Acca 102 Accounting Notes

1ACCOUNTING Notes ACCA 102

Contents 1) Heading : ANSWERS TO QUESTIONS:...........................................................................5 2) Heading : Special/Odd Things to watch out FOR:.........................................................5 3) Heading: TERMS :.........................................................................................................5 4) Heading: Revision Common Problems..........................................................................5 2.

DEPRECIATION.........................................................................................................5 Straight Line Method: (or Fixed Installment Method)....................................................5 Diminishing balance method (or Accellerated Method)................................................6 Production Method:.......................................................................................................6

2. Next heading:provision bad debts,realisation of assets,inventory in closing entries(trading acc.)Closing entries,etc...........................................................................6 3.

Provision bad debts + Bad Debts:...........................................................................6

5) FINANCIAL RATIOS / INTERPRETING FINANCIAL STATEMENTS......................................7 1.

Financial Strength...................................................................................................7 i)

Financing Structure / Solvability..............................................................................7

ii)

Liquidity................................................................................................................7

iii)

Income sensitivity /Cover Ratios..........................................................................7

2.

Rate of Return/Profitability......................................................................................7

1.

Growth.....................................................................................................................7

6) CHAPTER 2 CLUBS/NON-PROFIT ORGANISATIONS......................................................13 Introduction:..................................................................................................................13 Organisational & Control Characteristics.:.....................................................................14 Sources of finance for :..................................................................................................14 Accounting records:.......................................................................................................14 Entrance fees:.............................................................................................................15 Membership fees:.......................................................................................................15 Income from Bar,Tuck Shop,Restaurant:....................................................................15 Donations and Bequests:............................................................................................16 Receipts & Payments Statement:..................................................................................16 Income and Expenditure Statement:............................................................................16 Trading Statement:........................................................................................................17 Accumulated Fund Account...........................................................................................18 Special Funds.................................................................................................................18 EXAMPLE OF: A NON-EXPENDABLE SPECIAL FUND ACCOUNT:...................................19 EXAMPLE OF: An EXPENDABLE SPECIAL FUND ACCOUNT:..........................................20 ACN-101-M

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2ACCOUNTING Notes ACCA 102 FINANCIAL STATEMENTS -for SPECIALFUNDS................................................................20 Statement of changes in Equity:.................................................................................20 Balance Sheet.............................................................................................................20 Notes to the statements;............................................................................................20 IF INTEREST FROM A NON-EXPENDABLE FUND – MAY BE USED FOR GENERAL EXPENSES:show like this:...........................................................................................21 TO REMEMBER:IN GENERAL:..........................................................................................21 7) CHAPTER 3 Companies Financial Stments..................................................................22 1.

The Company as a form of Enterprise...................................................................23 i)

Introduction:..........................................................................................................23

ii)

Shares :..............................................................................................................23

iii)

Rights and Resposibilities of shareholders.........................................................23

iv)

Incorporation of a Company:..............................................................................23

v)

Managemnt of a Company.................................................................................24

2.

Share Capital.........................................................................................................24 i)

Authorised Share Capital.......................................................................................24

ii)

Issued Share CAPITAL.........................................................................................24

iii)

Share Values : Par value / No Par Value............................................................24

iv)

Ordinary & Preference Shares............................................................................24

v)

Recording Share Transactions:...........................................................................28

vi)

The PURCHASE BACK of a companies own shares:...........................................29

4.

Differences between company & partnership.:.....................................................29

5.

Reserves & Dividends...........................................................................................30 1)

Non-Distributable Reserves................................................................................30

2.

Distributable Reserves.......................................................................................30

6)

Tax of Companies..................................................................................................30

i)

Provisional Tax;.....................................................................................................30

ii)

Recording the provision for tax..........................................................................30

iii)

The Tax Return:..................................................................................................31

7)

Appropriation Account...........................................................................................31

8)

Group Companies..................................................................................................31

8)

The Companies Act 61 of 73.................................................................................31

9)

The Annual Financial Statements of a Company...................................................32

i)

Objective:..............................................................................................................32

ii)

Format & contents..............................................................................................32

10)

Disclosure Requirements.......................................................................................32

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3ACCOUNTING Notes ACCA 102 i)

Overall Considerations: as per AC101...................................................................32

ii)

Identification of fin.stats-....................................................................................32

iii)

Reporting period.................................................................................................33

iv)

Notes to the fin stats..........................................................................................33

v)

Measurement of elements of Fin Stats...............................................................33

11)

THE BALANCE SHEET.............................................................................................34

i)

Information to be presented on the face of the Balance sheet.............................34

ii)

Info to be on face of Bal. Sheet OR in the Notes...............................................35

12.

NOTES TO THE BALANCE SHEET............................................................................35

1)

Generally accepted accounting practice............................................................35

2)

Accounting Policy...............................................................................................35

3)

(Assets:) Property Plant & Equipment................................................................35

4)

(Assets:) Intangible assets..................................................................................36

5)

Other Financial Assets........................................................................................36

6)

Preliminary Costs and Share issue costs............................................................36

7)

Inventories:.........................................................................................................37

8)

Share Capital......................................................................................................37

9)

Reserves.............................................................................................................37

10) Interest bearing borrowings:..............................................................................37 12.

INCOME STATEMENT.............................................................................................38

13.

Notes to the Income Statement:...........................................................................40

11) Revenue.............................................................................................................40 12) Profit from Operations........................................................................................40 13) Income from other Financial Assets...................................................................40 14) Tax Expense.......................................................................................................40 15) Extraordinary Items............................................................................................41 16) Earnings per share.............................................................................................41 14.

STATEMENT OF CHANGES IN EQUITY....................................................................41

8) CHAPTER 3 : PARTNERSHIP ACCOUNTS.....................................................................44 1.

Temporary & Permanent Partnerships:.................................................................44 i)

Certain accounting aspects special for partnership:.............................................44

1.

Legal Aspects of a Partnership:.............................................................................44

1.

Partnership Agreement: Important matters to be included in it:...........................44

2.

RECORDING OWNERS EQUITY...............................................................................44 i)

Capital & Current Account.....................................................................................44

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4ACCOUNTING Notes ACCA 102 ii)

Valuation of contributions made by partners.....................................................45

ii)

Loans & Advances..............................................................................................46

2.

Determination & Distribution of Partnership Profits..............................................46 i)

Distrtibution of Profit for period:............................................................................46

ii)

Partners Salaries:...............................................................................................47

iii)

Bonus to Managing Partner:...............................................................................47

iv)

Interest on Capital: pg 527.................................................................................47

Drawings:....................................................................................................................48 iv)

Adjustments & Corrections in respect of Previous Fin Periods...........................48

4.

Financial Statements of Partnerships:...................................................................48

5.

Changes in Composition of the partnership:.........................................................49 ii)

A New Partner is added to Partnership...............................................................50

ii)

Retirement or Death of a Partner.......................................................................53

6.

Liquidation /Dissolution of a partnership:..............................................................55

7.

Merger of more than 1 Existing Partnerships:.......................................................60

8.

Take over by an existing Company.......................................................................60

9.

Conversion to a company......................................................................................60

10.

Conversion to a closed-corporation.......................................................................60

9) CASH FLOW STATEMENTS..........................................................................................61 1.

WHY USE A CASH STATEMENT?.............................................................................61

2.

GAAP & Law implications.......................................................................................61

3.

INTRO of Cash Flow to other Fin Stat.....................................................................61 i)

Operating Activities...............................................................................................61

ii)

Investment Activities: DEFINITIONS: (copy down ac118.6 here later)................62

iii)

Financing Activities: DEFINITIONS: (copy down AC118.6 here later)..................62

4.

The Preparation of a Cash Flow Statement...........................................................62 i)

Doing accounts to calculate TOTALS for the c/d statement:.................................62

CASH FLOWS FROM INVESTMENT ACTIVITIES.

1)Heading : Prescribed Books for second year: Main one: Univ . of Limpopo –Introduction to Fin Accounting By A dempsey AND hn pieters. Also used :Financial Accounting An introduction:by ??????? And Study Master Guides for acc. grade 11&12,E conradie,A Marais,D G Strapp,etc

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5ACCOUNTING Notes ACCA 102

2)Heading : Special/Odd Things to watch out FOR: 1- NOTE:IF INVENTORIES CURRENT on stock take do not match the amount in the "inventory account"(calculated amount) it is called a "deficit on inventory account" and is put as expense in the income statement –ie goods stolen/lost etc.!

1)Heading: TERMS : 1- SEMI-ANNUALLY: every 6 months eg: interest at 10% p/a but calculated semi-annually means :accrued(added to total of loan)&calc. 6 mnthly but at 10% p/a rate.

1)Heading: Revision Common Problems. 1. DEPRECIATION Straight Line Method: (or Fixed Installment Method)

1.

(Cost MINUS - SCRAP/RESIDUAL VALUE) Over/ fixed time or years usage estimated.

Diminishing balance method (or Accellerated Method) 1.

(ONLY Cost ONLY -not minus scrap value) Multiplied by Certain % of Value.

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6ACCOUNTING Notes ACCA 102 2. 3. 4. 5.

This method says asset looses more value in first years than in later years :(ie:amount subtracted auto. decreases over time as asset value decreases) This method DOES NOT SUBTRACT THE SCRAP VALUE from the COST PRICE to CALCULATE the RESIDUAL VALUE.-at all ever The carrying value at end of one of the years is simply deemed the Scrap value-then no more. Use same Entries as above:just 'calculation' in calc. column different.

Production Method:

1. 2. 3. 4.

(Cost MINUS - SCRAP/RESIDUAL VALUE ) Multiplied by: ( Units produced this year /OVER/ Estimated no. of units production from the asset in its.lifetime. ) variations include :hours worked , distance traveled . The depreciation rate can also be worked out at: Rands per Production unit (or kilometre) and given 2 extra columns: depreciation per unit & annual units : in the Schedule of depreciation ,and the standard depreciation quoted as 'per unit' at top of asset register. Use same Entries as above:just 'calculation' in calc. column different.

2. Next heading:provision bad debts,realisation of assets,inventory in closing entries(trading acc.)Closing entries,etc

NOTE:IF INVENTORIES CURRENT on stock take do not match the amount in the "inventory account"(calculated amount) it is called a "deficit on inventory account" and is put as expense in the income statement –ie goods stolen/lost etc.! 3. Provision bad debts + Bad Debts:

Note:Provision for bad debts is NORMALLY NOT DONE ON ANY "pre-paid expenses" ,even if they are added to "Trade&Other Receivables" in the Income Statement.

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7ACCOUNTING Notes ACCA 102

1)FINANCIAL RATIOS / INTERPRETING FINANCIAL STATEMENTS 1. Financial Strength i) Financing Structure / Solvability

1- Solvency ratio =total assets/total liabilities = xx TIMES ii) Liquidity

1- Current Ratio =current assets/current liabilities = xx:1 2- Quick Ratio /Acid test ratio =current assets - inventory/current liabilities = xx:1 3- Inventory Turnover rate= cost of sales/average inventory(last+this year over 2)=xx TIMES(per yr NOTE:for 'DAYS' allways put mentioned item on top.!!! 4- No. of days inventory on hand:= average inventory/costof sales*365/360 days= xx days 5- Creditors payment period in days =outstanding creditors/credit purchases*360/365= xxdays 6- Debtors collection period in days =outstanding debtors/credit sales*360/365= xxdays iii) Income sensitivity /Cover Ratios

1. Rate of Return/Profitability

14- Return on Equity = Net profit after(interest+tax+preference dividends)/ordinary shareholders equity*100=xx% 15- Return on tot shareholders interest before/after tax = Net profit before/after tax (after +interest+????equity income???)/total shareholders interest*100=xx %???????????????/ 16-Return on Total assets= net profit before interest and tax/total assets*100=xx% 17-Return on current assets= net profit before interest and tax/net current assets*100=xx% 18-Return on outside investments=dividends+interest/investments*100=xx% 19-turnover of total assets=turnover(sales)/average total assets = xx times 20-gross profit % on sales= gross profit/sales *100=xx% 21-gross profit % on cost of sales= gross profit/cost of sales *100=xx% 22-net profit % on sales or cost of sales= same as above ,just net profit. 23-earnings yield=earnings per share/market price*100=xx% 24-earnings ratio=earnings per share/market price=xx:1 25-dividend yield=dividends per share/market price*100=xx% 1. Growth

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8ACCOUNTING Notes ACCA 102

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9ACCOUNTING Notes ACCA 102

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10ACCOUNTING Notes ACCA 102

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11ACCOUNTING Notes ACCA 102

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12ACCOUNTING Notes ACCA 102

1)CHAPTER 2 CLUBS/NON-PROFIT ORGANISATIONS REMEMBER TO ADD A "STATEMENT OF CHANGES IN EQUITY" Key concepts . Receipts and payments statement . Income and expenditure statement . Trading statement . Balance sheet . Special funds . Nonexpendable special funds . Expendable special funds . Accumulated fund . Entrance fees . Membership fees

Introduction: 1.

