You are on page 1of 20

Maldives College of Higher Education

Faculty of Management and Computing

Subject: Financial Accounting

ACC107
2009
Faculty of Management and
Computing

FINANCIAL ACCOUNTING

Unit Index Number ACC101


Medium of Instructions English
Level
Hours per Week 4
Credit value 12
Pre-requisites None
Co-requisites None
Anti-requisites None
Weekly Tuition Pattern 2 hour lecture and 2 hour tutorial
Minimum qualification and
Bac
experience required by
Bachelors degree OR Higher
instructors/lecturers:
Maximum class-size per instructor 25

INTRODUCTION

This unit is designed to provide you with a better understanding of accounting’s role
within the business world and its influence on society in general. This unit relates to the
maintenance of accounts from the drafting of the initial trial balance through to the
preparation of information required to produce a set of final accounts. The preparation,
evaluation and interpretation of financial statements for incorporated enterprises,
partnerships and sole trader also are included.

PRE-REQUISITES

Although there are no pre-requisites for this unit, it is helpful to have some knowledge of
financial statements from studies in Financial Accounting.

AIMS

This is a CORE unit designed for Business students to develop knowledge and
understanding of the techniques used to prepare financial statements, including necessary
underlying records, and the interpretation of financial statements for incorporated
enterprises, partnerships and sole traders. Material covered in this course is technical, but
not highly complicated.

UNIT OUTCOMES

On successful completion of this paper, candidates should be able to:

Financial Accounting Page |2


Faculty of Management and
Computing
 Explain the context and purpose of financial reporting
 Define the qualitative characteristics of financial information and the fundamental
bases of accounting
 Demonstrate the use of double-entry and accounting systems
 Record transactions and events
 Prepare a trial balance (including identifying and correcting errors)
 Prepare basic financial statements for incorporated and unincorporated entities.

SYLLABUS

The syllabus for Financial Accounting introduces the students to the fundamentals of
financial accounting, explaining its context and purpose with reference to qualitative
characteristics of useful financial information and to the fundamental bases of
accounting. The syllabus then concentrates in depth on the basics of the double entry
system and on recording, processing, and reporting business transactions and events. The
syllabus then covers the use of the trial balance and how to identify and correct errors,
and then the preparation of financial statements for incorporated and unincorporated
entities.

SYLLABUS CONTENTS

The syllabus contents include the following:


 Introduction to accounting
 Double entry bookkeeping
 Introduction to financial statements
 Capital expenditure, deprecation and disposal
 Accruals and prepayments
 Bad debts and provisions
 Control accounts and reconciliations
 Accounting for inventories
 From trial balance to final accounts – sole trader
 Partnership accounts
 Limited liability companies
 Cash flow statements
 Interpreting financial statements
 Introduction to group accounts (preparation of consolidated financial statements is
excluded from this syllabus)

THE SEMESTER PROGRAM

Financial Accounting Page |3


Faculty of Management and
Computing
WEEK LECTURE LECTURETOPICS TUTORIAL

1 1 Introduction to accounting Topic 1

2 2 Double entry bookkeeping Topic 2

3 3 Introduction to financial statements Topic 3

4 4 Non-current assets, depreciation and disposal Quiz 1

5 5 Accrual and prepayments Topic 4 & 5

6 6 Bad and doubtful debts Topic 6

7 7 Control accounts and reconciliations Topic 7

8 8 Accounting for inventories Quiz 2

9 9 Fromtrial balance to final accounts - sole trader Topic 8 & 9

10 10 Partnership accounts Topic 10

11 11 Introduction to limited liability companies Topic 11

12 12 Financial statements of limited liability companies Quiz 3

13 13 cash flow statement Topic 12 &13

14 14 Interpretation of financial statements Topic 14

15 15 Introduction to group accounts Quiz 4

16 Review Topic 15

METHOD OF INSTRUCTION

There will be a 2 hour lecture and 2 hour tutorial per week. Attendance at all lectures and
tutorials is compulsory. A register will be kept at all classes. A student with 20% or more
absences at lectures and tutorials, without documentation excusing attendance (i.e.,
medical certificate) may not be eligible to sit in final examination.

LECTURES

The purpose of the lecture is to describe some of the principles in the unit and the
application of those principles. A lecture does not cover all there is to learn about the
area. You will need to read and study further those areas covered in the lecture.

