ICAEW ACA Accounting: Double Entry, Year-End Adjustments and Financial Statements
What the exam tests
ICAEW ACA Accounting examines whether you can record transactions using double entry and convert a trial balance into financial statements that comply with UK GAAP (FRS 102) for sole traders, partnerships and single companies - then explain what the numbers mean.
Core mechanics
Every transaction has two effects, so the trial balance stays in balance. Use the expanded equation: assets − liabilities = capital + (income − expenses) − drawings. Errors that do not disturb the trial balance are examinable favourites: error of principle, error of commission, error of original entry, error of omission, reversal of entries and compensating errors. Only one-sided postings, transposition and addition slips create a suspense account.
Year-end adjustments
Profit is measured on the accruals basis:
- accrue expenses incurred but not yet invoiced; prepay costs that relate to the next period;
- depreciate non-current assets (straight-line or reducing balance, pro rata from the month of acquisition);
- value inventory at the lower of cost and net realisable value;
- write off irrecoverable debts as an expense, but keep the allowance for receivables in its own account and adjust only the movement.
Companies and cash
Share capital and share premium sit in equity; retained earnings roll forward as opening balance + profit − dividends. Dividends are never an expense. In the statement of cash flows, start from profit before tax, add back depreciation and losses on disposal, adjust for working capital movements, then present tax paid, interest, investing and financing flows separately.
Worked example
A machine cost £40,000 on 1 January 20X1, is depreciated at 20% reducing balance, and is sold on 30 June 20X3 for £22,000. Charges: 20X1 £8,000; 20X2 £6,400, leaving NBV of £25,600. In the year of disposal: £25,600 × 20% × 6/12 = £2,560, so NBV at disposal is £23,040 and the loss on disposal is £23,040 − £22,000 = £1,040. Charging a full year would overstate the loss by £1,280.
Traps
Depreciating land; reversing a prepayment into the wrong period; netting the allowance against receivables on the statement of financial position; omitting closing inventory from cost of sales; treating a capital purchase as repairs; and putting drawings or dividends through profit.