A Non-profit organisation :economic entity which has the legitimate goal of furthering certain interests in the community.-objective not distribute profits but use profits achieve stated goal.

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13ACCOUNTING Notes ACCA 102 2. 3. 4.

5.

Membership acquired through paying membership fees-not same rights as shares in a company.-not entitled to distribution of profits.(normally clause in constitution that if entity is dissolved all assets go to a entity with similar objectives.) Funds from:donations,membership fees,fund raising projects,bequests,government subsidies. Under section 21 of companies act-61 of 1973- may register as a company not for gain. Must register for Vat if 'Taxable supplies' or Income/Revenue exeeds R300 000 ,or may register if below that and want to.

Organisational & Control Characteristics.: • •

•

Either voluntarily & unpaid by committee chosen by members or Paid managers etc in larger. Acc. records often incomplete○ Smaller-treasurer likely to keep cash transaction record in a receipts & payments statement,using a single entry system.Here only control is bank reconcilliation. ○ If double entry system used- accrual basis used& normal acc. procedures followed.This means depreciation + adjustments are done ,trial balance extracted& normal financial statements prepared. ○ eg:university discloses more info. to enhance usefulness of fin.statements In principle however-no difference between accounts of trading entity & non-profit organisation.

Sources of finance for : 1. 2.

Membership acquired through paying first entrance fees, thereafter membership fees-not same rights as shares in a company.-not entitled to distribution of profits.(normally clause in constitution that if entity is dissolved all assets go to a entity with similar objectives.) Funds from:donations,membership fees,fund raising projects,bequests,government subsidies.

Accounting records: 1. 2.

Return on Capital not goal of – non-profit organisation- so EQUITY REPLACED by FUNDS. Profit is called a Surplus and Loss is called a Deficit- Added/ subtracted to Accumulated funds account. B.A.E of Non-Profit Organisations ASSETS = FUNDS + LIABILITIES. B.A.E of Non-Profit Organisations ASSETS = FUNDS + LIABILITIES. DIFFERENCE IN ACCOUNTS BETWEEN: NORMAL ENTITY Capital Account

Non- PROFIT ENTITY Accumulated Funds Account

Profit and Loss Account (Yr.End)

Income and Expenditure Account

Income Statement

Income and Expenditure Statement DIFFERENCE IN TERMS Used

Profit Surplus Loss Deficit Equity Funds Accounting Treatment of various Sources of Finance Capitalised: First :"Entrance fees Acc"/"Bank Acc." Entrance Fees End of Year Close-off to "Accumulated Funds Acc." Revenue (Budget / No.members=annual Membership Fees fees) Fees paid in Advance : to "Income Received in Advance(Membership fees)" Account" + 'Trade& Other Payables' MUST be written back out of 'in advance' acc. in new year back into "Membership fees" account as pay Fees in Arrears to "Accrued Income(Membership Fees)" Account. +'Trade & Other Receivables' But in new

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14ACCOUNTING Notes ACCA 102 year re-reverse to act as a Debtors Account Bad debts can be written off against "membership fees" acc ONLY IF ACCRUED MEMBERSHIP FEES have been recorded in Memb. Acc.& "Accrued Memb. Fees Acc As a debtor account) . at previous Fin year end and reversed out in following year beginning . – so to lessen bad debts from the expected income to be balanced out (cancelled) by the 'reversing' in the new year ONLY EVER (from the accrued expenses on the Dr side of it ).If no accrued expense / reversal type "debtors record"then for those Bad debts NO ENTRY anywhere in books unless a Debtors account exists somewhere (not usual). Doantions & Bequests: 3.

Entrance fees: a.

b.

Capitalised normally–Ie:First go straight to "Entrance fees" account- then at Fin .Year End with:ClosingEntries/Procedure closed-off to "Accumulated Fund account" (like :Capital account). DO NOT GET ADDED TO REVENUE in 'Income and Expenditure Statement'

Membership fees: c. d. e.

f.

g.

Annual Fee = Estimated Budget for Following Year / divided by / Number of members Some fees could be in arrears,some could be irrecoverable. "Membership fees :Income" account can act as a "debtors" account at same time as being income account.-if there are no "debtors' for members but is actually ONLY an INCOME account by GAAP.So— 1-you can write off bad debts against it if no (2)... following is true: -2-have already (from past fin . year end procedures)put fees in arrears on debit side –to act as a debtors.- BUT if a fin. year end has not passed& the very bad debts have been written up as accrued income - then you cannot write the bad debts off in this manner –nor in the books at all. Sometimes no debtors accounts kept for arrears members fees-so one ONLY uses adjustment accounts for arrears membership fees + fees paid in advance's at YEAR END ONLY. SOME Bad Debts( if already an accrued income in books) CAN get written off against the "Membership fees " account if there are no "debtors accounts" for members.

h. Only bad debts that have been moved to dr side from last year ,ie , as accrued incvome reversed in new year, can be written off as bad debts to cancel the dr (which would have been used to cancel any payment for last years stuff in the current year). i. "Membership Fees account" is empty at beginning of year:EXEPT FOR first entries are the adjustments transferred back :Arrears=Debtor as DR ----- AND Income in advance='Income' as CR for new yrs. income now showing . ALL Arrears Fees : i. get included in Fin. Stat. as income for the year(still owing – like a debtor)under "Trade& Other Payables" :BUT ONLY AT YEAR END. ii. "Adj:Accrued Income" can also be called:"Membership fees in Arrears" !!!! iii.No other arrears payments go to same adjustment acc. they must go to another iv.Fees in arrears go to :"Adj:Accrued Income (Membership fees)" –CONTRA- "Membership Fees Income" account same as an adjustment " at year end –BUT MUST: v.MUST get REVERSED back into 'membership fees' account in new year (to accurately show income for new year)- on the DEBTORS SIDE if there are no Debtors accounts.-account acts as a debtors account at same time as an income account here.:do exact opposite to above procedure. Fees paid in advance : vi.go to separate account –same as for Adjustments- the 'Income Received in Advance(membership fees)" account :Under "Trade & other Payables" on balance sheet.vii."Adj: income received in advance(membership fees)" can also be called "Membership Fees Received in Advance" account. viii.No other advance payments go to same adjustment acc. they must go to another

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15ACCOUNTING Notes ACCA 102 ix.'Must first go to "Membership fees: Income" Acc. from'Bank' Acc. , ONLY then to "in advance" acc. AFTER by reversing -out of 'Membership Fees:Inc.' Acc x. MUST be reversed back out of 'in advance' acc. in new year and re-reversed back into "Membership account" to accurately show income for that year.

Income from Bar,Tuck Shop,Restaurant:

j.

Gross profit –Not a Surplus- is Shown for "trading" only- in trading statement. All trading closed off to Trading account at year end procedures as normal The Gross profit for : Each trading activity must be calculated separately.as: i. goes in income statement as calculation if any expenses which 'must' appear in inc& exp statement are involved eg:wages: these must be subtracted in the inc & exp stat . and while all other expenses come off in the Trading statemnt.- see example!!!!!! see calc . : Net Income /'Gross Profit'/(Expenses Incurred here in brackets. eg: 'wages') in inc&exp. statement. m. Otherwise all other expenses are subtracted as normal from all the Gross profits to show the Net Surplus for the year at bottom on the "Income & Expenditure Statement". (Net profit) k. l.

Donations and Bequests: 1. 2.

3.

Treated as REVENUE. : Dr bank –CONTRA- Cr donations received( income account) UNLESS: As an EXEPTION a 'special fund' is created from it –which must NOT be added to "accumulated funds"(old 'Capital account'), but goes to "Special Fund "account which is regarded as a 'type' of capitalisation:ALLWAYS utterly apart from other capitalisations though eg: if very large bequeathement from a testament or donation or conditional donation.

Receipts & Payments Statement: 1. 2. 3. 4. 5. 6. 7.

8. 9.

AN: analysed & classified Statement of ONLY the Cash transactions .-cash actually out or in. Smaller entities with only cash as assets need ONLY show this statement For Fin.Stats. at year end.meetingBUT larger must show Balance sheet & Income & Expenditure Statement as well. T format or Narrative-vertical where all ACTUAL cash received on DR and all cash Paid on CR. Accrual principle not applied here:So Prepayments + Accrued amounts received or paid + Income received in advance All recorded here. All operational + capital nature (assets buy/sell) cash goes on here –no separate. Opening balance = cash on hand in bank at beginning & Closing Balance = cash on hand in bank at end of period. Disadvantages: -1-No fin. performance OR fin. position can be determined from this statement.,-2-only cash transactions recorded,-3-surplass/deficit cannot be determined,-4-includes cash from A/F/L & Inc/Exp accounts All-no distinction. ALL INVESTMENTS are cash payments=CR :even fixed deposits. ALL LOANS are cash receipts.

Income and Expenditure Statement: 1.

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Same as normal 'Income Statement' –also prepared according to GAAP-ias1(ac101)

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16ACCOUNTING Notes ACCA 102 2. 3. 4.

Determine surplus / deficit for a fin. year. All Income ONLY shown under ONLY :heading :INCOME & All Expenses ONLY shown under ONLY :heading :EXPENSES 5. NOTE : MUST SUBTRACT / ADD all relevant accrued or pre-paid Income/Expenses for the period –AND RE-ADJUST THEM IN START OF NEW PERIOD. (others as well as -see memb.fees) 6. The Gross profit Breakdown for all Trading activities works as follows: 7. IN 'INCOME' SECTION: a. Gross Profit :'from xyz' =in this statement means no wages /similar expense still to be deducted in this statement- was already worked out in trading statement. b. 'Income from :xyz activity' 348.87 Gross Profit 389.44 Wages expense 40.43 .....means that an expense must still be deducted in this statement for some or .. other reason and it gets shown like this :method 2.-The main reason being that wages do not form part of gross profit and must be shown as a 'deduction' on this statement-not on the trading statement .

Trading Statement:

1. 2. 3.

IF the scale warrants it :a separate ' TRADING STATEMENT ' can be prepared for each operational activity'.eg :for Tuck shop one ,for restaurant one ,for fun run one etc. Layout similar to Trading section (revenue+ cost of sales....+gross profit of a normal Income Statement. Closes off with gross profit NOT surplus/deficit because trading calc. done here .

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17ACCOUNTING Notes ACCA 102 4.

WAGES MUST NOT BE SUBTRACTED IN THE TRADING STATEMENT :The main reason being that wages DO NOT FORM PART OF GROSS PROFIT and must be shown as a 'separate deduction IN the Income PART' of THE: "Income and Expenditure Statement"(see section on "Inc.&Exp. Statement")- not on the trading statement.