TUTORIALS

Financial Accounting Page |4


Faculty of Management and
Computing
You should attend 2 hour tutorial per week, commencing in the first week of the
semester. Your tutor will keep a record of your tutorial attendance. The purpose of a
tutorial is to:

The purpose of a tutorial is to:

 provide a small group forum for learning and applying decision making, and
enhancing your oral communication skills;
 assess your knowledge and professional skills; and
 provide an opportunity for you to raise with your tutor questions about the course
 The Tutorial Program contained in the Semester Program indicates that each tutorial
is based on the previous week’s lecture topic. Your tutor may depart from this
program. You will be given notice of any changes to the program. Given the time
constraints it may not be possible to deal with all tutorial questions.

UNIT ASSESSMENTS

Student performance in this unit will be based on their aggregate score in the following
assessments.

To pass this unit, you must complete the following components:

Components Weightings
Quizzes 20%
Major Assignment 20%
Attendance and Class Participation 10%
Final Examination 50%

To obtain a pass in this subject, students must:


1. Submit all the assignments and obtain a satisfactory mark by the lecturer; and
2. Obtain a minimum of 50% in the final examination.

ASSESSMENT CRITERIA

1. Quizzes (20%)

There are four multiple choice quizzes (5% each). These tests are scheduled for weeks 4,
8, 12 and 15. You should read the appropriate topics from the lecture notes and handout
materials before you come to tutorial and be prepared for the quiz, as they will be closed
book. These quizzes are designed to assess how effective your independent study has
been to date and reveal any basic misunderstandings in your technical or theoretical
knowledge in the discipline. The feedback you receive should enable you to improve

Financial Accounting Page |5


Faculty of Management and
Computing
your understanding and permit you to excel in the final exam. If you miss the test for an
acceptable reason (for example, if a medical certificate is provided to the lecturer), the
weighting of the test will be added to the weighting of the final examination.

2. Major Assignment (20%)

The aim of the case study is for you to revise and apply knowledge you gained from
studying Financial Accounting. The case study must be completed by groups of 4
students. Allocation of students into groups of 4 will be done in the second tutorial (Week
2). You must submit the completed case study with all 4 student names on the face sheet,
and an equal mark will be given to each of the 4 students. The due date for submission of
the case study will be informed by your tutor.

3. Attendance and Class Participation (10%)

Marks for Class Participation are not allocated to students simply for attending their
tutorials. You are expected to participate actively in tutorials, having prepared carefully
in advance. Active debate either from a practical or theoretical perspective on the
material is highly encouraged. Do not be afraid to speak out – you will find that you are
not the only person to be nervous about speaking in a group environment.

4. The Final Examination (50%)

There will be a formal 3-hour closed book written examination. The purpose of the
examination is to enable students to demonstrate a breadth of understanding across all of
the course material at an independent level. It assesses the knowledge you have obtained
through undertaking the unit, your communication skills in presenting that knowledge
and your problem-solving skills in answering the questions posed. You will be given
some guidance about the format of the examination in the last lecture. Please note that
only in special circumstances, and only on the recommendation of the lecturer-in-charge
or the Dean, will a student who fails this unit be granted a supplementary examination.
The final exam is conducted by the Faculty’s Exam Coordinator in the formal
examination period.

COURSE REGULATIONS
We draw your attention to MCHE course regulations, particularly to those clauses which
deal with attendance, assessment, plagiarism, cheating, sitting examinations and
completing assignments by the due date. You should familiarize yourselves with
regulations that are fully stated in College Student Handbook.

Attendance
Attendance at all lectures and tutorials is compulsory. A register will be kept at all
classes. A student with 20% or more absences at lectures and tutorials, without
documentation excusing attendance (i.e., medical certificate) may not be eligible to sit in
final examination.

Financial Accounting Page |6


Faculty of Management and
Computing

Policy on Late Assignments

Assignments are due at 9.00 am on the date specified and must be professionally
presented (i.e., word processed, stapled, spell-checked, etc) and submitted in hard-copy
form. Any assignment that does not meet this minimal standard of professionalism will be
immediately docked 50% of the maximum points possible.

