115 Accounting As Level Theory and Practice

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1 BOOKEPING AND ACCOUNTING 16
1.1 BRANCHES OF ACCOUNTING 16
1.2 ACCOUNTING EQUATION 16
1.3 TRANSACTION 17
1.4 BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) 19
2 ACCOUNTING FOR ASSETS, LIABILITIES AND CAPITAL 25
2.1 EVOLUTION OF BOOK KEEPING 25
2.2 RULES OF DEBIT AND CREDIT 25
2.3 LEDGER 26
2.4 ACCOUNT 26
2.5 DOUBLE-ENTRY RELATING TO ASSETS AND LIABILITIES 27
2.6 BALANCING OF AN ACCOUNT 28
2.7 TRIAL BALANCE 31
3 ACCOUNTING FOR INVENTORIES 35
3.1 INVENTORY OF GOODS 35
3.2 BOOKKEEPING FOR INVENTORY OF GOODS 25
3.3 PURCHASES 35
3.4 SALES 36
3.5 PURCHASES RETURNS (RETURN OUTWARDS) 37
3.6 SALES RETURNS (RETURNS INWARDS) 37
3.7 TRADING SECTION OF INCOME STATEMENT 38
3.8 CLOSING OF INCOMES AND EXPENSES 38
3.9 CLOSING INVENTORY 39
3.10 OPENING INVENTORY 40
3.11 CALCULATION OF PROFITS FOR SERVICE BUSINESSES 40
4 ACCOUNTING FOR INCOMES AND EXPENSES 44
4.1 INCOMES 44
4.2 EXPENSES 44
4.3 DOUBLE-ENTRY FOR EXPENSES AND INCOMES (REVENUES) 44
4.4 BOOKKEEPING FOR INCOMES AND EXPENSES 45
4.5 CALCULATION OF PROFIT FOR THE YEAR 46
4.6 CLOSING OF INCOMES AND EXPENSES 46
5 FINANCIAL STATEMENTS-AN INTRODUCTION 50
5.1 NEED FOR INCOME STATEMENT 50
5.2 USES OF INCOME STATEMENT 50
5.3 CARRIAGE INWARDS 50
5.4 CARRIAGE OUTWARDS 51
5.5 INCOME STATEMENT AND BALANCE SHEET-AN IMPORTANT CONSIDERATION 51
5.6 ACCOUNTING PERIOD 51
5.7 DRAWINGS 51
5.8 ASSETS 51
5.9 LIABILITIES 52
6 BOOKS OF ORIGINAL ENTRY & DIVISION OF LEDGER 61
6.1 ADVANTAGES OF MAINTAINING BOOKS OF ORIGINAL ENTRY 62
6.2 COMPONENTS OF BOOKS OF ORIGINAL ENTRY 62
6.3 SALES JOURNAL 62
6.4 PURCHASES JOURNAL 64
6.5 RETURN INWARDS JOURNAL 65
6.6 RETURN OUTWARDS JOURNAL 66
6.7 GENERAL JOURNAL 67
6.8 CASH BOOK 68
6.9 PERSONAL LEDGERS 71
6.10 CASH BOOK 71
6.11 GENERAL LEDGER 72
6.12 PRIVATE LEDGER 72
7 BANK RECONCILIATION STATEMENTS 76
7.1 REASONS FOR DIFFERENCE BETWEEN BANK STATEMENT AND CASH BOOK BALANCE 76
7.2 BANK RECONCILIATION STATEMENT 77
7.3 STEPS FOR PREPARING A BANK RECONCILIATION STATEMENT 77
7.4 USES OF BANK RECONCILIATION STATEMENT 80
8 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS 86
8.1 BAD DEBTS 86
8.2 DOUBTFUL DEBTS 86
8.3 PROVISION FOR DOUBTFUL DEBTS 86
8.4 AGEING SCHEDULE 88
8.5 BAD DEBTS RECOVERY 89
8.6 CASH DISCOUNTS ALLOWED AND PROVISION FOR DISCOUNTS ALLOWED 89
8.7 WHY PROVISIONS ARE MADE FOR BAD DEBTS AND DISCOUNTS ALLOWED 90