5.

Accumulated Fund Account 1. 2.

3.

The Capital Account is CALLED the 'Accumulated funds' account ,AND EQUITY is called "Funds" because: no owners=no equity The following go to the "Accumulated Fund account" (-old "capital" account) a. Any INITIAL DONATIONS made to begin organisation. b. Entrance Fees c. Surplus / Deficit for each period. d. "Special Funds" donated for "General Expenses" –separate investment account must be opened. Separate investment accounts must be opened for "Special Funds" donated for a special purpose :to be able to issue meaningful reports on the acquisition & utilization of funds.

Special Funds

1. 2.

3. 4.

5.

Used like an "Income" and "Expense" account same entries style for Dr & Cr .- NOT like an 'ASSET' ACCOUNT!so for all assets bought(asset exchanges) FIRST move(REVERSE) cash from Specisl Fund to Accumulated funds account-and leave it alone there. Money can be set aside so not all the cash is spent on expenses of general nature :in a Special Fund.. A Special fund can also be established for a 'Legacy' or a 'Conditional donation' with special conditions attatched. When purpose of fund is Finished / finalised –it must be closed off to the "Accumulated Funds" account. FOR A RECEIPT :ALWAYS FIRST to normal bank,then only to "Investment account" Bank account, :ALSO for a PAYMENT :first from "Investment bank acc" to normal 'bank' acc–then ONLY PAYMENT MADE from here. (:unless stipulated otherwise in exercise instructions). a. RECEIPT: i. Dr bank(normal ) –CONTRA Cr "Special non-expendable : Star Fund." account.????????????????????/ ii.Cr bank (normal)-CONTRA- Dr Investment Bank account (eg : fixed deposit )...move to investment account. b. PAYMENT: i. Cr Investment Bank account-CONTRA- Dr Bank account (normal ).FIRST move to normal bank account ii.Cr "Accumulated Funds" account –CONTRA-Cr "Special non-expendable: Star Fund." account. FIRST Move to "Accumulated Funds" account(old 'Capital acc'.) as a new 'contribution' to 'Funds'-ONLY FOR ASSETS BOUGHT-asset exchange (not called capital here) so for all assets bought(asset exchanges) FIRST move(REVERSE) to Accumulated funds account-and leave it alone there.

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18ACCOUNTING Notes ACCA 102 iii.Cr bank(normal ) –CONTRA Dr "ASSET BOUGHT':eg:"Land & buildings" account Interest either back to same ledger account as double-up account if non-exp. , or to other income acc. if expendable. d. Remember to add accrued interest at year end (with contra as :"accrued income") AND REVERSE IT AT BEGIN NEW YEAR out of same account and out of contra : "accrued income" If interest is nonexpendable then it does not go to INCOME &EXPENDITURE STATEMENT or ....ACCOUNT. If stipulated that interest MAY be used for "general expenses"-not only special ones- then the interest income goes to separate income account :eg:"Interest: Star Special Fund :income" account. and DOES GO to normal Income & expenditure account (old profit& loss account) & 'Income & Expenditure Statement' & part of "Surplus or deficit "etc etc. All interest not used, usually should be re-invested. c.

6.

7. 8.

"Income & Expenditure Account OR ..Statement :NO ENTRIES: Special Funds :the donations for them and the income from them and expenses paid from them- should NOT be reflected on the Income & Expenditure Account OR ..Statement .-BUT through the fund account itself.-this account ats as a MINI Fin. Statments all by itself, so no extra entries needed. a. USED AS : 'Expense' account. –(all expenses -'Bank' is –CONTRA-)

b. c. d. e.

Used as :'Income ' account

b.

Non-Expendable fund: May ONLY use Interest for a specific purpose. i. Investments from these funds must be shown as separate items on the balance sheet-Cross References must be given. ii.CAPITAL -Separate on balance sheet under :"Special Funds:Non-Expendable Funds"

Used as :Income & Expenditure Statement.(only this fin. stat.) Used as :Statement of Changes in Equities.

Used as:Accumulated Fund account.-is actually officially seen as 'capitalisation' ! ( old 'capital' account) because never goes as 'surplus' to here. f. Used as :Income & Expenditure account (profit & loss account) 9. Putting money in a special funds account is actually officially seen as 'capitalisation' of the funds-exept kept apart from: a. -"Accumulated Funds" account: .Special funds are normally accounted for separately from "Accumulated Funds" account .& "Funds'( old equity)EXEPT any asset bought from/through a special fund must be added/credited to the "accumulated fund " account-or any part of total money contributed toward asset from special fund . b. so for all assets bought(asset exchanges) FIRST move(REVERSE) to "Special Funds" account money used to Accumulated funds account-and leave it alone there as 'FUNDS' (same as in equity-cash type capital from an owner). 10.A separate investment (At the bank) bank account is normally opened for each special fund in which capital is deposited. 11. A Special Fund can be either of 2 types. a. Expendable Fund: May use Capital & Interest for specific purpose. i. Investments from these funds must be shown as separate items on the balance sheet-Cross References must be given. ii.CAPITAL &INTEREST-Separate on balance sheet under :"Special Funds:Expendable Funds"

iii.Any interest accrued ,where more than (excess to)

expenses in year,IF not allowed to be used for anything(see other no.s above) gets shown ,in addition to the above, as an extra heading: "Special Fund :Expendable Funds" -SO 2 HEADINGS FOR 1 FUND. iv.If expenses exceed costs for fund-entity must find other means to pay for them-may not use capital portion at all. 12.AN ASSET bought from a special fund –MUST include note in Fin statements to show this transaction,BUT treated normally in balance sheet exactly same as all other assets.EXEPT any asset bought from a special fund must be credited to the "accumulated fund " account-or any part of total money contributed toward it .

13.NOTE: Accrued income: gets reversed from Cr side to Dr side in beginning of ANY NEW FINANCIAL YEAR BECAUSE at end of LAST year interest owed on account-went to "accrued income' account ('debtors type) and to Cr side of Special fund account(as a income) to reflect. EXAMPLE OF: A NON-EXPENDABLE SPECIAL FUND ACCOUNT:

Used like an "Income account" ACN-101-M

Page 18

19ACCOUNTING Notes ACCA 102

EXAMPLE OF: An EXPENDABLE SPECIAL FUND ACCOUNT: Ignore contents here –just any old account example was used –because Same as any other . ... NOTHING Special- used like an "Income account"

account

FINANCIAL STATEMENTS -for SPECIALFUNDS Statement of changes in Equity:

a.

special funds each in own single separate column to 'accumulated funds' . i. headings for entries in special funds columns: 1. balance at beginning of year 2. Funds Invested /or Donations(in ) 3. 'Accrued Interest Income'/ or just 'Interest Income' 4. Funds used(out) ii. headings for entries in accumulated funds section 1. balance at beginning of year(uses same entry as above section) 2. surplus for the year 3. entrance fees 4. Lapa built from donation.etc.

Balance Sheet 1.

All Special funds are shown under Accumulated funds on balance sheet –under 2 separate headings-one a. Non-expendable funds b. Expendable funds.(remember this includes interest from non-expendable funds under same name –one put '-capital' , other put '-interest' next to heading (see below).

ACN-101-M

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20ACCOUNTING Notes ACCA 102

Notes to the statements; 1. 2.

normal notes + notes to disclose any assets purchased from special funds-now in accumulated funds. table for depreciation: Just add below the "additions" :as a breakdown:( otherwise all the same) a. from own funds b. from special fund:star fund (etc)

IF INTEREST FROM A NON-EXPENDABLE FUND – MAY BE USED FOR GENERAL EXPENSES:show like this:

TO REMEMBER:IN GENERAL:

1) There are 2 instances where one must reverse ADJUSTMENTS on the first day of the new year in these books: a) For MEMBERSHIP ACCOUNT: ACN-101-M

Page 20

21ACCOUNTING Notes ACCA 102 i) Income received in advance gets reversed back in (to cr side) ii) Accrued income gets reversed from dr side to cr side/ +deleted out of "accrued income"(debtors)account iii) last years total cd/bd GOES TO :INCOME & EXPENDITURE ACCOUNT-and membership fees account is then EMPTY IN THE NEW YEAR ALLWAYS EVER!!!!! b) fOR SPECIAL FUNDS ACCOUNT: i) Accrued income: gets reversed from Cr side to Dr side in beginning of ANY NEW FINANCIAL YEAR BECAUSE at end of LAST year interest owed on accountwent to "accrued income' account ('debtors type) and to Cr side of Special fund account(as a income) to reflect. 2) Add all membership fees in arrears AS WELL AS SUBTRACT all fees paid in advance to get the total for Income & Expenditure statement for the year.

ACN-101-M

Page 21

22ACCOUNTING Notes ACCA 102

1)CHAPTER 3 Companies & Financial Stments. Notes:

These type ARE NOT TO BE PART OF "EQUITY" These form part of non-current liabilities.-redeemable prefererence shares. Preliminary &share issue costs each get their own account in ledger,and what is not deducted therefrom as expenses in income statment that year,is then put as a noncurrent asset. Share premium is part of issued share capital=equity

1. The Company as a form of Enterprise. i) Introduction:

1- Definition:Company An association of people working together with the objective of making a profit. 2- Companies are an unseen entity controlled by ,and participates in legal communications through, mangmnt bodies . 3- Conduct of companies is restricted for reasons :eg monopolies. 4- Financial differences between company and partnership,company has to provide for these needs: Aquisition of more capital To make continued existence of entity independant of owners To be able to change owners To limit fin.liability of owners. ii) Shares :

1- Company divides capital into shares and sells,only keeps a shareholders register,no extra shareholders current accounts etc, 2- Principle quality is shares are easy transferable. iii) Rights and Resposibilities of shareholders

1- Change ownership : negotiable document = shareholders certificate is proof of ownership, 2- Right to vote : At Annual general meeting(agm) vote for directors+ broad objectives of company. 3- Dividend rights : Profit belongs to company – only dividends actually declared belong to sharehldr 4- Liquidation Rights : Assets belong to company ,NOT belong shareholder ,Surplass of assets after liabilities goes to shareholder only if liquidation. iv) Incorporation of a Company:

1- Once registrar issues CERTIFICATE OF INCORPORATION=evidence 'COMPANY ACT' etc was complied with,company comes into existence,THEREAFTER COMPANY MUST APPLY FOR A 'CERTIFICATE TO COMMENCE BUSINESS' only once this is issued may business be commenced. (1) MEMORANDUM OF ASSOSIATION: (a) Name of Company (b)Activities / Purpose Company incorporated for. ACN-101-M

Page 22

23ACCOUNTING Notes ACCA 102 (c) Amount of Share Capital And division thereof into shares ,with which company registered. (2) THE ARTICLES (a) Regulate internal and management of company: eg:shares + share cetificates,transfer of shares,loan powers,covening meetings,rights+resposibilities of directors,voting rights,power of attorney etc. (3) PRELIMINARY COSTS. (a) Debited to 'preliminary cost accnt',customarily written off against profits over next few yrs. Eg: legal costs,registration fees. (4) Most important consequence of separate legal entity (a) Liabilities separate owners (b)Profit + Assets belongs ONLY company,not to shareholders. (5) Meeting in 60 days (a) Shareholders must hold meeting in 60 days of 'certificate to commence business'-primary objective appoint board of directors. (6) Yearly shareholders meeting (a) Appoint board of directors.,subject to provisions of the articles of ass. (b)Annual Fin Stat. , incl. auditor report ,presented and approved. v)

Managemnt of a Company.

