FINANCIAL ACCOUNTING

(APPLIED KNOWLEDGE
LEVEL)
(F3/FFA)
INTRODUCTION TO ACCOUNTING
 DIPENDRA K SHRESTHA
MBA (UNIVERSITY OF GLOUCESTERSHIRE, UK)
ACCA (BPP UNIVERSITY, UK)
BSC (TRIVUWAN UNIVERSITY, NEPAL)

• DKSHRESTHA@THEBRITISHCOLLEGE.EDU.NP
• 9801134480
 WHAT IS F3 ALL ABOUT?
F3(FA/FFA)F7(FR)—P2 (SBR)
• 1ST LEVEL ACCOUNTING PAPER TESTING UNDERSTANDING OF DOUBLE-ENTRY
ACCOUNTING
• EXPLAINING THE CONTEXT & PURPOSE OF FINANCIAL REPORTING
• RECORDING TRANSACTIONS AND EVENTS
• DEFINING QUALITATIVE CHARACTERISTICS & FUNDAMENTAL BASES OF
ACCOUNTING
• PREPARING A TRIAL BALANCE
• PREPARING BASIC F/S FOR ST, PARTNERSHIPS & CO.
• UNDERSTANDING BASIC IAS/IFRS
 EXAM FORMAT
ON-DEMAND CBE
• 35*2=70
• 2*15=30
• TOTAL TIME ALLOWED: 2 HOURS/1.2 MIN PER MARK
• ALL PARTS OF SYLLABUS WILL BE ASSESSED (BOTH COMPUTATIONAL & THEORY
TYPE)
HTTPS://WWW.YOUTUBE.COM/WATCH?V=FICA3IF9O-0&T=1440S (EXAM FORMAT)
HTTPS://WWW.YOUTUBE.COM/WATCH?V=QUSOR0ALSDA (EXAM TECHNIQUE)
 HOW TO PASS?
• KNOWING DOUBLE-ENTRY TECHNIQUE/DEAD-CLIC
• BEING FAMILIAR WITH TYPICAL ADJ TO TB (DEPRECIATION, REVALUATIONS AND
DISPOSALS, INVENTORY, BAD AND DOUBTFUL DEBTS, ACCRUALS AND
PREPAYMENTS ETC.)
• PREPARING F/S & C/F
• CONTROL A/C, BANK RECONCILIATION STATEMENTS AND SUSPENSE A/C
(INCLUDING CORRECTION OF ERRORS)
• PREPARING LIMITED CO AND PARTNERSHIP A/C
• USING INCOMPLETE RECORD TO PRODUCE KEY FIGURES IN F/S
• KNOWING ACCOUNTING STANDARDS
• SO, YOU MUST ENSURE THAT YOU:
• UNDERSTAND THE CONCEPTS (IDEAS) USED IN EACH SYLLABUS AREA
• BE ABLE TO ADAPT TECHNIQUES STUDIED DURING THE COURSE TO INDIVIDUAL
EXAM QUESTIONS
• PRACTICE EXAM TYPE QUESTIONS IN STRICT TIMED EXAM
ENVIRONMENT/CONDITIONS
 CH1: INTRODUCTION TO ACCOUNTING

• RECORDING
• SUMMARIZING
 BUSINESS ENTITIES
• SOLE TRADER
• OWNED/MANAGED BY 1 PERSON
• MAY HAVE EE’S
• ANY LOSSES BORNE BY OWNER
• PROS/CONS: SIMPLE, FLEXIBLE, MANAGEABLE/UNLIMITED LIABILITY, PERSONAL RISK,
RELY ON OWNER

• PARTNERSHIP
• 2 OR MORE OWNERS
• EQUALLY LIABLE FOR LOSSES
• PROS/CONS: MORE RESOURCES, PEOPLE COMBINE, WORK TOGETHER/STILL TAKE RISK

• LIMITED LIABILITY CO. (LTD., PLC)

