ACCA FA (F3)

COMPLETE SUBJECT NOTES

BY VERTEX LEARNING SOLUTIONS
VALID UNTIL SEP 2025
 TABLE OF CONTENTS

CHAPTER TOPIC PAGE NO.

1 Financial Accounting 3

2 The Regulatory Framework 13

3 Accounting Concepts: Underlying Assumptions 18

4 The Contents and Purpose of Different Types of Business 22

Documentation

5 A Simple Representation of the Statement of Financial 37

Position

6 From Trial Balance to Financial Statements 66

7 Inventories 74

8 Tangible On-Current Assets 84

9 Intangible Non-Current Assets 101

10 Accruals and Prepayments 105

11 Provisions and Contingencies 110

12 Irrecoverable Debts (Bad Debts) 115

13 Sales Tax 120

14 Control Accounts and Reconciliations 127

15 Bank Reconciliations 137

16 Correction of Errors 142

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17 Incomplete Records 148

18 Preparing Financial Statements for Sole Traders 157

19 Preparing a Company’s Financial Statements 161

20 Set of Financial Statements 171

21 Events after the reporting period, IAS 10 176

22 Statements of Cash Flows 178

23 Consolidated Financial Statements 186

24 No Summaries 190

25 The consolidated Statement of Profit or Loss 191

26 The broad Categories of Ratios 192

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Chapter 1

Financial Accounting
 The purpose of financial accounting
 Types of business entity
 Advantages and disadvantages of different types of business entity
 The nature, principles and scope of financial reporting
 The users of financial statements

The Objectives of Financial Reporting

The Purpose of Financial Accounting

‘Financial accounting’ is described as:

 maintaining a system of accounting records for business transactions and

other items of a financial nature, and
 reporting the financial position and the financial performance of an entity
in a set of ‘financial statements.

Note: The term ‘entity’ is used to describe any type of organization. ‘Business
entities’ include companies, business partnerships and the businesses of ‘sole
traders’

Book-Keeping System

A system where business entities record their transactions in accounting records.

This is also known as ledger accounting system.

The information that is recorded in the bookkeeping system (ledger records) of an

entity is also analyzed and summarized periodically, typically each year, and the
summarized information is presented in financial statements.

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Financial statements provide information about the financial position and
performance of the entity.

Business Entity

It’s a commercial organization that aims to make a profit from its operations.
There are three main types of business entity.

 a sole trader
 a business partnership
 a company (a limited liability company).

Sole Trader

This business is owned and managed by one person. Sole trader is not legally
separate from the business they operate which means owner is legally responsible
for all the business liabilities.

There is no legal requirement to make financial statements and make it public

however it may record transactions and produce financial accounts by choice.

Advantages of the Sole Trader Disadvantages of the Sole Trader

 Personal Control  Limited sources of finance
 Enjoyment of all profits  Full personal responsibility for the
 Absence of legal formalities when decisions and due to unlimited
establishing business liability, the debts of the business
 Less stringent reporting obligations  Personal property may be
compared with other business vulnerable for debts and other
structures – no requirement to business liabilities
make financial accounts publicly  May be issues of continuity of
available, no audit requirements business in the event of death or
illness of the owner

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Partnership

A business entity in which two or more individuals (partners) share the ownership
of the business. Each partner contributes some funds (‘capital’) to set up the
business. Like a sole trader, a partnership may have employees who work for the
business but have no share in the ownership.

Advantages of a Partnership Disadvantages of Partnerships

 There are no legal formalities to  There are costs associated with
complete when setting up the setting up partnership
business agreements.
 Partners can share the workload  Unless a clause is written into the
 Additional capital can be raised original agreement, when one
because more people are partner leaves, the partnership is
investing in the business automatically dissolved, and
 Additional capital can be raised another agreement is required
because more people are between existing partners.
investing in the business  Slower decision making due to
the need for consensus
between partners
 Partners may disagree

Limited Liability Companies

Limited liability companies are incorporated to take advantage of ‘limited

liability’ for their owners (shareholders).

Ownership of the company is represented by ownership of shares. A company

might issue any number of shares, depending largely on its size. A very small
company might have just one share of $1, whereas a large stock market

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company will have millions of shares in issue. If a company has issued 100 shares,
ownership of 40 shares would represent 40% of the ownership of the company.

Unlike a sole trader or a partnership, a company has the status of a ‘legal person’
in law. This means that a company can be the legal owner of business assets and
can sue or be sued in the law.