1- Shareholders := owners 2- NEXT Board of directors= not involved day to day running of comp.,only policy &coordinating. 3- NEXT Management : running of company. 1. Share Capital. i)

Authorised Share Capital

1) Maximum Share capital it may obtain according to memorandum of association,can be changed. ii)

Issued Share CAPITAL

1) Amount of shares actually issued, remainder is called Reserve or Unissued Share cap. iii)

Share Values : Par value / No Par Value

(1) Par Value (PV): (a) Shares with Face value/Nominal value/Par Value :Value by which authorised share capital is divided into shares,CAN be different to Market Value.Only Original issue(sale) of shares is recorded in accounts, reselling is NOT,then only changed in 'Shareholders Register' (b)Share Premium is if Par Value shares are sold to the public at a higher value than the par value (c) All ordinary shares together must be the same ,either par value or no par value,not mixed,all preference shares can be another type,but not mixed either,one or other. (2) No Par Value Shares (a) System where the Authorised Capital of eg: 1000 shares have no face value ,eg:R10 (b)Must write as heading for No par value shares account: Ordinary Shares:Declared Capital. (or "...Stated capital")(also for pref.shares – same style) ACN-101-M

Page 23

24ACCOUNTING Notes ACCA 102 (3) Share Premium (a) is if Par Value shares are sold to the public at a higher value than the par value iv)

Ordinary & Preference Shares

(1) Ordinary Shares (a) Dividends Only get paid AFTER preference shares,dividend not fixed-BoD decides divident total value and then value divided up.Must have own account,not mixed up with preference shares.,and dividends do not go to communal accounts. (2) Preference Shares (a) Dividends Get paid Before ordinary shares,dividend% IS fixed on Issue. (b)Pref. Shares must have own account,not mixed up with ordinary shares.But dividends can all go to same account as ordinary shares. (c) Dividend only get paid if a Dividend was actually declared by BoD (d) All Pref. Shares have cumulative dividends(next year) if unpaid some years. = becomes an accrued liability for company for next year –Unlessstated not cuml. (3) Redeemable Preference Shares (note: Not included as Equity!!!!) (a) Special type of pref.Share where may be purchased back by company in manner & price predetermined on issue. (b)These type ARE NOT TO BE PART OF "EQUITY" (c) These form part of non-current liabilities. (d)May only be redeemed by funds from issuing new shares,or from profit available for distribution as dividends. (e) If from profits: Amount must first be tranferred to account called"Capital Redemption Reserve Fund" ONLY from 'Distributable Reserves'- reason :to maintain maintain capital of company-thereby protect creditors interests.

(i) (ii) The capital redemption fund may also be used to pay up unissued shares of the company for issue to members as fully paid up shares. (f) (g) PREMIUM ON REDEMPTION of Redeemable Pref.Shares. (i) 'Provision must be made ' for premium either from : 1. Profits or from an 2. Existing share premium account. (ii) Two new requirements of Act: (1)premium must be determined before alotment of redeem. Pref. shares and(2)conditions of redemption must be noted in articles. Before share premium acc. May be used to write off premium on redemption. (iii)Very complicated- must be researched. (h)Different journal entries for redeem.pref.shares methods: (i) P.s. :UNCLEAR ABOUT WHEN/ HOW CAPITAL REDEMPTION RESERVE FUND must be created. (i) New shares issued to pay: ACN-101-M

Page 24

25ACCOUNTING Notes ACCA 102

(ii) From retained earnings:

(iii)From issue new shares at a prmium+balance from retained earnings+as little retained earnings as possible to be used(already 7000 in old share premium acc)

ACN-101-M

Page 25

26ACCOUNTING Notes ACCA 102

(iv)By means of issue of no par value shares:

ACN-101-M

Page 26

27ACCOUNTING Notes ACCA 102

iii)

Recording Share Transactions:

(1) Shares of Par Value issued at Par: (a) Done normally ,same method for Ordinary and Preference Shares just each type must have their own accounts –see example that follows: (b)NOTE: SAICA have changed name of :Ordinary appication and allotment account" & "Preference application and allotment account to : ONLY " APPLICATION ACCOUNT" SAME ONE FOR BOTH. (c) Note: IF A QUESTION SHOWS THAT SOME SHARES WERE SOLD AT A LOWER VALUE PREVIOUSLY (WHETHER IT SAYS " FRESHLY ISSUED" OR NOT) it means any shares of same type sold at a later date at a higher price are treated as SHARE PREMIUM CASES.

(2) Shares of Par Value issued at a Premium: (a) If issue price exeeds the par value:exess must be credited to "SHARE PREMIUM ACCOUNT"(Same account is used for Preference Shares.) (b)"SHARE PREMIUM ACCOUNT" forms part of Share Capital EQUITY. (c) May be used according to 'companies act ' ONLY to write off certain costs. (d)Note: IF A QUESTION SHOWS THAT SOME SHARES WERE SOLD AT A LOWER VALUE PREVIOUSLY (WHETHER IT SAYS " FRESHLY ISSUED" OR NOT) it means any shares of same type sold at a later date at a higher price are treated as SHARE PREMIUM CASES.(exam)

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28ACCOUNTING Notes ACCA 102

(3) Issue of Shares of No Par Value: (a) The entire issue of no par value shares is paid-up capital and should be transferred to a separate account called "Ordinary Shares :Declared Capital Account"

iv)

The PURCHASE BACK of a companies own shares:

1) Companies Act allows buyback of companies own shares if :Artices + a special resolution of BoD allows it and also if :Companies debts will still be payable as arise + assets will still be more than Liabilities thereafter.See section 85 of companies act. 2) For PAR VALUE SHARES : issued capital must be decreased (cancelled) by par value of shares aquired.(but will remain as authorised shares 'allowed' still)(expense or loss????) 3) For NO PAR VALUE SHARES : Stated capital of shares must be decreased by book value of of share capital aquired.Amount of decrease = divide stated capital /by / total of issued shares bought back *multiplied by* amount of shares bought back.(ie: issue value/total no. issued at the time* no. of shares bought back =amount to decrease /cancel equity by) 4) If 1000 shares of value R2 are redeemed at R5 –Note: 'Ordinary/Pref Share account ' must be debited ONLY with the R2 per share bought back ,and reduce no. of shares issued by amount bought back,the other R3 /share must be debited to "distributable reserves" and will be disclosed in "statement of changes in equity" 5) The amount of shares bought back get SUBTRACTED from "issued no of shares".Ie: if 1000 bought back,then only eg:10000- 1000 = 9000 issued shares left-ie:company cannot own its own shares. 4. Differences between company & partnership.:

See page 380 for more.

ACN-101-M

Page 28

29ACCOUNTING Notes ACCA 102

5. Reserves & Dividends

1) Non-Distributable Reserves

1) May not be disributed as dividends (1) Voluntary: (a) Comp. can decide it is prudent to withhold eg:Revaluation surplus(assets revaluated)ledger account? (2) Involuntary (a) Prescribed by Companies act :eg "Capital redemption reserve fund"(eg:to buy back redeemable preference shares) (b)NOTE: if redeemable preference shares are redeemed with own resources,and not from issue of some other shares,amount must e transferred from profits to "Capital Redemption reserve fund"ledger account? 2. Distributable Reserves

1) Dividends declared by directors at AGM,ARTICLES may authorise an interim dividend at half-year as well.All declared in number of cents/share 2) Accounts as follows:

6) Tax of Companies

1) Companies must pay "normal tax" de3clared by fin minister in budget speech,as well as Secondary tax on dividends. ACN-101-M

Page 29

30ACCOUNTING Notes ACCA 102 i) Provisional Tax;

1) Company must pay Provisional Tax 2 times per year ,and then also pay tax difference within 6 months after fin. year end( if estimate was lower than true tax) . 2) 1st provisional tax payment is 6 mnths after beginning of financial year= half of estimated tax for year,second prov.tax payment is last day of fin. Year. = other half of estimated tax liability. 3) Each provisional tax payment is DEBITED to 'SARS/or tax payable account' ii) Recording the provision for tax.

1) If 'Sars/Provisional tax ' account has a debit balance =included as asset in balance sheet,Credit balance=included as liability in balance sheet. 2) On the accounting date provision is made for normal tax liability.:see below:

ii) The Tax Return:

1) After end of Fin Year Copy of Fin Statements and Tax Return Doc. Are sent to sars.Sars determines tax liability and issues an assesment to company and final payment is then made for past year. 7) Appropriation Account

1- The Appropriation account comes after the profit and loss account at end of year,in place of the "Owners Capital" account.All profit and loss, as well as last years "retained earnings"(any unappropriated earnings)get closed off to this account. 2- Tax is trandsfered frfom here too. 3-

4- All the possible different transactions that can be done in an Appropriation account.

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Page 30

31ACCOUNTING Notes ACCA 102 8) Group Companies

1- Parent –Subsidiary relationship-if have majority voting rights and right appoint /dismiss majority BoDirectors. 2- Companies act says group statement s muust be prpared for parent company. 3- Parent compaay has 2 accounts for the investment in its subsidiary 1- Investment account= represents cost of the shares 2- Current account = for moneys lent to subsidiary. 8) The Companies Act 61 of 73

1- Protects shareholders& 3rd parties eg:creditors 2- Needed due to Mngmnt/owner separation & separate legal entity status 3- A company must present its audited annual fin.stat at AGM ,approved by board +signed on behalf of board in one of official languages . Also copy must be set , at least 21 days before AGM,every member of company,every debenture holder , +every other other parties entitled to,+ Registrar of Companies., + interim statements for public companies at half year to members. 4- On incorporation constitutional documents of firm become private property. 9) The Annual Financial Statements of a Company. i) Objective:

1- To provide info on the fin position,fin performance,and changes in the fin position of the enterprise that is usefull to a wide range of users in making economic decisions. 2- 2 sets of fin stat . are prepared.One set is for internal use ,one set is for external users eg investors,creditors.External set has least amount of info. possible on itspy's etc. ii) Format & contents

1- Developments in field: improving comprehensability of.,single page for bal sheet etc,notes separate,also narratibve form,not t form 2- Composition-as normal 3- Fair representation accordance GAAP: See company act for very ! detailed 'required' 4- GAAP-APB=acc.practices board part of SAICA,APB negotiates + accept new accounting methods- REASONABLY REPRESENT THE STATE OF AFFAIRS OF COMP. AND PROFIT&LOSS 10)Disclosure Requirements i) Overall Considerations: as per AC101

(1) Fair Presentation and Compliance with Statements of GAAP (a) Fin Stat should fairly present the fin perf. Fin pos. & cash flows of enterprise (b)Appropriate application of statements of GAAP with additional disclosure when necessary,results in virtually all circumstances in fin stats. That achieve a fair presentation. (c) Must 'disclose' that fin stats . comply with GAAP, In notes.Departure from GAAP must be disclosed in special way. (d)Basicly fin stats. Must comply with GAAP and present relevant,comparable ,Understandable info.,it must fairly present the fin perf. Fin pos. & cash flows of.. (2) Accounting Policies (a) Policies used to be selected as per GAAP, ACN-101-M

Page 31

32ACCOUNTING Notes ACCA 102 (3) Going concern (a) Assesment of enterprises ability to continue as a going concern,must disclose in notes details if not.Pepared on agoing concern basis (4) Accrual Basis of Accounting (a) Transactions ony recognised when they occour,and reported in fin.stats. in period to which they relate(matching principle) (5) Materiality and Aggregation (a) Each material item presented separately,immaterial items should be aggregated (6) Offsetting (a) Assets & Liabilities should NOT be offset unless specific required/permitted by Gaap. (7) Comparative Information (a) Comparative info for all numerical figures shown for For previous period (fin year)+in same method /policy for both + in 'notes' if necessary. ii) Identification of fin.stats-

Put name, date etc. iii) Reporting period

1 year usually iv) Notes to the fin stats.

Cross reference etc. v) Measurement of elements of Fin Stats.

