Imrul Kayas, ACA (Mobile No : 01737231658)

Faculty Teacher, Creative Professional Coaching

ACCOUNTING
Reference books: -
a. Accounting (Manual)
b. ICAEW Question Bank
c. F 3 – Diploma in Accounting and Business (Text / Manual – Kaplan)
d. F 3 - Diploma in Accounting and Business (ACCA Exam kit – BPP)
e. F 7 – Financial Reporting (ACCA Text / Manual - Kaplan)
f. Accounting Principles – Kieso & Kimmel (Latest Edition)

SL IAS’s NAME / PRINCIPLES REMARKS

NO
1 IAS- 1 Presentation of Financial Statements Relevant
2 IAS- 2 Inventories Relevant
3 IAS- 7 Statement of Cash Flow Relevant
4 IAS- 8 Accounting Policies, Changes in Accounting Estimates and Relevant
Errors
5 IAS-10 Events after the reporting period Relevant
6 IAS-11 Construction Contracts (Replaced by IFRS 15) Not Relevant
7 IAS-12 Income Taxes Relevant
8 IAS-16 Property, Plant & Equipment Relevant
9 IAS-17 Leases (Replaced by IFRS 16) Not Relevant
10 IAS-18 Revenue (Replaced by IFRS 15) Not Relevant
11 IAS-19 Employee Benefits Not Relevant
12 IAS-20 Accounting of Government Grants and disclosure of Partial Relevant
government assistance
13 IAS-21 The effects of changes in foreign exchange rate Not Relevant
14 IAS-23 Borrowing Costs Partial Relevant
15 IAS-24 Related party disclosures Partial Relevant
16 IAS-26 Accounting and Reporting by retirement benefit plans Not Relevant
17 IAS-27 Separate Financial Statements Not Relevant
18 IAS-28 Investment in associate and joint venture Not Relevant
19 IAS-29 Financial Reporting in types – inflationary economics Not Relevant
20 IAS-32 Financial instruments: Presentation Not Relevant
21 IAS-33 Earnings per Share Not Relevant
22 IAS-34 Interim Financial Reporting Not Relevant
23 IAS-36 Impairment of Assets Relevant
24 IAS-37 Provisions, Contingents Liabilities and contingent Assets Relevant
25 IAS-38 Intangible Assets Relevant
26 IAS-39 Financial Instruments: Recognition and measurement Not Relevant
27 IAS-40 Investment property Relevant
28 IAS-41 Agriculture Not Relevant

Most important matter for accounting syllabus:

- Conceptual Framework
Relevant IFRS’s
IFRS 5 - Non-Current Assets held for sale and discontinued operations
IFRS 15- Revenue from contracts with customers

Chapter 01 – Introduction of Accounting

Question- What is accounting?

Answer- Accounting is a way of recording, analyzing and summarizing transaction of an entity-
- The transactions are recorded in the books of original entity,
- The transactions are analyzed and posted to the ledgers,
 - Finally, the transactions are summarized in the financial statements.
Types of Business Entity:
There are three types of profit-oriented business entity-
a. Sole Trader
b. Partnership
c. Company

Sole Trader: The simplest form of business is the sole trader. This is owned and managed by one person,
although there might be any number of employees. A sole trader is fully and personally liable for any losses
that the business might make.

Partnership: A partnership is a business owned jointly by a number of partners. The partners are jointly
and severally liable for any losses that the business might make.

Company: A company is owned by shareholders, shareholders are also known as members. Companies are
almost limited companies. This means that the shareholders will not personally liable for any losses that the
company incurs. Their liability is limited to the normal value of the shares that they own. This limited
liability is achieved by treating the company as a completely separate legal entity.

IASB – International Accounting Standard Board

Conceptual Framework

A conceptual framework is a set of theoretical principles and concepts that underline the preparation and
presentation of financial statements.

Need for conceptual Framework

If no conceptual framework existed, then it is more likely that accounting standards would be produced on a
haphazard basis. These accounting standards might be inconsistent with one another or perhaps even
contradictory.

