The Institute of Chartered Accountants in England and Wales, for exams in 2020. Accounting.

456 Pages·2019·19.228 MB·English

The Institute of Chartered Accountants in England and Wales
ACCOUNTING
For exams in 2020
Study Manual
www.icaew.com
Accounting
The Institute of Chartered Accountants in England and Wales
ISBN: 978-1-5097-2730-8
Previous ISBN: 978-1-5097-1992-1
First edition 2007
Thirteenth edition 2019

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, graphic, electronic or mechanical
including photocopying, recording, scanning or otherwise, without the prior written
permission of the publisher.
The content of this publication is intended to prepare students for the ICAEW
examinations, and should not be used as professional advice.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Contains public sector information licensed under the Open Government Licence v3.0
Originally printed in the United Kingdom on paper obtained from traceable,
sustainable sources.
The publishers are grateful to the IASB for permission to reproduce extracts from the
International Financial Reporting Standards including all International Accounting
Standards, SIC and IFRIC Interpretations (the Standards). The Standards together with
their accompanying documents are issued by:
The International Accounting Standards Board (IASB)
30 Cannon Street, London, EC4M 6XH, United Kingdom.
Email: [email protected] Web: www.ifrs.org
Disclaimer: The IASB, the International Financial Reporting Standards (IFRS)
Foundation, the authors and the publishers do not accept responsibility for any loss
caused by acting or refraining from acting in reliance on the material in this
publication, whether such loss is caused by negligence or otherwise to the maximum
extent permitted by law.
Copyright © IFRS Foundation
All rights reserved. Reproduction and use rights are strictly limited. No part of this
publication may be translated, reprinted or reproduced or utilised in any form either in
whole or in part or by any electronic, mechanical or other means, now known or
hereafter invented, including photocopying and recording, or in any information
storage and retrieval system, without prior permission in writing from the IFRS
Foundation. Contact the IFRS Foundation for further details.
The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the “Hexagon
Device”, “IFRS Foundation”, “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”,
“IFRSs”, “International Accounting Standards” and “International Financial Reporting
Standards”, “IFRIC” “SIC” and “IFRS Taxonomy” are Trade Marks of the IFRS
Foundation.
Further details of the Trade Marks including details of countries where the Trade Marks
are registered or applied for are available from the Licensor on request.

© ICAEW 2019
i i ICAEW 2020
Welcome to ICAEW

I'd like to personally welcome you to ICAEW.
In a fast-changing and volatile world, the role of the accountancy profession has never been
more important.
As an ICAEW Chartered Accountant, you'll make decisions that will define the future of global
business.
Whether you are studying our Certificate in Finance, Accounting and Business (ICAEW CFAB) or
our world-leading chartered accountancy qualification, the ACA, you'll acquire world-leading
knowledge and skills – with technology and ethics at the heart of your learning. A focus on
capabilities such as judgement and scepticism will enable you to make the right decisions in
diverse and often complex environments.
You'll be equipped to flourish and to lead, to embrace technological change and to be
adaptable and agile in your work – all within a set of values fundamental to trust and
transparency and which set you apart from others.
As the future professional, you're a force for positive change, investing in your own future and
contributing to wider economic progress.
Joining over 180,000 ICAEW Chartered Accountants and students worldwide, you are now part
of a global community. This unique network of talented and diverse professionals work in the
public interest to build economies that are sustainable, accountable and fair.
You'll also join a community of 1.7 million chartered accountants and students as part of
Chartered Accountants Worldwide – a family of leading institutes, of which we are a founder
member.
ICAEW will support you through your studies and throughout your career: this is the start of a
lifetime relationship, and we'll be with you every step of the way to ensure you are ready to face
the challenges of the global economy. Visit page vii to review the key resources available as
you study.
With our training, guidance and support, you'll join our members in realising your career
ambitions, developing world-leading insights and maintaining a competitive edge.
We'll create a world of strong economies, together.
I wish you the best of luck with your studies.

Michael Izza
Chief Executive
ICAEW

ICAEW 2020 iii
i v ICAEW 2020
Contents
 Key resources vii
1 Introduction to accounting 1
2 The accounting equation 35
3 Recording financial transactions 67
4 Ledger accounting and double entry 85
5 Preparing basic financial statements 119
6 Errors and corrections to accounting records and financial statements 141
7 Cost of sales and inventories 165
8 Irrecoverable debts and allowance for receivables 203
9 Accruals and prepayments 223
10 Non-current assets and depreciation 249
11 Company financial statements 291
12 Company financial statements under IFRS Standards 321
13 Statement of cash flows 339
14 Company financial statements under UK GAAP 365
15 Sole trader and partnership financial statements under UK GAAP 387
 Glossary of terms 411
 Index 421
The Accounting module ensures you have a sound understanding of the techniques of double
entry accounting and can apply its principles in recording transactions, adjusting financial
records and preparing non-complex financial statements.
Questions within this Study Manual should be treated as preparation questions, providing you
with a firm foundation before you attempt the exam-standard questions. The exam-standard
questions are found in the Question Bank.
ICAEW 2020 Contents v
Accounting
Module aim
To ensure that students have a sound understanding of the techniques of double entry
accounting and can apply its principles in recording transactions, adjusting financial records and
preparing non-complex financial statements.
On completion of this module, students will be:
 proficient in the use of double entry accounting techniques and the maintenance of
accounting records;
 able to identify and correct omissions and errors in accounting records and financial
statements; and
 able to specify the components of financial statements and prepare and present
non-complex financial statements for sole traders, partnerships and limited companies.