Historical cost At Amount paid originally Current cost At amount needed to aquire assets, or to pay liabilities current prices. Realisable(settlement )value If you dispose of asset now at a disposal, amount.or liabilities at settlement today values(undiscounted) Present Value At present discounted value of future net cash ouflow/inflow that item/liability is expected to generate/be required to settle in the normal course of business.

ACN-101-M

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33ACCOUNTING Notes ACCA 102

11)THE BALANCE SHEET

ACN-101-M

Page 33

34ACCOUNTING Notes ACCA 102 ASSETS

PAGE 44tsee-own notebook1-end ch3-format-dissertation.

Non-Current Assets ?????+ Provisions+????bad debts /guarantee + warrantee's. Property Plant and Equipment Other Financial Assets : Investments (at cost)( shares-unlisted + listed + fixed deposits+ loans-put as sub-headings below) Intangible assets Preliminary Expenses and Share Issue costs Current Assets Trade and other Receivables Cash and Cash Equivalents Inventories Prepaid Expenses ( should go in Trade & other Receivables???) Total Assets EQUITY AND LIABILITIES Capital and Reserves Issued Share Capital / or Capital (optional) Reserves(or –Other Reserves –optional)) Retained Earnings(optional) Non-Current Liabilities-rem put in increasing order liquidity:check chapter 15-payable last first ,those payable first go last!!! Interest bearing Borrowings: Long Term Loans.(over 20 years at 12% pa ) Mortgage Bonds (over 20 years at 10% pa ) Debentures: Non-Interest bearing Borrowings. Redeemable preference shares Current Liabilites(in incresing order of liquidity remember:payable last first) see page 291 t :chapter 14 : "current liabilities" Trade and other Payables Current portion of Interest bearing borrowings Tax Payable Dividends payable Bank Overdraft Cumulative preference dividends????????????????(goes to 'Dividends payable' think so . Total Equity and Liabilities

NO TE S

2005

2006

R TOTAL

R TOTAL

3 5

xxxxxxxx xxxxxxxx

xxxxxxxx xxxxxxxx

4 6

xxx xxx

xxx xxx

7

TOTAL xxxxxxxx xxxxxxxx xxxxxxxx xxxxxxxx TOTAL

TOTAL xxxxxxxx xxxxxxxx xxxxxxxx xxxxxxxx TOTAL

TOTAL xxxxxxxx x xxxx

TOTAL xxxxxxxxx

TOTAL

TOTAL

total xxxxxxx xxxxxxx

total xxxxxxx xxxxxxx

TOTAL

TOTAL

xxxxx xxxxxx xxxxx

xxxxx xxxxxx xxxxx

TOTAL

TOTAL

8 9

10 10 10 10 ?

8

xxxx

i) Information to be presented on the face of the Balance sheet.

At a minimum, the face of the balance sheet should: 1. Property, plant and equipment, 2. I ntangible assets, 3. Other financial assets (excluding amounts shown under 4. Investments accounted for using the equity method, 5. Inventories, 6. Trade and other receivables, 7. cash and cash equivalents, 8. trade and other payables, 9. tax liabilities and assets as required by the statement 10.provisions, ACN-101-M

Page 34

35ACCOUNTING Notes ACCA 102 11.non current interest-bearing liabilities, 12.minority interest, and 13.issued capital and reserves (AC 101 par .67). i) Info to be on face of Bal. Sheet OR in the Notes

1 .further subclassifications of line items classified in a manner appropriate to enterprises operations 2 . also amounts relating to parent & susidiaries 12.NOTES TO THE BALANCE SHEET The following are the headings etc needed for the NOTES(in yellow)and descriptions. NOTE: For bal. sheet notes,all must be for 2 yrs running figures,just "shares issued etc" not.(and obvious ones eg:prop,plant+equip) 1) Generally accepted accounting practice 1.1 Generally accepted accounting practice The annual financial statements are prepared according to the statements of generally accepted accounting . .. . .... practice. 2) Accounting Policy The accounting policy of the company is consistent with that of the previous years, and is as follows: 2.1 Measurement basis The annual financial statements are based on historic cost unless stated otherwise. 2.2 Property, plant and equipment Depreciation is not written off on land. Depreciation on a plant, buildings, machinery and vehicles . is written off .. at rates deemed appropriate to reduce the carrying amount of the assets over their . expected useful lives to their .. estimated residual values. The rates and methods are as follows: Buildings 2% per year on the straight-line method Plant 10% per year on the straight-line method Machinery 15% per year on the straight-line method Vehicles 20% per year on the straight-line method. 2.3 Other financial assets Other financial assets are valued at fair value. Listed shares ae .‘aiued at market value. Unlisted .. investments .. .. are revalued every year at net realisable value to establish the directors’ valuation. 2.4 Inventories Inventories are valued at the lower of cost, on a first-in-first-out basis, and net realisable value. . .. An appropriate ....part of the fixed and variable fac:ory overheads are included in determining the . .. cost of work in progress and ....finished goods. 2.5 Revenue recognition Sales are recognised upon delivery of products or performance of services.

(must show measurement bases used and each specific policy used in fin stats.needed tounderstand) 3) (Assets:) Property Plant & Equipment 4)

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36ACCOUNTING Notes ACCA 102 Property Plant & Equipment: Carrying amount: Beginning of the year: acc.depreciation) Cost Accumulated depreciation

( cost –

Additions (include all costs of : installation etc as COST price!) Disposals (Cost price – Accumulated depreciation ONLY ) Re-Evaluations. Depreciation (One Year's including Pro rata for Disposals +Additions)

Land&Buildin Vehicles gs xxx xxxx

Machinary

TOTAL

xxx

xx

-------------------

(Brackets)

(Brackets)

(Brackets)

--------------(Brackets) ---------------

(Brackets) (Brackets) (Brackets)

-----------(Brackets) (Brackets)

----------(Brackets) (Brackets)

(Brackets)

(Brackets)

(Brackets)

Cost --------------Accumulated Depreciation(remember to add all up extra mnths to ------------------date sold Carrying Amount: End of year: ( cost – acc.depreciation)

In Addition ,the land & buildings which the company owns is :erf 3432 in star industrial park ,which was purchased for R23453,00. On the DATE: 24/12/2005.Additions were made to value of R3999.(leave out additions and put date of revaluation, not bought date, if revaluated- )This land is subject to a mortgage bond of 300000 at 10%p/a 4) (Assets:) Intangible assets Intangible assets Carrying amount: Beginning of the year: acc.depreciation) Cost Accumulated amortisation

( cost –

Additions (include all costs of : installation etc as COST price!) Disposals (Cost price – Accumulated depreciation ONLY ) Amortisation (One Year's including Pro rata for Disposals +Additions)

Brand names Licences xxx xxxx

TOTAL xx

-------------------

(Brackets)

(Brackets)

-----------------------------

(Brackets) (Brackets)

----------(Brackets)

(Brackets)

(Brackets)

Cost --------------Accumulated Amortisation(remember to add all up extra mnths to ------------------date sold Carrying Amount: End of year: ( cost – acc.depreciation)

5) Other Financial Assets. 1 Listed shares at market value 2 Unlisted shares at market value

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37ACCOUNTING Notes ACCA 102 6) Preliminary Costs and Share issue costs

Also: comission costs in resect of issueing debentures Discount allowed in respect of issueing debentures

24542 32434

23455 24523

7) Inventories:

8) Share Capital All Authorised must be first,then all Issued 2nd. Any options granted or other movements must get a sentence at the bottom. Not 2 yrs figures, just 1 figure needed. Share Premium account is only allowed to be used for certain purposes.Any usage thereof must be disclosed in the statement of changes in equity.

9) Reserves

10)Interest bearing borrowings:

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38ACCOUNTING Notes ACCA 102

:

12.INCOME STATEMENT

1- In the company balance sheet, there are no "Dist ,admin &Other expenses" MAIN headings,only 'revenue' and different 'profits' MAIN headings. 2- In income stat. first put operating : all expenses and profits - then other profits and expenses . In operations section :must only put separately the 1-distribution + 2-administrative expenses , All the rest go in 'other operating expenses' or 'other operating income'. 3- After profit from operations,then put first all other income ,then all other expenses. 4- If there are no minority interests' or extraordinary items' then one must leave out "profit after tax" and 'profit from ordinary activities' and go staight to 'net profit for year' At a minimum, the face of the income statement should include line items that present: revenue, the results of operating activities, finance costs, share of profits and losses of associates, and joint ventures accounted for using the equity method, tax expense, profit or loss from ordinary activities, extraordinary items, minority interest, and net profit or loss for the period. Additional line items, headings and sub-totals should be presented on the face of the income statement when required by a statement of generally accepted accounting practice or when such presentation is necessary to present fairly the enterprise’s financial performance (AC 101 par .76). The financial statements should disclose either:(on the face) (a) the cost of inventories recognised as an expense during the period, or (b) the operating costs, applicable to revenue, recognised as an expense during the period classified by their nature (AC 108 par .34). ACN-101-M

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39ACCOUNTING Notes ACCA 102 In Notes or on Face-either of allowed- to display following an analysis of expenses using a classification based on either the nature of expenses or their function within the enterprise (AC 101 par .78). Enterprises classifying expenses by function should disclose additional information of the nature of expenses, including depreciation and amortisation expense and staff costs

NAME OF BUSINESS : XYZ Traders INCOME STATEMENT for The YEAR ended 28 Feb 2007 (over a specific period)

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40ACCOUNTING Notes ACCA 102 SEE PAGE 140 S REVENUE Cost of Sales Gross Profit Other operating income

NOTES 15

8 8 8 8 8 Bad Debts Recovered Discount received Rent or(next line)Comisssion/etc. income

Distribution Administration and other Expenses. Discount Allowed Depreciation Carriage on "Sales" (not purchases ! ) Packaging (also not in purchases ! ) Advertisements Wages and salaries Water and lights Finance Costs Interest on Long term Loan: MUST apart Interest on Bank Overdraft: Must apart Interest on Debentures Profit (for the year)

R TOTAL (xxxxxx) TOTAL xxxxx Xxxxx Xxxxx Xxxxx Xxxxx Xxxxx Xxxxx Xxxxx Xxxxx Xxxxx TOT. ALL Income (BRACKETS) Xxxxxx

1.2+3 Xxxxxx Xxxxxx Xxxxxx Xxxxxxx Xxxxxxx (BRACKETS) Xxxxxxx Xxxxxxx Xxxxxxx TOTAL

8 8 8

12.Notes to the Income Statement: 9)

Revenue

There are various complicated rules for revenue,following is simplified version.

Total

xxx

xxxx

10)Profit from Operations.

This one points to 'profit from operations',but just tells all extra expenses under'other operating expenses' and all extra profits under 'other operating income' In income stat. you must only put separately the 1-distribution + 2-administrative expenses , All the rest go in 'other' Directors salaries & must be separate & auditors fees must be itemised-listed one by one.

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41ACCOUNTING Notes ACCA 102

11) Income from other Financial Assets

12) Tax Expense

1- Must specify the different types and classes of tax individually in detail.

13)Extraordinary Items

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Income or Expenses. Events distinct not expected to reoccour frequently Eg:loss on expropriation of assets /earthquake Must allways show tax thereon separately in notes, but tax not included in income statement as part of extraordinary item.

14) Earnings per share

Show only total rand Value of dividend declared and breakdown to cents/share ,in a sentence format. 14.STATEMENT OF CHANGES IN EQUITY.

