Unit 1: The Accounting System and Costing
Assets, Liabilities, and Capital
Evaluate the usefulness of trial balance in ensuring the accuracy of the books
pro cons
Trial balance ensures that there is a debit If an account is debited and another
and credit of equal value credited, trial balance will not detect an error
Provides “prima facie” evidence of accuracy Does not locate actual error
There are errors that can be detected by the
trial balance (e.g. omission)
Existence of arithmetic errors can be Time consuming
identified and action taken
Form basis of preparing the financial
statements
Shows all accounts for information
Evaluate use of International Accounting Standards in preparation of financial statements
Provides a common international standard Only legally applies to corporate bodies
which can be applied across the world
Stakeholders can rely upon validity of figures Require trained accounting staff to apply
in statements
Greater accuracy of reporting in statement Cost of implementation will be higher
prepared in same format
Enable comparisons to be made Non-financial factors are not included in IAS
accounting
Standard can be contradictory
Trial balance Statement of financial position
Consists of all balance in the ledger from Consists of only year end assets and
which financial statements will be prepared liabilities carrying forward to next year
Not adjusted for year-end adjustments Contains only year-end adjustments carrying
forwards to next financial year
,Prepared before income statement Prepared after income statement
Not part of published financial statements Part of published financial statements
Evaluate whether it is useful to prepare projections of income and costs for future years
A target to work to for the forthcoming year Projections are only estimates of what might
happen and can be inaccurate
The plan can aid decision making Events may occur outside the control of the
partnership which can have a major negative
impact on the projections
(e.g.changes in demand/ government policy)
Projections of costs can aid control of costs Investment decisions may be made in
advance which are then not supported by
increased revenue
Gives idea of future profit Takes time and distracts managers from
other tasks
Provides a strategy for next year Expertise to prepare accurate budgets
Can help to manage the business
Sets goals for the business.
Accruals and repayment
Evaluate role of accruals concept in calculating profitability of a business
Adjusts income and expenditure to income Profit calculated requires a ‘yardstick’ of
and expenditure incurred comparison
Accurate calculation of profit generated in a Businesses in different sectors have diff
period levels of profitability
Profit calculation consistent with other
organisation
Irrecoverable debts
Reasons
- TR is dead, leaving insufficient estate to pay off his debts
, - TR is declared bankrupt, so no assets to pay to his TP
- TR closes business and disappear and no forwarding address
Evaluate use of allowance for irrecoverable debts
Ensure profit is not overstated Only an estimate based on historical
experience
Complies with prudence concept Actual irrecoverable debts may be
significantly different from the estimate
Irrecoverable debts were incurred in current Level of provision seem inadequate to level
year of bad debts incurred
Neet to give correct value for subscriptions Difficult to predict level of bad debts
receivable
Easier just to write off descriptions when
they occur
Evaluate decision of club to write off any bad debts
Write off bad debts Against bad debts
It is simple to apply entries that need only be Accrual principle not applied. There is a
made when the bad debts occur. There are requirement when preparing accounts to
therefore fewer entries as there is no match expenditure with income.
maintenance of an allowance for doubtful
debts account Prudence principle not applied. It would
therefore be prudent to allow for doubtful
debts which we know will occur, but the
extent of which is uncertain
No estimates or judgements will need to be Profit for the year could be overstated
made of potential debts. The recording of because we are making the assumption that
bad debts will be based upon actual figures all debts will be realised through payment.
This is probably unrealistic to assume that all
credit debts will be paid
Apply prudence conceppt Business could be destabilised by a
significant bad debt in the future. A
significant actual bad debt could destabilise
the business, although the impact could still
be great, advanced action could be taken if
there was a process of reviewing and
projecting potential non payment
, Cannot predict future bad debts with
accuracy. Events will largely be out of our
control for when a bad debt occurs.
Irrecoverable debts Allowance for irrecoverable debts
Reasonable certainty that a specific TR not Some doubt the value of TR will not be
going to pay collected
Charge income statement Change in allowance is charged in income
statement through the adjustment account
Amount is taken off from TR account Total allowance is deducted from TR in
statement of financial position
Actual figure Estimate only
Expense of the period entered in the Application of prudence concept to value
income statement trade receivables accurately
These have occurred in the current period This is for a debt which might occur in a
future period
Why is the percentage of the provision raised (reduced)?
- Percentage need to be raised (reduced) if it is too low (high)
- Credibility of trade receivable deteriorates (improves)
- Average credit period allowed to trade receivables lengthen (shortens)
schedule of trade receivables (def.)
