1. Chapter 7 Accounting Policies

2. Slide 2 notes reference - page 65 Accounting Standards Aim to narrow areas of choice and improve comparability. Apply to all accounts intended to give a truthful presentation (true and fair view).

3. notes reference - page 65 The objective of financial statements To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions

4. Slide 4 notes reference - page 65 Underlying assumptions Going concern The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.

5. Slide 5 notes reference - page 65 Underlying assumptions Accruals The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the period to which they relate

6. Slide 6 notes reference - page 65 Other concepts, conventions and qualities Prudence Consistency Entity concept Separate valuation principle Materiality Historical cost convention

7. Chapter 8 Accruals and prepayments

8. Slide 8 notes reference - page 71 Accruals Accruals are expenses incurred by the business during the accounting period but not yet paid for. Shown in the balance sheet under “Current liabilities”

9. Slide 9 notes reference - page 71 Accruals example Accounting period 1.1.X431.12.X41.10.X4 Period to which bill relates Accrue bill at 31.12.X4 Pay telephone bill $60 on 1.1.X5

10. Slide 10 notes reference - page 71 Prepayments Prepayments arise when expenses are paid for before they have been used. Shown in the balance sheet under “Current assets”

11. Slide 11 notes reference - page 72 Prepayments example Accounting period Period to which bill relates 1.1.X431.12.X431.12.X5 Pay insurance bill on 20.12.X4 Prepayment at 31.12.X4

12. Slide 12 notes reference - page 72 Lecture example 1 Electricity Date paid 10.3.X4 12.6.X4 14.9.X4 10.12.X4 96 Amount 120 104 145 Period 2 months to 28 Feb 20X4 Quarter to 31 May 20X4 Quarter to 31 August 20X4 Quarter to 30 Nov 20X4 Rates 1.2.X4 6.4.X4 375 1,584 3 months to 31 March 20X4 12 months to 31 March 20X5 1 July 20X4 employed assistant. Paid assistant $150 per month on 28 th of each month. 6 March 20X5 received electricity bill for $168 for quarter to 28 Feb 20X5.

13. Slide 13 notes reference - page 73 Lecture example 1 Electricity Expense for year to 31.12.X4 AccrualPrepaymentTotal paid Rates Wages 465 1,959 900 521(W1) 1,563(W3) 900 56 396 - - -- (W1) 96 + 120 + 104 + 145 + (1/3 x 168) (W3) 375 + (9/12 x 1,584) (W4) 3/12 x 1,584 (W4) (W2) (W2) 1/3 x 168 (W5) 6 x 150 (W5)

14. Slide 14 notes reference - page 73 Year-end adjustments Accruals DebitExpense CreditAccruals Prepayments DebitPrepayments CreditExpense

15. Slide 15 notes reference - page 74 Lecture example 2 104Cash14.9.X4 521I/S31.12.X456Accruals31.12.X4 145Cash10.12.X4 120Cash12.6.X4 96Cash10.3.X4 56bal b/d1.1.X5 56Electricity31.12.X456bal c/d31.12.X4 Electricity Accruals 521 56

16. Slide 16 notes reference - page 74 1,563 I/S 31.12.X4 1,584 Cash6.4.X4 375Cash1.2.X4 Rates 1,959 396 bal b/d 1.1.X5 396 bal c/d31.12.X4 396Rent31.12.X4 Prepayments 396 Lecture example 2 part (c) 396 Prepayments 31.12.X4

17. Slide 17 notes reference - page 74 Lecture example 2 150Cash28.9.X4 900I/S31.12.X4 150Cash 28.11.X4 150Cash28.10.X4 150Cash28.8.X4 150Cash28.7.X4 Wages 900 150Cash28.12.X4

18. Slide 18 notes reference - page 75 Accruals and prepayments Situation so far: Year end adjustment completed Revenues matched expenses Accrual or Prepayment created

19. Slide 19 notes reference - page 75 Reversals illustration Bal b/d on prepayments is $396 Paid rates in X5 of $1,740 for 12 months Prepayment from last year Cash paid that relates to this year 31.12.X5 1.4.X5 3/12 * $1,584 ($396) 9/12 * $1,740 = $1,701 ($1,305) 1.1.X5 The other 3/12 x $1,740 = $435 is a prepayment

20. Slide 20 notes reference - page 76 Reversals illustration (cont’d) Cash1,740Prepayment435 Bal b/d396 Rent435 Rates expensePrepayments

21. Slide 21 notes reference - page 76 Reversals illustration (cont’d) Opening prepayments must therefore bereversed DrRates expense (I/S) CrPrepayments (B/S)

22. Slide 22 notes reference - page 77 Summary - Reversals Accruals Prepayments Debit Accruals Credit Expense Debit Expense Credit Prepayments

23. Slide 23 notes reference - page 77 Steps Reverse the opening accrual/prepayment Post cash paid Post closing accrual/prepayment