A strong conceptual framework therefore means that there is a set of principles in place from which all
future accounting standards draw. It also acts as a reference point for the preparers of financial statements if
there is no adequate accounting standard governing the types of transactions that an entity enters into this
(this will be extremely rare)

Purpose and Status of Framework

The framework states that its purpose is to:

a. Assist in the development of future accounting standards and in the review of existing standards.
b. Provide a basis for reducing the number of alternative accounting standards.
c. Assist national standard setters in developing national standards.
d. Assist prepares of financial statements in applying international standards and dealing with issues
not covered by international standards.
e. Assist auditors in forming an opinion whether financial statements conform to international
standards.
f. Assist users of financial statements in interpreting the information continued in financial statements
complying with international standards.

Status: This conceptual framework is not a IFRS and hence does not define standards for any particular
measurement or disclosure issue. Nothing in this conceptual framework overrides any specific IFRS.

In a limited number of cases there may be a conflict between the conceptual framework and a IFRS. In those
cases, where there is a conflict the requirement of IFRS prevail over those of conceptual framework.
Scope: The conceptual framework deals with: -

a. the objective of financial reporting

b. the qualitative characteristics of useful information
c. the definition, recognition and measurement of the elements from which financial statements are
constructed, and
d. concept of capital and capital maintenance.

Objective of financial reporting:

The objective of general-purpose financial reporting forms the foundation of the conceptual framework.
The objective of general-purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt
instruments and providing and settling loans and others forms of credit.

Economic Decisions:

Different users make different types of economic decisions. These are –

- To decide when to buy, hold or sell an equity investment (Investor)

- To assess the stewardship or accountability of management. (Shareholders/ Directors)
- To assess the ability of the entity to pay and provide other benefits to its employees. (employee)
- To assess the security for amounts lent to the entity. (Lender)
- To determine taxation policies (NBR)
- To determine distributable profits and dividends (Management)
- To prepare and use national income statistics (Financial analysis and adviser)
- To regulate the activities of the entity. (Government)

Qualitative characteristics:

Qualitative characteristics are the attributes that make information provided in financial statements useful to
others.

The framework splits qualitative characteristics into two categories: -

(i) Fundamental qualitative characteristics

- Relevance
- Faithful representation
(ii) Enhancing qualitative characteristics
- Comparability
- Verifiability
- Timelines
- Understandability

Relevant

Information is relevant if it is capable of making a difference in decisions made by users of that information.
Information will be regarded as being relevant if it has either predictive value or confirmatory value to a
user.

Relevance is supported by materiality considerations. Information is regarded as material if its omission or

misstatement could influence decisions made by users of that information.

Faithful Representation:

For financial information to be faithfully presented, it must be: -

 - Complete
- Neutral
- Free from error

Therefore, it must compare information necessary for a proper understanding, it must be without bias or
manipulation and clearly prescribed.

In addition to the two fundamental characteristics, there are four enhancing qualitative characteristics of
useful financial information. These are –

Comparability:

Information is more useful if it can be compared with similar information about other entities or even the
same entity over different time periods.

- Consistency of methodology approach or presentation helps to achieve comparability of

financial information.

Verifiability:

Verifiability means that different, knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular presentation of an item is a faithful
representation.

Verifiability of financial information provides assurance to users regarding its credibility and reliability.

Timeliness

Information should be made available to users within a timescale which is likely to influence their decision.

- Older information is generally less useful

Understandability: Understandability is enhanced if information is classified, characterized and presented

clearly and concisely.

Constraint on useful financial reporting:

Cost constraint: It is important that the costs incurred in reporting financial information are justified by the
benefits that the information brings to its users.

Underlying Assumption:

The framework identifies one underlying assumption governing the preparation of financial statement: -
Going Concern:

- The going concern basis assumes that the entity has neither the need nor the intention to
liquidate or curtail materially the scale of its operations.
- Another definition of going concern: Under going concern assumption, the business will
continue its’ business operation for foreseeable future. Foreseeable future means 12 months after
the end of the reporting period.

In previous versions of the framework, accrual was also regarded as a fundamental assumption. Although it
is still referred to within the framework, it is no longer an underlying assumption.
Elements of financial statements:

According to the framework, the five elements of financial statements are as follows: -

(i) Asset
(ii) Liability
(iii) Equity
(iv) Income
(v) Expenses

Asset: An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits will follow the entity.

Liability: A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an out flow from the entity of resources embodying economic benefits.

Equity: Equity is the residual interest in an entity’s asset after deducting all its liabilities.