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42ACCOUNTING Notes ACCA 102

P.S. from old notes last year unisa(1) notes PETER PUMPKIN Traders NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1 (1):Accounting Policy (1.1):Financial Statements have been prepared on the Historical cost basis in accordance with Generally Accepted Accounting Practice. (1.2) Property plant & Equipment: Property plant & Equipment are shown at valuation on receipt of goods where cost price is not available. Depreciation(OR/AND amortisation) has been calc. at 10 % of cost price of Assets using the straight line method.(or . .. .... written off over 20 years for intangible assets –straight line method-) Land and buildings have been classified as investment properties and have not been depreciated (1.3)provision for bad debts has been provided for at 5% of debtors. (1.4)Inventories are valued at historical cost. + research & development costs + provisions + employee benefit cost + definition of cash & cash equivalents (1.5) Changes in accounting policy disclosure. (2): Revenue is Recognised as Net Sales to customers/OR Fees charged for services rendered.

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43ACCOUNTING Notes ACCA 102

(3) (3.1) Land & buildings consist of erf 1,miemville,with buildings ,purchased at R 150 000. :subject to a MORTGAGE BOND in favour of xxx Bank . (4) Trade and other Receivables consist of : 1:Debtors:starting balance less provision for bad debt less debtors with cedit balance total:XXXXXXXX 2:Bills receivable 3:Vat control account (5) Trade and other Payables consist of : 1:Creditors:starting balance less creditors with debit balance total:XXXXXXXX 3:Vat control account (6) Inventories/y consists of: (1)stationary (2)unfinished goods (3)merchandise for sale TOTAL:XXXXXXX (7)Investments consist of: (7.1)Unlisted Shares at cost: (7.1.1) 150 shares in XYZ Company bought for R3,00 per share(market value R3000)( put current value here, if different to cost price it only goes here ,the cost price is what shows on the balance sheeteg:MARKET VALUE: R5000) (7,1,2) 100 shares in abc Enterprise at cost price R5,00 per share(market value 1000) (7.2)Listed Shares at cost: (7.2.1) 1500 shares in TS Stores bought for R4,00 per share(DIRECTORS VALUATION R7000) (3)Loans granted: (3.1) loan granted to xyz Company (pty)ltd at 10% pa repayable in 4 years on 31 Jan 2005 secured by fixed property:erf 15 tekkiesville,valued at R100000. (7.4)Fixed deposits: (7.4.1) fixed deposit of R5000 over 5 years at xyz bank @ 5% interest p/a payable at end of term. (8)Interest Bearing borrowings: (8.1)Mortgage bonds consist of: The long term loan secured by first mortgage :(Refer to note 3 .for details:) The mortgage bond is for 500 000 repayable over a period of 4 years in installments of R128 000 per annum., Interest at 4 % per annum is levied on Outstanding capital and is also payable annually in addition to installment. Outstanding liability = 500 000. Less: Transferred to Current Liabilities: =128 000 384 000 (8.2) Debentures: 1500 Debentures at R100 are redeemable on 2 JAN 2008 to creditors.

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44ACCOUNTING Notes ACCA 102 Interest @ 10% p/a is payable each year . The debentures are secured by a mortgage bond over land & buildings(refer to note xxx) in favour of the trustees.

Property Plant & Equipment:

Land&Buildin Vehicles gs

Carrying amount: Beginning of the year: ( cost – acc.depreciation) Cost Accumulated depreciation ------------------Depreciation (One Year's including Pro rata for Disposals --------------+Additions) Additions (include all costs of : installation etc as COST price!) Re-Evaluations. --------------Disposals (Cost price – Accumulated depreciation ONLY ) (Brackets) Cost --------------Accumulated Depreciation(remember to add all up extra mnths ------------------to date sold Carrying Amount: End of year: ( cost – acc.depreciation) Cost Accumulated Depreciation ( top : Accumulated. Depreciation ------------------at beginning of Year + PLUS +-middle : Depreciation –MINUSDisposals : their Accumulated Depreciation =EQUALS= THIS AMOUNT.)

Machinary

TOTAL

(Brackets) (Brackets)

(Brackets) (Brackets)

(Brackets) (Brackets)

(Brackets) (Brackets) (Brackets)

-----------(Brackets) (Brackets)

----------(Brackets) (Brackets)

(Brackets)

(Brackets)

(Brackets)

1)CHAPTER 3 : PARTNERSHIP ACCOUNTS 1. Temporary & Permanent Partnerships:

1- Teemporary partnership known as a "Consortium" or Joint Ventures" - eg for one big construction job 2 companies co-operate or Doctors/Lawyers etc. 2- Separate set of books opened for a temporary partnership ,but often all transactions are recorded separately in each companies own books as well. 3- Permanent partnership terminates on 1- death of a partner 2- legal process eg: insolvency of a partner or /partnership / 3- one partner decides to terminate partnership(could be liable for breach) 4-admission of new member 5- one partner retires 4- MUST RESEARCH PARTNERSHIP AGREEMENTS ETC,ALSO basic charateristics of partnerships etc. i) Certain accounting aspects special for partnership:

1- Formation of partnership ACN-101-M

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45ACCOUNTING Notes ACCA 102 23456-

Distr. Of profits/losses Preparation fin. Stats. Dissolution of partnership Conversion into a private company Takeover of , by an existing company.

1. Legal Aspects of a Partnership:

1) ??what do you tell crditors when you merge 2 partnership with liabilities?Nothing or what- now 4 people each owe less ,before it was 2 people now you must fight 4,also it may weaken firm etc??? 2) The principles of common law are applied to settle disputes. 1. Partnership Agreement: Important matters to be included in it:

1- -Note: Two methods are used to make provision for in case a partner dies/retires and the partnership can ill afford to pay out his share.(usually!) (sell all property etc.!) a. The retiring partners interest is transferred to a loan account – (in the articles/ partnership agreement :it must be stated how /time period &interest rate( preferably low / 0)–safe!- this loan to be repaid ie: so executors of will cannot force it's immediate payment in court /argument etc.) b. The Lives of the partners are insured at the time of the formation of the partnership 1- Also whether assets& goodwill should be revaluated on death/retirement(common practice= yes) 2- The profit sharing ratio between the partners. 3- Participation in management 4- Salaries,interest on capital & drawings 5- If a case of Negative balance on 'current account' arises : rules+interest rates. 6- Specify whether assets&goodwill should be revaluated each time a partner joins/leaves or on dissolution or merger of partnership. 1. RECORDING OWNERS EQUITY. i) Capital & Current Account

1- Distiction is made between capital contributions and retained earnings of partners: 2. CAPITAL ACCOUNT = 1 each for permanent investment of each partner 3. CURRENT ACCOUNT = 1 FOR EACH PARTNER for all current transactions of each ,incl. share of profit/loss,withdrawals,interest on capital,interest on withdrawals,goods taken for personal use. 4. WITHDRAWALS ACCOUNT = A SEPARATE ACCOUNT = is sometimes additionally kept for each partner ,and transferred to each partners .current accounts at year end.

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46ACCOUNTING Notes ACCA 102

ii) Valuation of contributions made by partners.

1- NON-CURRENT ASSETS : at the values they were taken over –all partners must agree value is fair & reasonable as agreed upon- regardless of depreciation etc.Future depreciation starts again at 0-afresh- old books depreciation not continued. 2- ALL LAND OR VEHICLES : transferred must then be registered in the names of both partners –since a partnership is not a legal entity. 3- DEBTORS : may be transferrred ,normal show at carrying value,at same time a "provision for doubtful debts" is also included & deducted from capitalisation amount of same partner. 4- CREDITORS: may be transferred – but reduces capital amount of the partner it came from. 5- "GOODWILL"- may be added to capitalisation for a business of 1 partner taken over by partnership. 6- CERTAIN RIGHTS& CONTRACTS & EVEN' EXPERTISE ' : may be transferred to a partnership & be valuated. 7- Journalisiation of Partner A&B ' s contribution to a partnership at agreed valuations:

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47ACCOUNTING Notes ACCA 102 ii) Loans & Advances

1- Any loan by any partner to partnership –normally with interest -is regarded as a normal creditor/loan -no special current or capital or other accounts used here-. 2. Determination & Distribution of Partnership Profits. i) Distrtibution of Profit for period:

1- Partnership agreement should stipulate how profits divided/ratio 2- COMMON LAW principles apply:In ABSENCE of fixed agreement: a. All Partners Equal share of Profit & contribute equally to Loss. b. Partners entitled to Interest on capital or salaries,before profit for period determined. c. Somewhere Somehow if no profit/loss sharing ratio is given in agreement,then they are shared according to the ratio of partners capital accounts.(other text book says this) 1234-

Normal profit calc. in income stat. then,divided at end of. Compensation for Capital = takes form of interest Compensation for Services= normally form of salary. Methods used to Distribute profits. (1) Specified(fixed )ratios : eg. 60/40 % due to experience of one partner (2) Relative Capital Investments of Partners :.one must stipulate if Capital ratio at beginning, or end, or average for year :due to fluctuations in capital during the year.

Eg: (3) Service Contributions by Partners: specified ratios ii) Partners Salaries:

2) Problem with Salaries : First :salary must be legally viewed as part of profits,since owner cannot pay salary to himself.Secondly :If partners salary is treated normally in income statement with other salaries,it presents a more accurate view of profit/loss & expenses.So More correct METHOD ends up being treating salaries of partners as normal salaries- this is also method commonly used in practice. 3) Can be yearly allocation or mnthly- but note :withdrawals NOT =salaries. 4) Salaries MUST pay to partner even if Profit insufficient: the resulting loss divided equally between.

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48ACCOUNTING Notes ACCA 102

Eg: iii) Bonus to Managing Partner:

1- Some agreements provide for a bonus of xx% of profit before distribution/division of rest of profits to go to managing partner. iv) Interest on Capital: pg 527

1- If one partner has larger capital contribution than other , the interest on capital could first get brought into account ,remaining profit/loss only apportioned thereafter. 2- BUT it must be decided:To either use opening or closing or average balance of capital account to calculate. 3- If Loss that year :still work out interest before loss apportionment ,and add it to general loss/ and each partners capital – it should decrease the 'lower capitals' share of loss and increase the others( the higher capital should have a 'ratio increase' from this ,against other, by the way!) 4- Not operating expense- a distribution of available profit 5- (BUT a loan from a partner is an expense) 6Example 1 :for a profit example:

Example 2:for a loss example(NOTE!:)

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49ACCOUNTING Notes ACCA 102

Drawings:

All drawings can either come out of drawings account- then closed off to current accounts at end year,or can go directly to current account. Note : eg special type of drawings- goods all at purchase price

1- Drawings that are closed off to current account at end year BUT DO NOT go to Apportionment Account at year end at all – only current account!NOTE. iv) Adjustments & Corrections in respect of Previous Fin Periods.

1- Common to find mistakes made in previous Fin Period must be repaired in Current Period.eg: b. Types eg:erronoeous calc:Depreciation, inventory valuation,omissions of income/expenses,or some non-compliance with stipulations of partnership agreement. 1- Important:One must determine whether correction is; (Mostly it is -'Materiality Consideration'- of the matter which is determining factor here) a. Treated as determination of current years profit b. Treated as adjustment of partners equity at:beginning of current fin. Year. 4. Financial Statements of Partnerships:

1- Income Statement: One must break down all partners earnings ,then divide profit : a. At end of income statement after "OPERATING EXPENSES" is shown,in a long list FIRST the "before profit deductions: ie salaries of partners, bonuses of, interest on capital etc,THEN total of "Profit available for apportionment ".THEN division between partners.