Except where an extension has been granted on medical or compassionate grounds,


deadlines for all material submitted for assessment must be adhered to strictly. The
penalty for late submission of items for assessments is 5% of the maximum mark for each
day late. Any assignment submitted 5 days after the due date will NOT be accepted

If for any valid reason a student will not be able to turn assignments in on time s/he has to
make special arrangements with the lecturer. In such cases the lecturer should be notified
of any requests for extensions before and NOT after the due date. No consideration will
be given to requests that come after the due date.

Plagiarism
Plagiarism and cheating are serious offences and will be severely dealt with. To copy
another’s ideas or writing and pass them off as one’s own is plagiarism. It is unethical and
illegal.

Any of the following acts constitutes plagiarism unless the sources of each quotation or
piece of borrowed material is clearly acknowledged:
1. copying out part(s) of any document, audio visual material, or materials taken from
the Internet;
2. using or extracting another person’s concepts, experimental results, or conclusions;
3. summarizing another person’s work;
4. in an assignment where there was collaborative preparatory work, submitting
substantially the same final version as another student whether in whole or in part.

TEXT BOOK AND REFERENCES

Preferred Text book:

There is no specific textbook for this unit, but students will be given lecture notes and
reading materials during the lectures. However, the following books are used to prepare
lecture materials:

 BPP Course Companion, AAT Unit 5 – Maintaining Financial Records and


Preparing Accounts , 6th edition, BPP Professional Education, UK
 BPP Course Companion, AAT Unit 11 – Drafting Financial Statements , 5th edition,
BPP Professional Education, UK
 PBB Study Text, ACCA Paper 1.1 – Preparing Financial Statements, 6th edition,
BPP Professional Education, UK

Financial Accounting Page |7


Faculty of Management and
Computing

References:

Students are encouraged to do their own references. Any accounting textbook is useful
though only basics are recommended.

Financial Accounting Page |8


Faculty of Management and
Computing

SYLLUBUS

Financial Accounting Page |9


Faculty of Management and
Computing

INTRODUCTION

The syllabus for Financial Accounting introduces the students to the fundamentals of
financial accounting, explaining its context and purpose with reference to qualitative
characteristics of useful financial information and to the fundamental bases of
accounting. The syllabus then concentrates in depth on the basics of the double entry
system and on recording, processing, and reporting business transactions and events. The
syllabus then covers the use of the trial balance and how to identify and correct errors,
and then the preparation of financial statements for incorporated and unincorporated
entities.

SYLLABUS CONTENTS

The syllabus contents include the following:


 Introduction to accounting
 Double entry bookkeeping
 Introduction to financial statements
 Capital expenditure, deprecation and disposal
 Accruals and prepayments
 Bad debts and provisions
 Control accounts and reconciliations
 Accounting for inventories
 From trial balance to final accounts – sole trader
 Partnership accounts
 Limited liability companies
 Cash flow statements
 Interpreting financial statements
 Introduction to group accounts (preparation of consolidated financial statements is
excluded from this syllabus)

DETAILED SYLLABUS

LECTURE 1: INTRODUCTION TO FINANCIAL ACCOUNTING

Contents

1. The aim of an accounting system


2. Transaction of a business
3. Primary documents that record transactions
4. Primary records
5. The main ledger and subsidiary ledgers

Learning outcome

Financial Accounting P a g e | 10
Faculty of Management and
Computing
After completing this topic students will be able to:

 Understand how the accounting system contributes to providing useful accounting


information and complies with organizational policies and deadlines
 Understand the way the accounting systems of an organization are affected by its
organizational structure, its administrative systems and procedures and the nature of
its business transaction
 Identify and explain the function of the main data sources in an accounting system
 Outline the contents and purpose of different types of business documentation,
including: quotation, sales order, purchase order, goods received note, goods
dispatched note, invoice, statement, credit note, debit note, remittance advice,
receipt
 Identify the main types of ledger accounts and books of prime entry, and understand
their nature and function

LECTURE 2: DOUBLE ENTRY BOOKKEEPING

Contents

1. The accounting equation


2. Double-entry book-keeping principles including the maintenance of accounting
records and sources of information
3. Ledger accounts, books of prime entry, and journals
4. Double entry bookkeeping for cash and credit transactions
5. Balancing ledger accounts
6. Preparing trial balance
7. Preparing bank reconciliation statements

