Ledger

General (nominal) ledger is principal book for recording and totaling monetary transactions by account required to prepare trial balance. Each ledger account summarises transactions and events which affect it within particular period and shows net position of that account by the end of the period. The book consists of ledger accounts for each asset, liability, equity, expense and revenue items.  Financial statement is prepared by transferring respective ledgers account items and their balance at the end of reporting period.

Ledger can be prepared in two formats:

T Ledger:

Debit				Credit
Date	Particulars	Jrnl ref.	Amount	Date	Particulars	Jrnl ref.	Amount

Columnar Ledger:

Date	Particulars	Jrnl ref.	Debit Amount	Credit Amount	Balance

Balancing off a ledger account: Once the transactions for a period have been recorded, it will be necessary to find the balance on the ledger account

Ø  Total both sides of the T account and find the larger total.

Ø  Put the larger total in the total box on the debit and credit side.

Ø  Insert a balancing figure to the side of the T account which does not currently add up to the amount in the total box. Call this balancing figure ‘balance c/f’ (carried forward) or ‘balance c/d’ (carried down).

Ø  Carry the balance down diagonally and call it ‘balance b/f’ (brought forward) or ‘balance b/d’ (brought down).

Closing and Opening Ledger account: At the period end ledger account should be closed off. Financial position ledger account opens up for recording of transaction in the next accounting period. Income statement ledger accounts are closed by transferring to income statement. Therefore, there is no carried forward or brought forward balance for revenue and expenses items.
Statement of financial position ledger accounts: Assets and liabilities ledger account are key in construction of cash flow form indirect method. Assets/liabilities at the end of a period = Assets/liabilities at start of the next period.

Double entry and accounting system

Data Source: Source documents provide documentary evidence of existence of an accounting event. Every journal should provide reference to source documents. Different types of business documentation includes quotation, sales order, purchase order, goods received note, goods dispatch note, invoice statement, credit note, debit note, remittance advice, receipt. Source documents content relevant information for which they are produced. E.g. A purchase order contains supplier information, quantity, product quality, price, method of payment and delivery which is send to supplier as a request for supply of required product. Source document used by different organisation may vary in layout and contents.

The duality concept – Each transaction affects financial statement in two ways. OR Each Transaction affects two ledger accounts.

Dr (left or debit  side/+used in spreadsheet)= Cr (right or credit side/ - used in spreadsheet)

Increase	Debit	Credit	Credit	Credit	Debit
Account	Assets =	Liabilities +	Capital +	Revenue -	Expenses
Decrease	Credit	Debit	Debit	Debit	Credit

Understand and apply the accounting equation: The effect is equal and opposite such that the accounting equation (Assets = Liabilities + Capital) always holds true.

Assets = Liabilities + Capital

i.e. Assets – Liabilities = Capital

Books of Prime Entry – Record transactions

Sales Journal – Record credit sales

Sales Return Journal – Record sales return

Purchase Journal – Record credit purchase

Purchase Return Journal – Record purchase return

Cash Receipt Journal – Record cash sales

Cash Payment Journal – Record cash purchase

General Journal – Other than mentioned above

Matching Principle: requires that expenses incurred by an organization must be charged to the income statement in the accounting period in which the revenue, to which those expenses relate, is earned. Example where inventories purchased for sales are not sold by the end of accounting period, the cost is carried forward to match the purchase with sales in other accounting period. Other examples of matching principle include depreciation, deferred tax liability/assets and government grants.

Qualitative characteristics of financial reporting

The qualitative characteristics of financial information

Ø  Define, understand and apply qualitative characteristics.

o   Fundamental qualitative characteristics:

o   Relevance - for user in making economic decision where information provided by financial statements has predictive value and confirmatory value or both.

o   Faithful representation – to be faithfully representation financial statements should be complete, neutral (without bias) and free from error (omissions). Perfection is seldom, if ever, achievable.

o   Enhancing qualitative characteristics:

o   Comparability – user identifies similarities and differences between time/competitors and use information in deciding whether to invest/divest.

o   Verifiability – means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable. A range of possible amount and the related probabilities can also be verified.

o   Timeliness – information is available in time to be capable of influencing decision making. Generally, information is less useful with the passage of time. However, some information may continue to be timely for a long time in order to study trends.

o   Understandability – information presented clearly and concisely keeping in mind the financial statement is available to user who have reasonable knowledge

Ø  Define, understand and apply accounting concepts:

o   Materiality – where omitting or misstating single or combined information influence decision of users. Materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.

o   Substance over form – Financial information should represent an economic phenomenon rather than merely representing its legal form. Representing legal form that differs from the economic substance of underlying economic phenomenon could not result in faithful representation.

o   Going concern – The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Where, the entity discloses its intention to liquidate or faces difficulty so it cannot perform as a going concern, financial statements are prepared on break up basis.

o   Business entity concept  - Reporting entity

o   Accruals -  Cash Vs Accruals

o   Fair presentation – Financial statements should adopt a framework for reporting its financial position (i.e. IAS or national standards).

o   Consistency – implement consistent policies and estimates. Sufficient disclosures should be provided where there are changes in accounting policies and estimates so it does not affect the need of users of financial report.

Reference                                                                              

Conceptual Framework 2010 (IFAC)

Reporting entity

Reporting entity ED: Page 206-207 Discussion Paper Conceptual Framework - July 2013

a)      Describe a reporting entity as:

…a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decision about providing resources to the entity and in assessing whether management and the government board of that entity make efficient and effective use of resources provided.

b)      Explained that most, if not all, single legal entities have the potential to be reporting entities. However, a legal entity may not qualify as a reporting entity if, for example, there is no basis for objectively distinguishing its economic activities from whose of another entity.

c)       Stated that a portion of an entity could qualify as a reporting entity:

i.         If the economic activities of that portion can be distinguished objectively form the rest of the entity, and

j.        Financial information about the portion of the entity has the potential to be useful in making decision about providing resources to that portion of the entity.

Page 5 of Conceptual framework 2010

The board believes that financial statements prepared for  this purpose meet the common needs of most users. This is because nearly all users are making economic decision, for example:

(a)    To decide when to buy, hold or sell and equity investment.

(b)   To assess the stewardship or accountability of management.

(c)    To assess the ability of the entity to pay and provide other benefits to its employees.

(d)   To assess the security for amounts lent to the entity.

(e)   To determine taxation policies.

(f)     To determine distributable profits and dividends.

(g)    To regulate the activities of entities

Exploring these key needs of users of financial statement is helpful in distinguishing a reporting entity. These needs focus no how a proprietary perspective (sole trader and partnership) is differentiated from those organizations with entity perspective (Ltd and PLC).

(a)    Shareholders/lenders as the users of financial statements use the information provided to decide whether to buy, hold or sell any portion of investment in shares and securities (i.e. the reporting entity should be listed company) or a limited company where members can hold, buy or sell their shareholding to other members.

(b)   In a proprietary entity managers are owners. This is not the case for limited liability company, where there is separation of ownership and control and manager act as agent of shareholders.

(c)    In proprietary entity owner is liable to pay his employees the promised benefit even if the company suffers loss. Whereas for a limited liability company the ability of the entity to pay and provide other benefits of its employees rest on the performance of the company and if company suffers loss owners need not pull money out of their pocket to pay for employees.

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 Conceptual Framework on Financial Reporting