Summary
Summary CIMA BA3 Notes
- Everything you need to pass BA3 - Detailed 66 pages of notes, complete with diagrams, graphs and formulae - My score: 81%
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Chartered Institute of Management Accountants Certificate Level BA3BA3 Fundamentals of Financial Accounting
Structure
Accounting Principles, concepts and regulations (10%)
• Explain the principles and concepts of financial accounting
• Explain the impact of the regulatory framework on financial accounting
1. The accounting environment
2. The Regulatory Framework of Financial Reporting
Recording Accounting Transactions (50%)
• Prepare accounting records
• Prepare accounting reconciliations
• Prepare accounting entries for specific transactions
3. Ledger accounting and double-entry bookkeeping
4. From trial balance to financial statements
5. Sales tax, discounts and the books of prime entry
6. Accounting for accruals and prepayments
7. Accounting for payroll
8. Accounting for the issue of shares
9. Accounting for irrecoverable debts and allowances for receivables
10. Accounting for inventory
11. Non-current assets: Acquisition and depreciation
12. Non-current assets: Revaluation, impairment and disposal
13. Accounting reconciliations
14. Incomplete records
15. Accounting errors and suspense accounts
Preparation of Accounts for Single Entries (30%)
• Prepare accounting adjustments
• Prepare manufacturing accounts
• Prepare financial statements for a single entity
16. The financial statements of single entries
17. The manufacturing account
18. The statement of cash flows
Interpretation and Analysis of Financial Statements (10%)
• Identify information provided by accounting ratios
• Calculate basic accounting ratios
19. The interpretation of financial statements
Jack Gould 1 of 66
,Chartered Institute of Management Accountants Certificate Level BA3
The accounting environment
BUSINESS ENTITIES
• A business is an entity that regularly enters into transactions expected to yield a monetary reward.
• Entities have different organisational structures, and hence different accounting requirements,
largely due to two main reasons: the nature of their activities, and their size.
• Many accounting transactions are common to all types of entity, such as cash receipts and
payments, meaning the same accounting principles apply irrespective of the entity’s nature.
Profit making entities (formed with the intent of making profits from their activities for the owners):
• Sole traders (sole proprietors): owned by one person, typically small as they are constrained by
the limited financial resources of its owner. The sole trader also has unlimited personal liability for
debts incurred by the business, paying personal tax on profits of the business
• Partnerships: owned by two or more people, with the greater the number of owners compared to
sole traders increasing the availability of finance. Each partner has unlimited personal liability for
debts incurred by the business
• Limited liability companies: recognised in law as ‘persons’ in their own right, a company may
thus own assets and incur liabilities in its own name. There is a separation in law between
company shareholder ownership and its director management. The key distinction compared to
sole traders/partnerships is the shareholders only have limited liability for debts incurred. The
accounting requirements of companies must meet minimum legislative obligations.
• Private limited companies: owners are usually also actively involved in running the business,
thus are similar to sole traders/partnerships
• Public limited companies: are ‘listed’ on a stock exchange, thus may have thousands of
shareholding owners who are further removed from the day-to-day running of the business.
Hence, unlike private limited companies, the owners rarely involved in day-to-day activities of
the business, instead electing a board of directors to manage the company on their behalf.
Accounting requirements are therefore more onerous and arduous for public companies.
• It is possible, but not compulsory, for a shareholder to also be a director of that entity.
Non-profit-making entities (formed to provide services without the aim of long-term profitability)
• Clubs and societies: provide facilities and entertainments for members, with revenue derived
from members who benefit from the club’s facilities and activities; some ‘trading’ activities may
generate profits but are not seen as the entity’s main purpose, rather these are to raise funds.
• Charities: provide services to particular groups; often conduct ‘trading’ activities to raise income
• Local/central government: financed by society to provide infrastructure and redistribute wealth.
