2016 INTRODUCTION TO ACCOUNTING STUDY TEXT P P A C I Introduction to accounting 2nd edition published by Emile Woolf International Bracknell Enterprise & Innovation Hub Ocean House, 12th Floor, The Ring Bracknell, Berkshire, RG12 1AX United Kingdom Email: [email protected] www.emilewoolf.com © Emile Woolf International, August 2016 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of Emile Woolf International, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation. You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer. Notice Emile Woolf International has made every effort to ensure that at the time of writing the contents of this study text are accurate, but neither Emile Woolf International nor its directors or employees shall be under any liability whatsoever for any inaccurate or misleading information this work could contain. © Emile Woolf International ii The Institute of Chartered Accountants of Pakistan Certificate in Accounting and Finance Introduction to accounting C Contents Page Syllabus objective and learning outcomes v Chapter 1 Introduction to business and accounting 1 2 Accounting concepts and terminology 21 3 The accounting equation 35 4 Double entry bookkeeping 51 5 Sales and purchases 91 6 Depreciation 123 7 Bad and doubtful debts 149 8 Accruals and prepayments 167 9 Inventory 195 10 Control accounts and control account reconciliations 211 11 Bank reconciliations 223 12 Correction of errors 237 13 Preparation of financial statements 257 14 Partnership accounts 277 Index 301 © Emile Woolf International iii The Institute of Chartered Accountants of Pakistan Introduction to accounting © Emile Woolf International iv The Institute of Chartered Accountants of Pakistan Certificate in Accounting and Finance Introduction to accounting S Syllabus objective and learning outcomes CERTIFICATE IN ACCOUNTING AND FINANCE INTRODUCTION TO ACCOUNTING Objective To enable candidates to equip themselves with the fundamental concepts of accounts needed as a foundation for higher studies of accounting. Learning Outcome On the successful completion of this paper candidates will be able to: 1 understand the nature of accounting, elements of accounts and double entry rules 2 identify financial transactions and make journal entries 3 prepare general ledger accounts and a trial balance 4 make period end adjustments prior to the completion of financial statements 5 prepare basic financial statements 6 prepare partnership accounts and understand the concept of goodwill. Grid Weighting Introduction to accounting and book keeping 30-35 Adjustments prior to completion of financial statements 25-30 Preparation of final accounts of sole traders 20-25 Accounting for partnerships 15-20 Total 100 © Emile Woolf International v The Institute of Chartered Accountants of Pakistan Introduction to accounting Syllabus Contents Level Learning Outcome Ref A Introduction to accounting and bookkeeping a Introduction to accounting 1 Meaning of business 1 LO1.1.1: Explain the characteristic of a business LO1.1.2: Classify transactions that fall under the definition of business transactions 2 Mode of business organization 1 LO1.2.1: Describe the key features (meaning) - sole of sole proprietorship, partnership proprietorship; partnership; and limited company limited company LO1.2.2: Differentiate amongst the features of sole proprietorship, partnership and limited company 3 Fundamental accounting 2 LO1.3.1: Explain the difference concepts - accrual, between book-keeping and consistency, true and fair view, accounting materiality, prudence, LO1.3.2: Understand and apply the completeness, going concern, main accounting concepts, namely, substance over form accrual, consistency, and completeness LO1.3.3: Demonstrate familiarity with the concepts of true and fair view, materiality, prudence, going concern and substance over form 4 Financial statements- 1 LO1.4.1: List the components of a components, responsibility, set of financial statements. presentation, users LO1.4.2: Explain the characteristics and purpose of the statement of financial position and the statement of comprehensive income. LO1.4.3: Describe the basic presentation layout of statements of financial position and statements of comprehensive income. LO1.4.4: Identify users of financial information and describe how the information is useful to them © Emile Woolf International vi The Institute of Chartered Accountants of Pakistan Syllabus objective and learning outcomes Syllabus Contents Level Learning Outcome Ref b Bookkeeping 1 Elements of financial 2 LO2.1.1: Define and identify statements (meaning) - examples of assets, liabilities, Assets, liabilities, equity, equity, income and expenses income, expense LO2.1.2: Apply the underlying concepts of assets, liabilities, income and expenses. 2 Chart of accounts 1 LO2.2.1: Understand the meaning of a chart of accounts and explain its purpose. 3 Double entry system, 2 LO2.3.1: Understand and apply the accounting equation and rules accounting equation (Assets = of debit and credit Liabilities + Equity) LO2.3.2: identify financial and non- financial transactions in a well defined scenario LO2.3.3: Understand and apply the concept of double entry accounting 4 Books of prime entry 2 LO2.4.1: Understand the use of business documents as source of information LO2.4.2: Describe the basic contents of the sales day book, sales ledger, customer/debtors ledger, purchase day book, purchase journal and purchase ledger/creditors ledger LO2.4.3: Understand the use and format of the cash book and its types LO2.4.4: Record their respective entries. c General ledger and trial balance 1 General ledger 2 LO3.1.1: Describe the main features of the general ledger LO3.1.2: Post entries in the general ledger LO3.1.3: Balance the ledger accounts as required, make transfers to the final accounts. © Emile Woolf International vii The Institute of Chartered Accountants of Pakistan Introduction to accounting Syllabus Contents Level Learning Outcome Ref 2 Trial balance 2 LO3.2.1: Understand the purpose of the trial balance LO3.2.2: Understand and demonstrate mapping between general ledger balances and the trial balance LO3.2.3: Identify the limitations of a trial balance. B Adjustments before final accounts 1 Straight line, diminution 2 LO4.1.1: Explain the nature of balance, sum-of-years-digit, depreciation expense and number of units produced accumulated depreciation methods, recording of LO4.1.2: Calculate depreciation depreciation on Fixed Assets expense using straight line, and disposal of Fixed Assets diminution balance, sum-of-digits and number of units produced methods LO4.1.3: Post journal entry to record depreciation expense LO4.1.4: Understand the disposal of Fixed Assets and gain/loss on disposal LO4.1.5: Post journal entries of disposal and gain or loss on disposal 2 Allowance for bad debts and 2 LO4.2.1: Estimate allowance for write off bad debts based on a given policy LO4.2.2: Post journal entry to record bad debt expense LO4.2.3: Compute and record write off and understand its impact on allowance for bad debts. 3 Prepayments and accruals 2 LO4.3.1: Understand the matching concept that applies to prepayments and accruals. LO4.3.2: Post journal entries and ledger entries for prepayments and accruals. LO4.3.3: Post adjusting entries to recognize revenues or expenses © Emile Woolf International viii The Institute of Chartered Accountants of Pakistan