8.8 SALIENT POINTS TO NOTE 90
9 ACCOUNTING FOR NON-CURRENT ASSET 86
9.1 DEPRECIATION 94
9.2 AMORTISATION AND DEPLETION. 94
9.3 EFFECTS ON CASH FLOWS 94
9.4 RELATIONSHIP WITH MARKET VALUE 94
9.5 CAUSES FOR DEPRECIATION 94
9.6 FACTORS FOR CALCULATING DEPRECIATION 95
9.7 CHARACTERISTICS OF DEPRECIATION 95
9.8 WHY DEPRECIATION IS PROVIDED FOR? 95
9.9 METHODS FOR CALCULATING DEPRECIATION 95
9.10 ANNUAL DEPRECIATION UNDER REDUCING BALANCE & STRAIGHT LINE METHODS. 98
9.11 DISTINCTIVE FEATURES OF STRAIGHT LINE AND REDUCING BALANCE METHOD 98
9.12 CHOICE OF A METHOD 99
9.13 DIFFERENCE BETWEEN DEPRECIATION AND PROVISION FOR DEPRECIATION 99
9.14 DEPRECIATION POLICIES 99
9.15 DEPRECIATION ACCOUNTING 99
9.16 DEPRECIATION AND ACCOUNTING CONCEPTS 101
10 ACCOUNTING FOR NON-CURRENT ASSET 106
10.1 CONVENTIONS AND CONCEPTS – AN IMPLICATION 106
10.2 DUAL ASPECT (DUALITY) CONCEPT. 106
10.3 BUSINESS ENTITY CONCEPT 106
10.4 PRUDENCE CONCEPT 107
10.5 CONSISTENCY CONCEPT 107
10.6 MATERIALITY CONCEPT 108
10.7 REALISATION CONCEPT 108
10.8 ACCRUAL CONCEPT 108
10.9 METHODS FOR CALCULATING DEPRECIATION 108
10.10 SUBSTANCE OVER FORM 109
10.11 OBJECTIVITY 109
10.12 MONEY MEASUREMENT CONCEPT 109
10.13 HISTORICAL COST CONCEPT 109
10.14 GOING CONCERN CONCEPT 110
10.15 REVALUATION OF ASSETS 110
10.16 A CRITICAL REVIEW OF ACCOUNTING CONVENTIONS 110
11 CAPITAL AND REVENUE 113
11.1 TREATMENT OF CAPITAL AND REVENUE ITEMS IN FINANCIAL STATEMENT 113
11.2 DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURES. 113
11.3 APPLICATION OF MATERIALITY CONCEPT 114
11.4 DIFFERENCE BETWEEN CAPITAL AND REVENUE RECEIPTS 114
11.5 EFFECTS OF WRONG TREATMENT OF CAPITAL AND REVENUE ITEMS 115
12 CORRECTION OF ERRORS AND SUSPENSE ACCOUNT 118
12.1 TYPES OF ERRORS 118
12.2 SUSPENSE ACCOUNT. 120
12.3 EFFECT ON PROFIT OF CORRECTING ERRORS 122
12.4 EFFECTS ON BALANCE SHEET OF CORRECTING ERRORS. 122
13 CONTROL ACCOUNTS 128
13.1 CONTROL ACCOUNTS IN CAMBRIDGE A LEVEL SYLLABUS 128
13.2 THE FORMAT OF SALES LEDGER AND PURCHASE LEDGER CONTROL ACCOUNTS.. 128
13.3 HOW CONTROL ACCOUNTS ARE PREPARED? 129
13.4 CONTRA ENTRY 130
13.5 TWO BALANCES OF CONTROL ACCOUNTS. 131
13.6 CORRECTION OF ERRORS IN CONTROL ACCOUNTS 133
13.7 ADVANTAGES AND USES OF CONTROL ACCOUNTS 136
13.8 LIMITATIONS (DISADVANTAGES) OF PREPARING CONTROL ACCOUNTS 136
14 FINANCIAL STATEMENTS WITH ADJUSTMENTS 142
14.1 CASH AND ACCRUAL BASIS OF ACCOUNTING 142
14.2 NEED FOR ADJUSTMENTS. 142
14.3 TYPES OF ADJUSTMENTS 142
