Dawn Weeden Study tips: Introduction to Financial Accounting

ABE

Any person wishing to construct a building must undertake tasks in a particular order. Firstly foundations need to be laid and these must be firm and strong. Although they are hidden from view and are not very decorative, foundations are the base upon which the rest of the building depends for stability. Poor foundations will lead to a weak building which will be likely to crumble and fail. Once the foundations are completed, the walls can be added and then finally the roof. It would be impossible to try and construct a building beginning with the roof, then the walls and finally the foundations. You may wonder what any of this has to do with the Introduction to Financial Accounting Unit but the approach towards learning accountancy can be likened to constructing a building. A successful accountant needs to have a deep understanding of the basic principles involved and a good grounding in processing fundamental accounting transactions. Without such knowledge it will be very difficult to undertake the advanced tasks, both computational and advisory, expected of qualified accountants. The Introduction to Financial Accounting Unit is designed to equip students with the fundamental knowledge necessary for them to undertake more advanced studies. Students who are most successful in higher level accountancy qualifications are those that have taken the time to understand, learn and practice the basic skills that underpin the whole of accountancy. Fundamental areas of study There are seven fundamental areas of study covered in this Unit and students should be proficient in all areas before attempting the examination: 1. Understanding accounting concepts and accounting terminology Accounting concepts form the bedrock of accounts preparation. They assist with consistency of presentation and the truth and fairness of the content. Accounting has its own language and an understanding of different terms is essential. 2. Double entry book-keeping This is the most important aspect of accounts production and pervades all areas of accounting. The principle of double entry book-keeping is that every accounting transaction affects two accounts with equal and opposite entries. These are known as debits and credits. The balances on the general ledger accounts at the end of a financial period will be used to prepare the financial statements. 3. Books of prime entry The day to day financial transactions of a business are usually summarised in books of prime entry which are then totalled at regular intervals and the totals transferred into the general ledger accounts.

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Dawn Weeden

ABE

4. Checking procedures Accuracy is essential in accounting and there are a number of checking devices that can be employed. Those covered in this Unit are sales and purchase ledger control accounts and bank reconciliations. 5. Accounting adjustments: accruals, prepayments and depreciation Income and expenses must be included in the financial period in which they occur and not when payment is received or made. This necessitates the use of accounting adjustments such as accruals and prepayments. Depreciation is required to ensure that fixed assets are not overstated in the Balance Sheet. 6. Preparing financial statements: Trading, Profit and Loss Account and Balance Sheet Two of the most widely used financial statements are the Trading, Profit and Loss Account which shows the financial performance of a business over a period of time, and the Balance Sheet which shows the financial position of the business at a specific point in time. 7. Understanding and interpreting financial statements The ability to prepare financial statements is of little use unless they are understood and can be interpreted. The method of interpretation in this Unit is limited to ratio analysis. Exam format This Unit is assessed by means of a three hour examination. Students are required to select four questions from a choice of eight. Each question will have a mix of both numerical and computational elements totalling 25 marks. The pass mark is 40%. December 2007 was the first sitting for this Unit and it was clear that some students were far better prepared than others. How to be successful Success in an examination can never be guaranteed but there are a number of ways that you can use to ensure that you give yourself the best possible chance to be successful. And remember that time spent on mastering the basics will add to your potential to do well in subsequent financial accounting exams. Syllabus coverage Ensure that you have studied every area of the syllabus thoroughly before attempting the exam. The skills that you will learn in this Unit are inter-linked and cannot be taken in isolation. If you miss out sections of the syllabus or try and question spot then you are minimising your chances of achieving a pass grade and limiting your chance to acquire a range of accounting knowledge and skills. Practice, practice, practice There is no substitute or better preparation for the exam than to practice as many questions as possible. There are a number of basic accounting textbooks available that have wide selections Page 2

Dawn Weeden

ABE

of questions for practice. You should also attempt some questions under exam conditions, without reference to textbooks and notes, as this will help you judge how you are progressing and the level of your understanding. It was apparent from the December exam that students were ill-prepared for Question 1. Knowledge of double entry was poor suggesting a lack of practice prior to the exam. We have already seen that double entry underpins all areas of accounting and it is essential that a significant amount of study time is spent on this area.. There are a number of methods used by students when trying to remember double entry. A popular one is to use the word PEARLS. Other areas in the December 2007 exam which suggested insufficient practice were students not knowing how the treat a balance on the VAT account and including the depreciation expense on the Balance Sheet instead of in the Profit and Loss Account. DEBIT CREDIT

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Select the exam questions carefully It is important to spend some time at the beginning of the exam reading through all of the questions. You have to select four from a choice of eight. Take time to ensure that you select those questions where you can attempt all the required tasks. If you miss out part of a question then you are limiting the number of possible marks that you can obtain. Do not ignore the written elements There is a temptation by students to concentrate on the numerical part of questions and to ignore the written parts. There is a written task to almost every question and they serve an important purpose. It is not enough for accountants just to be able to follow a set of numerical processes to reach an answer they must also understand why they are performing those processes and be able to demonstrate that understanding through written explanation. Some written tasks will require you to define different accounting terms and some will require you to explain or comment on your results. In Question 7 on the December 2007 paper marks were lost through incorrect or inadequate explanation of calculated ratios. When you are practicing for the exam make sure that you also practice the written elements. Presentation The answers that you produce in the exam should be well presented, using standard accounting formats with clear cross references to workings. There were two main areas of weakness identified by the December 2007 exam. Firstly students were not aware of the correct formats for a Trading, Profit and Loss Account and a Balance Sheet. Secondly, the presentation of ledger accounts was very poor. These examples show how the examiner expects ledger accounts to be presented: Page 3

Dawn Weeden Bank Account Date Details 1,500 31/03/07 Purchases 34,590 31/03/07 Sundry expenses 2,000 31/03/07 Motor expenses 3,000 31/03/07 Rent 31/03/07 Bank charges 31/03/07 Drawings 31/03/07 Wages 31/03/07 Balance c/d 41,090 700 Rent Date 500 Details

ABE

Date 01/04/06 31/03/07 31/03/07 31/03/07

Details Capital introduced Sales Capital Bank loan

11,330 1,260 3,580 5,500 120 13,000 5,600 700 41,090

01/04/07 Date 01/04/06 31/03/07

Balance b/d Details Capital Bank

6,000 6,000

5,500 31/03/07 Profit & Loss Account 6,000

Note the following: Use a ruler to draw straight lines Include dates for each transaction Use suitable narrative marks are not awarded if a student only includes numbers without narrative When balancing off the ledger account clearly show whether there is a balance carried down or a transfer to the Trading, Profit and Loss Account. Many students in the December 2007 exam failed to distinguish between the balance carried down and the transfer to the Trading, Profit and Loss Account. If there is a balance carried down on the ledger account you should also show the balance bought down ready for the next financial period. Calculations Always double check your calculations. It is easy to key in an incorrect figure into a calculator and this will result in a Trial Balance or financial statements that do not balance. You should also consider whether the answer you have produced looks sensible. If you have been working with figures in the hundreds and you get an answer in millions then clearly this is likely to be incorrect. And finally There is no such thing as luck in an examination. You will achieve success through diligent study and plenty of exam question practice.

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