In law, sole traders and partnerships are not separate entities from their owners.
However, a limited liability company is legally a separate entity from its owners.
Contracts can therefore be issued in the company's name.

Advantages of a Limited Disadvantages of a Limited

Company Company
 Limited Liability itself is the sole  Financial statements must
benefit. comply with legal and
 More capital can be raised by accounting requirements, that is
new shareholders. both time and money
 The business will continue even if consuming.
one of the owners dies, shares  The financial statements of
being transferred to another larger limited liability companies
owner – separate legal identity must be audited.
 Limited liability makes  Limited liability companies must
investment less risky. publish annual financial
 It is easy to transfer shares from statements therefore anyone
one owner to another hence (including competitors) can see
ownership transfer is not a tough how well (or badly) they are
job. doing.

 Share issues are regulated by

law hence it is difficult and time

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 consuming to increase or
reduce share capital.

Elements of Accounting

Income

Capital Expenses

Elements of
Accounting

Liabilities Assets

Financial Statements

Financial statements overall present information about:

 the financial position of an entity

 its financial performance during an accounting period (‘reporting period’)
 its cash flows and
 changes in its financial position during the period.

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 Assets

•These are resources controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
•Non-current assets:
•Assets that are held and used in operations for a long time.
•Current assets:
•Assets taht are held for only a short time. They are likely to be realized within the normal
operating cycle or 12 months after the end of the reporting period.

Expense

•Expenses arise during the ordinary activities of the enterprise. They include, for example,
cost of sales, wages and depreciation.

Revenue

•Revenue is the income for a period. It is the gross inflow of economic benefits (cash,
receivables, other assets) arising from the ordinary operating activities of an enterprise
(such as sales of goods, sales of services, interest, royalties, and dividends).

Liabilities

•A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.
•Non-ciurrent liabilities:
•Liabilities which may take some years to repay
•Current liabilities:
•These are due to be settled within the normal operating cycle or 12 months after the end
of the reporting period.

Capital or Equity

•The amounts invested in a business by the owner are amounts that the business owes to
the owner. This is a special kind of liability, called capital. In a limited liability company,
capital usually takes the form of shares. Share capital is also known as equity. The IASB's
Conceptual Framework for Financial Reporting 2018 defines equity as follows. 'Equity is the
residual interest in the assets of the entity after deducting all its liabilities.'

Statement of Financial Position

The statement of financial position is a list of all the assets owned and the liabilities
owed by a business as at a particular date.

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Statement of Profit or Loss/ Income Statement

A statement of profit or loss is a record of revenue generated and expenditure

incurred over a given period. This shows whether the business has had more
revenue than expenditure (a profit) or vice versa (a loss).

Users of Financial Statements

Lenders
Managers
Public of the
company

Suppliers
Government
and other
and their
trade
agencies
creditors

Financial Users
analysts
Customers
and
advisers

Employees Shareholder
of the s of the
company company
Taxation Providers of
authorities finance

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Nature, Principles and Scope of Financial Reporting

Financial accounting is mainly a method of reporting the results and financial

position of a business. However, it’s not primarily concerned with providing
information towards the more efficient running of the business. In fact, financial
accounting provides historical (past) information.

Scope and Objective of Financial Reporting

Management Accounting

Providing financial information for the benefit of managers is known as

management accounting, and this is not subject to any regulatory control.
Managers can use the information in financial statements if they wish to do so,
but they ought to be able to obtain better information about the operations of
their business - and more regularly. So financial reporting is not primarily for the
benefit of management.

Financial Accounting

The rules on financial reporting, including the requirements of international

accounting standards, are concerned with the preparation of financial
statements for ‘external’ users.

The IASB has issued a Framework for the Preparation and Presentation of financial
Statements, which states that the objective of financial statements is to:

 provide information about the financial position, performance and

changes in financial position of an entity
 that is useful to a wide range of users in making economic decisions.

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Corporate Governance

 Corporate governance is the system by which companies and other

entities are directed and controlled.
 Good corporate governance is important as the owners of a company and
the people who manage the company are not always the same, hence
creating conflicts of interest.
 Corporate governance is not solely about introducing systems of control, it
is fundamentally linked to directing the organization in a way which is best
to achieve its objectives.

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Legal Responsibilities of Directors

Directors have a duty of care to show reasonable competence and may have
to indemnify the company against loss caused by their negligence.

