Recording, Processing and Reporting Financial Information
The accounting cycle and the reports it produces
Candidates must be able to move confidently through the full cycle: source documents, journals, ledgers, trial balance, adjusting entries, adjusted trial balance, and finally the income statement, balance sheet and cash flow statement. Know the accounting equation and how each transaction preserves it, the rules of double entry (debits increase assets and expenses; credits increase liabilities, equity and revenue), the distinction between capital and revenue expenditure, and the purpose of control accounts and bank reconciliations.
Accrual concepts that examiners target
Understand accrual versus cash accounting, matching, going concern, prudence and consistency. Be able to post adjusting entries for accrued and prepaid expenses, accrued and unearned revenue, depreciation, and allowance for doubtful debts. Know the closing process for temporary accounts and how retained profit links the income statement to the balance sheet.
Traps to watch
Typical traps include confusing a trial balance error with a transposition that still balances; treating drawings as an expense; recording GST collected as revenue rather than a liability; ignoring the effect of a stocktake adjustment on cost of sales; and misclassifying a loan repayment split between interest and principal. Watch for questions asking for the effect of an omission on profit and equity rather than the correcting entry itself.
Worked example
A business pays $12,000 on 1 April for 12 months of insurance. At 30 June, two months are expired. The adjusting entry debits insurance expense $2,000 and credits prepaid insurance $2,000, leaving $10,000 as a current asset. Rule of thumb: always convert the payment to a monthly rate, then count only the months consumed in the reporting period.