Accounting 9706 — specification explorer

1. Types of business entity

• 1.1.1

  Types of business entity:

  • the different types of business entity:
  • sole trader
  • partnership
  • limited company (including public limited company (plc))
  • the advantages and disadvantages of these types of business entity
  • sources of finance and methods of funding for these types of business entity including:
  • loans (secured and unsecured)
  • bank overdrafts
  • payment by instalments
  • rental/leasing as an alternative to purchase
  • trade credit
  • sources of finance for limited companies as in 1.5.4

2. The accounting system

• 1.2.1

  The accounting system:

  • the principles of the double entry system to record business transactions
  • the accounting equation
  • the role of books of prime entry in the recording of business transactions
  • sales journal
  • sales returns journal
  • purchases journal
  • purchases returns journal
  • cash book
  • general journal
  • preparation of ledger accounts
  • the purpose of a trial balance
  • the advantages and disadvantages of maintaining full accounting records
  • the accounting concepts underpinning the preparation of accounts: business entity, historic cost, money
  • the use of computerised accounting systems in recording financial transactions
  • the advantages and disadvantages of introducing a computerised accounting system
  • the ways in which the security of data can be ensured within a computerised accounting system

3. Accounting for non-current assets

• 1.3.1

  Capital and revenue income and expenditure:

  • the difference between the treatment of capital and revenue income and capital and revenue expenditure
  • the effect on profit/loss and asset value of the incorrect treatment of capital and revenue expenditure
• 1.3.2

  Changing asset values:

  • factors that cause the value of non-current assets to depreciate
  • the purpose of accounting for depreciation of non-current assets and the associated application of relevant
  • how to calculate depreciation using the reducing balance and straight-line methods
  • the most appropriate method of calculating depreciation
  • how to measure the value of non-current assets by the cost model or the revaluation model
  • how to prepare ledger accounts and journal entries for:
  • non-current assets (acquisition and revaluation)
  • depreciation and disposal (including entries for part exchange)
  • how to calculate profit or loss on disposal of a non-current asset
  • how to record the effect of a charge for depreciation in the statement of profit or loss and statement of

4. Reconciliation and verification

• 1.4.1

  Reconciliation and verification:

  • the need to reconcile and verify ledger accounts using documentation from internal and external sources
  • the benefits and limitations of reconciliation and verification procedures
• 1.4.2

  Trial balance:

  • errors which affect the trial balance
  • errors which do not affect the trial balance:
  • omission
  • commission
  • principle
  • original entry
  • reversal
  • compensating
  • how to prepare ledger accounts and journal entries to correct errors using a suspense account
  • the effect on the financial statements of the correction of errors
  • the benefits and limitations of a trial balance
• 1.4.3

  Bank reconciliation statements:

  • updating of cash books
  • how to prepare bank reconciliation statements
  • the benefits and limitations of preparing a bank reconciliation statement
• 1.4.4

  Control accounts:

  • entries in control accounts
  • sales ledger control accounts and purchases ledger control accounts
  • reconciliation statements between control account balances and ledger balances
  • the effects on financial statements of the correction of errors
  • the benefits and limitations of control accounts

5. Preparation of financial statements

• 1.5.1

  Adjustments to draft financial statements:

  • how to calculate and record the adjustments needed and the effect on financial statements in respect of:
  • accruals and prepayments of income and expenses
  • irrecoverable debts, irrecoverable debts recovered and allowance for irrecoverable debts
  • depreciation
  • inventory valuation
  • correction of errors
• 1.5.2

  Sole traders:

  • how to prepare a statement of profit or loss and statement of financial position for a sole trader from full or
• 1.5.3

  Partnerships:

  • how to prepare a statement of profit or loss, appropriation account and statement of financial position for a
  • why partners may maintain separate capital accounts and current accounts
  • how to prepare partners’ capital and current accounts
  • the contents of a partnership agreement
  • the advantages and disadvantages to partners of maintaining a partnership agreement
  • the provisions of the Partnership Act 1890 in respect of partners’ salaries, division of profit or loss, interest
• 1.5.4

  Limited companies:

  • the features and accounting treatment of ordinary shares, bonus issues, rights issues, debentures, dividends
  • the advantages and disadvantages to the company and to the shareholders of a company making a bonus
  • the advantages and disadvantages to the company and to the shareholders of a company issuing shares and
  • the distinction between capital reserves (share premium and revaluation reserve) and revenue reserves
  • how to prepare ledger accounts to record:
  • an issue of ordinary shares at par or at a premium
  • a rights issue of shares at par or at a premium
  • a bonus issue of shares
  • how to prepare a statement of profit or loss, statement of financial position and statement of changes in
  • sources of finance for specified purposes

6. Analysis and communication of accounting information

• 1.6.1

  Users of accounting information:

  • the differing requirements for information of stakeholders including:
  • owners
  • managers
  • employees
  • investors
  • lenders
  • suppliers
  • customers
  • government
  • public and environmental bodies
  • how to communicate and analyse the information required by these different stakeholders
• 1.6.2

  Calculation and evaluation of ratios:

  • how to calculate key accounting ratios to measure profitability, liquidity and efficiency:
  • profitability ratios: gross profit margin, mark-up, profit margin, return on capital employed, expenses to
  • liquidity ratios: current ratio, acid test ratio
  • efficiency ratios: non-current asset turnover, trade receivables turnover (days),
  • how to evaluate the profitability, liquidity and efficiency of an organisation by interpreting ratios
  • possible measures to improve the profitability, liquidity and efficiency of an organisation
  • the limitations of accounting information

1. Costs and cost behaviour

• 2.1.1

  Materials and labour:

  • accounting for material and labour costs
  • how to identify and calculate fixed costs, variable costs, semi-variable costs and stepped costs
  • how to identify and calculate the elements of direct and indirect costs
  • how to calculate the value of closing inventory using the first in first out (FIFO) and weighted average cost
  • the principles of just in time (JIT) management of inventory

2. Traditional costing methods

• 2.2.1

  Costing applications:

  • how to apply traditional costing methods to prepare costing statements using unit, job and batch costing
• 2.2.2

  Absorption costing:

  • the difference between a cost centre and a cost unit
  • how to allocate and apportion overhead expenditure between production and service departments
  • how to calculate overhead absorption rates using an appropriate basis
  • the causes and the calculation of under absorption and over absorption of overheads
  • how to prepare costing and profit statements using absorption costing
  • the uses and limitations of absorption costing
  • the usefulness of absorption cost data as a support for management decision-making
  • non-financial factors and their significance
• 2.2.3

  Marginal costing:

  • how to calculate the contribution of a product
  • how to interpret a break-even chart
  • how to calculate the break-even point, contribution to sales ratio, level of output or sales to achieve a target
  • the use and limitations of break-even analysis
  • how to prepare costing and profit statements using marginal costing
  • how to prepare a statement reconciling the reported profits using marginal costing and absorption costing
  • the uses and limitations of marginal costing
  • the usefulness of marginal costing data as a support for management decision-making, including make-or-
  • non-financial factors and their significance
• 2.2.4

  Cost–volume–profit analysis:

  • the advantages and limitations of cost–volume–profit analysis
  • the usefulness of cost–volume–profit data as a support for management decision-making
  • how to apply costing concepts to make business decisions and recommendations using supporting data
  • non-financial factors and their significance

1. Preparation of financial statements (3.1)

• 3.1.1

  Financial statements:

  • the need for and purpose of financial statements for specific types of business
• 3.1.2

  Partnerships:

  • goodwill and the difference between purchased goodwill and inherent goodwill
  • how to prepare partners’ capital and current accounts to record changes required in respect of goodwill and
  • a change in the partners’ profit-sharing ratio
  • the introduction of a new partner
  • the retirement of an existing partner
  • the dissolution of a partnership
  • how to prepare the partnership appropriation account, statement of profit or loss and statement of financial
  • how to prepare a realisation account and a revaluation account
• 3.1.3

  Clubs and societies:

  • the distinction between a receipts and payments account and an income and expenditure account
  • how to define and calculate the accumulated fund
  • how to prepare, from full or incomplete accounting records:
  • a receipts and payments account
  • accounts for trading and revenue-generating activities
  • a subscriptions account
  • an income and expenditure account
  • a statement of financial position
  • how to account for other receipts, including life memberships and donations
  • how to make adjustments to financial statements (as detailed in 1.5.1)
  • how to evaluate possible sources of finance and methods of fundraising
• 3.1.4

  Manufacturing businesses:

  • how to prepare a manufacturing account, to differentiate between direct and indirect expenses and to
  • how to prepare, for a manufacturing business, a statement of profit or loss and a statement of financial
  • how to account for manufacturing profit and the elimination of unrealised profit from unsold inventory
  • the reasons why a business may account for manufacturing profit
• 3.1.5

  Limited companies:

  • how to prepare for a limited company in line with the relevant international accounting standards and legal
  • statement of profit or loss
  • statement of financial position
  • statement of cash flows
  • statement of changes in equity
  • schedule of non-current assets

2. Regulatory and ethical considerations

• 3.2.1

  International Accounting Standards:

  • the main provisions of each of the following International Accounting Standards (IAS):
  • IAS 1 Presentation of financial statements
  • IAS 2 Inventories
  • IAS 7 Statement of cash flows
  • IAS 8 Accounting policies, changes in accounting estimates and errors
  • IAS 10 Events after the reporting period
  • IAS 16 Property, plant and equipment
  • IAS 36 Impairment of assets
  • IAS 37 Provisions, contingent liabilities and contingent assets
  • IAS 38 Intangible assets
• 3.2.2