THE NEED FOR ACCOUNTING RECORDS
• Accounting records are used to record transactions entered into by a business entity, which may
then be used to meet a range of needs:
• Help entity to record, summarise and classify transactions in a logical and systematic manner
• Help managers to easily locate information, such as details of an individual sale or transaction
• Help managers track of amounts owing to the entity from customers and owed to suppliers
• Help fulfilment of legal obligations relating to maintenance of accounting records
• Form the basis of preparation of management accounting information used by management fro
control and decision-making purposes
• Form the basis of financial accounting information used to prepare annual accounts for business
owners and other interested parties
• The principal transactions of most entities are sales, purchases, and payroll-related. Other
transactions include incurring costs for rent, heat and light, fuel and power, office expenses and so
on. All transactions must be captured by the accounting system to form the basis of preparation of
financial and management accounting informations.
• A supporting document is created with most transactions to confirm it has occurred; vital to the
accountant who uses this as a data source to initiate measuring and recording of transactions
• Main types of business documentations/accounting records:
• Quotation: details of goods required (quantity/description/details); used to establish cost from
various suppliers and cross reference to purchase order
• Purchase order: details of supplier (name/address), of goods required, and of price (terms and
conditions/delivery/payment); used to request supply from supplier
• Sales order: details of goods required and price; used to cross reference with customer order
Jack Gould 2 of 66
,Chartered Institute of Management Accountants Certificate Level BA3
• Despatch note / Goods despatched note (GDN): details of supplier and of goods; provided to
supplier, and checked with goods received and purchase order
• Goods received note (GRN): details of goods; produced by the business receiving goods as
proof of receipt, matched with supplier’s despatch note and purchase order
• Invoice: details of supplier, of customer and of goods; issued by supplier of goods as a request
for payment. Sales invoice for the supplier, purchase invoice for the customer.
• Statement: details of supplier, including invoice numbers/values; issued by the supplier
• Credit note: details of supplier, including details of goods returned; issued by the supplier,
checked with documents regarding returned goods
• Debit note: details of supplier, including details of goods returned; issued by the business
receiving goods, cross referenced against credit note
• Remittance advice: details of payment method and invoice; sent to supplier notifying payment
• Receipt: details of payment received; issued by selling business indicating payment received
CONCEPT OF STEWARDSHIP
• Stewardship is a relationship of accountability by one person/group for their management of
resources and decision-making on self of another person/group
• In financial accounting, employees (managers or directors) are ultimately accountable to the
business owners/principal (shareholders) for use of resources and for outcome of decisions.
• Stewardship is therefore exercised by managers and directors periodically providing financial
accounting information to the business owner, usually through a financial statement
• The steward is in a position of trust in managing and accounting for the resources placed under
their control by the principal, and should uphold CIMA’s five fundamental ethical principles:
• Integrity: be straightforward, honest and truthful in all professional and business relationships
• Objectivity: not allowing bias, conflict of interest or influence of others to override your
professional judgement; make decisions on their own merit
• Professional competence and due care: ongoing commitment to your level of professional
knowledge and skill; a commitment to continuing professional development (CPD)
• Confidentiality: not disclosing professional information without specific permission or a legal or
professional duty to do so.
• Professional behaviour: compliance with relevant laws and regulations; also avoiding action
that could negatively affect the reputation of the profession
• In a sole trader/partnership entity, the owners are answerable only to themselves and are
responsible for its day-to-day operations.
• Whereas in a corporate entity this is not the case, shareholders likely do not have day-to-day
involvement, instead providing capital and granting directors stewardship to manage the business
and safeguard assets on their behalf. As stewards, managing directors must therefore:
• Safeguard assets: record assets correctly, properly maintaining and insuring them
• Procedures to prevent misuse of assets, and adequate controls exist to prevent/detect fraud
• Run an efficient and effective accounting system
• Ensure proper procedures are carried out when undertaking expenditure or incurring liabilities
• Report adequately to the shareholders or stakeholders of the organisation
• Prepare financial statements in accordance with legislation and accounting standards
• Directors in return receive remuneration as salary and benefits but profits belong to shareholders
USE OF FINANCIAL INFORMATION
• Accounting information is used by different groups, for different purposes, with different benefits
gained in doing so. All groups have interest in the entity, so are legitimate users of set of accounts.
