Work Out Accounting GCSE

Frontmatter

Introduction

Abstract

This book is primarily intended for students who have already studied some book-keeping. However, since all the principles and techniques are illustrated in the relevant chapters, it is not a prerequisite to have any previous knowledge.

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1. Principles of Double-entry Book-keeping

Abstract

Book-keeping is concerned with recording business transactions. The principle of double-entry book-keeping is based upon every transaction having two aspects or two parts, and for this reason two entries are made in the books of account in respect of each transaction.

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2. The Trial Balance

Abstract

So far we have concerned ourselves with the posting of transactions to the ledger accounts, and we have seen how we balance off the cash account. The next stage in the book-keeping process is to examine the balances which exist on all of the accounts which we have opened. Looking to worked example 1.1 in Chapter 1, we shall now examine the balance on each of the accounts in the books of B. Brown.

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3. Trading and Profit and Loss Accounts

Abstract

The trading and profit and loss account is prepared to calculate and show in detail the profit or loss for an accounting period of the business. It is divided into two sections (or accounts) — the trading section and the profit and loss section.

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4. Balance Sheet

Abstract

We saw in Chapter 3 that the trading and profit and loss account is prepared to show the profit or loss of the business for an accounting period. The balance sheet is prepared to show the financial position of the business at the end of that accounting period. To achieve this we show the amounts on the asset and liability accounts in the books of the business. You should note that it is not part of the double-entry system; the balances on the asset and liability accounts are carried forward to the next accounting period, as illustrated in Section 1.5 for the bank account. Before preparing the balance sheet, all of the asset and liability accounts should be balanced off as illustrated there.

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5. Cash Book and Cash Discounts

Abstract

The cash book in manual systems and some computerised systems is a book combining the cash account and the bank account. (Other uses will be discussed in Chapter 7.) Refer back to Section 1.4, where a bank account was illustrated, and compare the cash and bank accounts with the illustration below, where we have a separate column for cash and bank.

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6. Bank Reconciliation

Abstract

The cash book of a business shows the balance which the business considers it has as cash at the bank. In the same way as an individual receives a bank statement and compares it with his own records, in whatever form they may be, so a business must make that same comparison. The object of this chapter will be to discover differences between the balance shown on the bank statement and the balance according to the business’s own records.

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7. Day Books and VAT

Abstract

So far we have emphasised the importance of the double-entry system of bookkeeping. For each transaction which we have looked at we have explained the double entry involved — that is, the debit to one account and the credit to another. This is an important principle, which has to be understood. However, the number of transactions quickly becomes very large in even the smallest of businesses and to record every transaction as a double entry would be unwieldy. In the life of a business there are many transactions of a similar nature — i.e. there will be many credit sale transactions. The purpose of day books is to summarise all of these transactions of a like nature and to make one entry in the ledger for the sum total of all those transactions. These books are also called books of prime entry or books of original entry. They are not part of the double-entry system. We shall now examine these various books.

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8. Errors and Suspense Accounts

Abstract

In Chapter 2 we saw that the purpose of preparing the trial balance was to check the arithmetical accuracy of the books. We also noted that some errors would not be revealed by extracting a trial balance, and we shall now look at those types of error in greater detail.

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9. Bad Debts and Bad Debts Provision

Abstract

Examination questions involving bad debts can be centred around the accounting entries to record the writing off of bad debts and the creation, increase and decrease of bad debts provisions. Alternatively, their treatment can be examined as part of a larger question such as a final accounts question. If you can master the principles necessary to answer the first type of question, you should have no difficulty with the second type of question.

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10. Control Accounts

Abstract

We have referred in previous chapters to entries to accounts of debtors and creditors, and this is the area where control accounts are used. We also saw in Chapter 7 how day books reduce the necessity of posting several separate transactions in our ledger. It is the problems associated with a large number of transactions in the ledger that control accounts seek to resolve.

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11. Depreciation and Disposal of Assets

Abstract

In Chapter 4 we defined fixed assets as those held for continuing use in the business. Fixed assets therefore earn profits for a business over several years, which was our reason for showing them on our balance sheet rather than treating them as an expense in our profit and loss account. We must realise, however, that fixed assets do not last forever, except land, although some, such as buildings, may have very long lives. In view of the above, we should make a charge to the profit and loss account each year equal to the part of the cost which we have used. We call this charge depreciation.

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12. Year End Adjustments

Abstract

In the examples which we have looked at so far we have considered that the expenses and income which we have entered in our accounts relate exactly to the period for which we are preparing the profit and loss account. For example, if there was a debit of £550 on the rent account, we assumed that that was the rent expense for that accounting period. We shall now consider the accounting treatment where that is not the case and either there is rent owing at the balance sheet date or there is rent paid in advance at the balance sheet date. In both of these cases the amount appearing in our rent account does not represent the true rent expense for that accounting period.

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13. Departmental Accounts

Abstract

One of the reasons for keeping accounts is to provide information for the owners and management of the business. One of the important areas of information relates to the profitability of the business. It is obviously important to know the overall or total profit of the business, but in the case of a business running separate departments or selling distinct and separate products it is also useful to know the profit made by each department or earned by each product. This is the purpose of departmental accounts: to provide us with information regarding profitability of separate departments.