Method of assessment
The Accounting module exam is 1.5 hours long. 40% of the marks are allocated from the
preparation of single company financial statements; either a statement of profit or loss and
statement of financial position or a statement of cash flows, using a pro-forma template. The
remaining 60% of the marks are from 24 multiple-choice, multi-part multiple choice or
multiple-response questions. These questions will cover the areas of the syllabus in accordance
with the weightings set out in the specification grid.
Ethics
Ethics is an overarching requirement for the professional accountant and students will be
expected to recognise that the exercise of judgement is required in applying fundamental
accounting concepts. Students will learn about the IESBA Code of Ethics for Professional
Accountants – fundamental principles and the ICAEW Code of Ethics and consider the merits of
a principles-based code. Specific questions on this area are included within the ‘Maintaining
financial records’ weighting in the specification grid.
Specification grid
This grid shows the relative weightings of subjects within this module and should guide the
relative study time spent on each. Over time the marks available in the assessment will equate to
the weightings below, while slight variations may occur in individual assessments to enable
suitably rigorous questions to be set.
Syllabus area Weighting (%)
1 Maintaining financial records 30
2 Adjustments to accounting records and financial statements 25
3 Preparing financial statements 45

v i ICAEW 2020
Key resources
Whether you're studying the ICAEW CFAB or ACA qualification or ICAEW CFAB, with an
employer, at university, independently (self-studying), or via an apprenticeship, we provide a
wide range of resources and services to help you in your studies. They can be found on our
website. Be sure to visit the specific area for your qualification.
ACA students, you can access dedicated exam resources, guidance and information for the ACA
qualification via your dashboard at icaew.com/dashboard.
ICAEW CFAB students, you can access everything you need at icaew.com/cfabstudents.
Syllabus and technical knowledge grids
This gives you the full breakdown of learning outcomes for each module and how your technical
knowledge will grow throughout the qualification.
Study guide
This guides you through your learning process, putting each chapter and topic of the Study
Manual into context and showing what learning outcomes are attached to them.
Exam webinars
The pre-recorded webinars focus on how to approach each exam, plus exam and study tips.
Errata sheets
These are available on our website if we are made aware of a mistake within a Study Manual or
Question Bank once it has been published.
Student support team
Our dedicated student support team is here to help and advise you throughout your studies,
don't hesitate to get in touch. Email [email protected] or call [phone] to
speak to an adviser.
ICAEW Business and Finance Professional (BFP)
ICAEW Business and Finance Professional (BFP) is an internationally recognised designation
and professional status. It demonstrates your business knowledge, your commitment to
professionalism and that you meet the standards of a membership organisation. Once you
have completed the ICAEW CFAB qualification or the ACA Certificate Level, you are eligible to
apply towards gaining BFP status. Start your application at icaew.com/becomeabfp.

ICAEW 2020 vii
v ii i Accounting ICAEW 2020
CHAPTER 1

Introduction to
accounting
Introduction
Examination context
TOPIC LIST
1 The purpose of accounting information
2 The regulation of accounting
3 The main financial statements
4 Capital and revenue items
5 Qualitative characteristics of useful accounting information
6 Accounting concepts and conventions
7 Ethical considerations
Summary and Self-test
Technical references
Answers to Interactive questions
Answers to Self-test
Introduction
Learning outcomes Tick off
 Specify why an entity maintains financial records and prepares financial statements
 Specify the ethical considerations for preparers of financial statements
 Record and account for transactions and events resulting in income, expenses,
assets, liabilities and equity in accordance with the appropriate basis of accounting

and the laws, regulations and accounting standards applicable to the financial
statements
 Specify the key aspects of the accrual basis of accounting and the cash basis of

accounting
Specific syllabus learning outcomes are: 1a, b, d; 3b
Syllabus links
The material in this chapter will be developed further in this exam, and later in the Professional
level module Financial Accounting and Reporting.
Examination context
Questions on topics in this chapter will be knowledge-type multiple choice , multi-part multiple
choice or multiple-response questions. In the exam you may be required to:
 identify capital as opposed to revenue expenditure
 specify the distinctions between the different qualitative characteristics
 identify the principles that relate to each qualitative characteristic
 identify the different interests of stakeholders
 identify the differences between IFRS Standards and UK GAAP
2 Accounting ICAEW 2020