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FRANK WOOD’S TENTH EDITION Every year, thousands of students rely on Frank Wood's best-selling books to help them pass their accountancy exams. business accounting selling textbook on bookkeeping and accounting.planations of contemporary TENTH EDITION Now in its tenth edition, it has become thectice, including double enFRANK WOObusiness and professionals alike.xt fostatementsng studentsreparationWof financial ➤ Clear and logical progression OOD & SANGSTER ➤ Over 120 brand new review questions for examkey conceptsorce your 1 practice ➤Examination Board questions including past accounting ➤ 2005rage of International ➤ 100 multiple choice questions with answers ➤ areas of difficultyted workfurther self-test questions and accountingding ➤ Treatment of VAT for companies operatingates ➤ Expanded introduction to the language andting Volume 1 is used on a wide history of accounting at secondary and tertiary level and for those, both studying for professional qualifications. FRANK WOOD & ALAN SANGSTER 'A classic textbook that has set thousands of students on a straight path since it was first published, Wood & Sangster's Business Accounting can be recommended without reservation to all accountingDr George Iatridis, University of Athens, Greece and University of Manchester 'I highly recommend Business Accounting because it is clear and to the point, which makes it easy the first time or have little knowledge of the accounting subject.'o want to study accounting for Caroline Teh, Inti College, Malaysia. An imprint of Additional student support at www.pearsoned.co.ukwww.pearson-books.com Additional student support at www.pearsoned.co.uk/wood BA10_A01.q21/12/010:18 aPage i FRANK WOOD’S business accoun 1 ting Visit the Business Accounting, tenth edition Companion Website at www.pearsoned.co.uk/wood to ﬁnd valuable srning material including: lLearning objectives for each chapter lMultiple choice questions to help test your learning lReview questions and answers lLinks to relevant sites on the web lSearchable online glossary lFlashcards to test your knowledge of key terms and deﬁnitions BA10_A01.qxd 21/12/04 10:18 am Page ii Frank Wood 1926–2000 BA10_A01.qxd 21/12/04 10:18 am Page iii FRANK WOOD’S TENTH EDITION business 1 accounting FRANKBSc (Econ), FCA ALAN SBA, MSc, Cert TESOL, CA BA10_A01.qxd 21/12/04 10:18 am Page iv Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE and Associated Companies throughout the world. Visit us on the World Wide Web at www.pearsoned.co.uk First edition published in 1967 Second edition published under the Longman imprint in 1972 Third edition published in 1979 Fourth edition published in 1984 Fifth edition published in 1989 Sixth edition published in 1993 Seventh edition published in 1996 Eighth edition published under the Financial Times Pitman Publishing imprint in 1999 Ninth edition published in 2002 Tenth edition published 2005 © Frank Wood 1967 © Longman Group UK Limited 1972, 1979, 1984, 1989, 1993 © Pearson Professional Limited 1996 © Financial Times Professional Limited 1999 © Pearson Education Limited 2002, 2005 The rights of Frank Wood and Alan Sangster to be identiﬁed as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, dre in a retrieval system, or transmitted in any form or by any means, electr onic, mechanical, photocopying, recording or otherwise, without either the pr r written permission of the publisher or a licence permitting restrict pying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. ISBN 0 273 68149 4 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress 01987654321 08 07 06 05 Typeset in 9.5/11.5 pt Sabon by 35. Printed and bound in China. SWTC/01 Also available: Frank Wood’s Business Accounting Vol 2 – 0273 693107 Book-keeping & Accounts – 0273 685481 Frank Wood’s A-level Accounting – 0273 685325 BA10_A01.qxd 21/12/04 10:18 am Page v Contents Notes for teachers and lecturers xiii Notes for students xv part 1 Introduction to double entry bookkeeping 1 The accounting equation and the balance sheet 3 2 The double entry system for assets, liabilities and capital 18 3 The asset of stock 28 4 The effect of proﬁt or loss on capital and the double entry system for expenses and revenues 38 5 Balancing off accounts 49 6 The