Accounting principles underlying final accounts
5%of exam
AccrualsGoing concernFaithful representationIAS terminology
Advanced double-entry bookkeeping
10%of exam
Accounting equationLedger entriesControl reconciliationsVAT records
Acquisition and disposal of non-current assets
10%of exam
Capitalisation policyAsset registerDisposal entriesPart-exchange boundaries
Depreciation calculations
10%of exam
Straight-lineReducing balanceTiming policiesRegister reconciliation
Period-end adjustments
10%of exam
Accruals and prepaymentsIncome adjustmentsInventory NRVReceivable allowances
Produce and extend the trial balance
15%of exam
Error correctionSuspense accountsSole trader ETBStatement extension
Financial statements for sole traders and partnerships
20%of exam
Interpret financial statements using profitability ratios
10%of exam
Gross and net marginsFAPS ROCEExpense percentagesContextual interpretation
Accounting records from incomplete information
10%of exam
Control reconstructionCash and bank recordsMark-up and marginAssumption checks
Quick Facts
- Unit
- AAT Level 3 FAPS
- Awarding Body
- Association of Accounting Technicians
- Guided Learning
- 150 hours
- Assessment
- Computer-based and computer-marked
- Duration
- 2 hours 30 minutes
- Pass Mark
- 70%
- Diploma Contribution
- 40%; four mandatory units
- Scope
- Nine official learning outcomes
Accounting Principles and Terminology
- Accruals
- Recognise earned income, incurred expenses
- Going concern
- Continuing operation, not planned liquidation
- Business entity
- Separate owner and business transactions
- Prudence
- Caution without deliberate bias
- Carrying amount
- Cost less accumulated depreciation
- SFP
- Statement of financial position
- Primary statement users
- Investors, lenders and other creditors
- Relevance
- Information influences users’ economic decisions
- Faithful representation
- Complete, neutral, free from error
- Enhancing qualities
- Comparability, verifiability, timeliness, understandability
- Professional scepticism
- Question evidence; resist biased reporting
- Materiality
- Consider decision impact, not size alone
DEAD CLIC
Debit Expenses Assets Drawings; Credit Liabilities Income Capital
Dr: expenses, assets, drawingsCr: liabilities, income, capital
Error Correction Decisions
- Both sides omitted→Record both original entries
- Wrong account, correct side→Transfer between the affected accounts
- Complete reversal→Reverse error; record correct entry
- One side missing→Check and clear related suspense
- Unexplained difference remains→Investigate; avoid invented balancing entries
Ledgers and Reconciliation
- Assets and expenses
- Normally debit balances
- Income and liabilities
- Normally credit balances
- Receivables control
- Reconcile with customer-ledger totals
- Payables control
- Reconcile with supplier-ledger totals
- Agreed contra
- Dr payables; Cr receivables
- VAT recovery
- Exclude recoverable VAT from cost
- Books of prime entry
- Record valid transactions before ledger posting
- Wages control
- Reconcile payroll charges and settlement
- VAT control
- Reconcile input, output and settlement
Capital versus Revenue Expenditure
Capital
- Creates or prepares qualifying asset
- Shown initially within asset cost
Revenue
- Routine operating or maintenance expense
- Charged to relevant reporting period
Purpose and recognition determine treatment
Asset Acquisition and Disposal
- Capitalised cost
- Purchase plus directly attributable costs
- Training and advertising
- Expense; not asset acquisition cost
- Asset register
- Reconcile costs and accumulated depreciation
- Disposal carrying amount
- Cost less accumulated depreciation
- Disposal result
- Proceeds less carrying amount
- Part-exchange
- Allowance is old asset proceeds
- Asset acquisition
- Follow authorisation and capitalisation policies
Straight-Line versus Reducing Balance
Straight-line
- Depreciable cost divided by useful life
- Apply specified time policy
Reducing balance
- Opening carrying amount times rate
- FAPS uses given full-year rate
Use the method stated
Depreciation Methods and Policies
- Straight-line
- (Cost − residual value) ÷ life
- Reducing balance
- Opening carrying amount × given rate
- Pro-rata charge
- Annual charge × relevant year fraction
- Depreciation journal
- Dr expense; Cr accumulated depreciation
- Acquisition/disposal timing
- Follow the stated accounting policy
- Register mismatch
- Reconcile individual charges and disposals
Allowance Review
Write off first; calculate requirement; post movement.
Remove known irrecoverable amountsApply stated allowance basisExpense the change, not total
Adjustments into the Statements
- Expense incurred, unpaid→Record expense and accrual liability
- Expense paid for next period→Record prepayment; reduce current expense
- Income earned, unreceived→Record income and accrued receivable
- Income received before earning→Record deferred-income liability
- NRV below cost→Write down affected item to NRV
Period-End Adjustments
- Closing expense accrual
- Dr expense; Cr accrual liability
- Closing prepayment
- Dr prepayment; Cr expense
- Accrued income
- Dr receivable; Cr income
- Deferred income
- Dr income; Cr liability
- Inventory valuation
- Lower cost/NRV for each item
- Allowance movement
- Required closing allowance less opening
- Known irrecoverable debt
- Dr expense; Cr trade receivables
- Debt recovery
- Record separately; avoid duplicate receivable removal
Agreement Is Not Accuracy
Omission, reversal and principle errors can hide.