• BUSINESS OWNED BY SHAREHOLDERS
• ONLY LOSE AMOUNT INVESTED
• MANAGERS RUN THE BUSINESS
• PROS/CONS: LIMITED LIABILITY, TAX EFFICIENT/ADMIN, INFLEXIBLE
• DIFFERENCE BETWEEN LIMITED CO. FROM ST/PARTNERSHIP:
• SLE
• PROPERTY BELONGS TO CO.
• TRANSFERABLE SHARES
• NO MAX. AMOUNT OF SHARES
• FLOATING SECURITY

• USERS OF INFO FROM CO:

• INVESTORS
• EE
• MANAGERS
• LENDERS
• CUSTOMERS
• SUPPLIERS
• GOVERNMENT
 ACCOUNTING INFORMATION
• MANAGEMENT ACCOUNTING INFO:
• FOR INTERNAL MANAGERS, HELPS MANAGERS TO RUN THE BUSINESS, USUALLY MONTHLY
• LOOKS FORWARD DIRECTION
• REAL TIME
• NO STANDARDS
• DEPEND ON TYPE OF BUSINESS
• NOT REQUIRED BY THE LAW

• FINANCIAL ACCOUNTING INFO:

• REQUIRED BY LAW ONCE A YEAR, LAYOUT REQUIRED BY LAW/IFRS
• FOR EXTERNAL USERS
• PUBLISED INFO
• LOOKS BACKWARD DIRECTION
• BASED ON STANDARDS
• COMPARABILITY
SYSTEM TO PROVIDE INFO WITHIN BUSINESS:
• USUALLY COMPUTERISED
 ELEMENTS OF FINANCIAL STATEMENTS
• ASSET
• A RESOURCE CONTROLLED BY THE ENTITY AS A RESULT OF PAST EVENTS FROM WHICH FEB
ARE EXPECTED TO FLOW TO THE ENTITY (CA, NCA)

• LIABILITIES
• AN OBLIGATION TO TRANSFER ECONOMIC BENEFIT AS RESULT OF PAST
TRANSACTION/EVENTS (NCL, CL)

• EQUITY
• RESIDUAL INTEREST IN A BUSINESS & REPRESENTS WHAT IS LEFT WHEN WOUND UP, ALL
ASSETS SOLD AND ALL LIABILITIES PAID. (E=A-L)

• INCOME
• INFLOW OF ECONOMIC BENEFIT TO THE ENTITY IN REPORTING PERIOD.

• EXPENSES
• OUTFLOW OF ECONOMIC BENEFIT FROM AN ENTITY IN THE REPORTING PERIOD.
• ELEMENTS OF FS
• INCOME (GENERALLY THROUGH SALES OR SERVICE REVENUE)
• EXPENSE (PURCHASING GOODS, PAYMENT OF BILLS AND SERVICES)
• ASSETS (PROPERTY, THINGS AND ITEMS THAT THE BUSINESS OWNS)
• LIABILITY (WHAT NEEDS TO BE PAID TO OTHERS BY THE BUSINESS)
• EQUITY (WHAT BELONGS TO THE OWNER - WHAT BUSINESS NEEDS TO PAY THE OWNER)

  Tangible Assets: Assets that can be seen, touched,

felt and easily valued For eg. Property, Plant &
ASSETS Equipment (PPE), Cash, Inventory, etc.

Intangible Assets: Assets that can't be seen,

touched, felt and easily valued For e.g.. Goodwill,
License, Trademark, Copyright, etc.
• STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (SPLOCI) :
SUMMARIES THE INCOME & EXPENSES OF A YEAR/OTHER UNREALIZED GAIN

• STATEMENT OF FINANCIAL POSITION (SOFP) : SUMMARIES THE ASSETS, LIABILITIES &

EQUITY BALANCE AT THE END OF THE YEAR
 
• STATEMENT OF CHANGES IN EQUITY (SOCIE) : SUMMARIES THE CHANGES IN EQUITY
I.E. CLOSING EQUITY - OPENING EQUITY
OR (CLOSING ASSETS - CLOSING LIABILITIES) - (OPENING ASSETS - OPENING LIABILITIES)
 
