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TENTH EDITIONEvery year, thousands of students rely onFrank Wood's best-selling books to help thempass their accountancy exams.Business Accounting Volume 1 is used on a widevariety of courses in accounting and business, bothat secondary and tertiary level and for thosestudying for professional qualifications.'A classic textbook that has set thousands of students on a straight path since it was firstpublished, Wood & Sangster's Business Accounting can be recommended without reservation to allaccounting students.'Dr 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 easyfor students to understand. This is especially true for students who want to study accounting forthe first time or have little knowledge of the accounting subject.'Caroline Teh, Inti College, Malaysia.FRANK WOOD’S Over 120 brand new review questions for exampractice Coverage of International Accounting Standards2005 Additional and updated worked examples forareas of difficulty Treatment of VAT for companies operatingwithin the United Kingdom Expanded introduction to the language andhistory of accountingbusiness accounting1New to this edition:Features: Easy-to-follow explanations of contemporaryaccounting practice, including double entrybookkeeping and the preparation of financialstatements Clear and logical progression through topics Activities designed to reinforce yourunderstanding of key concepts Over 300 review questions, including pastExamination Board questions 100 multiple choice questions with answers Regularly updated Companion Website includingfurther self-test questions and accountingstandards updatesWOOD & SANGSTERBusiness Accounting Volume 1 is the world’s bestselling textbook on bookkeeping and accounting.Now in its tenth edition, it has become thestandard introductory text for accounting studentsand professionals alike.FRANK WOOD’S1businessaccountingTENTH EDITIONFRANK WOOD &ALAN SANGSTERAn imprint ofAdditional student support itional student support atwww.pearsoned.co.uk/wood

BA10 A01.qxd 21/12/04 10:18 am Page iFRANK WOOD’Sbusiness accounting 1Visit the Business Accounting, tenth edition Companion Websiteat www.pearsoned.co.uk/wood to find valuable student learningmaterial including:llllllLearning objectives for each chapterMultiple choice questions to help test your learningReview questions and answersLinks to relevant sites on the webSearchable online glossaryFlashcards to test your knowledge of key terms and definitions

BA10 A01.qxd 21/12/04 10:18 am Page iiFrank Wood1926–2000

BA10 A01.qxd 21/12/04 10:18 am Page iiiFRANK WOOD’S1businessaccountingTENTH EDITIONFRANK WOOD BSc (Econ), FCAandALAN SANGSTER BA, MSc, Cert TESOL, CA

BA10 A01.qxd 21/12/04 10:18 am Page ivPearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEand Associated Companies throughout the world.Visit us on the World Wide Web atwww.pearsoned.co.ukFirst edition published in 1967Second edition published under theLongman imprint in 1972Third edition published in 1979Fourth edition published in 1984Fifth edition published in 1989Sixth edition published in 1993Seventh edition published in 1996Eighth edition published under theFinancial Times Pitman Publishing imprint in 1999Ninth edition published in 2002Tenth 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, 2005The rights of Frank Wood and Alan Sangster to be identified asauthors of this work have been asserted by them in accordance withthe Copyright, Designs and Patents Act 1988.All rights reserved. No part of this publication may be reproduced, storedin a retrieval system, or transmitted in any form or by any means, electronic,mechanical, photocopying, recording or otherwise, without either the priorwritten permission of the publisher or a licence permitting restricted copyingin the United Kingdom issued by the Copyright Licensing Agency Ltd,90 Tottenham Court Road, London W1T 4LP.ISBN 0 273 68149 4British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British LibraryLibrary of Congress Cataloging-in-Publication DataA catalog record for this book is available from the Library of Congress10 9 8 7 6 5 4 3 2 108 07 06 05Typeset in 9.5/11.5 pt Sabon by 35.Printed and bound in China.SWTC /01Also available:Frank Wood’s Business Accounting Vol 2 – 0273 693107Book-keeping & Accounts – 0273 685481Frank Wood’s A-level Accounting – 0273 685325