  Ethical considerations:

  • the need for an ethical framework in accounting
  • the fundamental principles of:
  • integrity
  • objectivity
  • professional competence and due care
  • confidentiality
  • professional behaviour
  • how the ethical behaviour of accountants and auditors impacts the business and other stakeholders
  • the social implications of decision-making
• 3.2.3

  Auditing and stewardship of limited companies:

  • the role and responsibilities of the auditor
  • the differences between an external audit and an internal audit
  • the difference between a qualified and unqualified audit report
  • stewardship and the role of directors and their responsibilities to shareholders
  • the importance of a true and fair view in respect of financial statements

3. Business acquisition and merger

• 3.3.1

  Business acquisition and merger:

  • the nature and purpose of the merger of different types of businesses to form a new business entity
  • how to prepare journal entries and make entries in the relevant ledger accounts to record the:
  • merger of two or more sole trader businesses to form a partnership or a limited company
  • merger of a sole trader’s business with an existing partnership to form a new partnership
  • acquisition of a sole trader’s business or partnership by a limited company
  • how to calculate the value of goodwill on the acquisition of a business by another entity
  • how to prepare statements of profit or loss and statements of financial position for the newly formed
  • the advantages and disadvantages of the acquisition or merger

4. Computerised accounting systems

• 3.4.1

  Computerised accounting systems:

  • the process of transferring the business accounts to a computerised accounting system
  • ways in which the integrity of the accounting data can be ensured during the transfer to a computerised

5. Analysis and communication of accounting information (3.5)

• 3.5.1

  Analysis and communication of accounting information:

  • how to calculate the following ratios:
  • working capital cycle (in days)
  • net working assets to revenue (sales)
  • interest cover
  • gearing ratio
  • earnings per share
  • price/earnings ratio
  • dividend per share
  • dividend yield
  • dividend cover
  • how to analyse and evaluate the results of the ratios and draw conclusions
  • how to make appropriate recommendations to stakeholders on the basis of the analysis undertaken
  • the interrelationships between ratios

1. Activity based costing (ABC)

• 4.1.1

  Activity based costing:

  • the application of activity based costing (ABC)
  • the uses and limitations of ABC
  • what is meant by a cost driver
  • how to use ABC to:
  • identify the appropriate cost driver
  • apportion and allocate overheads
  • calculate the total cost and selling price of a unit
  • the effect of different methods of overhead absorption on cost and profit
  • how to apply ABC costing techniques to make business decisions and recommendations using supporting

2. Standard costing

• 4.2.1

  Standard costing:

  • the meaning of a system of standard costing in an organisation
  • the advantages and disadvantages of a standard costing system
  • how standard costing can be used as an aid to improve the performance of a business
  • how to calculate the following variances:
  • direct material price and usage
  • direct labour rate and efficiency
  • fixed overhead expenditure and volume
  • fixed overhead capacity and efficiency sub-variances
  • sales price and volume
  • possible causes of favourable or adverse variances and their relationship to each other
  • how to make business decisions and recommendations using supporting data
  • the significance of non-financial factors

3. Budgeting and budgetary control

• 4.3.1

  Budgeting and budgetary control:

  • the advantages and disadvantages of a budgetary control system to an organisation
  • the advantages and disadvantages of preparing budgets using spreadsheets
  • what is meant by a master budget
  • how to prepare the following budgets:
  • sales
  • production
  • purchases
  • labour
  • trade receivables
  • trade payables
  • cash
  • budgeted statement of profit or loss
  • budgeted statement of financial position
  • the effect of limiting factors on the preparation of budgets
  • the benefits of flexible budgeting over fixed budgeting
  • how to prepare a flexible budget statement
  • possible causes of differences between actual and flexible budgeted data
  • how to prepare a statement reconciling the flexible budgeted cost of production with the actual cost of
  • how to prepare a statement reconciling the flexible budgeted profit with the actual profit
  • how to make business decisions and recommendations using supporting data
  • the behavioural aspects of budgeting, including targets, incentives and motivation
  • the significance of non-financial factors

4. Investment appraisal

• 4.4.1

  Investment appraisal:

  • future net cash inflows and outflows arising from the project
  • how to apply the following capital investment appraisal techniques:
  • payback
  • accounting rate of return (ARR = (average profit / average investment) × 100)
  • net present value (NPV)
  • internal rate of return (IRR)
  • the advantages and disadvantages of these capital investment appraisal techniques
  • how to make investment decisions and recommendations using supporting data
  • the significance of non-financial factors