• STATEMENT OF CASH FLOW (SOCF) : SUMMARIES THE CASH PAID & RECEIVED THROUGHOUT
THE YEAR
 
• NOTES: STATEMENT OF ACCOUNTING POLICIES, DISCLOSURES, ETC. (DETAILS &
EXPLANATIONS)
• PRUDENCE: EXERCISE OF CAUTION WHEN MAKING DECISIONS IN UNCERTAIN CONDITIONS
 
• SUBSTANCE OVER FORM: THE ECONOMIC REALITY OF A TRANSACTION IS MORE IMPORTANT THAN ITS STRICT LEGAL FORM
 
• MATERIALITY: AN ITEM IS CONSIDERED AS MATERIAL IF ITS OMISSION OR MISSTATEMENT WILL CHANGE THE PERCEPTION
(UNDERSTANDING) OF THE USER.
 
• GOING CONCERN ASSUMPTION: FS ARE PREPARED ON THE ASSUMPTION THAT THE ENTITY WILL CONTINUE TO OPERATE FOR THE
FORESEEABLE FUTURE
 
• BUSINESS ENTITY CONCEPT: IN FINANCE, BUSINESS & OWNER ARE NOT THE SAME
 
• ACCRUALS BASIS OF ACCOUNTING: TRANSACTIONS ARE RECORDED WHEN REVENUE IS EARNED & EXPENSES ARE INCURRED NOT WHEN
CASH IS PAID OR RECEIVED
 
• CONSISTENCY: PRESENTATION OF FS & ACCOUNTING TREATMENTS SHOULD BE SAME EVERY YEAR

• MONETARY MEASUREMENT CONCEPT: THE MONEY MEASUREMENT CONCEPT STATES THAT A BUSINESS SHOULD ONLY RECORD AN
ACCOUNTING TRANSACTION IF IT CAN BE EXPRESSED IN TERMS OF MONEY. THIS MEANS THAT THE FOCUS OF ACCOUNTING TRANSACTIONS
IS ON QUANTITATIVE INFORMATION, RATHER THAN ON QUALITATIVE INFORMATION
 QUALITATIVE CHARACTERISTICS
• ATTRIBUTES THAT MAKE INFO PROVIDED IN FS USEFUL TO OTHERS
• 2 CATEGORIES
• FUNDAMENTAL
• RELEVANCE: PREDICTIVE & CONFIRMATORY VALUE
--THRESHOLD QUALITY: NEEDS TO BE STUDIED BEFORE CONSIDERING OTHER QUALITIES OF
THAT INFO---
 A CUT-OFF POINT—INFO NOT PASSING THRESHOLD QUALITY TEST IS NOT MATERIAL & NO NEED TO
BE CONSIDERED FURTHER
 MATERIAL IF OMISSION/MISSTATEMENT COULD INFLUENCE ECONOMIC DECISIONS
• FAITHFUL PRESENTATION: “SUBSTANCE OVER FORM”
• COMPLETENESS, NEUTRALITY, FREE FROM ERROR
• ENHANCING
• COMPARABILITY- NEED TO HAVE CONSISTENCY & DISCLOSURE
• VERIFIABILITY- CAN BE DIRECT OR INDIRECT
• TIMELINESS-
• UNDERSTANDABILITY-
 CH2: REGULATORY FRAMEWORK

• TO ENSURE NEEDS OF USERS OF FS ARE MET

• TO ENSURE INFO IS BOTH COMPARABLE AND CONSISTENT
• TO ENHANCE USERS’ CONFIDENCE
• TO REGULATE BEHAVIOUR OF CO & DIRECTORS TOWARDS INVESTORS

TYPICAL REGULATORY STRUCTURE INCLUDE:

 NATIONAL FRS
 NATIONAL LAW
 MARKET REGULATIONS
 SECURITY EXCHANGE RULES
• CONVERGENCE OF:
• NATIONAL STANDARDS & IFRS
IS THE MAIN ISSUES IN TODAY’S POINT OF TIME ON GLOABALISING SAME ACCOUNTING
PRINCIPLES & COMPARING ON SAME BASIS.

