Paper 3 (INT) Maintaining Financial Records

To develop knowledge and understanding of the techniques used to maintain accounting records and prepare final accounts of unincorporated entities.

On completion of this paper candidates should be able to:

• understand, describe and apply relevant accounting concepts, policies and standards
• maintain records relating to capital acquisition and disposal
• prepare reconciliations for the preparation of final accounts
• identify, calculate and record appropriate adjustments
• prepare and complete the extended trial balance
• prepare final accounts for a sole trader
• prepare final accounts for a partnership.

Before commencing this paper, a thorough knowledge of Paper 1, Recording Financial Transactions, is required. Paper 3 builds on the knowledge acquired in Paper 1, enabling students to prepare final accounts for a sole trader and for partnerships. This knowledge is further developed in Paper 6, Drafting Financial Statements which will enable students to prepare final accounts for limited liability companies.

(a) The nature and confidentiality of business transactions

(b) Double entry bookkeeping

(c) Capital and revenue expenditure

(d) Assets, liabilities, revenue and expenses

(e) Initial trial balance

(f) Format of simple final accounts

(i) income statement

(ii) balance sheet

(g) The organisation’s policies, regulations and timescales in the preparation of final accounts

(a) Accounting standards (IASs and IFRSs)

(b) Accounting principles

(i) going concern

(ii) accruals

(ii) consistency

(iv) prudence

(c) Accounting policies

(i) relevance

(ii) reliability

(iii) comparability

(iv) understandability

(a) Non-current assets

(i) acquisition

(ii) asset register

(iii) accounting treatment

(iv) disposal

(v) part exchange

(vi) authorisation

(vii) maintenance of capital records

(b) Depreciation

(i) straight line

(ii) reducing balance

(a) Reconciliations

(i) payables ledger reconciliation

(ii) receivables ledger reconciliation

(iii) bank reconciliation

(b) Identification of errors

(i ) incorrect double entry

(ii) missing entries

(iii) numerical errors

(iv) insufficient information

(c) Correction of errors

(i) suspense account

(ii) journal entries

(a) Accruals and prepayments

(b) Depreciation

(c) Bad and doubtful debts

(d) Closing inventory (and inventory valuation)

(e) Extended trial balance

(f) Provisions

(a) Incomplete records

(b) Sole trader accounts

(i ) income statement

(ii) balance sheet

(c) Partnership accounts

(i ) income statement

(ii) appropriation of profit

(iii) balance sheet

(iv) partners’ capital and current accounts

The following topics are specifically excluded from Paper 3:

• club accounts
• manufacturing accounts
• detailed knowledge of sales tax
• tax computations
• foreign currency transactions
• goodwill arising on admission of a new partner
• cash flow statements.

The key topic areas are as follows:

• accounting concepts, policies and standards
• non-current assets and depreciation
• control accounts and bank reconciliations
• correction of errors
• post trial balance adjustments
• incomplete records
• final accounts for sole traders and partnerships.

The examination is a two-hour paper. It can be taken as a written paper or as a computer based exam. The questions in the computer based exam are objective test questions – multiple choice, number entry and multiple response.

The written exam consists of three sections structured as follows:

Section A – 20 compulsory 40 - multiple choice questions of two marks each

Section B – compulsory short 15 - from questions of between two and five marks each

Section C – three compulsory 45 - written questions of 15 marks each

Total 100

Accounting standards will not be examined until six months after they have been published. The cut off date for the June examination is 30 November preceding the June examination. The cut off date for the December examination is 31 May preceding the December examination.

There are a number of sources from which you can obtain a series of materials written for the ACCA CAT examination. These are listed below:

Candidates may also find the following texts useful, although they should be aware that these are based on UK accounting standards:

Cox, D. Business Accounts (Osborne Books)

Giles, R. A Complete Course in Business Accounting (Stanley Thornes) ISBN: 0748761594

Wood, F and Sangster, A. Business Accounting 1 (Pitman Publishing) Wider reading is also desirable, especially regular study of relevant articles in ACCA’s student accountant magazine.

(a) Understand the nature of business transactions, including the need to maintain confidentiality

(b) Explain the basis of double entry bookkeeping

(c) Explain and illustrate the dual aspect convention

(d) Apply the accounting equation (and derivatives thereof)

(e) Distinguish between assets, liabilities, revenue and expenses

(f) Prepare journal entries to record transactions

(g) Prepare ledger accounts

(h) Understand how the structure of accounting records contributes to providing useful accounting information and complies with organisational policies and deadlines

(a) Initial trial balance

(i) explain the purpose of the trial balance

(ii) identify the limitations of the trial balance

(iii) extract the ledger balances to form a trial balance

(b) Errors in the initial trial balance

(i ) distinguish between errors which will be detected by extracting a trial balance and those which will not

(ii) undertake correction of errors detected in the initial trial balance, using the journal and / or suspense account

(a) Explain the format and purpose of the income statement

(b) Explain the format and purpose of the balance sheet

(c) Explain the influence of organisational structure on accounting systems

(d) Identify the users of final accounts and their needs

(a) Principles of accounting

(i) explain and apply the basic principles of accounting:

– business entity

– double entry

– historic cost

– materiality

– going concern

– accruals

– prudence

– consistency

(ii) discuss the overriding need for the fair presentation of financial information

(b) Accounting policies

(i ) define the term ‘accounting policies’

(ii) distinguish between accounting policies, accounting estimates and measurement bases

(iii) explain and discuss accounting policies and their objectives:

– relevance

– reliability

– comparability

– understandability

(c) Regulation

(i ) explain the role of International Accounting

Standards and International Financial Reporting

Standards

(a) Capital and revenue expenditure

(i ) distinguish between capital expenditure and revenue expenditure

(ii) calculate and explain the effect of incorrectly classifying capital expenditure as revenue expenditure, and vice versa, on the final accounts