A summary of all trade receivables sum grouped by age of debtors
How schedule of trade receivables would be used to calculate allowance for irrecoverable
debts
Older the debt the less likely it is to be paid. A projected percentage of non-payment for
each age category is applied and a total allowance could be estimated
Correction of errors
Error of omission Completely omitted from the ledger
Assets, Liabilities, and Capital
Evaluate the usefulness of trial balance in ensuring the accuracy of the books
pro cons
Trial balance ensures that there is a debit If an account is debited and another
and credit of equal value credited, trial balance will not detect an error
Provides “prima facie” evidence of accuracy Does not locate actual error
There are errors that can be detected by the
trial balance (e.g. omission)
Existence of arithmetic errors can be Time consuming
identified and action taken
Form basis of preparing the financial
statements
Shows all accounts for information
Evaluate use of International Accounting Standards in preparation of financial statements
Provides a common international standard Only legally applies to corporate bodies
which can be applied across the world
Stakeholders can rely upon validity of figures Require trained accounting staff to apply
in statements
Greater accuracy of reporting in statement Cost of implementation will be higher
prepared in same format
Enable comparisons to be made Non-financial factors are not included in IAS
accounting
Standard can be contradictory
Trial balance Statement of financial position
Consists of all balance in the ledger from Consists of only year end assets and
which financial statements will be prepared liabilities carrying forward to next year
Not adjusted for year-end adjustments Contains only year-end adjustments carrying
forwards to next financial year
,Prepared before income statement Prepared after income statement
Not part of published financial statements Part of published financial statements
Evaluate whether it is useful to prepare projections of income and costs for future years
A target to work to for the forthcoming year Projections are only estimates of what might
happen and can be inaccurate
The plan can aid decision making Events may occur outside the control of the
partnership which can have a major negative
impact on the projections
(e.g.changes in demand/ government policy)
Projections of costs can aid control of costs Investment decisions may be made in
advance which are then not supported by
increased revenue
Gives idea of future profit Takes time and distracts managers from
other tasks
Provides a strategy for next year Expertise to prepare accurate budgets
Can help to manage the business
Sets goals for the business.
Accruals and repayment
Evaluate role of accruals concept in calculating profitability of a business
Adjusts income and expenditure to income Profit calculated requires a ‘yardstick’ of
and expenditure incurred comparison
Accurate calculation of profit generated in a Businesses in different sectors have diff
period levels of profitability
Profit calculation consistent with other
organisation
Irrecoverable debts
Reasons
- TR is dead, leaving insufficient estate to pay off his debts
, - TR is declared bankrupt, so no assets to pay to his TP
- TR closes business and disappear and no forwarding address
Evaluate use of allowance for irrecoverable debts
Ensure profit is not overstated Only an estimate based on historical
experience
Complies with prudence concept Actual irrecoverable debts may be
significantly different from the estimate
Irrecoverable debts were incurred in current Level of provision seem inadequate to level
year of bad debts incurred
Neet to give correct value for subscriptions Difficult to predict level of bad debts
receivable
Easier just to write off descriptions when
they occur
Evaluate decision of club to write off any bad debts
Write off bad debts Against bad debts
It is simple to apply entries that need only be Accrual principle not applied. There is a
made when the bad debts occur. There are requirement when preparing accounts to
therefore fewer entries as there is no match expenditure with income.
maintenance of an allowance for doubtful
debts account Prudence principle not applied. It would
therefore be prudent to allow for doubtful
debts which we know will occur, but the
extent of which is uncertain
No estimates or judgements will need to be Profit for the year could be overstated
made of potential debts. The recording of because we are making the assumption that
bad debts will be based upon actual figures all debts will be realised through payment.
This is probably unrealistic to assume that all
credit debts will be paid
Apply prudence conceppt Business could be destabilised by a
significant bad debt in the future. A
significant actual bad debt could destabilise
the business, although the impact could still
be great, advanced action could be taken if
there was a process of reviewing and
projecting potential non payment
, Cannot predict future bad debts with
accuracy. Events will largely be out of our
control for when a bad debt occurs.
Irrecoverable debts Allowance for irrecoverable debts
Reasonable certainty that a specific TR not Some doubt the value of TR will not be
going to pay collected
Charge income statement Change in allowance is charged in income
statement through the adjustment account
Amount is taken off from TR account Total allowance is deducted from TR in
statement of financial position
Actual figure Estimate only
Expense of the period entered in the Application of prudence concept to value
income statement trade receivables accurately
These have occurred in the current period This is for a debt which might occur in a
future period
Why is the percentage of the provision raised (reduced)?
- Percentage need to be raised (reduced) if it is too low (high)
- Credibility of trade receivable deteriorates (improves)
- Average credit period allowed to trade receivables lengthen (shortens)
schedule of trade receivables (def.)
A summary of all trade receivables sum grouped by age of debtors
How schedule of trade receivables would be used to calculate allowance for irrecoverable
debts
Older the debt the less likely it is to be paid. A projected percentage of non-payment for
each age category is applied and a total allowance could be estimated
Correction of errors
Error of omission Completely omitted from the ledger
