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Frontmatter

1. Accounting Concepts

Although you may not have been aware of it, you have already been applying certain accounting concepts when you were preparing accounting statements in your earlier studies. Examples of this are in valuation of stock and depreciation of fixed assets. The method of dealing with these operations has arisen from generally accepted accounting concepts. One further example is the differentiation between capital and revenue expenditure, where such expenses as rent and wages have been treated as revenue expenditures and have been taken account of in the calculation of the net profit. Capital expenditures — for example, fixtures — have been treated as an asset and have not been taken. account of in the profit calculation (except by way of depreciation).

P. Stevens, B. Kriefman

2. Partnership Accounts

Examination questions on the topic of partnership accounts, in particular, will be set to examine your understanding of other accounting areas. These will include subjects such as year-end adjustments and forecasts which you studied at GCSE. You should study the worked examples very carefully to ensure that you have a thorough grasp of these GCSE topics. It may be necessary for you to go back to your GCSE book to revise these areas.

P. Stevens, B. Kriefman

3. Issue of Shares and Debentures

A limited company may raise finance either by issuing shares or by raising loans. Debentures are simply a type of loan. Shares may be further subdivided into different types, as follows.

P. Stevens, B. Kriefman

4. Limited Companies’ Published Accounts

This topic was introduced to you at GCSE and now you must become familiar eith the permitted statutory formats as laid down in the 1985 Companies Act, the most common of which are shown below.

P. Stevens, B. Kriefman

5. Accounting Standards

Prior to 1981 the Companies Acts were generally deficient in the regulation of accounting principles, and even with what has now become the 1985 Companies Act there are still many different bases which can be used legally in the preparation of accounts. The bases of stock valuation and calculation of the depreciation charge are two examples.

P. Stevens, B. Kriefman

6. Redemption of Shares and Debentures

In the straightforward case of repaying debentures the entry will be Cr. BankDr. Debentures This will eliminate the liability and is all that needs to be done. However, because of the strain on the bank balance, many companies set aside out of profits annually an amount to provide for the redemption; this is done as follows: Dr. Profit and lossCr. Debenture redemption reserve The debenture redemption reserve is part of the total reserves of the company making up the shareholders’ funds. By doing this the company is indicating that it is not intending to distribute those reserves by way of dividends.

P. Stevens, B. Kriefman

7. Takeovers and Mergers

Businesses amalgamate in order that together they may achieve more than the sum total of what they would achieve by remaining independent. The amalgamation may come about as a result of: ia partnership being taken over by another sole trader, a partnership or a limited company;iia partnership being taken over by another partnership or a limited company;iiia limited company being taken over by another limited company;iva new company being formed to take over one or more existing businesses.

P. Stevens, B. Kriefman

8. Capital Reconstruction

Capital reconstruction schemes usually become necessary following periods of losses, and any or all of the following features will be present.

P. Stevens, B. Kriefman

9. Social Accounting

Social accounting has been defined as ‘the measurement and reporting, internal or external, of information concerning the impact of an entity and its activities on society’. It is, therefore, concerned with the reporting in accounting statements of a business’s activities which affect society. Fundamental to its being is the idea that management’s objectives should not solely be the maximisation of profits. They have additional responsibilities, such as: ito produce safe and reliable products of a high quality;iito ensure that they do not cause pollution;iiito ensure that they do not discriminate against groups of workers such as women and ethnic minorities;ivto ensure that their employees are not exposed to undue risk;vto devote some effort towards social programmes.

P. Stevens, B. Kriefman

10. Branch Accounts

Many retailing and wholesaling companies operate from more than one site. These other locations are known as branches. Among many well-known examples might be mentioned such companies as Tesco, Sainsbury and Marks and Spencer.

P. Stevens, B. Kriefman

11. Incomplete Records

Questions on the topic of incomplete records present you with real-life situations where businesses are not keeping a full set of double entry records. The subject is also a favourite with examiners, since giving you the minimum of information and asking you to complete the accounts provides an excellent test of your understanding of accounting.

P. Stevens, B. Kriefman

12. Non-trading Organisations

The topic of non-trading organisations is another of those introduced at GCSE but frequently examined at A-level. The principles of accounting for these organisations, as covered by the GCSE, do not change; however, the worked examples and further exercises will show you the type of question that you should be prepared to tackle.

P. Stevens, B. Kriefman

13. Valuation of Stock

Valuation of stock is subjective. However, there are some established ‘methods’ and principles which are commonly applied. The physical units or quantities of stock may be valued in several alternative ways, depending on the method applied. This will obviously affect trading profits, in as much as various possible values of opening and closing stock will affect the trading and net profits for each period under review.

P. Stevens, B. Kriefman

14. Marginal Costing

Marginal costing begins to look at costs in a way unfamiliar to many students. When applying marginal costing principles, the overriding objective is to exclude from costing any fixed or unavoidable costs. We must only consider the shortterm changes in total costs which will occur when the level of business activity changes — i.e. the marginal costs.

P. Stevens, B. Kriefman

15. Costing for Decision-making

The subject matter of this chapter is closely allied to that of Chapter 14, marginal costing. It is costing for decision-making using the concept of marginality — i.e. ‘What costs and/or revenues will change as a result of the decision made?’

P. Stevens, B. Kriefman

16. Budgeting

Questions on budgeting usually require an application of common-sense and a clear interpretation of the question. The biggest problem with these questions is that they tend to be rather time-consuming. It is essential that a clear layout be produced, so that it is easy to read, and avoidable errors are not made.

P. Stevens, B. Kriefman

17. Variance Analysis

Variance analysis is a means of comparing the finn’s performance over a period against the budget for that period. Its purpose is to highlight areas of poor perfonnance, known as adverse variances, as well as highlighting areas of ‘good’ performance, known as favourable variances.

P. Stevens, B. Kriefman

18. Ratio Analysis

Ratio analysis is a numerical attempt to analyse the performance and financial position of a business. By converting absolute numbers into ratios, we have the ability to make comparisons between one firm and another, or between one period and another. Indeed, ratio analysis, which is the interpretation of ratios, cannot be meaningfully achieved without some form of comparison.

P. Stevens, B. Kriefman

19. Cash Flow Statements

A profit and loss account is an important statement which assists users of accounts in assessing the financial performance of an organisation. It is prepared, as we know, using accounting concepts such as accruals or matching concept. It is important to understand that profit is an accounting concept and does not provide information about the financial liquidity of the organisation. Cash flow is important to the survival of any organisation and accounts should there fore give information concerning these cash flows. This is the objective of the cash flow statement, namely to identify cash flow from operating activities and other cash inflows and outflows and arrive at the increase/decrease in cash during the period.

P. Stevens, B. Kriefman

20. Capital Budgeting

Capital budgeting is really about how the firm decides which fixed assets are a ‘worthwhile’ investment or which alternative investments are the most profitable or financially attractive. There are four techniques commonly used: iThe average rate of returniiPaybackiiiNet present value (NPV)ivPercentage yield or internal rate of return (IRR) None of these methods needs to be used in isolation. Quite often management will evaluate investment projects using two or more of the above investment appraisal techniques.

P. Stevens, B. Kriefman

21. Use of Computers in Accounting

We cannot attempt here to provide a full authoritative text on the use of computers in accounting, but merely an outline of their applications, along with a few definitions and some suggested answers to typical examination questions.

P. Stevens, B. Kriefman

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