Paper FA2 Maintaining Financial Records Pocket Notes Maintaining Financial Records British library cataloguing-in-publication data A catalogue record for this book is available from the British Library Published by: Kaplan Publishing UK Unit The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-78740-066-5 © Kaplan Financial Limited, 2017 Printed and bound in Great Britain P.2 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties Please consult your appropriate professional adviser as necessary Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing KAPLAN PUBLISHING paper FA2 Contents Chapter Recording transactions Chapter Trial balance 21 Chapter Final accounts – introduction and accounting policies 31 Chapter Non-current assets 39 Chapter Control account reconciliations 53 Chapter Bank reconciliation 61 Chapter Accruals, prepayments and irrecoverable debts 69 Chapter Closing inventory, liabilities and provisions 79 Chapter Extended trial balance .89 Chapter 10 Sole trader accounts 95 Chapter 11 Partnership accounts 105 Chapter 12 Incomplete records 115 Index KAPLAN PUBLISHING I.1 P.3 Maintaining Financial Records Preface These Pocket Notes contain everything you need to know for the exam, presented in a unique visual way that makes revision easy and effective Written by experienced lecturers and authors, these Pocket Notes break down content into manageable chunks to maximise your concentration P.4 Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions KAPLAN PUBLISHING Introduction In this chapter • Overview of the examination • Keys syllabus areas P.5 Maintaining Financial Records Overview of the examination • As part of your revision, work through the questions in the study text and any question banks you may have to ensure you understand the style of question asked • You should ensure that you allocate your time correctly so that you can answer all questions • Remember in the examination, you can answer questions in any order (as long as you complete the multiple choice boxes on the Candidate Registration Sheet correctly) It is therefore worth completing the easier questions first and then re-visiting the more difficult questions at the end of the examination This approach will (hopefully) ensure you have obtained the easy marks first and avoid missing this should you run out of time This examination will consist of: 50 compulsory multiple choice questions for two marks each 100 Total marks 100 The examination duration is two hours The pass mark is 50% The examination is available in either paperbased format or computer-based format As the examination mainly multiple-choice, you need to consider the following: P.6 • Multiple choice questions allow the examiner to cover a significant amount of the syllabus within each examination This means you cannot simply learn say 50% of the syllabus and hope to achieve • Achieving a pass standard – you will need to learn the entire syllabus to maximise your chances of passing Finally, when all else fails guess – there is no negative marking KAPLAN PUBLISHING Introduction Key syllabus areas • The aim of FA2 is to develop knowledge and understanding of the underlying principles and concepts relating to Maintaining Financial Records and technical proficiency in the use of double-entry accounting techniques including the preparation of basic financial statements xtend the trial balance, including yearE end adjustments and final accounts • Account for partnerships On completion of this paper candidates should be able to: • xplain generally accepted accounting E principles and concepts • utline the principles and process of O basic bookkeeping • Preparing journals and ledger accounts • Record transactions and events • repare a trial balance (including P identifying and correcting errors) • econcile the control accounts and R cashbook KAPLAN PUBLISHING P.7 Maintaining Financial Records P.8 KAPLAN PUBLISHING chapter Recording transactions In this chapter • • • • • • • • • • • • asic recording of business transactions B Key accounts in financial statements General ledger Credit transactions and sales tax Ledgers – key definitions Discounts Purchases cycle Cash payments cycle Sales cycle Variable consideration Cash receipts cycle Journal Recording transactions Basic recording of business transactions The accounting equation Assets • Land and buildings • Plant and machinery • Motor vehicles • Inventory • Money in bank • Receivables Key Point Business entity concept = a business is separate from its owners The owner’s private transactions are not entered in the business’ books An entity may be a sole trader, a partnership, a limited company or a non-profit making organisation Accounting • Records a business’ transactions • Summarises the transactions + Capital • Amounts introduced to business by owner • Accounting equation elements change over time (e.g a cash sale results in a fall in inventory and an increase in cash) • Despite this, the equation will always balance = basis of double entry bookkeeping • All transactions are entered into the accounts twice – a debit and a credit • Sum of all debits = sum of all credits Exam focus Only sole traders and partnerships are examinable within this paper = Liabilities • Payables • Bank loan • Bank overdraft • Other payables (e.g tax due to tax authorities KAPLAN PUBLISHING Recording transactions General ledger • Contains all individual accounts needed to record business transactions • Shows double entry recording of all transactions Double entry rules Debit entries record: in assets Credit entries record: in assets in liabilities in liabilities Expenses Drawings Income Injections of capital KAPLAN PUBLISHING Chapter Credit transactions and sales tax Credit transactions Credit transaction = goods exchanged before payment made Sales tax Applies to businesses registered for sales tax Sales However transactions are recorded as they • Must add sales tax to sales made occur therefore need payable/receivable • Typical sales tax rate = 20% accounts • Receivable amount recorded gross of sales tax Credit purchase • Sale recorded net of sales tax 1 Purchase recorded and payable Purchases account set up showing amount due to • Sales tax charged on price by supplier supplier 2 Amount is later paid from bank Credit sale Sale recorded and receivable account setup showing amount due from receivable Debtor pays invoice KAPLAN PUBLISHING • Payables amount is recorded gross of sales tax • Purchase recorded net of sales tax Net sales tax Tax on sales Tax on purchases Tax payables to authorities X (X) X Recording transactions Purchases and sales tax Purchase Sales tax 5,000 1,000 Total 6,000 Purchases 5,000 Purchase made – recorded in general ledger showing sales tax amount separately Sales tax 1,000 Payables 6,000 6,000 Payable paid – money transferred from bank account to payables – cancelling the liability Bank 6,000 KAPLAN PUBLISHING Chapter Sales and sales tax Sale Sales tax 8,000 1,600 Total 9,600 Sales 8,000 KAPLAN PUBLISHING Sale made – recorded in general ledger showing sales tax amount separately Sales tax 1,600 Receivables 9,600 9,600 Customers pays balance due cancelling the debt Bank 9,600 Recording transactions Net sales tax • Calculated regularly (e.g every or months) • Excess of sales tax charged over incurred is paid to tax authorities Bank Sales tax 600 1,000 600 Net sales tax paid to government Sales tax incurred on purchases 1,600 Sales tax charged on sales Exam focus Sales tax is not relevant to all questions Read the question carefully to decide whether it needs to be considered 10 KAPLAN PUBLISHING Chapter Ledgers – key definitions Definition A ledger is a collection of ledger accounts, each account recording transactions of the same type • General ledger = holds all individual ledger accounts used to prepare the financial statements • Personal ledgers = receivables ledger and payables ledger, holding individual accounts for all receivables/payables • Books of original (or prime) entry = books in which transactions are originally recorded: –– Sales day book (credit sales) –– Purchase day book (credit purchases) –– Cash received day book –– Cheque payments day book –– Petty cash book –– Journal KAPLAN PUBLISHING 11 Recording transactions Discounts Discounts Trade discounts Settlement discounts = discount given for ordering in large quantities as an incentive for regular customers = discount given for early payment of a debt (within a stated period of time) Reduction in selling price at point of sale Record transaction at discounted price Settlement discounts = discount given for early settlement of an amount due i.e pay supplier within days of invoice date Seller to decide at point of sale whether settlement discount terms likely to be taken up by customer If probable that settlement discount terms will be taken up by customer, deduct from price in arriving at invoice amount Adjust for any cash received in excess of receivable recorded (or of shortfall of cash received) against revenue 12 If probable that settlement discount terms will not be taken up by customer, not deduct from price in arriving at invoice amount Purchaser decides whether to take advantage of settlement discount terms If will so, pay reduced amount and record discount received to clear payable previously recorded as follows: Dr PLCA Cr Cash Cr Discount received KAPLAN PUBLISHING Chapter Purchases cycle Invoice number Date Total $ Payables ledger control account Contents of payables ledger account Purchase invoice Purchase Payables ledger • Purchase recorded in individual supplier’s ledger account Purchase day book • Recorded in numeric sequence • Also called PLCA • Summary of all posting to payables ledger • Total of balanes on payables ledger is agreed to balance on PLCA to confirm accuracy of posting of invoices General ledger Records double entry of: • Dr Individual expense accounts with net purchase amount • Dr Sales tax control with Sales tax amount • Cr PLCA/payables ledger with gross purchase amounts Contents of purchase day book Date On purchase invoice KAPLAN PUBLISHING Invoice number Numeric sequence to confirm completeness of recording Supplier name Ease of identification (better than just ledger account number) Supplier code Account reference to trace invoice into payables ledger Total $ For posting to payables ledger control account Sales tax For posting to sales tax account Net purchase $ Analysed by type of purchase ready for posting to different expense accounts in general ledger 13 Recording transactions Cash payments cycle Date Cheque number Total $ Payables ledger control account Contents of payables ledger account Cash Cheque/internet payment • Total of individual supplier accounts Cash payment Recorded in Cheque payments day book • Recorded in numeric sequence of cheque number/date of payment for internet Payables ledger • Payment recorded in individual supplier’s ledger account • Return recorded in individual supplier’s ledger account (as debit amount) Purchase ledger payments Day book contents Total all payments General ledger Records double entry of: • Cr Bank account with total amount paid • Dr Sales tax account with sales tax total • Dr PCLA/payables ledger with payments made • Dr Expense account with other payments Contents of cash payments day book Date Payment date 14 Cheque number Numeric sequence to confirm completeness of recording Payee name Ease of identification (better than just ledger account number) Payables ledger code When paying suppliers