• These users are not mutually exclusive, as they can fall into multiple classifications:
• Investors (includes existing and potential owners of shares in corporate entities): better
investment decisions are made if relevant information informs such decisions. Investors require
information concerning performance in terms of profitability and the extent to which profits are
distributed to shareholders; as well as social/economic policies.
• Lenders (includes existing and potential providers of secured/unsecured, long/short term loan
finance): they require information regarding the ability of the entity to repay interest of such
loans as well as long term growth and stability. With secured loans, as a means of recovering
the amount due in the case of defaults, the value of assets used as a security is important.
• Employees (includes current, potential and past employees): they require information relating to
the ability of the entity to continually pay wages/pensions, and the future of the entity as this
impacts job security and employment prospects
Jack Gould 3 of 66
, Chartered Institute of Management Accountants Certificate Level BA3
• Analyst/advisors (includes advisors to investors, employees and the general public): they
require similar information to their clients, however will be more qualified to understand and
evaluate the financial accounting reports
• Business contacts (includes customers and suppliers): customers are interested in the entity’s
ability to provide goods/services requested; and suppliers need to know if the entity is capable of
paying for goods/services supplied
• Government (includes taxation authorities, plus other local and national government agencies
and departments): requires information to calculate the entity’s taxation liability, and government
agencies will collect data to evaluate national and regional economic performance
• The general public (includes taxpayers, consumers, and other community groups): require
information relating to practices of the entity and how such policies affect the community, such
as environmental impact or exploitative working, which may impact their reputation
• Internal users: management of the entity requires information to assist in performing duties:
• Strategic: senior level management requiring information to assist with major decisions
affecting long-term future of the entity
• Tactical: middle level management requiring information to support with monitoring
performance and to enable achievement of short to medium term targets
• Operational: lower level management requiring information to help control and manage day-
to-day activities; much of this information may be in non-financial terms.
WHAT IS ACCOUNTING?
• Accounting has two key elements: the recording and summarising of transactions:
• Recording: classification and recording of monetary transactions as they occur in order to provide
up-to-date information for management.
• Measurement: a permanent record of past data is essential for control and monitoring, and for
this to record-keeping to be efficient, transactions must first be classified into categories
• Summarising: transactions for a period are summarised in order to provide information
concerning the company to interested parties. The results of all monetary transactions are
presented and interpreted in order to assess financial performance for a given period, with
monetary projection of future activities arising from various courses of action
• Management: use of measured data to make decisions that benefit the entity. At appropriate
intervals, transactions must be summarised as a basis for the preparation of financial
performance and position of an entity; as well as the basis of planning and decision-making
• Objective of accounting: to provide useful and relevant financial information to users
(managers, owners and other parties interested in an entity); through preparation of financial
statements in the context of financial accounting.
• Transactions are initially recorded in books of prime entry, which shows similar transactions
recorded in sequential order. This is periodically totalled and the total posted to the double-entry
accounting system, hence minimising entries to this system. Logical, comprehensive yet flexible
transaction coding systems are common in order to enable summarisation and further analysis
• Smaller entities may maintain a set of manual accounting records, whereas larger entities may
use computerised records; but these are based on the same bookkeeping principles.
• A common problem is when to recognise or record a transaction. Therefore, accounting is
distinguished from bookkeeping through the exercise of judgement by the person responsible
for converting data into meaningful information.
• Accounting can be said to be a method of providing information to management relating to the
activities of an entity; and this relies on the accurate collection of data, known as bookkeeping.
• Accounting policies: the principles, bases, conventions, rules and practices applied by an entity
which specify how the effects of transactions and other events are reflected in financial statements
• Accounting estimates: inherent uncertainties result in estimates having to be made; hence these
estimates need to be revised
USE OF ACCOUNTING INFORMATION
• The accounting system of an entity records and summarises transactions to aid preparing of
useful information for managers, who require this to manage and control the entity (management
accounting), and to prepare financial statements for external use (financial accounting).
• Financial statements are crucial to various stakeholders of the business entity, who analyse the
information in order to inform significant economic decisions. The statements comprise of:
• Statement of profit or loss: summary of income and expenses for an accounting period
• Statement of financial position: summary of assets and liabilities and capital at a specific date
Jack Gould 4 of 66
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