Accounting: AS Level and A Level

1 Accounting: AS Level and A LevelAS Level and A LevelAccountingHarold RandallPUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGEThe Pitt Building, Trumpington Street, Cambridge, United KingdomCAMBRIDGE UNIVERSITY PRESSThe Edinburgh Building, Cambridge CB2 2RU, UK40 West 20th Street, New York, NY 10011-4211, USA477 Williamstown Road, Port Melbourne, VIC 3207, AustraliaRuiz de Alarc n 13, 28014 Madrid, SpainDock House, The Waterfront, Cape Town 8001, South Cambridge University Press 2005 This book is in copyright. Subject to statutory exception and to the provisions of relevant collectivelicensing agreements, no reproduction of any part may take place without the written permission ofCambridge University published 2005 Printed in the United Kingdom at the University Press, CambridgeA catalogue record for this book is available from the British LibraryISBN 0 521 53993 5 paperbackACKNOWLEDGMENTSC over image Philip James Corwin/CORBISPast examination questions are reproduced by permission of the University of Cambridge LocalExaminations gridixI The accounting system11 Double-entry bookkeeping.

2 Cash transactions22 Double-entry bookkeeping: credit transactions73 Books of prime (or original) entry124 Balancing accounts195 The classification of accounts and division of the ledger216 The trial balance23II Financial accounting277 Trading and Profit and Loss Accounts for sole traders288 Balance Sheets for sole traders369 Accounting principles or concepts3910 Accruals and prepayments (the matching concept)4311 Provisions for the depreciation of fixed assets4812 Bad and doubtful debts5613 bank reconciliation statements6214 Control accounts6615 Suspense accounts7616 Incomplete records8417 Non-profit-making organisations (clubs and societies)

3 9418 Departmental accounts10319 Manufacturing Accounts11020 Valuation of stock117 Contents21 Partnership accounts12522 Partnership changes13323An introduction to the accounts of limited companies14824 Cash flow statements16425 Limited companies: more about share capital and debentures; capital reductions and reconstructions18126 Business purchase19227 Published company accounts200 III Financial reporting and interpretation20928 Interpretation and analysis21029 Company financing227IV Elements of managerial accounting23330 Costing principles and systems: total (or absorption) costing23431 Unit, job and batch costing24532 Process costing24933 Marginal costing25534 Budgeting26635 Standard costing27736 Investment appraisal288 Appendix 1: Table showing net present value of $1295 Answers to exercises and multiple-choice questions297 Index353viContentsPart IThe accounting is double-entrybookkeeping?

4 Double-entry bookkeeping is a system of recordingtransactions that recognises that there are two sides (oraspects) to every transaction. For example, you give yourfriend $10 in exchange for his watch. This involves yougiving him $10 (one aspect) and your friend receiving $10(the other aspect). The transfer of the watch involves himgiving you the watch (one aspect) and you receiving hiswatch (the other aspect). Every transaction involves givingand receiving. It is important that you recogniseandrecordboth aspects of every transaction in your accountsTransactions are recorded in ledger accounts.

5 An accountis a history of all transactions of a similar nature. A ledgeris a book that contains accounts. An account separateswhat is received from what is given. For example, a Cashaccount records cash received and cash paid, as shown:CashDebitCredit$$Mar 1 Cash receivedMar 2 Cash paidfrom customers240to suppliers80 Mar 4 Cash receivedMar 3 Wages paid116from customers118 The left-hand side of the account is called the debit sideand is used to record cash received (that is, coming intothe account). The right-hand side of the account is thecredit side and shows cash paid (that is, going out of theaccount).

6 All accounts have a debit side on the left torecord what is received, and a credit side on the right torecord what is given. In practice, the words debit and credit are not shown because bookkeepers do not needto be reminded of them. to record cash transactionsBookkeeping treats businesses as persons with separateidentities from their owners. For example, if Abdul is atrader, all his business transactions are recorded as thoseof the business and not as Abdul s own transactions. In the example that follows, some transactions arerecorded in ledger accounts. Make sure you understandthe bookkeeping entries, and observe the wordingcarefully.

7 This is important as you must be able to recordtransactions in ledger accounts (Here all transactions are recorded from the point of viewof Abdul s business, not from the point of view of thepeople with whom the business deals.)Transaction 1 April 1. Abdul starts business as a trader bypaying $10 000 into a bank account which he opens forthe business. Abdul gives, and the business receives,$10 000. An account for Abdul will be opened (his Capitalaccount) and credited with his capital . The businessBank account will be Capital$$Apr 1 Bank10 000 bank $$Apr 1 Abdul Capital10 0002 Double-entry bookkeeping:cash transactions1In this chapter you will learn.

8 That every transaction has two aspects that double-entry bookkeeping records both aspects of a transaction what ledger accounts are the meanings of the terms debit and credit how to record cash transactions in ledger accounting entry is dated and shows the name of theother account in which the double entry is sure you show these details for every entry youmake in a ledger in ledger accounts are known as postings, andbookkeepers are said to post transactions to 2 April 2. Abdul buys a motor vehicle for thebusiness and pays $2000 from the business bank Motor Vehicles account must be $$Apr 1 Abdul Capital10 000 Apr 2 Motor Vehicles2000 Motor Vehicles$$Apr 2 Bank2 000 Transaction 3 April 3.

9 Abdul buys stock (goods which hewill re-sell in the normal course of trade) for $3000 andpays by $$Apr 1 Abdul Capital10 000 Apr 2 Motor Vehicles2000 Apr 3 Purchases3000 Purchases$$Apr 3 Bank3 of stock are always debited to aPurchases account. An account called Stock account isused for a special purpose, which will be explained inchapter 4 April 4. Abdul sells a quantity of stock for$800 and banks the $$Apr 1 Abdul Capital10 000 Apr 2 Motor Vehicles 2000 Apr 4 Sales800 Apr 3 Purchases3000 Sales$$Apr 4 Bank800 Sales of stock are always credited to Sales account, neverto Stock 5 April 7.

10 A customer returns some goodsand receives a refund of $ $$Apr 1 Abdul Capital10 000 Apr 2 Motor Vehicles 2000 Apr 4 Sales800 Apr 3 Purchases3000 Apr 7 Sales Returns40 Sales Returns$$Apr returned are not debited to Sales accountbut to Sales Returns account. This account is also knownas Goods Inwards 6 April 8. Abdul returns some goods costing$100 to a supplier and receives a $$Apr 1 Abdul Capital10 000 Apr 2 Motor Vehicles2000 Apr 4 Sales800 Apr 3 Purchases3000 Apr 8 Purchases Returns100 Apr 7 Sales Returns40 Purchases Returns$$Apr returned to a supplier are credited toPurchases Returns account.