Learning outcome

After completing this topic students will be able to:

 Understand and apply the concept of double entry accounting and the duality
concept
 Understand and apply the accounting equation
 Identify the main types of business transactions e.g. sales, purchases, payments,
receipts
 Identify the main types of ledger accounts and books of prime entry, and understand
their nature and function
 Understand and illustrate the uses of journals and the posting of journal entries into
ledger accounts
 Illustrate how to balance and close a ledger account
 Explain and prepare bank reconciliation statements including the need for entries in
the cash book when reconciling

Financial Accounting P a g e | 11
Faculty of Management and
Computing

LECTURE 3: INTRODUCTION TO FINANCIAL STATEMENTS

Contents

1. Recognizing assets, liability, income and expenses in the trial balance


2. The profit and loss account
3. The balance sheet
4. Regularity framework for accounting
5. Accounting policies

Learning outcome

After completing this topic students will be able to:

 Understand and identify the purpose of each of the main financial statements
 Explain users of financial statements and their information needs
 Explain the main elements of financial statements: balance sheet and income
statement
 Explain the purpose of each of the main statements
 Explain the nature, principles and scope of accounting.
 Explain how the balance sheet equation and business entity convention underlie the
balance sheet
 Define and identify assets, liabilities, equity, revenue and expenses
 Draft a simple balance sheet in vertical format
 Explain the matching convention and how it applies to revenue and expenses
 Explain how and why revenue and expenses are disclosed in the income statement
 Illustrate how the balance sheet and income statement are interrelated
 Draft a simple income statement in vertical format
 Understand the role of the regulatory system including the roles of the different
regulatory bodies

LECTURE 4: CAPITAL EXPENDITURE, DEPRECATION AND DISPOSAL

Contents

1. Accounting for non-current assets


2. Distinction between capital and revenue expenditure
3. Acquisitions and disposals
4. Depreciation – definition, reasons for and methods, including straight line, reducing
balance and sum of digits
5. Accounting for disposal of non-current assets

Financial Accounting P a g e | 12
Faculty of Management and
Computing
Learning outcome

After completing this topic students will be able to:

 Explain the difference between capital and revenue items


 Classify expenditure as capital or revenue expenditure
 Define non-current assets and recognize the difference between current and non-
current assets
 Prepare ledger entries to record the acquisition and disposal of non-current assets
 Calculate and record profits or losses on disposal of non-current assets in the
income statement
 Calculate the profit or loss on disposal of a revalued asset
 Illustrate how non-current asset balances and movements are disclosed in financial
statements
 Understand and explain the purpose of depreciation
 Calculate the charge for depreciation using straight line and reducing balance
methods
 Identify the circumstances where different methods of depreciation would be
 Appropriate
 Illustrate how depreciation expense and accumulated depreciation are recorded in
ledger accounts

LECTURE 5: ACCRUALS AND PREPAYMENTS

Contents

1. Accounting for sales and purchase


2. Accounting for expenses
3. Accounting for accruals of expenses
4. Accounting for prepayments of expenses
5. Accounting for accruals of income
6. Accounting for prepayments of income

Learning outcome

After completing this topic students will be able to:

 Understand how the matching concept applies to accruals and prepayments


 Identify and calculate the adjustments needed for accruals and prepayments in
preparing financial statements
 Illustrate the process of adjusting for accruals and prepayments in preparing
financial statements
 Prepare the journal entries and ledger entries for the creation of an accrual or
prepayment
 Understand and identify the impact on profit and net assets of accruals and
prepayments

Financial Accounting P a g e | 13
Faculty of Management and
Computing
LECTURE 6: BAD DEBTS AND PROVISIONS

Contents

1. Chasing debts
2. Accounting treatment for bad debts
3. Bad debts that are recovered
4. Doubtful debts
5. Accounting for doubtful debts
6. Provision for doubtful debts
7. Adjusting the provision for doubtful debts

Learning outcome

After completing this topic students will be able to:

 Explain the inevitability of irrecoverable debts in most businesses.