Equal totals are necessarySource records still matter
Sole Trader Extended Trial Balance
- Trial balance agreement
- Does not detect all errors
- Error of principle
- Correct account; normally no suspense
- One-sided posting
- May require suspense correction
- Closing inventory
- SPL cost reduction; SFP asset
- Net profit
- SPL debit; SFP capital credit
- Assessment boundary
- Partnership ETB completion is excluded
Partnership Allocation Order
Profit, appropriations, residual share, current accounts.
Use the partnership agreementInterest figures are suppliedDrawings reduce partner balances
Carriage Inward versus Outward
Inward
- Brings purchased goods to business
- Part of inventory acquisition cost
Outward
- Delivers sold goods to customers
- Selling expense in profit or loss
Direction changes cost classification
Partnership Account Selection
- Employee wages→Expense before partnership profit
- Agreed partner salary→Appropriate profit to that partner
- Given interest on capital→Appropriate supplied amount
- Residual profit or loss→Apply agreed profit-sharing ratio
- Partner drawings→Debit the relevant current account
Sole Trader Statements
- Net revenue
- Sales less sales returns
- Cost of sales
- Net purchases + opening inventory − closing
- Net purchases
- Purchases − purchase returns + carriage inward
- Carriage inward
- Included in acquisition cost
- Carriage outward
- Selling expense, outside inventory cost
- Profit for year
- Gross profit + other income − expenses
- Closing capital
- Opening + introduction + profit − drawings
Partner Capital versus Current Account
Fixed capital
- Permanent capital invested
- Changes for capital introductions/withdrawals
Current account
- Profit allocations and drawings
- May have debit or credit balance
Distinguish investment from ongoing appropriations
Partnership Profit Allocation
- Partner salary
- Profit appropriation, not employee wages
- Interest on capital
- Use supplied appropriation amount
- Interest on drawings
- Adds to profit available for allocation
- Residual profit
- Allocate using agreed sharing ratio
- Fixed capital
- Long-term partner investment account
- Current account
- Allocations less drawings and charges
Mark-Up versus Gross Margin
Mark-up
- Profit divided by cost
- 25% mark-up gives 20% margin
Gross margin
- Profit divided by revenue
- 20% margin gives 25% mark-up
Different denominators; never interchange blindly
FAPS Profitability Ratios
- Gross margin
- Gross profit ÷ revenue × 100
- Net margin
- (Profit for year/revenue) ×100
- Expense percentage
- Specified expense ÷ revenue × 100
- FAPS ROCE
- (Profit for year/capital employed) ×100
- Capital employed
- Capital + non-current liabilities
- Interpretation
- Compare like measures and explain context
Gross versus Net Profit Margin
Gross margin
- Gross profit divided by revenue
- Focuses on trading margin
Net margin
- Profit for year divided by revenue
- Includes operating expenses and other income
Explain movements using supporting figures
Missing-Figure Route
- Missing credit sales→Reconstruct receivables control account
- Missing credit purchases→Reconstruct payables control account
- Known cost and mark-up→Multiply cost by one plus mark-up
- Known revenue and margin→Multiply revenue by one minus margin
- Unexpected reconstruction result→Check assumptions and omitted transactions
Reconstructing Missing Figures
- Capital comparison profit
- Capital change + drawings − introductions
- Credit sales*
- Receipts + closing receivables − opening
- Credit purchases*
- Payments + closing payables − opening
- Mark-up revenue
- Cost of sales × (1 + mark-up)
- Margin cost of sales
- Revenue × (1 − margin)
- *Control assumptions
- No returns, discounts or other movements
Common Traps
Drawings versus Business Expenses
Drawings: reduce capital, not profit ≠ Business expenses: reduce profit
Trial Balance Agreement
Equal debits and credits ≠ Proof every transaction is correct
Partnership ETB Scope
Know partnership statement preparation ≠ Complete a partnership ETB
Part-Exchange Scope
Calculate disposal using allowance ≠ Apply part-exchange VAT rules
FAPS Ratio Scope
Profitability ratios in specification ≠ Assume liquidity ratios are tested
Prudence and Bias
Cautious judgement under uncertainty ≠ Deliberately understate assets or profit
Last Minute
- 1.150 minutes; 70% pass threshold
- 2.FAPS is one diploma unit
- 3.Nine learning outcomes total 100%
- 4.Apply stated depreciation timing
- 5.Exclude recoverable VAT from asset cost
- 6.Write off before calculating allowances
- 7.Value inventory item by item
- 8.Sole trader ETB completion only
- 9.Partner salaries appropriate profit
- 10.ROCE uses FAPS profit definition
- 11.Mark-up divides profit by cost
- 12.Reconcile missing-record assumptions
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