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14. Incomplete Records

Abstract

We have, in previous chapters, looked at the double-entry system of book-keeping. The advantages of the system can be summarised as follows:

(i)

There is a complete record of every transaction.

 

(ii)

There is an arithmetical check on the accuracy of the figures.

 

(iii)

Greater control can be exercised over the accounting records.

 

(iv)

Certain subsidiary functions in larger businesses can be delegated to junior staff.

 

(v)

Greater reliability can be placed on the accounts produced from those records.

 

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15. Income and Expenditure Accounts

Abstract

An income and expenditure account is prepared for non-trading organisations such as clubs and societies in place of the profit and loss account which we prepare for trading organisations. Items of income and expenditure are shown on this account on the basis of expenses incurred and revenue earned, which means that we must adjust for accruals and prepayments in exactly the same way as we do for trading organisations in the profit and loss account.

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16. Partnership Accounts: 1

Abstract

A partnership is a relationship between persons carrying on business in common with a view of profit. A key feature is that each partner accepts full liability for the debts of the partnership, which means that if the business becomes insolvent, the partners are liable for the full debts of the business in the same way as a sole trader. However, if one partner is unable to meet his share of the debts, it must be met by the other partners.

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17. Partnership Accounts: 2

Abstract

In Chapter 16 we looked at examples where the partnership had commenced as a new business. We shall now examine the situation where a partnership is formed by the amalgamation of two existing businesses. In a simple case where the partners bring in cash or assets the entries are the same as those illustrated in worked example 16.3 in Chapter 16 — that is,

Dr. Asset account

Cr. Partner’s capital account

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18. Manufacturing Accounts

Abstract

In the examples we have looked at so far, most businesses have been trading businesses. That is to say, they have purchased goods and resold them. We now look at what happens where instead of purchasing goods the business manufactures the goods itself. Simply stated, all of the costs incurred in connection with the cost of manufacturing are collected in the manufacturing account, which we prepare to ascertain the cost of finished production. Having ascertained the cost of finished production, we transfer this amount to the trading account, where it replaces the item ‘purchases’ which appears in the trading account of trading businesses.

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19. Stock Valuation

Abstract

We have already seen that stock is an asset of the business. In all of the examples so far, a closing stock valuation has been given to us in the question. We shall now look closer at how the stock valuation figure is arrived at and the problems involved. We first of all should consider the various bases on which we can value stock.

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20. Comprehension and Interpretation of Accounts

Abstract

We have so far been concerned with the preparation of final accounts without any examination of those accounts and without asking ourselves what those accounts mean or what they are telling us. In order to remedy this situation, we need to calculate some ratios from the figures in the final accounts. In addition to the calculation of ratios, we really need a yardstick or something else with which to compare our figures. For this purpose we may use any or all of the following: (a) previous year’s figures; (b) competitors’ figures; (c) average figures for the type of business which we are running. We shall now look at some accounting ratios in detail.

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21. Accounts of Limited Companies

Abstract

The format of the final accounts of limited companies is laid down in the Companies Act 1985. We need not concern ourselves at this level with a detailed study of the published formats, but you should carefully study the worked examples and follow the format which is used there in answering questions on accounts of limited companies. First of all, what is a limited company and what does ‘limited’ refer to? The answer is that the owner’s liability is limited to the capital of the business. In the case of sole traders and partnerships, if the business runs up debts, the proprietor is responsible for those debts and his personal assets can be taken in order to pay them. This is not so with a limited company. Outsiders are therefore more willing to invest in such a company than in a partnership, because they know the maximum amount which they can lose — i.e. the nominal value (explained later) of the shares they agree to buy.

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22. Forecasts and Budgets

Abstract

The object of going into business is to make a profit. But how do we ensure that we achieve that objective? The answer is that we must plan what we are going to do. If we plan what we are going to do, we can set out that plan in figures. The profit and loss accounts prepared in the examples so far have told us historically how much profit or loss we have made. In planning we prepare profit and loss accounts and balance sheets for future periods of time. If we then examine our plans or forecasts we can take any of the following actions:

(i)

Accept the plan as giving us a satisfactory profit and make business decisions based upon that plan.

 

(ii)

Amend the plan because we consider the profit inadequate.

 

(iii)

Scrap the plan completely and start on fresh plans.

 

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23. Funds Flow Statements

Abstract

So far, in the preparation of final accounts, we have concerned ourselves mainly with two statements: first, the profit and loss account, which tells us the profit or loss for the accounting period and how that profit or loss has been arrived at; second, the balance sheet, which provides us with details of assets and liabilities at that date.

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24. Multiple Choice Questions

Abstract

Many of the examining boards include in their papers a section with multiple choice questions. These questions do no more than test your knowledge of accounting within areas covered elsewhere in this book. However, just as with all types of questions in all examinations, familiarity with the style of question with which you will be faced is important.

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Backmatter