Fundamentals of Financial Accounting (CIMA BA3)
BA3 tests the mechanics and judgement behind financial accounting: double-entry bookkeeping, books of prime entry, year-end adjustments, and preparation of financial statements for sole traders and limited companies. Expect computational questions on ledger accounts and adjustments, plus conceptual questions on accounting principles.
Double entry and the accounting equation
Assets = Capital + Liabilities. Each transaction affects two ledger accounts. Debits increase assets and expenses; credits increase liabilities, capital and income. Record transactions first in books of prime entry (sales day book, purchase day book, cash book, returns day books, journal), then post to the nominal ledger. The trial balance lists debit and credit balances; unequal totals indicate an error, often held in a suspense account.
Year-end adjustments
Accruals match expenses to the period: Dr expense, Cr accruals. Prepayments: Dr prepayment, Cr expense. Depreciation spreads the cost of a non-current asset: Dr depreciation expense, Cr accumulated depreciation; carrying amount = cost less accumulated depreciation. Inventory is measured at the lower of cost and net realisable value (IAS 2). Irrecoverable debts are written off Dr irrecoverable debts expense, Cr receivables; an allowance for receivables is adjusted through the statement of profit or loss by the movement, not the closing balance.
Worked example
A sole trader reports profit of £40,000 before these adjustments: rent paid £12,000 includes £2,000 prepaid; wages £18,000 include £1,500 unpaid; depreciation £3,000; closing inventory cost £10,000, NRV £9,200. Corrected profit: start £40,000; add £2,000 prepaid rent = £42,000; deduct £1,500 accrued wages = £40,500; deduct £3,000 depreciation = £37,500; deduct £800 inventory write-down (10,000 − 9,200) = £36,700. Each adjustment follows the accruals concept and the lower of cost and NRV rule.
Traps that cost marks
Adding a prepayment instead of deducting it from the expense; charging the full allowance for receivables rather than the movement; crediting depreciation to the asset cost account instead of accumulated depreciation; forgetting that closing inventory reduces cost of sales; and treating a debit balance in the trial balance as a credit. In company accounts, profit for the year increases retained earnings, not share capital.