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50ACCOUNTING Notes ACCA 102 1- Balance Sheet: Stays the same : Just write "Equity" and one total of all partners equity(add capital +current acc's), or you can put 'Current acc's'. and Capital acc's. separate under equity and just put total of equity below or next to heading- 'equity' 2- St. of Ch. In Equity. :see example below

Method as per one textbook:

Alternative Method of doing Balance Sheet.:

For: ULIM lecturer type Inc.Stat. :do as follows Below Net Profit for year:carry on as follows: Less:Annual Salaries : For 'A' R5873.12 Annual Salaries : For 'B' R5235.12 Interest on Capital: For 'A' R127.12 Interest on Capital: For 'B' R186.12 Interest on Current Account For 'A' R5235.12 Interest on Current Account For 'B' R53865.12 Add: Interest on Drawings : "A" R7366.34 Interest on Drawings : "B" Profit Avaiable for Distribution: Capital "A" Capital "B"

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R3867.34 Rxxxxxxx R0.5 of above R0.5 of above R -nil-

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51ACCOUNTING Notes ACCA 102 5. Changes in Composition of the partnership:

NOTE: if a new member joins /or leaves etc. it does mean that LEGALLY partnership is dissolved but for accounting practice we do not restart books each time, the entries just continue. :The concept dissolution i) Partnerships are dissolved from a legal point of view as a result of the following: 1- Voluntary action of partners • mutual agreement by partners • changes in the membership of the partnership by agreement • end of the period for which the partnership was originally formed • completion of the purpose for which the partnership was formed. 2- Unilateral action of one partner • A partner can dissolve a partnership by unilateral notice. Under certain circumstances he may possibly be held liable by the other former partners for breach of contract. 3- Operation of law • death or insanity of a partner • insolvency of the partnership • insolvency of a partner when a partnership’s membership exceeds 20 (excluding the exceptions already mentioned) • on court order at the request of one of the partners. For example where the mutual trust and good . relationship between partners have been irrevocably damaged as a result of misconduct or gross negligence. ii) The partnership in most cases simply continues, albeit with a change in the composition of the partners. iii) Interested third parties will simply be notified of the change. iv) Current accounting practice entails treating a partner’s interest as a share in a continuing business which is transferable with the consent of the other partners. This approach is followed in most larger partnerships. v) It is :Note: definitely current customary practice to Revalue all assets&goodwill of a partnership when interests in partnership change hands.

i) A New Partner is added to Partnership.

1- Admission & Retirement of partners can all take place simultanoeously. 2- Methods of New Partner Joining a partnrship:

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52ACCOUNTING Notes ACCA 102

(1) REVALUATION ACCOUNTS: 1) REM: Open a revaluation account – rem: any new provision for bad debts goes to revaluation acc+capital acc's ,NOT to 'Bad Debts' as CONTRA acc. 2) REM: If debtors are adjusted on admission- the adjustment is done in the "Provision for bad debts account" NOT as 'Debtors' , in the General Journal entry.The Prov. Bad debts (debtors revaluation) is ALSO recorded in REVALUATION acc. CONTRA Prov.bad Debts.acc.(and the Reval. Acc. closed off to Capital acc. of old partners in old ratio before proceeding) 3) REM: ONLY the DIFFERENCE is recorded in the ASSET account Contra REVALUATION acc – so NOT the full amount of the revaluation –and NOT write back /out the old asset amount –JUST the difference between old/new amounts is recorded+entered in both accounts. 4) The REVALUATION ACCOUNT is then CLOSED OFF to the CAPITAL Accounts of the former partners NOT the new partner, in OLD RATIO, -BEFORE new partners ratio is used . 5) IF: partners prefer the revaluations to NOT reflect in the books of new partnership after new admittal-ie to leave values of assets unchanged-, the same amounts (differences) added to each Asset & Prov.Bad.Debts accounts are then written back AFTER new admittal, First from Capital Acc. of all parnters(incl. new partner) BACK to revaluation acc again(re-open it from scratch) then close off new revaluation acc. to relevant Asset acc's & Prov bad debts acc(if required), to write the amounts back OUT of the Asset& Prov.Bad.debts acc's.- Now Gone! (1) If not Stated how much of each old Partners Share Goes to New Partner. 1) Take the new partners share from old partners in SAME OLD CAPITAL RATIO of old partners.eg 2/3 from 1 and 1/3 from other .NOT just 50/50! (3) HOW TO CALCULATE NEW PROFIT SHARING RATIOS.

(3) Direct Purchase of an Interest: Not through firm but private transaction. (a) No entry need to be made in the asset and liability section – no cash/credit passes through books- only the capital accounts need to be adjusted. ACN-101-M

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53ACCOUNTING Notes ACCA 102 (b)Note total capital remains the same-none is contributed or subtracted from firm.

(c)

(4) Contibution to Assets of Partnership: Without Goodwill:

(a)

(5) Contibution to Assets of Partnership: With Goodwill: (a) Either new partner must pay for goodwill in his purchase price ,or another possibility is that the new partner also brings goodwill into the ACN-101-M

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54ACCOUNTING Notes ACCA 102 partnership. In such a case the partners will have to agree to a value for it and it will be recorded and credited, together with any other assets which the new partner contributes, to his capital account.

(b) (6) Admission with goodwill ,but without it being shown in the books: (a) The goodwill here is merely written into books in the old partnership ratio of old partners and then written out of books again in the new (with extra partner) ratio,effectively increasing former partners capital ratio and decreasing new partners capital ratio.

(b) ACN-101-M

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55ACCOUNTING Notes ACCA 102 (c) Revaluation Accounts Usage: One can use this method:see example here.Remember provision for bad debts can use this as a contra account instead of 'bad debts' account if a brand new provision for.. is made on entry of new partner.This is to merely ,in the middle of financial year,move the amount directly into old partners accounts,to be seen as if it had happened in last end fin year and now merely reflects in the capital balances already sort of style'.(try redo example etc. properly at later stage)

(d) ii) Retirement or Death of a Partner

1- -Note: Two methods are used to make provision for in case a partner dies/retires and the partnership can ill afford to pay out his share.(usually!) (sell all property etc.!) 2- The remaining partners each get amount owed to retiring partner credited to their accounts-tey now owe him this part of formwr equity. 3- The following must be adjusted: a. Corrrection of errors in accounts b. Revaluate assets & goodwill. l (1) The retiring partners interest is transferred to a loan account (a) – (in the articles/ partnership agreement :it must be stated how /time period &interest rate( preferably low / 0)–safe!- this loan to be repaid ie: so executors of will cannot force it's immediate payment in court /argument etc.)

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56ACCOUNTING Notes ACCA 102

(b)

(2) The Lives of the partners are insured at the time of the formation of the partnership .

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57ACCOUNTING Notes ACCA 102

5. Liquidation /Dissolution of a partnership:

-Open a Realisation Account for the profit/loss from each sale of assets etc etc – and from here apportion all profits/losses to capital accounts of partners. Summary: 1- : Open a "realisation/ or dissolution" account in the ledger for the determination of the profit or loss on the realisation of the assets and the settlement of external liabilities. The profit or loss is transferred to the capital accounts of the partners according to the profit-sharing ratio. 2- The sale of asset does NOT go to a normal "Asset realisation account " as per textbook –but:3 method for this a. direct to asset account Also Accumul.Deprec.could get transferred to the asset account- from here only profit/loss goes to the 'realisation account –easy shortcut way.! b. All the asset accounts as well as all Accumul.Deprec. Acc's are closed off to the "dissolution-realisation" account ,and any income from sales of assets also go to this 'dissolution account' ,from where any eventual profit/loss gets apportioned to 'Capital " accounts. ACN-101-M

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58ACCOUNTING Notes ACCA 102

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c. (it could if you wanted to here though –also Accum.Deprec. Acc would have to be included -and then all 'profit/loss from sale of assets' accounts merely transferred to "Partnership dissolution/realisation acc.) : Loans to partners. Transfer the balance of the loan accounts to the capital account of the partner involved. Loans by partners to the partnership are treated as external liabilities, for example as payables. Current accounts of partners are transfered to the relevant capital accounts. After completing the above-mentioned steps, the capital accounts and bank account vill be the only remaining accounts with balances. Settlement takes place as already indicated. It is, of course, possible that a partner’s capital account can swing around to have a debit balance. In such a case, the partner has to pay the amount into the partnership’s bank account. This could also be the case when the partner with a debit balance on his capital account is insolvent and unable to pay in the deficit. This situation is illustrated in example 15.13. (1) If Profit on realisation:

(2) If Loss on Realisation

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59ACCOUNTING Notes ACCA 102

(3) Gradual /Piecemeal liquidations. (a) Problem here is partner with less capital cannot do any withdrawals before others or he may end up owing them later – so a schedule of who gets how much of possible asset realisations(AFTER ALL DEBTORSS ARE PAID) first ,second etc must be worked out.

(b)

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60ACCOUNTING Notes ACCA 102

(c)

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61ACCOUNTING Notes ACCA 102

(d)

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62ACCOUNTING Notes ACCA 102

(e)

5. Merger of more than 1 Existing Partnerships:

NOTE:special procedures needed- not done this year 6. Take over by an existing Company

NOTE:special procedures needed- not done this year 7. Conversion to a company

NOTE:special procedures needed- not done this year 8. Conversion to a closed-corporation

NOTE:special procedures needed- not done this year.

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63ACCOUNTING Notes ACCA 102

1)CASH FLOW STATEMENTS 1. WHY USE A CASH STATEMENT?

(a) CASH inflow & outflow ONLY is recorded in Cash Flow Statement ,NO Debt/Depreciation etc. (b)Operating Activities:Extent to which able repay loans,maintain operating capability of entity,pay dividends,make new investments without financing, (c) Investing actib=vities:(from statements of gaap) extent to which payments made for resources intended to generate future economic benefits. (d)Financing activities: (from statements of gaap) predicting claims on future cash flows by providers of capital. (e) To answer questions like: (i) How much cash was generated. (ii) Forecast future cash flows from historical info. (iii)How are employees paid,dividends paid,loans repaid,sufficient cash to carry on... (iv)Why did company ,though very profitable that year,pay such a small dividend. (v) How much spent on equipment&sources of finance for it. (f) Income statement does not show ONLY CASH in/out ,due to accrual concept-expense&income recognition-,so credit as well as .eg depreciation is shown but deprec. is just 'academic' &creditors are not yet +might never be realised. (g)It is possible for a firm to be highly profitable while experiencing a critical cash shortage.(eg the start of universal general requirement for cash flows comes from large USA firm bankrupt 1950s seemed impossible – started the trend. (h)Provides info. on 'investment &other activities' not very clear in other statements. 2. GAAP & Law implications.

1234-

Statement IAS7(ac118) concerns Schedule 4 of companies act- cash flow stat. MUST be prepared. C.C's do not need to prepare one,but it is prudent as per GAAP to . AC118.02 : states :The objective of cash flow stat. is to provide info. to the users of fin. Stst. Regarding the historical changes in cash & cash equivalents,classified according to operating,investment,financing activities. 5- AC118 states: CASH = cash on hand & call deposits ; CASH EQUIVALENTS = highly liquid short term investments which can easily be converted into cash and whose risks of changes in value are insignificant. 3. INTRO of Cash Flow to other Fin Stat.

1- Cash flow stat just reconciles Cash beginning year with CASH end year – in many cases it is just a summary of the cash received & cash payments journal. 2- ONLY CASH in/out flow is recorded :

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64ACCOUNTING Notes ACCA 102 i) Operating Activities

1- Ac118.16 (copy down AC118.6 here later)–All activities NOT under Investment or Financing activities., 2- This is the most important of generating activities. 3- All cash from calculating Net Profit of Entity. 4- Dividends paid& Interest Paid & Interest Received. 5- Cash from contracts for trading activities,income tax payments & refunds exept where these relate to financing and investment activities,insurance,insurance claims paid out,cash payments to and on behalf of employees,cash payments to suppliers of goods & services;receipts from royalties,cash commissions,and other income;receipts from sale of goods &rendering services;royalties,comissions,fees & other revenue. ii) Investment Activities: DEFINITIONS: (copy down ac118.6 here later)

1- Ac118.18- Non-Current Assets mainly :Any +/- of Long term assets / Investments NOT included in Cash Equivalents. 2- Prop./plant&Equip ;Intangible assets ; Marketable Securities ; Cash Advances & Loans to other parties ; Recovery of Loans (payments Received ) BUT NOT :Interest received from these loans is :Operating Activities!!!! iii) Financing Activities: DEFINITIONS: (copy down AC118.6 here later)

1- AC 118.19 -NON-CURRENT liabilities & Owners Equity. Cash in/out from.- ie:Debt& Capital Funding 'buy back' and issue ;mortgage Bonds; & other short or non-current liabilities TYPE OF DEBT;Repayments of borrowings liabilities,NOT: Repayment of interest & dividends: NOT( those are under 'Operating Activities ')Cash inflow from DEBENTURE issue;bonds etc. 2- Finance lease payments by lessee to reduce outstanding liability. 4. The Preparation of a Cash Flow Statement.

