CA11 Financial Accounting KASNEB notes

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PART I SECTION 1

PAPER NO.1 FINANCIAL ACCOUNTING

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GENERAL OBJECTIVE

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to prepare financial statements for different entities.

LEARNING OUTCOMES

A candidate who passes this paper should be able to:

• Prepare books of original entry and basic ledger accounts under double entry system
• Prepare basic financial statements of sole traders, partnerships, companies, manufacturing entities and not for profit organisations
• Comply with the regulatory framework in the accounting field
• Account for assets and liabilities
• Analyse financial statements use of ratios and statement of cash

CONTENT

Introduction to accounting

• The nature and purpose of accounting
• Objectives of accounting
• Users of accounting information and their respective needs
• The accounting equation
• Regulatory framework of accounting (regulatory bodies such as ICPAK, IFAC, IASB, IPSASB, IAESB)
• Accounting standards (IASs/IFRSs) (importance and limitations)
• Professional ethics
• Accounting concepts/principles
• Qualities of useful accounting information

Recording transactions

• Source documents: quotations, purchase orders, statement of account, remittance advice, receipts, petty cash vouchers, sales and purchase invoice, credit notes and debit notes, bank statements
• Books of original entry: sales journal, purchases journal, returns inwards journal, returns outward journal, cash book, petty cash book and general journal
• Double entry and the ledger; use of T- accounts and double entry aspects (debit and credit), sales ledger and purchases ledger
• The trial balance
• Computerised accounting systems – role of computers, application and accounting softwares in the accounting process, benefits and challenges of operating computerised accounting systems

Accounting for assets and liabilities

Assets

• Property, plant and equipment – recognition, capital and revenue expenditure, measurement (depreciation and revaluation), disposal and disclosures, property, plant and equipment schedule
• Intangible assets – recognition, measurement (amortisation, impairment and revaluation), disposals and disclosures
• Financial assets – examples and risks only
• Inventory – recognition, measurement and valuation using specific cost method, FIFO and weighted average cost only
• Trade receivables – bad debts and allowance for doubtful debts and receivables control accounts
• Accrued income and prepaid expenses
• Cash at bank – cash book and bank reconciliation statement
• Cash in hand – cash book and petty cash books

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Liabilities

• Bank overdraft – cash book and bank reconciliation statement
• Trade payables – control accounts
• Loans – accounting treatment of repayment of principal and interest
• Prepaid incomes and accrued expenses

Correction of errors and suspense account

Financial statements of a sole trader

• Income statement
• Statement of financial position

Financial statements of a partnership

• Partnership agreement
• Introduction to partnership accounts
• Distinction between current and fixed capital
• Income statement
• Statement of financial position
• Changes in partnership – admission of a new partner, retirement, death and change in profit sharing ratio

Financial statements of a company

• Types of share capital – ordinary shares and preference shares
• Issue of shares (exclude issue instalment and forfeiture)
• Types of reserves – share premium, revaluation reserve, general reserves and retained profits
• Income tax – accounting treatment and presentation (exclude computation)
• Financial statements – income statement and statement of financial position
• Published financial statements (describe a complete set of published financial statements but not preparation)

Financial statements of a manufacturing entity

• Features of a manufacturing entity
• Classification and apportioning costs between manufacturing, selling and administration
• Financial statements – manufacturing account, income statement and statement of financial position

Accounts from incomplete records

• Features
• Types of incomplete records(pure single entry, simple single entry, quasi single entry)
• Ascertainment of profit capital comparison
• Preparation of statement of affairs and profit determination
• Techniques of obtaining complete accounting information

Financial statements of a not for profit organisation

• Distinction between not for profit making organisation and profit making organisation
• Nature of receipts and payments account
• Accounting treatment of some special items
• Income and expenditure account
• Statement of financial position

Analysing financial statements

• Statement of cash flows (categories of cash, methods of preparing statement of cash flows and the importance)
• Financial ratios – definition, categories, analysis and interpretation, application and limitations

Introduction to Public Sector Accounting

• Features of public sector entities (as compared to private sector)
• Structure of the public sector (National and county governments, state corporations and other agencies)
• Regulatory structures and oversight IPSASB, PSASB (establishment, mandate and functions), Director of Accounting Services, National Treasury, Parliamentary Committees, Accounting Officers at national and county levels]
• Objectives of public sector financial statements
• Objectives of IPSAS
• Accounting techniques in public sector (budgeting, cash, accrual, commitment and fund)

(Preparation of financial statements excluded)

Emerging issues and trends

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