trial balance 57 part 2 The ﬁnancial statements of sole traders 7 Trading and proﬁt and loss accounts: an introduction 71 8 Balance sheets 83 9 Trading and proﬁt and loss accounts and balance sheets: further considerations 91 10 Accounting concepts 104 part 3 Books of original entry 11 Books of original entry and ledgers 119 12 The banking system in the UK 125 13 Cash books 136 14 The sales day book and the sales ledger 153 15 The purchases day book and the purchases ledger 162 16 The returns day books 168 17 The journal 180 18 The analytical petty cash book and the imprest system 191 19 Value added tax 200 20 Columnar day books 218 21 Employees’ pay 226 22 Computers and accounting 234 23 Computerised accounting systems 244 part 4 Adjustments for ﬁnancial statements 24 Capital expenditure and revenue expenditure 259 v BA10_A01.qxd 21/12/04 10:18 am Page vi Contents 25 Bad debts, provisions for doubtful debts, and provisions for discounts on debtors 269 26 Depreciation of ﬁxed assets: nature and calculations 284 27 Double entry records for depreciation 294 28 Accruals and prepayments and other adjustments for ﬁnancial statements 315 29 The valuation of stock 336 30 Bank reconciliation statements 351 31 Control accounts 364 32 Errors not affecting trial balance agreement 378 33 Suspense accounts and errors 386 Scenario questions 404 part 5 Special accounting procedures 34 Introduction to accounting ratios 411 35 Single entry and incomplete records 423 36 Receipts and payments accounts and income and expenditure accounts 443 37 Manufacturing accounts 457 38 Departmental accounts 480 39 Cash ﬂow statements 488 40 Joint venture accounts 505 part 6 Partnership accounts and company accounts 41 Partnership accounts: an introduction 515 42 Goodwill for sole traders and partnerships 533 43 Revaluation of partnership assets 548 44 Partnership dissolution 556 45 An introduction to the ﬁnancial statements of limited liability companies 576 46 Purchase of existing partnership and sole traders’ businesses 608 part 7 An introduction to ﬁnancial analysis 47 An introduction to the analysis and interpretation of accounting statements 623 part 8 An introduction to management accounting 48 An introduction to management accounting 657 Appendices 1 Answers to review questions 667 2 Answers to multiple choice questions 741 3 Glossary 742 Index 753 vi BA10_A01.qxd 21/12/04 10:18 am Page vii Supporting resources Visit www.pearsoned.co.uk/wood to ﬁnd valuable online resources Companion Website for students l Learning objectives for each chapter l Multiple choice questions to help test your learning l Review questions and answers l Links to relevant sites on the web l Searchable online glossary l Flashcards to test your knowledge of key terms and deﬁnitions Foor nstructors l Complete, downloadable Solutions Manual l PowerPoint slides that can be downloaded and used as OHTs Also:: The Companion Website provides the following features: l Search tool to help locate speciﬁc items of content l E-mail results and proﬁle tools to send results of quizzes to instructors l Online help and support to assist with website usage and troubleshooting For more information please contact your local Pearson Education sales representative or visit www.pearsoned.co.uk/wood BA10_A01.qxd 21/12/04 10:18 am Page viii Guided tour of the book Part opening part chapter Balancing off accounts 5 THE FINANCIAL 2 STATEMENTS OF SOLE TRADERS Learning objectives After you have studied this chapter, you should be able to: Learning objectives l close accounts when appropriate l balance off accounts at the end of a period and bring down the opening ba▯ lance to the next period outline what you will l distinguish between a debit balance and a credit balance l describe and prepare accounts in three-column format need to have Introduction learned by the end In this chapter, you’ll learn how to discover what the amount outstan▯ding on an account is at a particular point in time. You’ll also learn how to clo▯ se accounts that of the chapter. are no longer needed and how to record appropriate entries in accounts at▯ the end and beginning of periods. Finally, you’ll learn that T-accounts are no▯ t the only way to record accounting transactions. 