1- The heading of Cash Flow Stat. is :....FOR THE YEAR ENDED ... 2- As per AC118 – Format must follow a logical hierarchy-starting with sources of cash flows and thereafter the priority claims aginst the cash flows,thereafter how cash surplass has been dealt with.Also Ac118 prescribes operating-then-investment–thenfinancing-activities as the Order. 3- The Following is Required to Prepare a Cash Flow Statement. : a. Income Statement & Statement of Changes in Equity for current year b. Balance Sheet of Current & Previous Year c. Additional Information 1- Amounts in brackets=ouflows of cash / no brackets = inflow of cash 2- Direct Method:/ Indirect Method:Direct method is encouraged by Saaica because it provides Info useful to predict future cash flows ,which is not available in Indirect method.Difference between: ONLY in 'Operating Income' section ,the rest is same for both - Direct is –We refer to the actual accounts to get the totals for certain items,not to the income statement., whereas for Indirect -the figures are taken from the Income Statement ,not from individual accounts. 3- we must move to another account while in the middle of doing one type, between accounts, in order to get certain totals needed.This is a characteristic of these calculations. 4- NOTE: One must often move to another account and complete it while in the middle of doing one type,ie:jump between accounts, in order to get certain totals needed.This is a characteristic of these type of calculations for cash flow. ACN-101-M

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65ACCOUNTING Notes ACCA 102 i) Doing accounts to calculate TOTALS for the c/d statement:

(1)FOR : ASSET&LIABILITY&EQUITY Accounts: (incl.Receivables/Sales/paidtosuppliers etc/costsales) (a) Transfer previous Year to Debit Side at top. (b) Current Year to Credit side at Bottom-(as Closing balance!) rework outwrong (c) Other INFLOW (or additions to/large' ering of last years balance :eg: purchases of assets for the 'equipment account') to Dr Side (d)Other Outflow to Cr Side(eg sales of assets for equipment account) (e) Your Answer is Balancing figure which: Note:funny method :goes to the top of the balancing side ,not as a c/d or b/d figure and not below ruled totals!-note-, with {details as= 'bank' etc.or whatever-use your brains here-} Then if the total is on Dr side =income(inflow) -Vs- on Cr side = loss(outflow) EXAMPLE:

(2)FOR :INCOME /EXPENSE Accounts: (incl: 1- As income/expense comes from income statement,not 2 yearly balance sheet ,totals for a t-account method go to different side than in asset/liability accounts-as per normal Dr/Cr practice,nothing special here- .So Just use t-account to work out amounts actually paid this year from the 'unpaid' at beginning & end amounts): by putting Unpaid Amounts at Beginning of year to credit side{details = just : balance b/d or c/d}(as per normal ie;as a credit,not funny style as for assets).Then Unpaid amounts at End of year to Cr side {as details=Balance b/d}(below ruled off totals) as well as to Dr side as the {DETAILS =balance C/d amount!}.Then amounts owed(dividends declared in current year ,or interest actually due for year,or actual tax expense for year) to Cr side as a normal liability-{details = tax/interest expense or dividends declared} etc.( as per normal ie-Cr=liability).Then You can calculate any amounts actually paid this year –this is the one funny entry and goes to DR side –{with details='bank'} ,(above the c/d year end balance)and this is your answer for cash flow statement NOTE: it does not matter if you paid last years debts,no matching principle is applied in Cash Flow Statement!,just actual cash flow itself is needed.

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66ACCOUNTING Notes ACCA 102

12- Example of a CashFlow Statement:

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67ACCOUNTING Notes ACCA 102 ii) CASH FLOWS FROM OPERATING ACTIVITIES.

(1) InDirect Method:

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(2) Direct method: 1- Direct method is encouraged by 'Saica' because it provides Info useful to predict future cash flows ,which is not available in Indirect method. 2- The DIRECT METHOD info on major classes of gross cash receipts & payments taken: a) from the accounting records of the entity; or b) by adjusting sales, cost of sales (interest received and similar income and interest expense and similar charges for a financial institution) and other items in the income statement for: (i) changes during the period in inventories and operating receivables and payables; (ii) other non-cash items; and (iii) other items for which the cash effects are investing or financing cash flows (lAS 7 (AC 118) par 19). 3- A RECONCILIATION :between the profit before tax as reported in the income statement and ‘the cash generated from operations, should be given as a note to the financial statements if such information is not supplied in the cash flow statement itself. This reconciliation must disclose the movements in inventories, receivables and payables related to operating activities and other differences between cash flows and profits. ii) Calculating each Operating Activities amount:

(2) Cash receipts from CUSTOMERS :(ACCOUNTS RECEIVABLE) 1- Very Basicly just :sales less increase in 'receivables'

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69ACCOUNTING Notes ACCA 102 2- INCOME RECEIVED IN ADVANCE :must be added to the 'cash received from customers' Total :for T-account method you put previous year balance on CR side &Current Year balance on Dr side.(opposite way around to receivables) See 2 methods below:

(2) Cash payments to SUPPLIERS & EMPLOYEES:(Cost of Sales) (a) REDRAFT INCOME STATEMENT/ Cost of Sales calculation. 1) NOT Ever Done in T-Account Format:In Column Format(like an income stat.)This is the ONLY Item in Cash Flow Stat. that is treated so in calcs./workings(exept in notes) 2) Cash paid to suppliers and employees is determined by redrafting the income statement and determining the amount of the total expenses which do not do not include: • items appearing on the face of the cash flow statement; • items which do not represent cash flows. This amount is then adjusted for the change in inventories and payables. The change is derived by comparing the items on the given balance sheets year 1 & 2 with each . other. When inventories increase from one year to the next the effect on cash flows is negative. . .. Payables include biLls payable as well as other amounts owing.VAT owing is also included in . .. ... ... payables. Where payables have increased from the last year to the next, there were less cash . .. ... outflows and the amount is positive in terms of cash flow. Example of 'Redraft' :

(a) Do additional t-accounts ;Inventory & Payables –to get totals for the Redraft. 1- One must however do a few other accounts in t-format/or column in order to get certain totals for the 'Redraft'.This means we must move to another account while in the middle of doing one type,jump between accounts, in order to get certain totals needed.This is a characteristic of these calculations.

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70ACCOUNTING Notes ACCA 102 2- Inventory:Assets accounts:year 1 to Dr side ,year 2 to Cr side,(other amounts which must be included here perhaps use your brain :decrease years increase/decrease go to Cr side,amounts which increase years incr/decrease go to Dr side total 3- Asset Disposal: to get a 'profit/loss on disposal of assets' amount for the redraft & also for reconcilliation in 'Notes' ,do an 'asset disposal account' in the "income/expense type format-normal dr/cr)" after doing an 'asset eg:equipment' account to get the necessary totalsDO NOT TRY do both at once.First comes asset account, it can also be used for all other places it is needed. 4- ANY POSSIBLE asset buy/sell :do an equipment account first to get / check totals here,then an Acc depr. Account to get depreciation, then asset disposal account for profit/loss:MUST., 5- Any other accounts needed- same as above. (3) Cash generated From Operations Subtract 2 from 1 to get this. (4) FINANCE COSTS :heading –(put no totals here-just a heading) (a) Dividends Received/Paid 1- AC118 –Cash flow from interest& dividends to be disclosed separately ,each classified as either ????operating,investment or financing activities???????? 2- As income/expense comes from income statement,not 2 yearly balance sheet ,totals for a t-account method go to different side than in asset/liability accounts-as per normal Dr/Cr practice,nothing special here- .So Just use t-account to work out amounts actually paid this year from the 'unpaid' at beginning & end amounts): by putting Unpaid Amounts at Beginning of year to credit side{details = just : balance b/d or c/d}(as per normal ie;as a credit,not funny style as for assets).Then Unpaid amounts at End of year to Cr side {as details=Balance b/d}(below ruled off totals) as well as to Dr side as the {DETAILS =balance C/d amount!}.Then amounts owed(dividends declared in current year ,or interest actually due for year,or actual tax expense for year) to Cr side as a normal liability-{details = tax/interest expense or dividends declared} etc.( as per normal ie-Cr=liability).Then You can calculate any amounts actually paid this year –this is the one funny entry and goes to DR side –{with details='bank'} ,(above the c/d year end balance)and this is your answer for cash flow statement NOTE: it does not matter if you paid last years debts,no matching principle is applied in Cash Flow Statement!,just actual cash flow itself is needed.

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(b) Interest Paid /received 1- Works same as the above-but separate totals for paid and received. (c) Tax paid /Received 1- AC118-Cash flows from Tax es on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities 2- Works same as the above interest or dividends. (3) FINAL TOTAL for "CASH FLOW FROM OPERATING ACTIVITIES" Below th above put a total: "Net cash from Operating activites" /or put next to the heading at top of section. i) CASH FLOWS FROM INVESTMENT ACTIVITIES.

1- Report separately all major classes of gross cash receipts& payments from investing activities 2- INFLOWS: "disposal of n-c assets " 3- OUTFLOWS:"aquisition of n-c assets" :REPLACEMENTS(maintaining of operations-ac118) must be separate from ADDITIONS(or ac118 extension of operations). UNDER THIS HEADING. 4- Revaluations :all revaluations are ignored completely here 5- Shares : investing/disposal of other company shares is seen as ASSETS aquisition/disposal. 6- Assets: Buy/Sell :Must do an 'Equipment 'etc. T-account for each class bought/sold(seen as prudent by gaap to "reconstruct the assets account' do this!)to get all the facts straight for cash flow stat.Just do normal balance b/d year 1(seen as beginning of year 2) and c/d year 2(seen as end of year 2) a. Put gross carrying amount(less acc. depr!!!) at beginning of year at dr side as b/d top corner b. Put gross carrying amount(less acc. depr!!!) at end of year at cr side c/d bottom corner & as b/d balance ,below totals ruled off. c. All purchases on dr side, all sales on cr side d. Finished –just use figures as you need them from all this! e. Just divide up additions /replacements with :your own small calc.no special method. 6- Accumulated Depreciation: Do an Acc. depr. Account for each asset sold if time , Else only for a calculation if needed to get "depreciation ' amount ACN-101-M

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iii) CASH FLOW FROM FINANCING ACTIVITIES:

1- Just do an asset type account for year1 /vs/year2 for each item and put the net increase/decrease as the answer. 2- Share Premiums are counted as part of normal share values for the share calculation: just add in line below the concerned share as 'share premium' to count as part of same amount- in your asset t-account. 3- Loans are treated the same as asset account.! iv) Net change in cash & cash equivalents

Just cash& cash equivalents :net increase/decrease –plus- cash&cash equiv at beginning=cash& cash equiv at end. Cash&Cash Equivalents = Bank Overdraft+Cash on hand+ Bank v) NOTES TO THE FINANCIAL STATEMENTS :Reconcilliation Between The Net Profit Before Tax With The Cash Generated By Operations:

DO NOT INCLUDE TAX IN THE :ADJUSTED FOR SECTION- IT IS ALREADY NOT IN THE PROFIT BEFORE TAX TOTAL!!!!!!!!!!

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