for updating payables ledger Total $ Payment to supplier Sales tax $ Nothing (sales tax in PDB) Analysis of payment PLCA ledger noting any settlement discount Other payments Sales tax on payment Other payments – expense account in general ledger KAPLAN PUBLISHING Chapter Sales cycle Date Invoice number Total $ Receivables ledger control account Contents of receivables ledger account • Also called RLCA • Summary of all postings to receivables ledger • Total of balances on receivables ledger is agreed to balance on RLCA to confirm accuracy of posting of invoices Invoice details recorded Sales invoice Sales Receivables ledger • Sales recorded in individual customer ledger account Recorded in Each invoice Sales day book • Recorded in numeric sequence Total all payments Day book contents General ledger Records double entry of: • Dr RLCA receivables ledger with gross sales • Cr Sales with sales amount net of sales tax • Cr Sales tax with sales tax on sales Contents of sales day book Date Sales invoice raised KAPLAN PUBLISHING Invoice number Numeric sequence to confirm completeness of recording Customer name Ease of identification (better than just ledger account number) Receivables ledger acc ref Account reference to trace invoice into receivables ledger Total $ For posting to receivables ledger control account Sales tax $ For posting to sales tax account Net sales $ For posting to sales account 15 Recording transactions Variable consideration When goods are sold on credit, the seller must estimate the amount of revenue that will be receivable Trade discount is always deducted in arriving at the price to be invoiced If early settlement terms are offered to the customer, the seller must estimate whether or not it is probable that the early settlement terms offered will be taken by the customer If it is probable that early settlement will be made by the customer, then early settlement discount should be deducted in arriving at the invoice price If it is probable that early settlement will not be made by the customer, early settlement discount is not deducted in arriving at the invoice price Example A business sold goods to a customer on credit at a list price of $240 Early settlement discount of 4% was offered to the customer for payment within days of invoice date If the customer is expected to take advantage of the settlement discount offered, the revenue and receivable will be recorded as: $240 × 96% = $230.40 If the customer is not expected to take advantage of the settlement discount offered, the revenue and receivable will be recorded as $240 When cash is subsequently received from the customer, any under- or over-receipt of cash (in comparison with the receivable recorded) is adjusted against revenue 16 KAPLAN PUBLISHING Chapter Cash receipts cycle Cash Date Total $ Receivables ledger control account Contents of receivables ledger account • Total of all individual customer accounts Invoice details recorded Cash receipt Cash Receivables ledger • Cash receipt is credited to individual customer account Recorded in Cash received day book • Recorded according to date received Each invoice Day book contents Total from cash received day book General ledger Records double entry of: • Dr Bank account – total cash received • Cr RLCA amounts received from credit customers • Cr Cash sales – amounts of cash sales • Cr Sales tax for sales tax on cash sales Contents of cash received day book Date Date money received KAPLAN PUBLISHING Reference Either customer code or ‘cash sales’ if not a credit sale Customer name Ease of identification (better than just ledger account number) Total $ Total amount of receipt Receivables Amount of receipt from cr customer Sales tax $ Nothing (sales tax in SDB) Amount from cash sales Sales tax on cash sales Other income $ e.g Bank interest received 17 Recording transactions Journal Definition A journal is a record containing details of non- routine double entry transactions Uses of journal • Correction of errors • Year-end adjustments (e.g depreciation) • Recording of significant transactions (e.g non-current asset purchase) Exam focus Many examination questions focus on the double entry required for different accounting transactions Ensure you can prepare entries as T accounts as well as journals Even with multiple-choice questions, it can be useful to prepare working T accounts to check the double entry of different transactions Format of journal Reference Detail General ledger ref 52 Depreciation charge on motor vehicles GL78 Accum depreciation on motor vehicles GL54 Year end depreciaition charge for motor vehicles 31 December 20X4 Debit $ Credit $ 7,800 7,800 Exam focus If a question asks for a journal, be sure to provide the Dr, Cr and narrative explanation 18 KAPLAN PUBLISHING Chapter Key Point The receivables and payables ledger control accounts are normally part of the double entry system The receivables and payables ledgers containing individual customer and supplier accounts are not You MUST, however, ensure that both are updated with entries in the day books Definition Control accounts are accounts which contain only totals rather than several individual entries For example, the receivables ledger control account contains totals from the sales day book KAPLAN PUBLISHING 19 Recording transactions 20 KAPLAN PUBLISHING .. .Maintaining Financial Records British library cataloguing-in-publication data A catalogue record for this book is available from the British... electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing KAPLAN PUBLISHING paper FA2 Contents Chapter Recording transactions ... accounts 105 Chapter 12 Incomplete records 115 Index KAPLAN PUBLISHING I.1 P.3 Maintaining Financial Records Preface These Pocket Notes contain everything