BA10 A01.qxd 21/12/04 10:18 am Page vContentsNotes for teachers and lecturersNotes for studentspart 1Introduction to double entry bookkeeping1234The accounting equation and the balance sheetThe double entry system for assets, liabilities and capitalThe asset of stockThe effect of profit or loss on capital and the double entry system forexpenses and revenues5 Balancing off accounts6 The trial balancepart 21112131415161718192021222331828384957The financial statements of sole traders7 Trading and profit and loss accounts: an introduction8 Balance sheets9 Trading and profit and loss accounts and balance sheets: furtherconsiderations10 Accounting conceptspart 3xiiixv718391104Books of original entryBooks of original entry and ledgersThe banking system in the UKCash booksThe sales day book and the sales ledgerThe purchases day book and the purchases ledgerThe returns day booksThe journalThe analytical petty cash book and the imprest systemValue added taxColumnar day booksEmployees’ payComputers and accountingComputerised accounting systems119125136153162168180191200218226234244part 4 Adjustments for financial statements24 Capital expenditure and revenue expenditure259v

BA10 A01.qxd 21/12/04 10:18 am Page viContents25 Bad debts, provisions for doubtful debts, and provisions for discountson debtors26 Depreciation of fixed assets: nature and calculations27 Double entry records for depreciation28 Accruals and prepayments and other adjustments for financialstatements29 The valuation of stock30 Bank reconciliation statements31 Control accounts32 Errors not affecting trial balance agreement33 Suspense accounts and errorsScenario questionspart 534353637383940414243444546vi515533548556576608An introduction to financial analysis47 An introduction to the analysis and interpretation of accountingstatementspart 8411423443457480488505Partnership accounts and company accountsPartnership accounts: an introductionGoodwill for sole traders and partnershipsRevaluation of partnership assetsPartnership dissolutionAn introduction to the financial statements of limited liability companiesPurchase of existing partnership and sole traders’ businessespart 7315336351364378386404Special accounting proceduresIntroduction to accounting ratiosSingle entry and incomplete recordsReceipts and payments accounts and income and expenditure accountsManufacturing accountsDepartmental accountsCash flow statementsJoint venture accountspart 6269284294623An introduction to management accounting48 An introduction to management accounting657Appendices1 Answers to review questions2 Answers to multiple choice questions3 Glossary667741742Index753

BA10 A01.qxd 21/12/04 10:18 am Page viiSupporting resourcesVisit www.pearsoned.co.uk/wood to find valuable online resourcesCompanion Website for studentslLearning objectives for each chapterlMultiple choice questions to help test your learninglReview questions and answerslLinks to relevant sites on the weblSearchable online glossarylFlashcards to test your knowledge of key terms and definitionsFor instructorslComplete, downloadable Solutions ManuallPowerPoint slides that can be downloaded and used as OHTsAlso: The Companion Website provides the following features:lSearch tool to help locate specific items of contentlE-mail results and profile tools to send results of quizzes to instructorslOnline help and support to assist with website usage and troubleshootingFor more information please contact your local Pearson Education salesrepresentative or visit www.pearsoned.co.uk/wood