• TYPES OF REGULATIONS:
• PRINCIPLE BASED – E.G. IFRS, BASED ON COCEPTUAL FRAMEWORK, NOT DEFINED
‘RULES’
• RULES BASED – E.G. US GAAP, CLEAR SET RULES

• WHY REGULATED:
• COMPARABLE INFO
• USEFUL TO USERS
• STIPULATE INFO REQUIRED
• REGULATE THE BEHAVIOUR OF BUSINESS
• REGULATORY FRAMEWORK (GLOBAL CONSTITUTION OF ACCOUNTS)
• IFRS STANDARDS (INTERNATIONAL LAWS FOR PREPARING FS)
• IAS STANDARDS (INTERNATIONAL LAWS FOR PREPARING FS)

• NATIONAL REGULATORY FRAMEWORKS (NATIONAL CONSTITUTION FOR EACH

COUNTRY'S ACCOUNTS)
• NATIONAL FINANCIAL REPORTING STANDARDS (NEPAL ACCOUNTING STANDARDS - NAS)
• NATIONAL LAWS (FOR E.G.. NRB RULES & REGULATIONS)
• MARKET & SECURITY EXCHANGE RULES (FOR E.G.. SHARE MARKET RULES)

• IFRS IS SLOWLY BEING ADOPTED AROUND THE WORLD DUE TO THE INCREASINGLY
GLOBAL NATURE OF BUSINESSES & INVESTMENTS
• IFRS STANDARDS ARE NOT ENFORCEABLE IN ANY COUNTRY (ONLY NATIONAL LAWS ARE
ENFORCEABLE)
• IFRS STANDARDS MAY OR MAY NOT BE ADOPTED BY A COUNTRY'S NATIONAL LAW
MAKERS
 REGULATION
• IFRS FOUNDATION (INTERNATIONAL FINANCIAL REORTING STANDARDS):
• SUPPORTS/SUPERVISE IASB (22 TRUSTEES)
• GOVERNANCE
• OBJECTIVES: DEVELOP GLOBAL STANDARDS, PROVIDES INFO TO USERS AND HELP
INVESTORS TO MAKE DECISIONS, PROMOTE THE USE OF THOSE STANDARDS,
HARMONIZE NATIONAL & INTERNATIONAL REPORTING STANDARDS

• IASB (INTERNATIONAL ACCOUNTING STANDARD BOARD):

• 14 MEMBERS
• OBJ SAME AS FOUNDATION, IT IS AN INDEPENDENT STANDARDS SETTING BODY OF
THE IFRS FOUNDATION, ALSO RESPONSIBLE FOR DEVELOPING & PUBLISHING
ACCOUNTING STANDARDS
• THE IASB INCLUDES NATIONAL STANDARDS SETTERS OF VARIOUS COUNTRIES
• IFRIC (IFRS INTERPRETATION COMMITTEE): IT REVIEWS WIDESPREAD ACCOUNTING
ISSUES & PROVIDES GUIDANCE ON THOSE ISSUES. THEIR MEETINGS ARE OPEN TO PUBLIC.

• IFRS ADVISORY COUNCIL (THE COUNCIL): ITS RESPONSIBILITY IS TO ADVISE THE BOARD
(IASB)

• DEVELOPMENT OF AN IFRS STANDARD:

• THE BOARD IDENTIFY THE SUBJECT AND APPOINTS AN ADVISORY COMMITTEE TO ADVISE ON THE
ISSUE
• THE BOARD PUBLISHES AN EXPOSURE DRAFT WHICH IS OPEN FOR PUBLIC COMMENT
• THE BOARD PUBLISHES THE FINAL TEXT OF THE STANDARD
• IF 8 OUT OF 15 IASB BOARD MEMBERS ACCEPT, THE STANDARD IS PUBLISHED
 CORPORATE GOVERNANCE

• THE SYSTEM BY WHICH COMPANIES ARE DIRECTED AND CONTROLLED

(CADBURY REPORT 1992)
• IN THE INTERESTS OF S/H & OTHER STAKEHOLDERS (SUCH AS PUBLIC DUTY &
CSR)
 PURPOSE: TO MONITOR THOSE PARTIES WITHIN A CO WHO CONTROL RESOURCES
& ASSETS OF OWNERS
 OBJECTIVE: TO CONTRIBUTE FOR IMPROVING CORPORATE PERFORMANCE AND
ACCOUNTABILITY IN CREATING LONGER TERM S/H VALUE
 NEED FOR CORPORATE GOVERNANCE

