FSTP - the second financial accounting unit at Level 3 - often appears to be quite a straightforward and small unit at first glance. Indeed, I often see people saying that the books are small compared to ACPR. Don't be fooled by the short books! This unit holds a lot of nasty twists if you're not fully confident/competent with material covered in ACPR and, more importantly, Level 2 financial accounting units PBKT & CJBS.
Let's take a look at the assessment task by task and try to identify common errors.
Incomplete records
Task 1 is all about incomplete records.
It always pays dividends to take a little time to read and re-read the information provided for this task as, in my experience, it's very common for students to skim the written information in favour of jumping in a completing each element of the task.
It is very common to have to complete either the Sales ledger control account (SLCA) or Purchase ledger control account (PLCA) and, to be honest, given the typical information you're provided, I would expect any Level 2 student to be able to competently draw up the SLCA or PLCA. Between Level 2 and Level 3, nothing changes with regards to the items one would expect to find in these accounts. It's also important to remember where you get the information from (i.e. day books) as, again, this should be very familiar territory for all competent Level 2's.
Remember that gross (inclusive of VAT) figures are used to help complete the SLCA and PLCA whilst discounts allowed and received should not be forgotten. You should also remember to check any information about bad debt write offs, returned cheques and contra entries as these will all affect the closing balance *(which is sometimes the figure you're asked to find).
Sometimes you have to find the closing balance, whilst other times you have to complete the t-account (including opening and closing balances which have been given) in order to be able to establish the missing figure (which, of course, you will be told needs to be calculated).
Sometimes you are also asked to complete a VAT control account which, as with SLCA and PLCA, should not be to much of a problem - epsecially given that you are usually given nearly all the figures you need to complete the task. Remember input VAT (on expenses identified in the informtion, sales returns and purchases) are debits and outputs (on sales and purchase returns) - often this information will also be found in the extracts of the day books (Sales day book, Purchases day book etc). It is very common to have to calculate the payment made to HMRC (a debit in VAT account) and this should be entered as the balancing figure.
Sometimes you will have to reconstruct a bank t-account and, again, the majority of the information if already given to you - just remember that money in is a debit and money out is a credit.
Task 1 is not a difficult task - if you're well prepared and, of course, you take time to RTFQ (Read The Full Question)!
Task 2 often requires you to find a missing figure by employing the accounting equation:
Assets - Liabilities = Capital
Make sure that you can also identify assets, liabilities and capital items (Capital, Drawings and Profit/Loss) as, without this, you will not succeed in this task.
Task 2 also requires you to employ the margin/mark-up techniques in order to calculate missing elements of a Trading account. See my blog entry on Mark-up and Margin for guidance on a fool-proof way to be able to answer any task thrown at you.
Task 2 often has a few tick box/multiple choice tasks - take care to RTFQ here too as it's very common to miss key words/phrases and, therefore, give an incorrect answer.
For example, one practice task I've seen asks you to identify where one would find a prepayment of income in the financial statements. It's so common for students to select current asset because, of course, they know that prepayments are assets. Sadly, however, missing the key word income in prepayment of income means they get 0 marks as a prepaid income is a current liability (think about it - we may have to pay it back!)
Task 3 is often very well done as students love the financial statements - just remember to check to see if you're allowed to use a minus symbol for negative figures as, of course, -£100 is very different from £100 and the computer won't know what you 'meant' when you entered your figure.
Task 3 also often has tasks similar to ACPR which check your general accounting knowledge so, if you had a few difficulties in ACPR with these multiple choice tasks, revise the same sort of material for this part of FSTP too.
Partnership Accounting
Task 4 deals with partnership accounting and you're often required to complete a t-account to show the introduction and elimination of goodwill. Remember, in the Goodwill account, the goodwill is created by debiting the a/c in the old profit share ratio and elimination is achieved by crediting it in the new profit share ratio (in with the old, out with the new may help here).
Take care to complete the correct things too - sometimes, students make all the entries one would expect to see in the capital accounts but, sadly, they make them in the goodwill account and, therefore, they are all on the wrong side of the t-account. Similarly, it's very common for students to make all the entries for an admission of a new partner but, they have actually been asked to deal with a retirement of a partner. Therefore, 4 little letters come out to play again RTFQ!
You will also be required to complete either an appropriation account or the current accounts for a partnership. Again, please take a few minutes to RTFQ (twice even) to be sure you're fully aware what you've been asked to do - it's so common to see students making all the entries in an appropriation account in both time periods when, in fact one of the partners has not been a partner for part of the year. Partners are only entitled to salaries, interest on capital and have to pay interest on drawings only when they are actually partners. Partners do not receive salaries or interest on capital before they join the partnership and, similarly, they do not pay interest on drawings before they join Partners are also only entitled to a share of the profits earned when they were actually a partner, so, if a partner leaves six months into the year, he/she should only receive a share of the profits earned whilst he/she was a partner. (I may appear to have over-emphasised this but I know from experience how many people do forget - almost as if they're on autopilot).
You should also remember that you may be completing a partnership appropriation account for a year (12 months). It is so common to find students miscounting the number of months for each profit share ratio. For example, let's look at situation where the accounting year is April to March and a partner leaves at the end of October. The partner leaving has been a partner for how many months - I see some of you counting on fingers now whilst other jump straight in with 6 months. Sadly those who jump in are incorrect:
April May June July August September October (when the partner leaves) = 7 months not 6!
Take a moment to learn to check your 'gut feeling' by counting properly!
Finally, you have to complete a statement of financial position (SFP) for a partnership - again, most students do this really well. Just take a minute to remember that you may have to take the current account calculated in part a of this task and include it in the Financed by section at the bottom of the statement - don't be tempted to use the figures included in trial balance (you're told to use the figures calculated in part a instead of the figures in the trial balance, so there really is no excuse for getting this wrong.
One important point to remember with the SFP is the order of liquidity in the current assets. This is the order you list the current assets:
- Inventory
- Trade receivables (less any allowance for doubtful debt)
- Prepayments
- Bank (not overdrafts which are current liabilities)
- Cash
Similarly, there is a preferred order for current liabilities:
- Trade payables
- VAT
- Bank overdraft
This is not a difficult assessment to pass just make sure that you're well prepared. Things to remember are:
- RTFQ
- Revise what goes where in SLCA/PLCA/BANK/CASH and VAT accounts
- Be happy classifying accounts as assets, liabilities, capital, expenses or incomes.
- Make sure that you can also understand the effect of a debit/credit entry on each type fo account (e.g. a credit reduces the value of an expense account).
- Partnerships - be very clear what you've been asked to do and what information is available to you. Make sure that you account the correct event (partner joining or leaving the partnership) and, of course, make sure you know when the profit share ratio changes.
You have 2 hours for this assessment but, in reality, you can be out of there much quick if you're well prepared.
Final advice comes in 4 parts:
RTFQ
Practice
Practice
Practice
Good luck!
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