 Illustrate the bookkeeping entries to write off an irrecoverable debt and the effect on
the income statement and balance sheet
 Illustrate the bookkeeping entries to record irrecoverable debts recovered
 Explain the difference between writing off an irrecoverable debt and making an
allowance for receivables
 Explain and illustrate the bookkeeping entries to create and adjust an allowance for
receivables
 Illustrate how to include movements in the allowance for receivables in the income
statement and how the closing balance of the allowance may appear in the balance
sheet

LECTURE 7: CONTROL ACCOUNTS AND RECONCILIATIONS

Contents

1. The accounting system for sale on credit


2. The accounting system for purchase on credit
3. Sales ledger control account
4. Purchase ledger control account
5. Contra entries
6. Errors in control account
7. Sales ledger control account reconciliation
8. Purchase ledger control account reconciliation

Learning outcome

After completing this topic students will be able to:

 Record sale and purchase transactions in ledger accounts and in day books

Financial Accounting P a g e | 14
Faculty of Management and
Computing
 Understand and record sales and purchase returns
 Understand the general principles of the operation of a sales tax
 Calculate sales tax on transactions and record the consequent accounting entries
 Account for discounts allowed and discounts received
 Explain the nature and purpose of control accounts for the accounts
 Receivable and accounts payable ledgers
 Explain how control accounts relate to the double entry system
 Construct and agree a ledger control account from given information.

LECTURE 8: ACCOUNTING FOR INVENTORIES

Contents

1. The stock account


2. The closing stock reconciliation
3. IAS 2 requirements for the valuation of stock
4. Methods of valuing stock
5. Accounting for stock in the ledger accounts

Learning outcome

After completing this topic students will be able to:

 Explain the need for adjustments for inventory in preparing financial statements
 Illustrate income statements with opening and closing inventory
 Explain and demonstrate how opening and closing inventory are recorded in the
inventory account
 Discuss alternative methods of valuing inventory
 Explain the use of continuous and period end inventory records.
 Understand and apply the IASB requirements for valuing inventories
 Recognize which costs should be included in valuing inventories
 Understand the use of continuous and period end inventory records
 Calculate the value of closing inventory using FIFO (first in, first out) and AVCO
(average cost)
 Understand the impact of accounting concepts on the valuation of inventory
 Identify the impact of inventory valuation methods on profit and on assets

LECTURE 9: FROM TRIAL BALANCE TO FINAL ACCOUNTS – SOLE TRADER

Contents

1. Sole traders’ capital


2. Preparing the initial trial balance
3. Setting up a suspense account
4. Clearing the suspense account

Financial Accounting P a g e | 15
Faculty of Management and
Computing
5. Journal entries for adjustments
6. Preparing an amended trial balance
7. Preparing the profit and loss account and balance sheet

Learning outcome

After completing this topic students will be able to:

 Identify the purpose of a trial balance


 Extract ledger balances into a trial balance
 Prepare extracts of opening trial balance
 Identify and understand the limitations of a trial balance
 Identify the types of error which may occur in bookkeeping systems
 Identify errors which would be highlighted by the extraction of a trial balance
 Prepare journal entries to correct errors
 Prepare a set of financial statements, the balance sheet and the profit and loss
account, for a sole trader from the adjusted trial balance, after allowing for accruals
and prepayments, depreciation, irrecoverable debts and allowances for receivables
 Understand the interrelationship between the balance sheet and income statement

LECTURE 10: PARTNERSHIP ACCOUNTS

Contents

1. Accounting for capital, profits and drawings in a partnership


2. Partnership balance sheet
3. Accounting for partners’ salaries and interest on capital
4. Final accounts for a partnership
5. Admission of a new partner
6. Retirement of a partner
7. Change in the profit sharing ratio

Learning outcome

After completing this topic students will be able to:

 Understand and identify the typical content of a partnership agreement, including


profit sharing terms
 Understand the nature of capital accounts, current accounts, and division of profits
 Calculate and record the partners’ shares of profit/losses
 Account for guaranteed minimum profit shares
 Calculate and record partners’ drawings, interest on drawings, interest on capital,
partner salaries
 Prepare an extract of a current account and a capital account
 Prepare extracts of the income statement, including division of profit, and balance
sheet of a partnership

Financial Accounting P a g e | 16
Faculty of Management and
Computing
 Define goodwill, in relation to partnership accounts
 Identify the factors leading to the creation of goodwill in relation to partnership
accounts
 Calculate the value of goodwill from given information.