BA10 A01.qxd 21/12/04 10:18 am Page viiiGuided tour of the bookPart openingTHE FINANCIALSTATEMENTS OF SOLETRADERSpartchapter25Balancing off accountsLearning objectivesAfter you have studied this chapter, you should be able to:lclose accounts when appropriatelbalance off accounts at the end of a period and bring down the opening balanceto the next periodldistinguish between a debit balance and a credit balanceldescribe and prepare accounts in three-column formatIntroductionIn this chapter, you’ll learn how to discover what the amount outstanding on anaccount is at a particular point in time. You’ll also learn how to close accounts thatare no longer needed and how to record appropriate entries in accounts at the endand beginning of periods. Finally, you’ll learn that T-accounts are not the only wayto record accounting transactions.5.1Learning objectivesoutline what you willneed to havelearned by the endof the chapter.Accounts for debtorsIntroductionWhere debtors have paid their accountsThis part is concerned with preparing, from double entry records,the financial statements of sole traders.78910So far you have learnt how to record transactions in the accounting books by means of debit andcredit entries. At the end of each accounting period the figures in each account are examined inorder to summarise the situation they present. This will often, but not always, be a year if youare calculating profit. It will be at least once a month if you want to see what is happening withrespect to particular accounts. Probably the most obvious reason for this is to find out howmuch our customers owe us for goods we have sold to them. In most businesses this is done atthe end of each month.Trading and profit and loss accounts: an introduction71Balance sheets83Trading and profit and loss accounts and balance sheets:further considerations91Accounting concepts104Activity5.1Why do you think we would want to look at the debtor accounts in theaccounting books as often as once a month?49A wide range of exhibits offer clear examplesof accounting practice and methodology.Chapter 27 l Double entry records for depreciationThe depreciation is posted directly into the cumulative provision for depreciation account.The double entry is:Part 3 l Books of original entry11.8Debit the profit and loss accountCredit the accumulated provision for depreciation accountTypes of accountsSome people describe all accounts as personal accounts or as impersonal accounts.l Personal Accounts – these are for debtors and creditors (i.e. customers and suppliers).l Impersonal Accounts – divided between ‘real’ accounts and ‘nominal’ accounts:Exhibit 27.1– Real Accounts – accounts in which possessions are recorded. Examples are buildings,machinery, fixtures and stock.– Nominal Accounts – accounts in which expenses, income and capital are recorded.A business has a financial year end of 31 December. A computer is bought for 2,000 on 1 January20X5. It is to be depreciated at the rate of 20 per cent using the reducing balance method. Therecords for the first three years are:A diagram may enable you to follow this better:Computer20X5Jan 1 Cash 2,000Accumulated Provision for Depreciation – Computer20X5Dec 31 Balance c/d 40020X5Dec 31 Profit and loss20X6Dec 31 Balance c/d72020X6Jan1 Balance b/dDec 31 Profit and loss20X7Dec 31 Balance c/d976 40040032072072020X7Jan1 Balance b/dDec 31 Profit and loss72025697697620X8Jan1 Balance b/d97611.9 40032025620X5 Depreciation20X6 Depreciation20X7 DepreciationNominal and private ledgersThe ledger in which the impersonal accounts are kept is known as the Nominal (or ‘General’)Ledger. In order to ensure privacy for the proprietor(s), the capital, drawings, and other similaraccounts are sometimes kept in a Private Ledger. This prevents office staff from seeing details ofitems which the proprietors want to keep secret.Profit and Loss Account (extracts) for the year ended 31 DecemberActivity11.2Note: In this case, the depreciation for the period being posted to the profit and loss account isbeing described as ‘depreciation’ and not by the name of the account it is being posted from. Thisclearly is not the convention usually adopted when posting entries between ledger accounts andis very much ‘the exception that proves the rule’.Activity27.311.10The accountant as a communicatorThe impression is often given that all that an accountant does is produce figures arranged in various ways. This has led to a perception that accountants are boring, pragmatic people with nosense of humour. While it is true that such work does take up quite a lot of an accountant’s time,it does not acount for all of a typical accountant’s work. Accountants also need to be good communicators, not just in the way they present accounting information on paper, but also in howthey verbally communicate the significance of the information they prepare.An accountant can obviously arrange the financial figures so as to present the information inas meaningful a way as possible for the people who are going to use that information. That is,What advantages are there in making this exception to the rule by using’depreciation’ rather than ‘accumulated provision for depreciation’ in the profitand loss account entry?Now the balance on the Computer Account is shown on the balance sheet at the end of eachyear less the balance on the Cumulative Provision for Depreciation Account.295Why bother with books of original entry? Why don’t we just enter transactionsstraight into the ledgers?122Activities occur frequently throughout the bookto test your understanding of new concepts.viii

