Miran El Maghrabi 1

Accounting Final Revision

 Income statement: a financial statement showing the revenue
(profit) and expenses (loss) for a certain period.
 Statement of financial position: a financial statement that shows
the financial position of the business at year end.
 Assets: items owned by the business
 Current assets: assets that we intend to turn into cash OR which
are already cash
- Stock
- Trade receivables (debtors) : amounts owed by customers buying
the company’s goods on credit
- Other receivables (prepayments) : amounts paid by the business
for a service not received yet
- Cash in hand
- Cash at bank
 Noncurrent assets: assets that are currently being used by the
business with no intention of being sold
- Equipment
- Motor van
- Fixtures & fittings
 Liabilities: amount owed by a business
 Current liabilities: liabilities due within a short time (1 year)
- Bank overdraft: amount due when a business withdraws more
than its balance in a bank account
Miran El Maghrabi 2

- Trade payables (creditors): the amount due to suppliers who

provide the company with its need of stock, goods, etc.. on
credit
- Other payables (accruals, accrudes, in arrear, outstanding,
owing, unpaid) expenses for services which have not yet been
paid
 Noncurrent liabilities: liabilities due on the long term (more than 1
year)
- Loans
 Dual aspect concept: (duality)
Assets= liabilities + capital
This states that there are two aspects in ACCOUNTING. One
represented by the assets and the other by the claims against
them, and they should always be equal.
 Revenue: income generated by the operation of a business
 Book keeping: is the process by which the business maintains its
detailed recording of all the financial transactions of the business
using the double entry method.
 Double entry: method used in recording the transactions of a
business so that the dual aspect concept is upheld.
 Liquidity: the ability of a business to cover its current liabilities using
its current assets on the due date
 Business entity concept: the business and the owner have separate
identities.
 Working capital: the amount available from current assets after
covering current liabilities.
 Gross profit is the difference between net sales and cost of sales.
Miran El Maghrabi 3

 Sales turnover is the income gained from sales net (sales – sales
return)
 Net purchases is the difference between purchases and purchases
returns
 Effect of changing opening stock on Gross Profit AND Net Profit.
If the opening stock is overvalued: they will be undervalued
If the opening stock is undervalued: they will be overvalued
 Effect of changing closing stock on Gross Profit AND Net Profit.
If the closing stock is overvalued: they will be overvalued
If the closing stock is undervalued: they will be undervalued
 Capital expenditure: payments made for buying non current assets or
adding to the value of the existing assets, which will benefit the
business for a long time. (SoFP)
 Revenue expenditure: expenses needed for the daily running of the
business which will benefit the business for a short time. (I/S)
 Capital receipts: money coming into the business from any source
other than the normal activities of the business
 Revenue receipts: money coming into the business from the normal
activities of the business such as sales of the goods.
 If capital expenditure was treated as revenue expenditure:
-Expenses will be overstated
-Net profit understated
-Non current assets will be understated
-Capital balance will be understated
Miran El Maghrabi 4

 If revenue expenditure was treated as capital expenditure:

-Expenses will be understated
-Net profit overstated
-Non current assets will be overstated
-Capital balance will be overstated
Miran El Maghrabi 5

Accounting ratios:

Current ratio: Return on capital employed

Current assets
Current liabilities Profit for the year
Capital employed

Quick ratio Capital employed

Current assets – stock NCA + WC
Current liabilities

Gross profit margin Working capital

Current assets – current liabilities
Gross profit
Sales X100

Mark up Rate of inventory turnover

Gross profit Cost of sales

Cost of sales X100 Average inventory

Net profit margin

Trade receivables collection period
Profit for the year Trade receivables
Sales X100 Credit sales
Miran El Maghrabi 6

 Current ratio:
1. More cash introduced through further capital, loans or borrowing
2. Selling old fixed assets
3. Selling goods
4. Less drawings
5. Admission of a new partner
 Quick ratio:
1. Selling goods (holding too little inventory)
2. Improvements in current ratio
 GP Margin
1. Buying from cheaper suppliers
2. Buying in bulk
3. charging higher prices
4. Overvaluation of closing stock
5. Undervaluation of opening stock
 NP Margin
1. Controlling the overhead expenses
2. New sources of income
3. Improvement of GP %
 ROCE
1. Better investments
2. Controlling the overhead expenses
3. Improvement of the GP %
Miran El Maghrabi 7

Double entry: system used to record business financial transactions so

that the accounting equation is upheld (Assets= capital + liabilities)
 Debit Dr (left side of the T)
 Credit Cr (right side of the T)
 Benefits of keeping accounting records using the double entry:
-Less risk of errors
-Easier to refer to previous transactions
-Easier to prepare financial statements
-Easier to calculate accounting ratios

 Secondary books of entry:

Cashbook
Sales ledger – trade recievable or customer accounts
Purchases ledger – trade payable or supplier accounts
General-Nominal ledger – anything else gher el bank cash, TR and
TP.
 Why divide the ledger into three sections?
-Make reference easily and rapidly
-Know total balances easily
-Make fraud more difficult
-Easy to trace errors
Miran El Maghrabi 8

 Trial balance: list of debit and credit balances extracted from the books
of secondary entry at a given time, to check the arithmetic accuracy of
the book keeping.
 Purposes of a trial balance:
Checking the arithmetical accuracy of book keeping
To prepare final accounts (I/S-SOFP)
To check the accuracy of posting “every Cr has a Dr”