Income: Income is the increase in economic benefits during the accounting period.

Expenses: Expenses are the decrease in economic benefit during the accounting period.

Recognition: Recognition is the process of incorporating in the balance Sheet or income statement an item
that meets the definition of an element and satisfies the criteria for recognition.

Recognition of the elements of financial statements: An item should be recognized in the financial
statement if: -

- It meets one of the definitions of an element

- It is probable that any future economic benefit associated with the item will follow to or from
the entity
- the item can be measured at a monetary amount (cost or values with reliability)

Income: Income comprises both revenue and gain

Income

Revenue Gains

Revenue: Revenue arises in the course of ordinary activities of an entity and is referred to by a variety of
different name including sales, fees, interest, dividend, royalties and rent.

Gain: Gains represents other items that meet the definition of income and may or may not arise in the
course of the ordinary activities. Gains include, for example, those arising on the disposal of non-current
assets. Gains are often reported net of related expenses.

Expenses: The definition of expenses encompasses losses as well as those expenses that arise in the course
of ordinary activities of the entity, for example – cost of sales, wages and depreciation.

Losses: Losses represent other items that meet the definition of expenses and may, or may not, arises in the
course of ordinary activities of the entity. Losses includes, for example those resulting from disasters such as
fire and flood, as well as those arising on the disposal of non-current assets.
When losses are recognized in the income statement, they are usually displayed separately because
knowledge of them is useful for the purpose of making economic decisions. Losses are often reported net of
related income.

Measurement of the elements of financial statements:

Measurement is the process of determining the amount at which transactions are recorded and carried in the
balance sheet or income statements. A number of different measurement bases are employed in financial
statements as follows-

Historical Cost: Assets are recorded at the amount of cash paid (or the fair value of the consideration
given). Liabilities are recorded at the amount to be paid to satisfy the liabilities, in the normal course of the
business.

Current Cost: Assets are carried at the amount that would have to be paid if the same (or an equivalent)
assets are acquired today. Liabilities are carried at the undiscounted amount that would be required to settle
the obligation today. It is also called replacement cost. For example, asset /liability recorded at foreign
currency translating into reporting currency using the historical spot rate of transaction date and which is
subject to be retranslated at to the reporting date exchange rate. Thus, historical cost is changed to current
historical cost. This measurement method is applicable on IAS 21.

Example:

1st April, 2020 XYZ company sold some items at $ 1000 on four months credit.

Journal Entry:

Receivables (1000*85) 85,000

Sales 85,000

Exchange rate = Tk 85/$ on 1st April, 2020

30th June, 2020

Exchange rate = Tk. 85.5/$

Receivables 500

Remeasurement gain (p/l) 500

Customer Paid at 30th July, 2020

Exchange Rate Tk 86/$

Bank 86,000

Receivables 85,500

Exchange gain 500

Fair Value: Assets are carried at the amount that could currently be obtained by selling the asset and
liabilities carried at their settlement values. This base is applicable when any asset is expected to be sold or
disposed from the business. It is also called as Realizable (settlement) value or Exit value.

Present Value: Assets are carried at present amount discount value of the net cash inflows that the item will
generate in the normal course of business. Liabilities are carried at the present discounted value of the net
cash outflows, which will be required to settle the liabilities, in the normal course of business. For example,
provision for decommissioning costs for a mine for which work will not be carried out after 20 years.
The most commonly used measurement basis is historical cost other bases are also used e-g. Inventories are
usually carried at the lower of cost and net realizable value; marketable securities may be carried at fair
value and pension liabilities are carried at their present value and so on.

Example:

On 1st January, 2020 XYZ company sold an equipment at Tk. 100,000 on credit. Customer will pay the
amount within 31st December, 2021.

Discount rate/cost of capital is 10%. Show the journal entries.

1st January, 2020

Receivables 100000/1.10^2 82645

Sales 82645

31st December, 2020

Receivables 82645*10% 8264

Interest Income 8264

31st December, 2021

Receivables (82645+ 8264) *10% 9091

Interest Income 9091

Bank/Cash 100,000

Receivables 100,000

Other measurement methods:

1. Net realizable Value

2. Revaluation Model (applicable on IAS 16 & IAS 38)

*Capital and capital maintenance

** Capital and revenue items from Accounting Manual.