Frank Wood’s Business Accounting Basics

Transcription

Business Accounting BasicsFrank WoodDavid HornerBusiness Accounting Basics is the ideal introduction into the fundamentals of bookkeeping andfinancial accounting. The book utilises both the IFRS and IAS framework making the text accessibleto students and professionals from all around the globe. Its user-friendly worked examples and clearexplanations help students build their knowledge of accounting standards one step at a time. Withover 250 assessment questions containing full solutions, Business Accounting Basics is the perfectintroduction to Business Accounting.Business Accounting Basics is ideal for a wide variety of courses in accountingand business. It is particularly useful for those studying for AAT, A level andintroductory professional qualifications in financial accounting.Front cover image: Getty ImagesCVR WOOD5008 01 SE CVR.indd 1Frank Wood’sBusiness Accounting BasicsFrank WoodDavid HornerWood & HornerBusiness Accounting Basics offers: Easy to follow worked examples and explanations of the basics of bookkeeping Logical development of the techniques used for maintaining financial accounting records Full explanation on how to create financial statements for businesses Clear progression throughout the text builds your knowledge of accounting standards Cross referencing to the relevant and up-to-date international accounting standards Over 250 assessment questions with full answers Regular and comprehensive assessment questions with some full answers allow you tomonitor your progress and understandingFrank Wood’s Business Accounting BasicsFrank Wood’swww.pearson-books.com8/6/10 08:45:55

FRANK WOOD’SBUSINESSACCOUNTING BASICS

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FRANK WOOD’SBUSINESSACCOUNTINGBASICSFrank WoodandDavid Horner

Pearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEEnglandand Associated Companies throughout the worldVisit us on the World Wide Web at:www.pearsoned.co.ukFirst published 2010 Pearson Education Limited 2010The rights of Frank Wood and David Horner to be identified as authors of this work havebeen asserted by them in accordance with the Copyright, Designs and Patents Act 1988.All rights reserved. No part of this publication may be reproduced, stored in aretrieval system, or transmitted in any form or by any means, electronic, mechanical,photocopying, recording or otherwise, without either the prior written permission of thepublisher or a licence permitting restricted copying in the United Kingdom issued by theCopyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.All trademarks used herein are the property of their respective owners. The use of anytrademark in this text does not vest in the author or publisher any trademark ownership rightsin such trademarks, nor does the use of such trademarks imply any affiliation with orendorsement of this book by such owners.Pearson Education is not responsible for third party internet sites.ISBN: 978-0-273-72500-8British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British LibraryLibrary of Congress Cataloging-in-Publication DataWood, Frank, 1926–2000.Business accounting basic / Frank Wood and David Horner.p. cm.ISBN 978-0-273-72500-8 (pbk.)1. Accounting. I. Horner, David, 1970– II. Title.HF5636.W858 2010657—dc22201001348210 9 8 7 6 5 4 3 2 114 13 12 11 10Typeset in 10.5/12.5pt ITC Garamond Book by 35Printed and bound by Rotolito Lombarde. Italy

ContentsPrefaceChapter 1 Introductionxii1Learning objectivesIntroductionSectors in the economyTypes of business organisationBusiness objectivesFundamentals of financial accountingThe accounting equationInternational standardsTerminologySummaryChapter reviewKey termsReview questionsChapter 2 Double-entry bookkeepingLearning objectivesIntroductionWhat does the account show?Rules for double-entry transactionsFurther information for double-entry bookkeepingAccounting for inventoryWhat do we mean by inventory?Double-entry transactions for inventoryReturns of inventoryDrawingsIncome and expenses111233455566699991012121313151717v

ContentsHow many different expense accounts should be opened?Balancing accountsChapter reviewHandy hintsKey termsReview questionsChapter 3 Financial statementsLearning objectivesIntroductionTrial balanceStatement of comprehensive incomeStatement of financial positionFurther adjustments to the statement of comprehensive incomeChapter reviewRelevant accounting standardsHandy hintsKey termsReview questionsChapter 4 Day books and ledgersLearning objectivesIntroductionLedgersDay booksCash booksCash and trade discountsThree-column cash booksPetty cash bookSales day bookPurchases day bookReturns day booksThe journalThe use of folio columnsChapter reviewHandy hintsKey termsReview 252525353555657596062636565666667

ContentsChapter 5 Value added taxLearning objectivesIntroductionThe administration of VATVAT and double-entry bookkeepingOther items in the VAT accountVAT and discountsChapter reviewHandy hintsKey termsReview questionsChapter 6 Capital and revenue expenditureLearning objectivesIntroductionClassifying capital and revenue expenditureJoint expenditureCapital and revenue receiptsAreas of debateIncorrect classification of expenditureChapter reviewRelevant accounting standardsHandy hintsKey termsReview questionsChapter 7 Accounting concepts and standardsLearning objectivesIntroductionFinancial statements – the underlying principlesAccounting conceptsIntroduction to accounting standardsChapter reviewHandy hintsKey termsReview 292939398989898100101103104104104vii

ContentsChapter 8 Adjustments to the financial statementsLearning cruals and prepayments and the statement of financial positionDealing with trial balances when outstanding balances existDealing with balances from more than one yearLinks with other topicsChapter reviewHandy hintsKey termsReview questionsChapter 9 Bad debts and provision for doubtful debtsLearning objectivesIntroductionAccounting for bad debtsHow can a business minimise the risk of bad debts?Provision for doubtful debtsCalculating the size of the provision for doubtful debtsAccounting entries for the provision for doubtful debtsProvision for doubtful debts and the statement of financial positionBad debts recoveredProvision for discounts on debtorsChapter reviewHandy hintsKey termsReview questions1Chapter 10 Depreciation of non-current assetsLearning objectivesIntroductionWhy do assets lose value?Do all assets lose value?Methods of 131135135135135136137