Debit ‘Dr’ Credit ‘Cr’

Drawings

Assets

Expenses

Purchases

Sales returns

Liabilities

Income

Capital

Sales

Purchases returns

TB: Provision

Inventory – opening
Capital – opening
Provision – old
Miran El Maghrabi 9

 Cashbook: records bank and cash receipts and payments

it is the only book that is in both prime and secondary entry
 Cash discount: reduction in cash payments, given by the supplier to
the customer to encourage early-quick payment
 Trade discount: reduction in the amount to be paid by a customer,
given to encourage bulk purchases
IT DOES NOT APPEAR IN THE LEDGER ACCOUNTS OR CASHBOOK
IT IS DIRECTLY REDUCED IN THE INVOICE OR CREDIT NOTE.
 Books of prime: file where the business records its daily transactions
(then posted to the books of secondary entry)
1)Sales journal: used to record credit sales

Document: sales invoice ‘a copy of the document sent by the supplier for goods
sold and their prices’

2)Purchases journal: used to record credit purchases

Document: purchases invoice ‘a document sent by supplier to customer showing

details of goods purchased’

3)Sales returns journal: used to record return inwards

Document: credit note issued

4)Purchases returns journal: used to record return outwards

Document: credit note received

5)Petty cash book: to record small item payments of expense

Document: petty cash voucher

6)Cash book: to record receipts and payments

Document: cheque ‘receipt’ ‘counterfoil’

Miran El Maghrabi 10

Credit note: a document sent to a customer, showing allowance given to

supplier for reduction in the amount due
Debit note: a document sent to a supplier asking for allowance for
reduction in amount due
Statement of account: copy of the customer’s personal account in the
supplier’s books sent to remind the customer of the amounts due.
(Summary of all transactions that happened in a certain period between
a supplier and his customer)
General journal: book of prime entry used to record any transactions
unlikely to be recorded in the others books of prime.
1. Writing off bad debts
2. Opening and closing entries
3. Buying and selling of noncurrent assets
4. Correction of errors

Accounting cycle:
Transactions
Documents
Prime
Secondary
Trial Balance
IS and SoFP
Miran El Maghrabi 11

Petty cash book: book of prime entry used for recording the small items
of receipts and payments.
Imprest system: the petty cashier starts each period with a fixed amount
of money (float) At the end of each period, the chief cashier will restore
the cash remaining so that it is equal to the original amount.
Advantages of an imprest system:
1. Chief cashier is aware of the amount spent each month, where any
expense can be controlled.
2. The total of petty cash voucher and petty cash in hand should
always be equal to the imprest amount.

Calculating revenue: Calculating purchases:

Amount received from trade Amount paid to trade payables

receivables
+ Trade payables closing
+ Trade receivable closing
-Trade payables opening
-Trade receivable opening
+ Purchases returns
+ Sales returns
+ Discount received
+ Discount allowed
“credit purchases”
Miran El Maghrabi 12

Statement of affairs
Non current *** + current *** = “total ***”

Total assets – total liabilities = capital

Non current assets X

Current assets X

Total assets XX

Less current liabilities (X)

Less non-current liabilities (X)

Capital X

Gross profit
Mark up
Cost of sales “sales – gross profit”

Gross profit
Margin
Sales

Prudence concept: we should expect, estimate, and record any possible future
loss or expense; and we should only record assured income or profit.

Stock should be valued at the lower cost and net realizable valuable.

Cost is the purchase price of the goods plus any costs needed in bringing the
inventory “carriage inwards”

Net realizable value is the selling price less selling expenses which are all costs
needed to put the goods in a saleable condition.
Miran El Maghrabi 13

Depreciation and Disposal:

Methods of Depreciation:

1. Straight-line method:
With or without scrap value
Equal installments each year
(Cost-*scrap value*) x rate of depreciation or ÷ number of expected years
2. Reducing method:
Net Book Value X Rate of depreciation
*remember net book value is the cost of the asset after deducting previous
years’ depreciation
*remember there is no accumulated years depreciation in the first year
3. Revaluation method:
The cost of the asset at the end of the year - cost of the asset at the
beginning of the year

Remember that the depreciation expense of ONE year will be posted in the Income
Statement but the provision for depreciation will be posted in the Statement Of
Financial Position.

Disposal Account:
C PS

Cost of the asset Provision for depreciation

Selling Price

Remember to eliminate the disposed asset at its cost without the depreciation.
Miran El Maghrabi 14

The Errors:

Errors which do not affect the trial balance:

Accounting Errors Description

1. Error of Principle in Accounting Correct amount, wrong type of account

2. Errors of Omission in Accounting Entry missed from accounting records

Correct amount and type of account but wrong

3. Error of Commission account

4. Compensating Error Two or more errors balance each other out

5. Error of Original Entry Correct accounts, wrong amounts

6. Complete Reversal of Entries Correct amount and account, entries reversed

Errors that affect the trial balance and require suspense:

 One sided transactions

 Addition in any account by mistake
 Subtraction in any account by mistake
Miran El Maghrabi 15

Business References:

comparability: recognise that a financial report can only be compared with

reports for other periods if similarities and differences can be identified

relevance: understand that financial information is relevant only if it affects the

business decisions

reliability: understand that financial information is reliable only if it can be

depended upon to represent actual events and is free from error and

understandability: recognise that a financial report must be capable of being

understood by the users of that report.

Limitations of Accounting Statements:

• historic cost

• difficulties of definition

• non-financial aspects