ACA [ICAEW] – ACCOUNTING Exam with 100% correct Answers

Books of Original Entry - ANSWER 1. Cash Book 2. Sales Day Book (Credit Sales) 3. Purchases Day Book (Credit Purchases) 4. Petty Cash Book 5. Journal Book 6. The Payroll Statement of Financial Position - ANSWER S ...

Books of Original Entry - ANSWER 1. Cash Book 2. Sales Day Book (Credit Sales) 3. Purchases Day Book (Credit Purchases) 4. Petty Cash Book 5. Journal Book 6. The Payroll Statement of Financial Position - ANSWER SOFP - Snapshot of assets controlled, liabilities owned and capital at a point in time Statement of Profit and Loss - ANSWER Income and expenses over a period of time The Business entity concept - ANSWER Business transactions should be kept separate from the personal transaction of the owner Qualitative characteristics of financial information - ANSWER Two fundamental concepts 1. Relevance [Assists users in evaluating past and predicting future events + Materiality] 2. Faithful Representation [Neutral; Free from Error; Complete] Four Enhancing Characteristics 1. Verifiability [Can be proven] 2. Timeliness [In time to influence decisions of users] 3. Understandability [Readily understandable by people with reasonable knowledge] 4. Comparability [Consistency] Accrual basis of accounting - ANSWER - Items recognized as assets, liabilities, equity, income and expenses (elements of FS) when they satisfy definitions and recognition criteria for those elements in conceptual framework - Transactions recognized when they occur !! Income earned must be matched against the expenditure incurred in earning it Accrual Concept - ANSWER Effects of transactions reognized when they occur - not when cash received/paid IFAC Code of Ethics - ANSWER 1. Integrity 2. Objectivity 3. Professional Competence and Due Care 4. Confidentiality 5. Professional Behavior Accounting Equation - ANSWER Assets = Capital + Liabilities same: Assets - Liabilities = Capital + Profit - Drawings ICAEW Code of Ethics - ANSWER - Demonstrate highest standards of professional conduct and take public interest into consideration - Maintain reputation of accounting profession Payroll cost - ANSWER Total Payroll cost = Gross Pay + Employer NI + Employer Pension Net Pay by Employer - ANSWER Gross Pay - Employees NI - PAYE = Net Pay Trial Balance Definition - ANSWER A list of balances from each ledger account split into debits and credits Cost of sales [function] - ANSWER Opening inventory + Purchases + Carriage Inwards - Closing Inventory Carriage Inwards vs. Outwards - ANSWER Carriage inwards: added to cost of purchases therefore included in COS and Gross Profit Carriage outwards: distribution cost deducted from gross profit in Statement of Profit and Loss Net Realizable Value - ANSWER NRV of an item is net selling proceeds after all cost needing to be incurred to sell item have been deducted Closing and Opening Inventory Entries - ANSWER Closing: Dr. Inventory Cr. Cost of Sales Opening: Dr. Cost of Sales Cr. Inventory Inventory Drawings Entry - ANSWER Dr. Drawings Cr. Purchases Accrual Definition - ANSWER Accrued expenses are those charged against the profit for a particular period, even though they have not yet been paid for - Accruals belong to current liabilities Accrual Adjustment Entry - ANSWER Dr. Expense (P/L) Cr. Accrual (SOFP) Prepayment Definition - ANSWER Expenses which have been paid in one accounting period, but are not charged against profit until a later period, because they relate to that later period - Prepayment belong to current assets Prepayment Entry - ANSWER Dr. Prepayment (SOFP) Cr. Expense (P/L) Accrued Income - ANSWER Income earned during accounting period, but not invoiced or received Dr. Accrued Income (Asset) Cr. Income Deferred Income - ANSWER When income is received in advance of it being earned (e.g. Deposit) Dr. Income Cr. Deferred Income (Liability) Approach to Accrual & Prepayments in next period - ANSWER 1. Reverse opening accrual/prepayment 2. Post cash paid during the year 3. Post closing accrual/prepayment 4. Balance-off the accounts Depreciation Entry - ANSWER Dr. Depreciation Expense Cr. Accumulated Depreciation Capital Expenditure - ANSWER Acquisition, Replacement or Improvement of non-current assets Revenue Expenditure - ANSWER Trading expenses or the repair, maintenance or servicing of non-current assets -> Must be directly attributable Entry Remove Cost of Asset - ANSWER Dr. Disposal account Cr. Non-Current Asset Entry Remove accumulated Depreciation charged to date - ANSWER Dr. Accumulated Depreciation Cr. Disposal Account Entry Account for Sales Proceeds - ANSWER Dr. Cash Cr. Disposal Account Entry Accounting for Cash Discounts - ANSWER Dr. Discounts Allowed (Expense) Cr. Trade Receivables Entry Discount received from suppliers - ANSWER Dr. Trade Payables Cr. Discount Received Entry Writing off irrecoverable debts - ANSWER Dr. Irrecoverable Debts Expense (P/L) Cr. Trade Receivables (SOFP) Entry Irrecoverable debts written off and subsequently paid - ANSWER Dr. Cash Cr. Irrecoverable Debts Expense Entry Accounting for VAT (Purchases) - ANSWER Dr. Purchases Dr. VAT Control Account (purchases tax) Cr. Trade Payables Entry Accounting for VAT (Sales) - ANSWER Dr. Trade Receivables Cr. Sales Cr. VAT Control Account (sales tax) Entry Contra - ANSWER Dr. PLCA Cr. RLCA Entry Returns - ANSWER Dr. Sales Cr. RLCA Entry Cash Refund - ANSWER Dr. RLCA Cr. Cash Entry Shares issued at nominal value - ANSWER Dr. Cash Cr. Share Capital (Nominal Value) Entry Shares issued at premium to nominal value - ANSWER Dr. Cash Cr. Share capital (nominal value) Cr. Share premium (Excess over nominal value) Rights Issue - ANSWER New shares are offered to existing shareholders in proportion to their existing shareholding, usually at a discount to the current market price Share premium account - ANSWER Shares may not be issued at a price below their nominal value -> If issued above, the excess of issue price above nominal value is added to reserve account -> Cannot pay dividends out of premium Bonus issue - ANSWER An issue of fully paid shares to existing shareholders, free of charge, in proportion to their existing shareholdings -> Does not involve any cash inflow for the company (or capitalization issue or scrip issue) Entry Bonus Issue - ANSWER Dr. Reserve Account Cr. Share Capital Account Provision - ANSWER A liability of uncertain timing or amount Retained Earnings - ANSWER Accumulated Profits less Dividends Approach to preparing an P/L and SOFP in the exam - ANSWER 1. Transfer balances that will not change to solution 2. Work through additional information and use workings to calculate adjusted balances 3. Enter adjusted balances into solution and add up subtotals 4. Remember to add profit to retained earnings Cash Flow Statement - ANSWER - Indicator of Performance - Indicator of liquidity and solvency