FINANCIAL ACCOUNTING – ATD II

ATD
ACCOUNTING TECHNICIAN DIPLOMA

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LEVEL II

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FINANCIAL ACCOUNTING 7 ak
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STUDY TEXT
KASNEB JULY 2018 SYLLABUS

Revised on: January 2019

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 FINANCIAL ACCOUNTING – ATD II

SYLLABUS

PAPER NO 5: FINANCIAL ACCOUNTING

GENERAL OBJECTIVE
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable
him/her to account for various basic financial transactions, prepare and analyse financial statements
LEARNING OUTCOMES
A candidate who passes this paper should be able to:
• Prepare books of original entry and basic ledger accounts under double entry system
• Prepare basic financial statements of sole traders. partnerships, companies and manufacturing
entities and not for profit organisations
• Comply with the regulatory framework in the accounting field
• Account for assets and liabilities
• Analyse financial statements by use of ratios and statement of cash flows

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CONTENT

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1. Introduction to Accounting

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- The accounting framework

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- Sources of regulations of National and global levels; the law (Companies Act), professional

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bodies, global regulational bodies

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- Accounting standards (IAS/IFRS), (Importance and limitations) 73 me
- Professional ethics
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2. Accounting for assets and liabilities

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2.1 Assets
- Property, plant and equipment — recognition, capital and revenue expenditure, measurement
(depreciation and revaluation), disposal and disclosures — property, plant and equipment
schedule
- Intangible assets — recognition, measurement (amortisation, impairment and revaluation),
disposals and disclosures
- Financial Assets – examples and categpries
2.2 Liabilities
- Loans - accounting treatment of repayment of principal and interest
3. Financial statements of a sole trader
- Income statement
- Statement of financial position

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 FINANCIAL ACCOUNTING – ATD II

4. Financial statements of a partnership

- Income statement
- Statement of financial position
- Changes in partnership – Admission of a new partner, retirement and change in profit sharing
ratio
5. Financial statements of a company
- Financial statements - Income statement and statement of financial position
- Published financial statements (describe a complete set of published financial statements but
not preparation)
6. Financial statements of a manufacturing entity
- Features of a manufacturing entity
- Classification and apportioning costs between manufacturing and selling and administration
- Financial statements - manufacturing account, income statement and statement of financial
position
7. Accounts from incomplete records

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- Features

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- Types of incomplete records (Pure single entry, simple single entry, quasi single entry)

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- Ascertaining of profit by capital comparison

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- Preparation of statement of affairs and profit determination

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- Techniques of obtaining complete accounting information

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8. Financial statements of a not-for-profit making organisation

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- Features 7 ak
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- Types of funds and their accounting treatment
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- Income and expenditure account

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- Statement of financial position

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8. Analysing financial statements

- Statement of cash flows (categories of cash, methods of preparing statement of cash flows
and the importance)
- Financial ratios — definition, categories, analysis and interpretation, application and
limitations
9. Introduction to public sector Accounting
- Features of public sector entities (as compared to private sector)
- Structure of the public sector (National and county governments: state corporations and other
agencies)
- Regulatory structures and oversight [IPSASB, PSASB (establishment, mandate and
functions), Director of Accounting Services, National Treasury, Parliamentary Committees.
Accounting Officers at national and county levels]
- Objectives of public sector financial statements
- Objectives of IFSAS
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 FINANCIAL ACCOUNTING – ATD II

- Accounting techniques in public sector (budgeting, cash, accrual: commitment and fund)
(Preparation of financial statements should be excluded)
10. Emerging issues and trends

CONTENT PAGE

Topic 1: Introduction to Accounting.....................................................................................5

Topic 2: Accounting for assets and liabilities......................................................................12
Topic 3: Financial statements of a sole trader....................................................................47
Topic 4: Financial statements of a partnership..................................................................94
Topic 5: Financial statements of a company......................................................................134
Topic 6: Financial statements of a manufacturing entity.................................................165

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Topic 7: Accounts from incomplete records.......................................................................182

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Topic 8: Financial statements of a not-for-profit organisation........................................ 202

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Topic 9: Analysing financial statements...............................................................................220

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Topic 10: Introduction to public sector accounting.............................................................252

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 FINANCIAL ACCOUNTING – ATD II

TOPIC 1

INTRODUCTION TO ACCOUNTING

INTRODUCTION

Financial accounting is a system that accumulates, processes and reports information about an
entity's performance (i.e. profit or loss), its financial position (i.e. assets, liabilities and shareholders'
equity) and changes in financial position.

Every entity, whether for-profit or not-for-profit, aims at creating maximum value for its
stakeholders. The goal of maximum value addition is best achieved when there is a mechanism to
monitor the management and the board of directors. Financial accounting helps in such monitoring
by providing relevant, reliable and timely information to the stakeholders.

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Inputs to a financial accounting system include business transactions which are supported by source

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documents, such as invoices, board resolutions, management memos, etc. These inputs are processed

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using generally accepted accounting principles (GAAP). The processed information is reported

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through standardized financial statements.