5.1 Accounts for debtors Introduction Where debtors have paid their accounts This part is concerned with preparing, from double entry records, the ﬁnancial statements of sole traders. So far you have learnt how to record transactions in the accounting books▯ by means of debit and credit entries. At the end of each accounting period the ﬁgures in eac▯ h account are examined in order to summarise the situation they present. This will often, but not a▯ lways, be a year if you are calculating proﬁt. It will be at least once a month if you want to▯ see what is happening with 7 Trading and proﬁt and loss accounts: an introduction 71 respect to particular accounts. Probably the most obvious reason for thi▯s is to ﬁnd out how 8 Balance sheets 83 much our customers owe us for goods we have sold to them. In most busines▯ ses this is done at 9 Trading and proﬁt and loss accounts and balance sheets: the end of each month. further considerations 91 10 Accounting concepts 104 Activity Why do you think we would want to look at the debtor accounts in the 5.1 accounting books as often as once a month? 49 A wide range of exhibits offer clear examples of accounting practice and methodology. Chapter 27 l Double entry records for depreciation Part 3 l Books of original entry The depreciation is posted directly into the cumulative provision for de▯preciation account. The double entry is: 11.8 Types of accounts Debit the proﬁt and loss account Credit the accumulated provision for depreciation account Some people describe all accounts as personal accounts or as impersonal a▯ ccounts. l Personal Accoun– these are for debtors and creditors (i.e. customers and suppliers).▯ l Impersonal Accoun– divided between ‘real’ accounts and ‘nominal’ accounts:▯ Exhibit 27.1 – Real Account– accounts in which possessions are recorded. Examples are buildings,▯ machinery, ﬁxtures and stock. A business has a ﬁnancial year end of 31 December. A computer is bough t for £2,000 on 1 January – Nominal Account– accounts in which expenses, income and capital are recorded. 20X5. It is to be depreciated at the rate of 20 per cent using the reduci ng balance method. The records for the ﬁrst three years are: A diagram may enable you to follow this better: Computer 20X5 £ Jan 1 Cash 2,000 Accumulated Provision for Depreciation – Computer 20X5 £ 20X5 £ Dec 31 Balance c/d 400 Dec 31 Proﬁt and loss 400 20X6 20X6 Dec 31 Balance c/d 720 Jan 1 Balance b/d 400 Dec 31 Proﬁt and loss 320 720 720 20X7 20X7 Dec 31 Balance c/d 976 Jan 1 Balance b/d 720 Dec 31 Proﬁt and loss 256 976 976 20X8 Jan 1 Balance b/d 976 11.9 Nominal and private ledgers Proﬁt and Loss Account (extracts) for the year ended 31 December The ledger in which the impersonal accounts are kept iNominal(or ‘General’) Ledge. In order to ensure privacy for the proprietor(s), the capital, drawin▯ gs, and other similar £ accounts are sometimes kPrivate Ledg. This prevents ofﬁce staff from seeing details of 20X5 Depreciation 400 items which the proprietors want to keep secret. 20X6 Depreciation 320 20X7 Depreciation 256 Activity 11.2 Why bother with books of original entry? Why don’t we just enter transactions straight into the ledgers? Note: In this case, the depreciation for the period being posted to the proﬁt and loss account is being described as ‘depreciation’ and not by the name of the account it is being posted from. This clearly is not the convention usually adopted when posting entries betwee n ledger accounts and is very much ‘the exception that proves the rule’. 11.10 The accountant as a communicator The impression is often given that all that an accountant does is produce▯ ﬁgures arranged in vari- ActivityWhat advantages are there in making this exception to the rule by using ous ways. This has led to a perception that accountants are boring, pragm▯ atic people with no 27.3 ’depreciation’ rather than ‘accumulated provision for depreciati on’ in the proﬁt sense of humour. While it is true that such work does take up quite a lot▯ of an accountant’s time, and loss account entry? it does not acount for all of a typical acAccountants also need to be good com- municatorsnot just in the way they present accounting information on paper, but a▯ lso in how they verbally communicate the signiﬁcance of the information they prep▯ are. Now the balance on the Computer Account is shown on