(b) Current assets

(i ) define current assets

(ii) report current assets in the final accounts

(a) Non-current assets

(i) define non-current assets

(ii) account for the acquisition of non-current assets

(iii) report non-current assets in the final accounts

(b) Non-current asset records

(i) explain the purpose and function of an asset register

(ii) record data in an asset register

(iii) explain the purpose of data recorded in an asset register

(iv) explain how to identify and resolve any discrepancy between the asset register and the physical presence of assets

(v) explain the need for authorisation of acquisition, disposal and part exchange of non-current assets

(a) Depreciation

(i) define depreciation

(ii) explain the purpose of depreciation

(iii) calculate the charge for depreciation using the straight line and reducing balance methods

(iv) account for depreciation

(b) Changes in non-current assets

(i) account for the disposal or scrapping of a non-current asset

(ii) account for the part exchange of a non-current asset

(iii) calculate the profit or loss arising on the disposal, scrapping or part exchange of a non-current asset

(a) Identify and correct errors in the accounting records, including:

– incorrect double entry

– missing entries

– numerical errors

– insufficient information

(b) Explain the nature and purpose of control accounts

(c) Explain how control accounts relate to the double entry system

(a) Identify and explain the action required to correct errors

(b) Prepare correcting journal entries

(c) Record correcting entries in the ledgers

(d) Demonstrate how the income statement and balance sheet are affected by the correction of errors

(e) Use of a suspense account

(i) explain the purpose of a suspense account

(ii) record entries in a suspense account

(iii) explain the treatment of any remaining balance on a suspense account

(a) Explain the purpose of a payables ledger reconciliation

(b) Identify errors in the ledger accounts and list of balances

(c) Make correcting entries in the ledger accounts

(d) Prepare a reconciliation of the list of balances to the corrected ledger balance

(e) Identify the payables ledger balance to be reported in the final accounts

(f) Report the payables ledger balance in the final accounts

(a) Explain the purpose of a receivables ledger reconciliation

(b) Identify errors in the ledger accounts and list of balances

(c) Make correcting entries in the ledger accounts

(d) Prepare a reconciliation of the list of balances to the corrected ledger balance

(e) Identify the receivables ledger balance to be reported in the final accounts

(f) Report the receivables ledger balance in the final accounts

(a) Explain the purpose of a bank reconciliation

(b) Identify errors and omissions in the ledger account and bank statement

(c) Identify timing differences

(d) Make correcting entries in the ledger account

(e) Prepare a reconciliation of the statement balance to the corrected ledger balance

(f) Identify the bank balance to be reported in the final accounts

(g) Report the bank balance in the final accounts

(a) Describe the nature and purpose of accruals

(b) Describe the nature and purpose of prepayments

(c) Calculate accruals

(d) Calculate prepayments

(e) Account for accruals

(d) Account for prepayments

(e) Report accruals in the final accounts

(f) Report prepayments in the final accounts

(a) Define, and distinguish between, bad debts and doubtful debts

(b) Explain the need to provide for bad and doubtful debts

(c) Calculate the allowance for bad and doubtful debts

(d) Account for the write off of bad debts

(e) Report the write off of bad debts in the final accounts

(f) Account for the allowance for bad and doubtful debts

(g) Account for the movement in the allowance for bad and doubtful debts

(h) Report the movement in the allowance for bad and doubtful debts in the final accounts

(i ) Report the allowance for bad and doubtful debts in the final accounts

(a) Explain the application of accounting concepts to the valuation of inventory

(b) Explain the methods of valuing inventory when items have been purchased at different prices (FIFO – first in  first out; LIFO – last in first out; Periodic weighted average and Continuous weighted average)

(c) Explain the impact of inventory valuation methods on profit and assets

(d) Calculate the value of closing inventory

(e) Report closing inventory in the final accounts

(a) Explain the nature of provisions and liabilities

(b) Distinguish between a current liability and a non-current liabilies

(c) Calculate provisions and liabilities

(d) Account for provisions and liabilities

(e) Account for movements in provisions and liabilities

(f) Report provisions, non-current liabilities and long term liabilities in the final accounts

(a) Record the correction of errors on the etb

(b) Record post trial balance adjustments on the etb

(i) accruals and prepayments

(ii) depreciation

(iii) provisions (including allowances for bad and doubtful debts)

(iv) closing inventory

(c) Extension and completion of the etb

(i ) extend and complete the etb

(ii) calculate and record the net profit or loss for the period

(a) Close off ledger accounts for preparation of final accounts

(b) Prepare the final accounts (income statement and balance sheet) for a sole trader

(c) Record the profit or loss for the period and drawings in the capital account

(d) Prepare the opening trial balance for the next accounting period

(a) Define a partnership

(b) Explain the purpose of a partnership agreement

(c) Explain and account for appropriations of profit

– salaries of partners

– interest on capital

– interest on drawings

– share of residual profit

(d) Explain the difference between partners’ capital accounts and partners’ current accounts

(e) Close off ledger accounts for preparation of final accounts

(f) Prepare the final accounts (income statement, appropriation account and balance sheet) for a partnership

(g) Prepare the partners’ capital and current accounts

(h) Prepare the opening trial balance for the next accounting period

(a) Describe the circumstances which lead to incomplete records

(b) Calculate the net assets and profit or loss for a sole trader who has incomplete records

(c) Prepare and complete ledger accounts to derive missing figures

(d) Calculate missing figures using margin or mark up percentages

(e) Construct final accounts for a sole trader who has incomplete records.