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Users of the Financial Statements

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The most basic objective of financial accounting is preparation of general purpose financial

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statements, which are financial statements meant for use by stakeholders external to the entity, who
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do not have any other means of getting such information, i.e. people other than the management.
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These stakeholders include:

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 Investors and Financial Analysts: Investors need the information to estimate the instrinsic
value of the entity and to decide whether to buy, hold or sell the entity's shares. Equity
research analysts use financial statements to conduct their research on earnings expectations
and price targets.
 Employee groups: Employees and their representative groups are interested in information
about the solvency and profitability of their employers to decide about their careers, assess
their bargaining power and set a target wage for themselves.
 Lenders: Lenders are interested in information that enables them to determine whether their
loans and the interest earned on them will be paid when due.
 Suppliers and other trade creditors: Suppliers and other creditors are interested in
information that enables them to determine whether amounts owing to them will be paid
when due and whether the demand from the company is going to increase, decrease or stay
constant.
 Customers: Customers want to know whether their supplier is going to continue as an entity,
especially when they have a long-term involvement with that supplier. For example, Apple is
interested in long-term viability of Intel because Apple uses Intel processors in its computers

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 FINANCIAL ACCOUNTING – ATD II

and if Intel ceases operations at once, Apple will suffer difficulties in meeting its own
demand and will loose revenue.
 Governments and their agencies: Governments and their agencies are interested in financial
accounting information for a range of purposes. For example, the tax collecting authorities,
such as IRS in USA, are interested in calculating taxable income of the tax-paying entities
and finding their tax payable. Antitrust authorities, such as Federal Trade Commission, are
interested in finding out whether an entity is engaged in monopolization. The governments
themselves are interested in efficient allocation of resources and they need financial
accounting information of different sectors and industries to decide on federal and state
budget allocation, etc. The bureaus of statistics are interested in calculating national income,
employment and other measures.
 Public: the public is interested in an entity's contribution towards the communities in which it
operates, its corporate social responsibility updates, its environmental track record, etc

THE ACCOUNTING FRAMEWORK

An accounting framework is a published set of criteria that is used to measure, recognize, present,

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and disclose the information appearing in an entity's financial statements. An organization's financial

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statements must have been constructed using a recognized framework, or else auditors will not issue

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a clean audit opinion for them.

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The most commonly-used accounting frameworks are generally accepted accounting principles

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(GAAP) and international financial reporting standards (IFRS). GAAP is used by entities in the

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United States, while IFRS is used in most other parts of the world. These two frameworks are

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designed to be broad-based and therefore applicable to most types of businesses. There are other

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accounting frameworks that are designed for special situations, and which are known as other
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comprehensive bases of accounting (OCBOA).
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SOURCES OF REGULATIONS OF NATIONAL AND GLOBAL LEVELS; THE LAW

(COMPANIES ACT), PROFESSIONAL BODIES, GLOBAL REGULATIONAL BODIES

PROFESSIONAL BODIES

INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT (ICPAK)

The Institute of Certified Public Accountants of Kenya (ICPAK) was established in 1978. The
Institute is a member of the Pan-African Federation of Accountants (PAFA) and the International
Federation of Accountants (IFAC), the global umbrella body for the accountancy profession. The
Vision of the Institute is ‘A world class professional accountancy institute‘, while the Mission is
‘To develop and promote internationally recognised accountancy profession that upholds public
interest through effective regulation, research and innovation’.

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 FINANCIAL ACCOUNTING – ATD II

The Institute is guided by the following core values: Credibility, Professionalism and
Accountability. The Institute draws its mandate from the Accountants Act (no 15 of 2008).

Its mandate includes:

The Accountants Act No 15, 2008 prescribes the following as the functions of the Institute:

 To promote standards of professional competence and practice amongst members of the

Institute
 To promote research into the subject of accountancy and finance and related matters, and the
publication of books, periodicals, journals and articles in connection therewith;
 To promote the international recognition of the Institute.
 To advise the Examination Board on matters relating to examinations standards and policies;
 To advise the Minister on matters relating to financial accountability in all sectors of the
economy;
 To carry out any other functions prescribed for it under any of the other provisions of this Act
or any other written law and
 To do anything incidental or conducive to the performance of any of the preceding functions.

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GLOBAL REGULATIONAL BODIES

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The International Federation of Accountants (IFAC)

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The International Federation of Accountants (IFAC) was founded on 7 October 1977, in
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Munich, Germany, at the 11th World Congress of Accountants. IFAC comprises 179 member
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and associate member organisations in 130 countries, representing more than 2.5 million
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accountants in public practice, education, government service, industry, and commerce.

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 FINANCIAL ACCOUNTING – ATD II

IFAC has established the following boards. We maintain separate pages for each board, with a
history of developments for each board:

Body Function

International Public Sector Sets International Public Sector Accounting Standards (IPSAS) for
Accounting Standards Board use by the public sector
(IPSASB)

International Auditing and Sets International Standards on Auditing, Assurance Engagements

Assurance Standards Board and Related Services
(IAASB)

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International Accounting Develops International Education Standards

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Education Standards Board

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(IAESB)

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International Ethics Standards Develops the international Code of Ethics for Professional

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Board for Accountants Accountants

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(IESBA)

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Public Interest Oversight Oversees IFAC's standard-setting activities, particularly with
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Board (PIOB) respect to auditing, assurance, ethics, and independence. The

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PIOB also oversees IFAC's compliance activities.

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IFAC also supports the IASB with respect to setting accounting standards.

The International Accounting Standards Board (IASB)

The International Accounting Standards Board (IASB) is an independent, private-sector body
that develops and approves International Financial Reporting Standards (IFRSs). The IASB
operates under the oversight of the IFRS Foundation. The IASB was formed in 2001 to replace
the International Accounting Standards Committee. Currently, the IASB has 14 members.

The IASB's role

Under the IFRS Foundation Constitution, the IASB has complete responsibility for all technical
matters of the IFRS Foundation including:

- Full discretion in developing and pursuing its technical agenda, subject to certain
consultation requirements with the Trustees and the public

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