the balance sheet at▯ the end of each An accountant can obviously arrange the ﬁnancial ﬁgures so as to pr▯ esent the information in year less the balance on the Cumulative Provision for Depreciation Accoun▯ t. as meaningful a way as possible for the people who are going to use that▯ information. That is, 295 122 Activities occur frequently throughout the book to test your understanding of new concepts. viii BA10_A01.qxd 21/12/04 10:18 am Page ix A number of worked examples are provided to guide you through more difficult concepts. Chapter 45 l An introduction to the ﬁnancial statements of limited liability compan▯ ies Part 1 l Introduction to double entry bookkeeping In Business Accounting 2 you will be told more about the differences between ‘revenue reserves’▯ Cash and ‘capital reserves’. The most important reason for the distincti▯ on has to do with deciding how £ much can be treated as being available for paying out to shareholders as▯ dividends. ‘Revenue Aug 25 Drawings 50 reserves’, which include the proﬁt and loss account balance and th▯e general reserve, can be treated as available for such dividends. ‘Capital reserves’, which▯ will include revaluation reserves Sometimes goods are taken for private use. These are also known as drawin▯ gs. In Section 3.2, on property and land, also some reserves (which you have not yet met) w▯ hich have to be created to meet some legal statutory requirement, cannot be treated as available▯ for payment of dividends. you learnt that when goods are purchased, the purchases account is debite▯ d. As a result, when goods are withdrawn it is the purchases account which should be credited.▯ A term which sometimes appears in examinations is that of ‘fungible as▯ sets’. Fungible assets The following example illustrates the entries for this form of drawings:▯ are assets which are substantially indistinguishable one from another. On 28 August, the owner takes £400 of goods out of the business for hi▯ s own use. A fully worked example s Effect Action Exhibit 45.8 1 Capital is decreased by £400 Debit the drawings account £400 2 Stock is decreased by £400 Credit the purchases account £400 ll The following trial balance is extracted from the books of F W Ltd as on 31 December 20X5: Drawings Trial balance as on 31 December 20X5 £ Dr Cr £ £ Aug 28 Purchases 400 10% preference share capital 200,000 Purchases Ordinary share capital 700,000 10% debentures (repayable 20X9) 300,000 £ Goodwill at cost 255,000 Aug 28 Drawings 400 Buildings at cost 1,050,000 Equipment at cost 120,000 Motor vehicles at cost 172,000 Provision for depreciation: buildings 1.1.20X5 100,000 Provision for depreciation: equipment 1.1.20X5 24,000 Learning outcomes Provision for depreciation: motor vehicles 1.1.20X5 51,600 Learning outcomes Stock 1.1.20X5 84,912 You should now have learnt: Sales 1,022,000 Purchases 439,100 1 How to calculate proﬁt by comparing revenue with expenses. revisit and reinforce Carriage inwards 6,200 2 That the accounting equation is central to any explanation of the effect▯ of Salaries and wages 192,400 Directors’ remuneration 123,000 trading upon capital. the major topics 3 Why every different type of expense is shown in a separate expense accoun▯ t. Motor expenses 3,120 Business rates and insurances 8,690 4 Why every different type of revenue is shown in a separate revenue accoun▯ t. General expenses 5,600 covered in the 5 Why an expense is shown as a debit entry in the appropriate expense accou▯ nt. Debenture interest 15,000 Debtors 186,100 6 Why revenue is shown as a credit entry in the appropriate revenue account▯ . Creditors 113,700 chapter. 7 How to enter a series of expense and revenue transactions into the approp▯ riate Bank 8,390 General reserve 50,000 T-accounts. Share premium account 100,000 8 What is meant by the term ‘drawings’. Interim ordinary dividend paid 35,000 Proﬁt and loss account 31.12.20X4 43,212 9 That drawings are always a reduction in capital and never an expense of a 2,704,512 2,704,512 business. The following adjustments are needed: 10 How to record drawings of cash in the accounting books. (i) Stock at 31.12.20X5 was £91,413. 