24. Slide 24 notes reference - page 77 396Reverse prepayment 1.1.X5 Rates 2,136 (3/12 x 1,740) 435 Prepayments 31.12.X5 435 bal b/d 1.1.X6 435 bal c/d31.12.X5 396bal b/d1.1.X5 Prepayments 831 Lecture example 3 1,701I/S 31.12.X5 1,740 Cash10.4.X5 396Reverse prepayment 1.1.X5 43531.12.X5 Rates (3/12 x 1,740)

25. Slide 25 notes reference - page 78 Lecture Example 4 Date paidAmountPeriod $ quarter 12.3.X5168Feb 20X5 9.6.X5134May 20X5 12.9.X5118Aug 20X5 12.12.X5158Nov 20X5 During March 20X6 Fiona received bill for $189 for quarter to 28 February 20X6 Accounting Opening accrual Cash paid

26. Slide 26 notes reference - page 78 Lecture example 4 (a) The closing accrual is (b) The electricity expense for the year is $63 $585 118Cash12.9.X5 585I/S 31.12.X5 158Cash 12.12.X5 134Cash9.6.X5 168Cash12.3.X5 Electricity 641 Working 63Accruals31.12.X5 (1/3 x 189) 56Reverse accrual1.1.X5

27. Chapter 9 Non-current assets and depreciation

28. Slide 28 notes reference - page 83 Definitions Intended for use on continuing basis Non-current assets Property, plant and equipment Tangible assets –production/supply of goods/services –rental to others –admin purposes AND Expected use > 1 period

29. Slide 29 notes reference - page 83 Lecture example 1 Land and buildings Plant and equipment Motor vehicles Furniture and fixtures

30. Slide 30 notes reference - page 83 Non-current asset register A listing of all non-current assets owned by the organisation Details likely to be kept: - serial number - description of asset - location of asset - purchase date - cost - depreciation method & estimated useful life - net book value

31. Slide 31 notes reference - page 84 Capital expenditure Results in NCA on B/S Initial cost of NCAexpenditure on NCA Subsequent Purchase price Directly attributable costs - acquisition costs - site preparation - delivery & handling - installation - professional fees Improves earning capacity of NCA more output better quality output longer life of NCA

32. Slide 32 notes reference - page 85 Revenue expenditure Expense in IS expenditure on NCA Subsequent To carry on trade of business e.g. rent electricity Maintains existing earning capacity repairs routine maintenance of NCA

33. Slide 33 notes reference - page 85 Lecture example 2 Frodo Ltd buys a car for a sales representative. The invoice contained the following information: List price of the car15,000 Road tax165 Burglar alarm system200 Petrol30 Delivery charge100 The car will be shown in the B/S at a cost of 15,300 List price 15,000 Burglar alarm system 200 Delivery charge 100 15,300 Working

34. Slide 34 notes reference - page 86 Depreciation “…the systematic allocation of the depreciable amount of an asset over its useful life.” All non-current assets apart from land should be depreciated

35. Slide 35 notes reference - page 86 Depreciation There are 3 methods of calculating depreciation: (a)Straight line (b)Reducing balance (c)Machine hour

36. Slide 36 notes reference - page 86 Depreciation = cost – residual value useful economic life (years) Residual value = expected proceeds at end of UEL or Depreciation=% x (cost – residual value) Straight line method

37. Slide 37 notes reference - page 87 Lecture example 3 (a) The annual depreciation charge is$400 2,500 - 500 5 years = 400

38. Slide 38 notes reference - page 87 2,500 5 4 3 2 1 NBVAcc depnCostYear 400 800 1,600 2,100 1,700 1,300 900 500 Lecture example 3 part (b) 1,200 2,000

39. notes reference - page 87 Lecture example 2 (cont’d) Graphical representation $ 2,500 500 0 5 Year NBV

40. Slide 40 notes reference - page 87 Depreciation = depreciation rate (%) x NBV Cost – accumulated depn to date Reducing balance method

41. Slide 41 notes reference - page 88 NBVYear rateexpensedepn 518 4 864 3 1,440 2 2,400 1 Acc Depn 2,4003,600 2,160 1296 778 Lecture example 4 part (a) Depn 3,840 4,704 5,222 40%

42. notes reference - page 88 Lecture example 4 (cont’d) Graphical representation 778 $ 6,000 1234512345 Year NBV 3,600 2,160 1,296

43. Slide 43 notes reference - page 89 Machine hour method Depreciation = cost – residual value useful economic life (hours) x actual use p.a.