LECTURE 11: INTRODUCTION TO LIMITED LIABILITY COMPANIES

Contents

1. The nature of limited companies


2. How the accounts of limited companies differ from those of sole traders and
partnerships
3. Share capital, reserves and debentures
4. Drafting limited company accounts

Learning outcome

After completing this topic students will be able to:

 Explain the differences between a sole trader and a limited liability company
 Explain the advantages and disadvantages of operating as a limited liability
company rather than as a sole trader
 Explain the capital structure of a limited liability company including: authorized
share capital, issued share capital, called up share capital, paid up share capital,
ordinary shares, and preference shares
 Explain and illustrate the share premium account
 Explain and illustrate the other reserves which may appear in a company balance
sheet
 Explain why the heading retained earnings appears in a company balance sheet
 Explain and illustrate the recording of dividends
 Explain the impact of income tax on company profits and illustrate the ledger
account required to record it
 Record income tax in the income statement and balance sheet of a company
 Draft an income statement and balance sheet

LECTURE 12: FINANCIAL STATEMENTS OF LIMITED LIABILITY COMPANIES

Contents

1. Accounting for share issue


2. Accounting for bonus issue
3. Advantages and disadvantages of bonus issue
4. Accounting for rights issue
5. Advantages and disadvantages of rights issue

Learning outcome

Financial Accounting P a g e | 17
Faculty of Management and
Computing
After completing this topic students will be able to:

 Record the share issue transactions in the ledger accounts and show the affects in
the balance sheet
 Define a bonus (capitalization) issue and its advantages and disadvantages
 Record a bonus (capitalization) issue in ledger accounts and show the effect in the
balance sheet
 Define a rights issue and its advantages and disadvantages
 Record a rights issue in ledger accounts and show the effect in the balance sheet
 Recall the definition of reserves and the different types of reserves

LECTURE 13: CASH FLOW STATEMENTS

Contents

1. IAS7: cash flow statements


2. Classifying cash flows
3. Calculating cash generating from operations
4. Preparing the cash flow statement
5. Interpreting the cash flow statement

Learning outcome

After completing this topic students will be able to:

After completing this topic students will be able to:

 Differentiate between profit and cash flow


 Understand the need for management to control cash flow
 Recognize the benefits and drawbacks to users of the financial statements of a cash
flow statement
 Classify the effect of transactions on cash flows
 Calculate the figures needed for the cash flow statement including cash flows from
operating activities, cash flows from investing activities and cash flows from
financing activities
 Calculate the cash flow from operating activities using the indirect and direct
method
 Prepare extracts from cash flow statements from given information
 Identify the treatment of given transactions in a company’s cash flow statement

Financial Accounting P a g e | 18
Faculty of Management and
Computing
LECTURE 14: INTERPRETING FINANCIAL STATEMENTS

Contents

1. Ratio analysis of accounting information and basic interpretation


2. Profitability
3. Liquidity
4. Efficiency
5. Gearing
6. Interpreting ratios
7. Limitation of ratio analysis

Learning outcome

After completing this topic students will be able to:

 Explain the advantages and disadvantages of interpretation based on financial


statements
 Explain the factors forming the environment in which the business operates
 Explain the uses of ratio analysis
 Explain and calculate the main ratios to be used in interpreting financial statements
to appraise: profitability, liquidity, working capital efficiency, financial risk and
performance from an investor’s point of view
 Explain the working capital cycle (or cash operating cycle)
 Explain normal levels of certain ratios
 Formulate comments on movements in ratios between one period and another or on
differences between ratios for different businesses
 Explain the factors which may distort ratios, leading to unreliable conclusions
business

LECTURE 15: INTRODUCTION TO GROUP ACCOUNTS

Contents

1. Introduction to groups
2. The consolidated balance sheet
3. The consolidated income statement
4. Associates

Note: Preparation of consolidated financial statements (both the balance sheet and the
profit and loss account) is excluded from this syllabus

Learning outcome

After completing this topic students will be able to:

Financial Accounting P a g e | 19
Faculty of Management and
Computing
 Define a parent company, subsidiary company and group
 Explain the IASB requirements defining which companies must be consolidated
 Understand the consolidated balance sheet for a parent with one wholly owned
subsidiary
 Understand the consolidated profit and loss account for a parent with one wholly
owned subsidiary

Financial Accounting P a g e | 20