11 How to record drawings of goods in the accounting books. (ii)Depreciate buildings £10,000; motor vehicles £18,000; equipment £1 2,000. (iiiAccrue debenture interest £15,000. ‘ 587 44 Five sets of multiple choice questions Each chapter ends with a selection of allow you a quick and easy method of practice questions to prepare you for checking your own progress as you your examinations. work through the book. Part 2 l The ﬁnancial statements of sole traders Chapter 13 l Cash books account, the ﬁrst part of the entry having been made when the transact ion was recorded in the Review questions Cash Book. 13.2 If an entry has not been ﬁlled in, i.e. if the folio column is blank a gainst an entry, the double entry 7.1 From the following trial balance of A Moore, extracted after one year’s trading, prepare a trad- has not yet been made. As a result, looking through the entry lines in th e folio columns to ensure they have all been ﬁlled in helps detect such errors quickly. ing and proﬁt and loss account for the year ended 31 December 20X6. A balance sheet is not required. 13.3 It should be quite obvious whether discount is received or allowed. And, more importantly, the Trial Balance as at 31 December 20X6 double entry is with the Cash Book columns for discount, not with either the discount allowed Dr Cr account or the discount received account in the General Ledger. At the en d of the period (usually a month) the totals of the two discount columns in the Cash Book are po sted to the discount £ £ allowed and discount received accounts in the General Ledger. Sales 190,576 Purchases 119,832 Salaries 56,527 Motor expenses 2,416 Rent 1,894 Multiple choice questions: Set 2 Insurance 372 General expenses 85 Premises 95,420 Now attempt Set 2 of multiple choice questions. (Answers to all the mult iple choice questions are given in Appendix 2 at the end of this book.) Motor vehicles 16,594 Debtors 26,740 Each of these multiple choice questions has four suggested answers, (A) , (B), (C) and (D). You Creditors 16,524 Cash at bank 16,519 should read each question and then decide which choice is best, either ( A) or (B) or (C) or (D). Write down your answers on a separate piece of paper . You will then be able to redo the set of Cash in hand 342 questions later without having to try to ignore your answers from previou s attempts. Drawings 8,425 Capital 138,066 345,166 345,166 MC21 Gross proﬁt is (A) Excess of sales over cost of goods sold Stock at 31 December 20X6 was £12,408. (B) Sales less Purchases (Keep your answer; it will be used later in Question 8.1) (C) Cost of goods sold + Opening stock (D) Net proﬁt less expenses of the period. 7.2 From the following trial balance of B Lane after his ﬁrst year’s tr ading, you are required to draw up a trading and proﬁt and loss account for the year ended 30 Jun e 20X8. A balance sheet is MC22 Net proﬁt is calculated in the not required. (A) Trading account Trial Balance as at 30 June 20X8 (B) Proﬁt and loss account (C) Trial balance Dr Cr (D) Balance sheet. £ £ Sales 265,900 MC23 To ﬁnd the value of closing stock at the end of a period we Purchases 154,870 Rent 4,200 (A) do this by stocktaking Lighting and heating expenses 530 (B) look in the stock account Salaries and wages 51,400 (C) deduct opening stock from cost of goods sold Insurance 2,100 (D) deduct cost of goods sold from sales. Buildings 85,000 Fixtures 1,100 MC24 The credit entry for net proﬁt is on the credit side of Debtors 31,300 Sundry expenses 412 (A) The trading account Creditors 15,910 (B) The proﬁt and loss account Cash at bank 14,590 (C) The drawings account Drawings 30,000 (D) The capital account. Vans 16,400 Motor running expenses 4,110 Capital 114,202 MC25 Which of these best describes a balance sheet? 396,012 396,012 (A) An account proving the books balance (B) A record of closing entries Stock at 30 June 20X8 was £16,280. (C) A listing of balances (Keep your answer; it will be used later in Question 8.2) (D) A statement of assets. ‘ 80 147 ix BA10_A01.qxd 21/12/04 10:18 am Page x Guided tour of the companion website Business Accounting is supported by a fully interactive Companion Website, available at www.pearsoned.co.uk/wood, that contains a range of additional learning material. Multiple choice questions test your learning and provide helpful feedback to improve your results. Review questions and answers provide practice at
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