BA10 A01.qxd 21/12/04 10:18 am Page ixA number of worked examples are providedto guide you through more difficult concepts.Chapter 45 l An introduction to the financial statements of limited liability companiesPart 1 l Introduction to double entry bookkeepingIn Business Accounting 2 you will be told more about the differences between ‘revenue reserves’and ‘capital reserves’. The most important reason for the distinction has to do with deciding howmuch can be treated as being available for paying out to shareholders as dividends. ‘Revenuereserves’, which include the profit and loss account balance and the general reserve, can betreated as available for such dividends. ‘Capital reserves’, which will include revaluation reserveson property and land, also some reserves (which you have not yet met) which have to be createdto meet some legal statutory requirement, cannot be treated as available for payment of dividends.A term which sometimes appears in examinations is that of ‘fungible assets’. Fungible assetsare assets which are substantially indistinguishable one from another.CashAug 25 Drawings 50Sometimes goods are taken for private use. These are also known as drawings. In Section 3.2,you learnt that when goods are purchased, the purchases account is debited. As a result, whengoods are withdrawn it is the purchases account which should be credited.The following example illustrates the entries for this form of drawings:On 28 August, the owner takes 400 of goods out of the business for his own use.sllA fully worked exampleEffectExhibit 45.8Action1 Capital is decreased by 4002 Stock is decreased by 400Debit the drawings account 400Credit the purchases account 400The following trial balance is extracted from the books of F W Ltd as on 31 December 20X5:DrawingsTrial balance as on 31 December 20X5Dr 10% preference share capitalOrdinary share capital10% debentures (repayable 20X9)Goodwill at costBuildings at costEquipment at costMotor vehicles at costProvision for depreciation: buildings 1.1.20X5Provision for depreciation: equipment 1.1.20X5Provision for depreciation: motor vehicles 1.1.20X5Stock 1.1.20X5SalesPurchasesCarriage inwardsSalaries and wagesDirectors’ remunerationMotor expensesBusiness rates and insurancesGeneral expensesDebenture interestDebtorsCreditorsBankGeneral reserveShare premium accountInterim ordinary dividend paidProfit and loss account 31.12.20X4Cr 200,000700,000300,000 400Aug 28 g 28 Drawings100,00024,00051,600Learning outcomes84,912You should now have learnt:1,022,0001 How to calculate profit by comparing revenue with expenses.2 That the accounting equation is central to any explanation of the effect 86,100trading upon capital.34567113,7008,39050,000100,000Why every different type of expense is shown in a separate expense account.Why every different type of revenue is shown in a separate revenue account.Why an expense is shown as a debit entry in the appropriate expense account.Why revenue is shown as a credit entry in the appropriate revenue account.How to enter a series of expense and revenue transactions into the appropriateT-accounts.Learning outcomesrevisit and reinforcethe major topicscovered in thechapter.8 What is meant by the term ‘drawings’.9 That drawings are always a reduction in capital and never an expense of a35,0002,704,512 40043,2122,704,512business.10 How to record drawings of cash in the accounting books.11 How to record drawings of goods in the accounting books.The following adjustments are needed:(i) Stock at 31.12.20X5 was 91,413.(ii ) Depreciate buildings 10,000; motor vehicles 18,000; equipment 12,000.(iii) Accrue debenture interest 15,000.‘58744Each chapter ends with a selection ofpractice questions to prepare you foryour examinations.Five sets of multiple choice questionsallow you a quick and easy method ofchecking your own progress as youwork through the book.Part 2 l The financial statements of sole tradersChapter 13 l Cash booksaccount, the first part of the entry having been made when the transaction was recorded in theCash Book.Review questions13.2 If an entry has not been filled in, i.e. if the folio column is blank against an entry, the double entry7.1has not yet been made. As a result, looking through the entry lines in the folio columns to ensurethey have all been filled in helps detect such errors quickly.From the following trial balance of A Moore, extracted after one year’s trading, prepare a trading 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, theTrial Balance as at 31 December 20X6SalesPurchasesSalariesMotor expensesRentInsuranceGeneral expensesPremisesMotor vehiclesDebtorsCreditorsCash at bankCash in handDrawingsCapitalDrCr 740Multiple choice questions: Set 2Now attempt Set 2 of multiple choice questions. (Answers to all the multiple choice questions aregiven in Appendix 2 at the end of this ep your answer; it will be used later in Question 8.1)7.2From the following trial balance of B Lane after his first year’s trading, you are required todraw up a trading and profit and loss account for the year ended 30 June 20X8. A balance sheet isnot required.Trial Balance as at 30 June 20X8DrCr 412(Keep your answer; it will be used later in Question 8.2)80MC21MC22(A)(B)(C)(D)Gross profit is114,202396,012(A)(B)(C)(D)To find the value of closing stock at the end of a period wedo this by stocktakinglook in the stock accountdeduct opening stock from cost of goods solddeduct cost of goods sold from sales.MC2415,910Net profit is calculated in theTrading accountProfit and loss accountTrial balanceBalance 12Stock at 30 June 20X8 was 16,280.Each of these multiple choice questions has four suggested answers, (A), (B), (C) and (D). Youshould read each questi

Business Accounting Volume 1is the world’s best-selling textbook on bookkeeping and accounting. Now in its tenth edition, it has become the standard introductory text for accounting students and professionals alike. New to this edition: Over 120 brand new review questions for exam practice Coverage of International Accounting Standards 2005 Additional and updated worked examples for areas of .

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