Financial Accounting Written in a very friendly, easy-to-read style, this excellent financial accounting text will suit beginners as well as more experienced learners. Comprehensive and up-to-date, it enables readers to explore different angles of financial reporting. It makes good use of a number of relevant contemporary examples, which helps with maintaining student motivation. Petros Vourvachis, Lecturer in Financial Accounting, Loughborough University, UK Financial accounting is the branch of accounting thought and practice concerned with preparing and providing information for external users of financial statements. This text- book helps students to understand the underlying concepts that underpin the theory of financial accounting in the solution of accounting problems. This international edition includes learning-path tools at the beginning of each chapter, extracts from the financial statements of listed companies, definitions of key terms and exam examples. Unlike other textbooks, Financial Accounting provides analysis of why accountants do what they do and not just how. With such a wealth of accounting models and diagrams intertwined with this analysis, this book guides the reader through all the concepts and practicalities of financial accounting. This book is an essential guide for students new to accountancy and finance and an equally useful tool for more experienced students and researchers. David Kolitz is Senior Lecturer in Accounting at the University of Exeter, UK. A companion website for this book is available at www.routledge.com/cw/kolitz This page intentionally left blank Financial Accounting A concepts-based introduction David Kolitz First published 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 David Kolitz The right of David Kolitz to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. 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 Names: Kolitz, David L., author. Title: Financial accounting: a concepts-based introduction/David Kolitz. Description: Abingdon, Oxon; New York, NY: Routledge, 2017. Identifiers: LCCN 2016024035| ISBN 9781138844964 (hardback) | ISBN 9781138844971 (pbk.) | ISBN 9781315728445 (ebook) Subjects: LCSH: Accounting. Classification: LCC HF5635.K792 2017 | DDC 657–dc23 LC record available at https://lccn.loc.gov/2016024035 ISBN: (hbk) 978-1-138-84496-4 ISBN: (pbk) 978-1-138-84497-1 ISBN: (ebk) 978-1-315-72844-5 Typeset in Bembo by Sunrise Setting Ltd, Brixham, UK To Maeve This page intentionally left blank Contents Preface ix Outline xi Supplements xiv PART I A conceptual overview 1 1 The accounting environment 3 2 Fundamental accounting concepts 23 3 The accounting equation and the analysis of transactions 67 PART II The accounting process 101 4 Recording external transactions 103 5 Recording internal transactions 144 6 Preparation and presentation of financial statements 166 7 Closing entries 193 PART III The accounting process expanded 215 8 Purchase and sale transactions 217 9 Analysis journals 259 PART IV Recognition and measurement of the elements of financial statements 285 10 Property, plant and equipment 287 11 Inventory and cost of sales 333 viii Contents 12 Accounts receivable 368 13 Cash and bank 385 14 Accounts payable 409 15 Owner’s equity and non-current liabilities 420 PART V Entity forms 431 16 Partnerships 433 17 Companies 477 PART VI Sundry topics 519 18 Statement of cash flows 521 19 Analysis of financial statements 552 20 Non-business entities 583 21 Incomplete records 601 Index 614 Preface Pedagogical philosophy The literature refers to the procedural and conceptual approaches in the teaching of an introductory accounting course. The procedural course is usually described as being concerned mainly with the techniques of double-entry bookkeeping, while the concep- tual approach in its pure form moves away from the techniques of accounting for transac- tions and uses a decision-making approach as the foundation for explaining the need and role of accounting in society. It is submitted that the procedural approach places too much emphasis on how to perform various techniques rather than why these techniques are performed. It is pro- posed that this may not develop the student’s ability to apply the techniques to practical situations. On the other hand, the application of the pure conceptual approach places little emphasis on the techniques of double-entry bookkeeping. The concepts model integrates the conceptual and procedural approaches to the teaching of introductory accounting by teaching students to understand the why of accounting before considering the how of accounting. This impacts on both the order of the teaching of topics and the way in which the various topics are taught. Features The requirements and terminology of the latest lAS 1 have been incorporated throughout the book. The statement of profit or loss is introduced and used throughout, except where there are items of comprehensive income, where a statement of comprehensive income is used. The statement of financial position is used throughout instead of the bal- ance sheet. The text takes account of the latest amendments in the Conceptual Framework project as well as the latest relevant International Financial Reporting Standards. Learning path tools are included at the beginning of each chapter. These include a Business focus section, where a real life scenario is discussed in the context of the chapter contents, as well as a Dashboard, which guides the student on how to study the particular chapter. Other features include the Key definitions, highlighted in each chapter, and the Pause and reflect scenarios. The former give students a focus when reading the text and are useful for revision purposes. The latter are short scenarios, both narrative and numerical, designed to confirm understanding, illustrate a specific point or make the reader think about the meaning and implication of the preceding paragraphs. The transactions in the Smart Concepts case study (that runs from Chapters 2 to 7) are grouped into distinct sets to make the case study manageable and understandable to