44. Slide 44 notes reference - page 89 Lecture example 5 (a) The depreciation rate per HOUR is£6 125,000 – 5,000 20,000 hours = £6

45. Slide 45 notes reference - page 89 NBVYear expensedepnuse 30,000 3 42,000 2 48,000 1 Acc Actual 48,00077,000 35,000 5,000 Lecture example 5 part (b) hours Depn 90,000 120,000 8,000 7,000 5,000

46. Slide 46 notes reference - page 90 Accounting for depreciation Dr Depreciation expense (I/S) Cr Accumulated depreciation (B/S)

47. Slide 47 notes reference - page 90 Lecture example 6 part (a) Machine 2,500 Cash 2,500 bal b/d bal c/d2,500 Depreciation expense Year 1 Acc depn 400 Year 2 Acc depn 400 Year 3 Acc depn 400 Year 4 Acc depn 400 Year 5 Acc depn 400 Year 1 IS 400 Year 2 IS 400 Year 3 IS 400 Year 4 IS 400 Year 5 IS 400

48. Slide 48 notes reference - page 91 Lecture example 6 part (a) 400Depn exp2000bal c/d 1600bal b/dYear 5 400Depn exp1600bal c/d 1200bal b/dYear 4 400Depn exp1200bal c/d 800bal b/dYear 3 400Depn exp800bal c/d 400bal b/dYear 2 400Depn expYear 1400bal c/d 400 800 1200 1600 2000 Accumulated depreciation

49. Slide 49 notes reference - page 91 Lecture example 6 part (b) Income Statement (extract) Expenses Year 1 Year 2Year 3Year 4 Year 5 Depreciation400

50. Slide 50 notes reference - page 91 Lecture example 6 part (b) Balance Sheet (extract) Cost Acc depnNBV Year 1 Year 2 Year 3 Year 4 Year 5 2,500(400)2,100 2,500(800)1,700 2,500(1,200)1,300 2,500(1,600)900 2,500(2,000)500

51. Slide 51 notes reference - page 92 Lecture example 6 part (c) Journal entry Debit Credit Depreciation expense400 Accumulated depreciation400 Being annual depreciation charged on machine

52. Slide 52 notes reference - page 92 Disposal of non current assets Profit/loss on disposal NBV < sales proceeds = profit NBV > sales proceeds = loss Accounting treatment Everything to do with disposal is transferred to a Disposal a/c (a) Transfer original cost of asset to disposal a/c (b) Transfer accumulated depreciation to disposal a/c (c) Post sales proceeds (d) Balance off disposal a/c to find profit/loss on disposal (e) Profit on disposal = sundry income in I/S Loss on disposal = expense in I/S

53. Slide 53 notes reference - page 93 Lecture example 7 The profit/loss on disposal is Machine bal b/d Disposal6,000 Accumulated depreciation bal b/d3,840 Disposal 3,840 Disposal 6,840 Accum depn3,840Machine cost6,000 Cash3,000Profit on disposal (I/S) 840 $840

54. Slide 54 notes reference - page 94 Lecture example 8 The profit/loss on disposal is Machine bal b/d Disposal6,000 Accumulated depreciation bal b/d3,840 Disposal 3,840 Disposal 6,840 Accum depn3,840Machine cost6,000 Profit on disposal (IS) 840 $840 Cash paid for the new machine is$7,000 New machine3,000 (part exchange)

55. Slide 55 notes reference - page 94 Lecture example 8 (cont) New machine 10,000 bal b/d10,000 Disposal (part ex)3,000 bal c/d10,000Cash7,000

56. Slide 56 notes reference - page 94 Land and Buildings Non-current assets are depreciated over their useful life Property is split into land and building elements for depreciation Land is not normally depreciated as it has an unlimited useful life

57. Slide 57 notes reference - page 95 If an item of property has increased in value, IAS 16 allows the asset to be revalued to show the increase in value on the balance sheet. All items in the same class must be revalued at the same time. Revaluations

58. Slide 58 notes reference - page 95 Land and Buildings – accounting treatment REVALUEDDr NCA cost Dr Accumulated depreciation Cr Revaluation reserve/Capital

59. Slide 59 notes reference - page 96 Lecture example 9 The balance on the capital a/c / revaluation surplus is$70,000 Accumulated depreciation bal b/d20,000 Building 150,000 Revaluation20,000 bal b/d100,000 Revaluation50,000 Capital/Revaluation Surplus Building50,000 Accum depn20,000bal c/d70,000 bal c/d 150,000 70,000

60. Slide 60 notes reference - page 97 Lecture example 10 DateDepn chargeAcc DepnNBV 31.12.X5200,000/5 = 40,00040,000160,000 31.12.X640,00080,000120,000 31.12.X740,000120,00080,000 Working

61. Slide 61 notes reference - page 97 Lecture example 10 (cont.) (a) Asset revalued on 1.1.X8 to 250,000. The double entry to reflect the revaluation is: Dr NC asset (250,000 – 200,000)50,000 Dr Accumulated depn (Working)120,000 Cr Revaluation surplus170,000

62. Slide 62 notes reference - page 97 Lecture example 10 (cont.) (b) Asset revalued on 1.1.X8 to 180,000. The double entry to reflect the revaluation is: Dr Accumulated depn (Working)120,000 Cr NC Asset (200,000 – 180,000)20,000 Cr Revaluation surplus100,000

63. Slide 63 End of day 2 - what to do now… 1.Course notes review Course Companion 2. Question practice 3. Study text review Reinforce today’s learning Develop question skills