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 resources

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
  18 resources

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
  3 resources
• 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
  8 resources

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
  8 resources
• 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
  5 resources
• 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 resource
• 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
  1 resource

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
  6 resources
• 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
  2 resources
• 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
  3 resources

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 resource
• 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
  4 resources

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 resources

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
  6 resources
• 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
  6 resources
• 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 resource