnce the depreciation charge has been calculated it should be entered into theaccounts through the journal.The journal entry for depreciation is:DrDepreciation expense(Statement of comprehensive income)CrAccumulated depreciation(Statement of financial position)Non-current assets are shown at their carrying value in the statement of financialposition.Statement of Financial Position (extract) as at 31 December 2009Cost 000Non–current assetsPropertyPlant and machineryMotor vehiclesww w. st u d yi n t e ra ct i v e . or g150,00045,00026,000221,000AccumulatedDepreciation 000(12,000)(11,250)(13,260)(36,510)CarryingValue 000138,00033,75012,740184,49051
CHAPTER 5 – NON-CURRENT ASSETSMethods of depreciationCalculating depreciation in a given period are common questions in this exam.There are two main methods of depreciation. These are straight line and reducingbalance.Straight line depreciationDepreciation is charged on a straight-line basis over the life of the non-currentasset. This means an equal amount is charged in every accounting period over thelife of the asset.To calculate the depreciation charge the following formula is used:Depreciation per annum Original cost – estimated residual valueEstimated useful LifeAlternatively the examiner may choose to give you a straight-line depreciationpercentage; this percentage must be applied to the cost of the asset.Depreciation per annum % x costExample 2Mr Bubble purchased a building on 31 July 2005 for 150,000. The building has anexpected useful life of five years and a residual value of 20,000.Calculate the depreciation charges for each of the five years ended 31 December onthe basis:1.It is Mr Bubble’s policy to depreciate on a straight-line basis with a full year’scharge made in the year of acquisition and none in the year of disposal.2.It is Mr Bubble’s policy to depreciate on a straight-line basis withproportionate depreciation in the year of purchase.52ww w. st u d yi n t e ra ct i v e . or g
CHAPTER 5 – NON-CURRENT ASSETSReducing balance depreciationThis method of depreciation is generally used for assets that tend to lose morevalue in the initial years and require greater maintenance in the later years.A fixed percentage is charged to the carrying value on an annual basis. Hence, asthe book value of an asset reduces, the depreciation charge reduces accordingly.Depreciation per annum % x carrying valueExample 3Mr Jazzy purchased a motor vehicle for 25,000 on 1 October 2006. The estimateduseful life is three years.Required:Calculate the depreciation charges for each of the three years ended 31 Decemberon the basis:1.It is Mr Jazzy’s policy to charge depreciation at 25% per annum on a reducingbalance basis, with a full year’s charge in the year of acquisition and none inthe year of disposal.2.It is Mr Jazzy’s policy to charge depreciation at 25% per annum on a reducingbalance basis, with proportionate depreciation in the year of purchase.ww w. st u d yi n t e ra ct i v e . or g53
CHAPTER 5 – NON-CURRENT ASSETSDISPOSAL OF NON-CURRENT ASSETSWhen a business disposes of an asset it is unlikely that the sale proceeds will agreewith the carrying value of the asset at the date of disposal. A profit or loss ondisposal will arise which will need to be calculated and accounted for: Sale proceedsXCarrying value of asset at the date of disposalDifference Profit / (Loss) on disposal(X)X/(X)Accounting for a disposal Step 1: Remove the costDrDisposalsCrNon-current asset cost Step 2: Remove the accumulated depreciationDrNon-current asset accumulated depreciationCrDisposals Step 3: Deal with the sale proceedsDrBank (Cash proceeds)CrDisposals Alternative step 3: part-exchange proceedsDrAsset costCrBankCrDisposals (with part-exchange allowance)54ww w. st u d yi n t e ra ct i v e . or g
CHAPTER 5 – NON-CURRENT ASSETSExample 4Mrs Kemp purchased a motor vehicle on 1 April 2005 costing 22,000 anddepreciates the asset 20% reducing balance basis with proportionate depreciationin the years of purchase and disposal. Mrs Kemp sold the motor vehicle for 8,000on 1 July 2009.Mrs Kemp has a year-end of 31 December each year.Required:Show the journal entries to record the disposal and complete the disposals ledgeraccount.Calculate the profit / loss arising on the disposal.Example 5Lesley bought a van costing 15,000 several years ago. On 1 March 2010 the vanwas exchanged for the latest model.At the date of exchange the old van’s carrying value was 3,400 and the dealershipgave a part-exchange allowance of 1,500. The new van has a list price of 18,000.Required:Show the journal entries to record the disposal and complete the disposals ledgeraccount.Calculate the profit / loss arising on the
business is a separate entity for the business itself. Example 1 . Katy P is a sole trader and commences business on 1 July 2009. The following transactions took place in her first week of trading: 1.7.2009 Katy put 20,000 cash into the business. 3.7.2009 Katy purchased a motor vehicle
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