MASTERING PRINCIPLES OF ACCOUNTS MACMILLAN MASTER SERIES Basic Management Biology Chemistry Commerce Computer Programming Computers Data Processing Economics Electronics English Language French German Italian Marketing Mathematics Modem World History Office Practice Physics Principles of Accounts Sociology Spanish Statistics Study Skills Other books by I. Randall Stott published by Macmillan Education BASIC COMMERCE MASTERING PRINCIPLES OF ACCOUNTS J. RANDALL STOTT, F.C.A. M es> J. Randall Stott 1982 Line-drawings es> The Macmillan Press Ltd 1982 Softcover reprint of the hardcover 1s t edition 1982 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. First published 1982 by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world Filmset by Reproduction Drawings Ud Sutton, Surrey ISBN 978-0-333-30446-4 ISBN 978-1-349-16707-4 (eBook) DOI 10.1007/978-1-349-16707-4 The paperback editions of this book are sold subject to the condition that they shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which they are published and without a sirnilar condition including this condition being irnposed on the subsequent purchaser. This book is also available under the title Basic Principles o[ Accounts published by Macmillan Education. CONTENTS Preface IX 1 Introduction to accounting 1.1 Historical note 1 1.2 Drigin of double-entry book-keeping 1 1.3 Age of business efficiency 2 1.4 Accounting 2 1.5 liability to keep accounts 2 1.6 The language of the business world 3 2 Capital and the balance 2.1 The balance sheet 5 sheet 2.2 The changing form of assets and liabilities 6 3 The theory of double entry 3.1 l..edger accounts 10 3.2 The account 11 3.3 Cash sale contrasted with credit sale 12 4 Practical book-keeping (1) 4.1 Basic principles 17 4.2 Points to note on cash book illustration 18 4.3 Posting up the ledger accounts 18 4.4 The trial balance 19 4.5 The trading account 20 4.6 The balance sheet 21 5 Practical book-keeping (2) 5.1 Full-Iength illustration to the trial balance 25 6 Practical book-keeping (3) 6.1 Stock and the revenue accounts 35 6.2 Cost, expense and revenue 36 6.3 The trading and profit and loss account 37 6.4 Comments on the revenue accounts 38 6.5 Closing of the revenue accounts 39 6.6 Capital and revenue expenditure 40 CONTENTS 7 Practical book-keeping (4) 7.1 The balance sheet 43 7.2 Capital owned and capital employed 47 7.3 Working capital 47 7.4 Solvency 47 7.5 Personal drawings 48 8 Cash and bank: cash 8.1 The two-column cash book 51 discount 8.2 Textbook procedure 52 8.3 Cheques 53 8.4 Cheque counterfoils 54 8.5 Paying-in slip 54 8.6 Dishonoured cheques 54 8.7 Cash discount and the three- column cash book 55 8.8 Posting the discount totals 57 8.9 Banking terms 57 9 Bank reconciliation 9.1 Procedure in practice 63 9.2 General rules 63 9.3 Practical examples 63 10 Petty cash 10.1 Imprest system of petty cash 69 11 The day books, original 11.1 Purehases day book 73 records and V.A.T. 11.2 The invoice 74 11.3 Trade discount 74 11.4 Sales day book 77 11.5 Returns and allowances 78 11.6 Summary of day book procedure 80 11.7 Value-added tax 80 12 Thegenendjounud: 12.1 The general journal 86 correction of errors 12.2 Special entries and transfers 87 12.3 The correction of errors 88 12.4 Trial balance errors and location of errors 90 13 C1assification of 1edger 13.1 Sub division of ledgers 95 accounts 13.2 Destination of account balances 96 14 Recapitulation by illustra- tive exercise 100 IS The bank cash book: 15.1 The bank cash book 112 control accounts 15.2 Total accounts 114 15.3 Control accounts 115 15.4 Illustration of bought ledger control 115 15.5 Typical examination question 116 16 Depreciation of fIxed 16.1 Depreciation methods 121 assets: provision for 16.2 Provision for depreciation bad debts account 124 16.3 Disposal of fIxed assets 125 16.4 Scrap value 127 16.5 Bad debts 127 16.6 Bad debts recovered 128 16.7 Provision for bad debts 128 16.8 Creating the provision 129 17 Year,end adjustments 17.1 Expenses owing or accrued 135 17.2 Wages owing 135 17.3 Rent accrued or owing 136 17.4 Payments in advance (or pre-payments) 137 17.5 Insurance paid in advance 137 18 Comprehension and 18.1 The meaning of the balance interpretation sheet 147 18.2 Capital of proprietorship 148 18.3 Loan capital 148 18.4 Trade and expense creditors 148 18.5 Fixed and current assets 148 18.6 Business profits and losses 150 18.7 How profIt is represented by additional assets 150 18.8 Statistics for management 151 18.9 Gross profit percentages 152 18.10 Rate of stock turnover 152 18.11 Claims for 10ss of stock 153 18.12 Important ra ti os 154 19 Incomplete records and 19.1 Where cash records are single entry availab1e 159 19.2 Where few records are available 162 20 Non-trading concerns 20.1 Non-trading organisations 168 and club accounts 20.2 Receipts and payments account 168 20.3 Income and expenditure account 169 20.4 Illustration 170 21 Introduction to partner- 21.1 Separate capital accounts 177 ship accounts 21.2 Interest on capital 177 CONTENTS 21.3 Current accounts 177 21.4 Partnership sa1ary 178 21.5 Interest on drawings 178 21.6 Partnership agreement 178 21.7 The appropriation account and balance sheet 178 21.8 Goodwill 180 21.9 Admission of new partner 180 21.10 Amalgamation of sole traders 183 22 Manufacturing accounts 22.1 Manufacturing account: and production costs works cost: cost of sales 189 22.2 Prime and factory costs 191 22.3 Fixed and variable overheads 191 23 Introduction to company 23.1 Public and private companies 195 accounts 23.2 Types of share capita1 196 23.3 C1asses of shares 197 23.4 New terms 198 23.5 Share issues 198 23.6 Calls in arrear 200 23.7 Shares issued at a premium 202 23.8 Shares issued at a discount 202 23.9 Presentation of final accounts 203 23.10 Capita1 and revenue reserves 205 23.11 The annual return 205 23.12 Style of presentation 205 Appendix A.1 Basic documents of accounting 215 A.2 V.A.T. input and output procedure 217 A.3 Bin cards and stock records 219 A.4 Wages and labour records 220 A.5 An extension of the slip system 224 A.6 Examination guidance and technique 225 Answers to problem questions 229 Index 233 PREFACE The subject of accounting in this new textbook is built up progressively, step by step, with the interest of the student maintained through the recognition that 'double entry' is a working tool of management and not simply an exercise in balancing up sets of figures. The book is designed specifically to cover the latest syllabuses of all major examining bodies in Book-keeping and Accounts. The questions at the end of each chapter are based upon recent exami nation papers, and brief answers to all the problems questions are listed at the back of the book.