Directors act within their powers

should: promote the success of the company

exercise independent judgement
exercise reasonable skill, care and diligence
avoid conflicts of interest
not accept benefits from third parties
declare interest in a proposed transaction or arrangement.

Directors are responsible for:

 The preparation of the financial statements of the company in accordance

with the applicable financial reporting framework (e.g., IFRSs)
 The internal controls necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to error
or fraud
 The prevention and detection of fraud

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Chapter 2

The Regulatory Framework

Accounting Regulation and International Accounting Standards

As we know, financial reporting is regulated and controlled.

Regulations are there to ensure that information reported in financial statements

has the required qualities and content. Countries have their own national laws
and regulations about financial accounting.

Accounting Standards

The accountancy profession has developed many regulations and codes of

practice that professional accountants are required to use when preparing
financial statements. These are known as accounting standards.

Many countries and companies whose shares are traded on the world’s stock
markets have adopted international accounting standards. These are issued by
the International Accounting Standards Board (IASB). Accounting standards are
applied to companies and corporations but are not a compulsion for non-
corporate businesses, such as sole traders and partnerships.

International Accounting Standards Board (IASB)

It is an independent, privately funded body that develops and approves IFRSs.

Prior to 2003, standards were issued as International Accounting Standards (IASs).
In 2003 IFRS 1 was issued, and all new standards are now designated as IFRSs.
Therefore, IFRSs encompasses both IFRSs, and IASs still enforced (e.g., IAS 7).

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 IFRS
•IFRS stands for International Financial Reporting Standards.
•IFRS are rules, protocols, and compliance standards public companies must abide by
when creating their public disclosures. The IASB established IFRS with the aim of
harmonizing and subsequently converging financial metrics globally.
•IFRS standards are defined by [Link] as: “a single set of accounting standards,
developed and maintained by the International Accounting Standards Board with the
intention of those standards being capable of being applied on a globally consistent
basis - by developed, emerging and developing economies - thus providing investors
and other users of financial statements with the ability to compare the financial
performance of publicly listed companies on a like-for-like basis with their international
peers.”
IAS
•IAS stands for International Accounting Standards. IAS was the first attempt at a single
universal set of accounting standards way back in 1973 when IFRS was just a twinkle in
finance's eye.
•These standards were originally issued by the International Accounting Standards
Committee (IASC).
•Just like IFRS, the goal of IAS was to make global businesses easier to compare, aid in
transparency, improve trust, and foster international trade.

What’s the difference between the IAS and IFRS?

IAS is simply the original IFRS. When the IASB came into existence in 2001, it agreed
to adopt IAS standards and name them under IFRS. As the IASB issues and updates
standards today, IFRS standards supersede any old IAS standards.

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The IFRS Foundation (IFRSF)

 The IFRS Foundation is an independent organization having two main

bodies, the Trustees and the International Accounting Standards Board
(IASB), as well as the IFRS Advisory Council (IFRS AC) and the IFRS
Interpretations Committee (IFRS IC).
 The IFRSF is governed by a board of 22 trustees.
 These trustees appoint the members of the IASB, IFRS IC and the IFRS AC.
 These trustees also raise the funds necessary to support the IFRSF.

How Are Standards Developed?

International Financial Reporting Standards (IFRSs) are developed through an

international consultation process, the "due process” that involves interested
individuals and organizations from around the world.

The due process consists of six stages.

IAASB reviews auditing developments and takes suggestions from interested parties.

Planning the project, including forming a 'working group' to advise the IASB and its
staff on the project.

Developing and publishing the discussion paper for public comment.

Draft standard produced and commented on by interested parties for a period of 120
days (Exposure period).

Project task force considers comments and amendments made if appropriate. If

changes significant there may be another exposure period.

Standard finalized and approved by meeting of IAASB at which there must be a

minimum of 12 members.

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IFRS Advisory Council

The Advisory Council is the formal advisory body to the Trustees of the IFRS
Foundation and the International Accounting Standards Board (Board). It consists
of a wide range of representatives, comprising individuals and organizations with
an interest in international financial reporting.

The focus of the Advisory Council is to provide strategic support and advice to
the IFRS Foundation, and it meets in London at least twice a year for a period of
two days.

The IASB

The IASB role is to develop new international accounting standards.

These are called International Accounting Standards (IASs) or International

Financial Reporting Standards (IFRSs). An IAS and an IFRS have equal status: both
are recognized internationally.

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