• BASIC ELEMENTS OF SOUND CORPORATE GOVERNANCE INCLUDE:

 EFFECTIVE MANAGEMENT
 EFFECTIVE SYSTEM OF INTERNAL CONTROL
 OVERSIGHT OF MANAGEMENT BY NED
 FAIR APPRAISAL OF DIRECTORS’ PERFORMANCE
 FAIR REMUNERATION OF DIRECTORS
 FAIR FINANCIAL REPORTING, AND
 CONSTRUCTIVE RELATIONSHIPS WITH S/H
• LISTED COMPANIES ARE OWNED BY THE PUBLIC (SHAREHOLDERS)
• THE SHAREHOLDERS APPOINT DIRECTORS (BOD) TO MANAGE & RUN THE COMPANY
• CORPORATE GOVERNANCE IS THE SYSTEM BY WHICH LIMITED LIABILITY COMPANIES ARE
DIRECTED & CONTROLLED (OPERATED)
• THE BOD (MANAGEMENT) NEEDS TO OPERATE THE COMPANY IN THE INTEREST OF
SHAREHOLDERS (PRIMARILY) AND IN THE INTEREST OF OTHER STAKEHOLDERS (SECONDARILY)
 
• SHAREHOLDERS OWN THE COMPANY BUT DIRECTORS (BOD) RUN THE COMPANY.
UNFORTUNATELY, THE OBJECTIVES OF OWNERS AND DIRECTORS OFTEN CONFLICT
• THE DIRECTORS WILL BE REWARDED FOR THE FINANCIAL SUCCESS OF THE BUSINESS. THIS MAY
LEAD TOWARDS BIAS WHILE PREPARING THE FS.
 
• PURPOSE OF CORPORATE GOVERNANCE: TO MONITOR THE DIRECTORS & EMPLOYEES OF A
COMPANY WHO CONTROL THE COMPANY WHICH IS OWNED BY THE SHAREHOLDERS
• OBJECTIVE OF CORPORATE GOVERNANCE: TO ENSURE LONG-TERM GROWTH OF THE COMPANY
• CORPORATE GOVERNANCE IS THE SYSTEM BY WHICH COMPANIES ARE CONTROLLED
• WHO SHOULD THE SYSTEM MONITOR & CONTROL - THE DIRECTORS & EMPLOYEES OF
THE COMPANY
• WHO IS RESPONSIBLE FOR ENSURING THAT THE COMPANY HAS AN EFFECTIVE SYSTEM -
THE DIRECTORS OF THE COMPANY
• HENCE, THE DIRECTORS ARE RESPONSIBLE TO ENSURE THAT THE COMPANY HAS AN
EFFECTIVE SYSTEM TO MONITOR AND CONTROL THE DIRECTORS AND EMPLOYEES
OF THE COMPANY!
• IF DIRECTORS DON'T MAINTAIN AN EFFECTIVE SYSTEM, THEY WILL BE HELD
ACCOUNTABLE.
• THE CODE OF CONDUCT (UK CORPORATE GOVERNANCE CODE)
• ALL BRITISH COMPANIES NEED TO COMPLY WITH THE UK CORPORATE GOVERNANCE
CODE
• IF THEY HAVE NOT COMPLIED, THEY NEED TO EXPLAIN WHY THEY HAVEN'T COMPLIED
AND WHAT ALTERNATIVE ACTIONS HAVE BEEN TAKEN IN PLACE.
 HOMEWORK

• REVIEW THOROUGHLY CHAPTERS 1 AND 2

• GO THOROUGHLY WITH ALL PDF, ATTACHMENTS AND LINKS PROVIDED IN EMAIL
TILL NOW
• PR KIT: Q1-35
• TEXTBOOK:
• CH1: TYU1-3
• PRACTICE Q1-6 (PAGE 462)