Financial Accounting
This section covers the Financial Accounting domain of MATSEC SEC Accounting. The exam tests your ability to record transactions under double entry, adjust the books at year end and prepare an income statement and statement of financial position for a sole trader, with supporting notes. Expect questions on accounting concepts, depreciation, accruals and prepayments, bad debts and inventory.
Core rules
- Choose an appropriate concept: going concern, accruals (matching), consistency, prudence, business entity. Apply it to the entry, not just name it.
- Every debit has a credit; the trial balance proves arithmetic equality only.
- Year-end adjustments update the ledger and the financial statements: expenses accrued or prepaid, income receivable or prepaid, depreciation, irrecoverable debts, allowance for doubtful debts, closing inventory.
- Depreciation is an allocation of cost, not a valuation. Straight-line = (cost − residual value) / useful life.
- Inventory is measured at the lower of cost and net realisable value.
Worked example
A sole trader’s draft profit is €24,000. Rent of €9,000 was paid for the 12 months ending 31 March next year; the year end is 31 December. Machinery cost €18,000, residual value €3,000, life 5 years; depreciation is unrecorded. Wages accrued €1,500.
Reasoning: only 9 months’ rent belongs to this year: expense = €9,000 × 9/12 = €6,750, so add back prepayment €2,250. Depreciation = (€18,000 − €3,000)/5 = €3,000. Accrued wages increase expense by €1,500. Corrected profit = €24,000 + €2,250 − €3,000 − €1,500 = €21,750.
Traps
- Treating drawings as an expense; they reduce capital.
- Charging capital expenditure such as machinery as a revenue expense.
- Adding an accrual instead of deducting it, or reversing the prepayment direction.
- Forgetting depreciation on assets bought or sold during the year.
- Including VAT in income and expenses when the trader is VAT-registered.