ContentsStraight line methodReducing balance methodDepreciation and the statement of financial positionA comparison of the two methodsChanging methods of depreciationMid-year purchases and salesDepreciation and double-entry bookkeepingAsset disposalDepreciation of intangible assetsChapter reviewRelevant accounting standardsHandy hintsKey termsReview questionsChapter 11 Errors and suspense accountsLearning objectivesIntroductionErrors that don’t affect the trial balance agreementCorrection of the errorsErrors that do affect the trial balance agreementErrors and profitsChapter reviewHandy hintsKey termsReview questionsChapter 12 Control accountsLearning objectivesIntroductionInformation used in the control accountsMemorandum accountsLayout of control accountsOther items found in control accountsUse of control accountsChapter reviewHandy hintsKey termsReview 67169170174174174174ix

ContentsChapter 13 Bank reconciliation statementsLearning objectivesIntroductionProcedure for bank reconciliationIdentifying items not appearing both in the cash book and on the bankstatementBringing the cash book up to dateUpdated cash bookProducing the bank reconciliation statementFurther information concerning construction of bank reconciliationstatementsChapter reviewHandy hintsKey termsReview questionsChapter 14 Manufacturing accountsLearning objectivesIntroductionHow costs are classifiedPrime costIndirect manufacturing costsAfter the manufacturing account is completedFactory profitProvision for unrealised profit on unsold inventoryChapter reviewHandy hintsKey termsReview questionsChapter 15 Limited companiesLearning objectivesIntroductionTypes of limited companyDifferences between public and private limited companiesShares and 1210210210210211212214

ContentsFinancial statements of limited companiesReservesChapter reviewRelevant accounting standardsHandy hintsKey termsReview questions214218223223224224225Appendix 1: Answers to review questions233Appendix 2: Glossary298Index306Supporting resourcesVisit www.pearsoned.co.uk/wood to find valuable online resourcesFor instructorsComplete Instructor’s Manual For more information please contact your local Pearson Education salesrepresentative or visit www.pearsoned.co.uk/woodxi

PrefaceNotes for teacher and lecturersThis textbook has been written to provide a concise but comprehensive introductionto financial accounting.It is suitable for beginners to this subject area and provides an introduction to themajor topics covered within an introductory bookkeeping or financial accountingcourse. The textbook would be ideal for those studying for A and AS level, IGCSE,Scottish Higher Qualifications, Association of Accounting Technicians, universityundergraduate degree courses and professional accountancy qualifications.The textbook is based on the International Financial Reporting Standard (IFRS) andthe International Accounting Standard (IAS) framework, meaning it can be used bystudents across the world rather than any one country in particular.Each chapter begins with learning objectivities which outline what skills andtechniques will be acquired by completion of the chapter. The chapter will exploreeach topic in sufficient detail with explanation of each topic accompanied by fullyworked-out examples accompanied by explanations and reference to the relevantinternational accounting standards throughout.Frequent learning checks appear throughout each chapter in the form of reviewquestions. These are included in each chapter and follow a scale of increasingchallenge. This provides accessibility for all students whilst providing the relevantchallenge for the student who is keen to practice further as the chapter progresses.Answers for each of the review questions appear at the end of the textbook.The textbook is written on the assumption that the user of the book has limitedor no knowledge of accounting. Although each chapter is largely self-contained, thechapters are arranged in a sequential order. This means that review questions in laterchapters will require the completion of the subject metier in the earlier chapters.Where review questions require prior knowledge, this is highlighted.Although the textbook is written to comply with international standards so as tomaximise its usefulness for students of accounting across the globe, the chapter onValue Added Tax is based on the UK rate as at May 2010 of 17.5%.An Instructor’s Manual, which contains further guidance on the how to use the textbook, how to approach particular topics, as well as additional review questions foreach chapter, is available from www.pearsoned.co.uk/wood.Notes for studentsThis textbook is designed to provide a full and comprehensive guide as you begin yourstudy of bookkeeping and financial accounting. It is meant to serve as an introductionto financial accounting, which means that you are not expected to have read any othertextbooks in advance of using this particular one.xii

PrefaceWhen using this textbook, we would recommend that you always stick to thefollowing guidelines: Always read the learning objectives as you begin to study a new chapter. Theseobjectives give you clear targets for each chapter, which you can check oncompletion.Ensure that you attempt all the review questions when you have completed therelevant section of each chapter. The questions are designed to be completed as youfinish a relevant section so you don’t have to wait until the end of the chapter.Answers to the review questions appear at the end of the textbook. However, westrongly recommend that you only use these answers to review your own progressafter you have completed all the questions. Your progression in terms of learningwill be severely restricted if you constantly check the answers before you havefirmly grasped a topic. As a minimum, you should complete the entire relevantsection before you check your own answers.If you are unsure on how to complete a review question, then revisit the relevantsection in the chapter. The fully worked-out examples and explanation shouldprovide guidance on how to reach the correct solution.Although financial accounting can seem very complex when undertaking study of thesubject for the first time you should see clear improvement as you progress througheach chapter. Regular practice through the review questions will help to consolidateyour knowledge and understanding of the subject area.Finally, we wish you luck with your studies. Financial accounting is not the easiestsubject to

Business Accounting Basics is the ideal introduction into the fundamentals of bookkeeping and fi nancial accounting. The book utilises both the IFRS and IAS framework making the text accessible to students and professionals from all around the globe. Its user-friendly worked examples and clear explanations help students build their knowledge of accounting standards one step at a time. With .