14.4 INVENTORY AT YEAR END 143
14.5 DRAWINGS OF GOODS FOR OWNER’S PERSONAL USE 143
14.6 ACCRUED EXPENSES 143
14.7 ACCRUED INCOMES 144
14.8 PREPAID EXPENSES (OTHER RECEIVABLES) 144
14.9 PRE-RECEIVED /DEFERRED INCOMES 145
14.10 TREATMENT OF OPENING ACCRUALS OR PREPAYMENTS 145
14.11 DEPRECIATION 146
14.12 BAD DEBTS 147
14.13 PROVISION FOR DOUBTFUL DEBTS 147
14.14 ADJUSTING MORE THAN TWO ACCOUNTS 148
14.15 CALCULATION OF PROFITS FOR SERVICE BUSINESSES 150
14.16 USERS OF FINANCIAL STATEMENTS 150
14.17 LIMITATIONS OF FINANCIAL STATEMENTS. 150
15 ACCOUNTS FROM INCOMPLETE RECORDS 160
15.1 THE REASONS FOR INCOMPLETE RECORDS 160
15.2 NEED FOR PREPARING FINANCIAL STATEMENT FROM INCOMPLETE RECORDS. 160
15.3 CALCULATING PROFITS AND LOSSES FROM CHANGES IN CAPITAL/NET ASSETS 160
15.4 PREPARATION OF FINANCIAL STATEMENTS FROM INCOMPLETE RECORDS 162
15.5 MARK-UP AND MARGIN 166
15.6 CALCULATION OF GOODS LOST BY THEFT OR FIRE 170
15.7 PREPARING BALANCE SHEET FROM INCOMPLETE RECORDS 172
15.8 INVENTORY COUNT AND THE BALANCE SHEET DATE 172
15.9 DISADVANTAGES OR DEFECTS OF ACCOUNTS PREPARED FROM INCOMPLETE RECORDS 174
16 FINANCIAL STATEMENTS OF PARTNERSHIPS 182
16.1 CHARACTERISTICS OF PARTNERSHIP 182
16.2 ADVANTAGES AND DISADVANTAGES OF THE PARTNERSHIP. 183
16.3 PARTNERSHIP AGREEMENT 183
16.4 PROVISIONS OF PARTNERSHIP ACT 1890 WHEN NO PARTNERSHIP AGREEMENT EXISTS 184
16.5 FINANCIAL STATEMENTS OF A PARTNERSHIP 184
16.6 ACCOUNTING RECORDS FOR PARTNERS 186
16.7 CALCULATION OF INTEREST ON CAPITAL 189
16.8 CALCULATION OF INTEREST ON DRAWINGS 189
16.9 PARTNER’S GUARANTEED SHARE IN PROFIT 189
17 CHANGES IN PARTNERSHIPS 199
17.1 ADMISSION OF A NEW PARTNER 199
17.2 RETIREMENT OR DEATH OF AN EXISTING PARTNER. 199
17.3 CHANGES IN PROFIT-SHARING ARRANGEMENTS 200
17.4 APPORTIONMENT OF PROFITS 200
17.5 ADJUSTMENTS FOR GOODWILL 202
17.6 REVALUATION ON PARTNERSHIP CHANGE 206
17.7 CAPITAL IN PROFIT AND LOSS SHARING RATIOS 215
18 DISSOLUTION OF PARTNERSHIPS 224
18.1 REASONS OF DISSOLVING A BUSINESS 224
18.2 REALISATION ACCOUNT. 224
18.3 ACCOUNTING TREATMENT ON DISSOLUTION 224
19 FINANCIAL STATEMENTS OF COMPANIES 232
19.1 THE NEED FOR COMPANIES 132
19.2 CHOICE BETWEEN A PARTNERSHIP AND A LIMITED COMPANY. 232
19.3 ADVANTAGES AND DISADVANTAGES OF FORMING A LIMITED COMPANY 233
19.4 SOURCES OF FINANCE FOR A COMPANY 235
19.5 TYPES OF SHARES 235
19.6 DEBENTURES 236
19.7 TYPES OF PREFERENCE SHARES 236
19.8 FORMS OF CAPITAL 237
19.9 FINANCIAL STATEMENTS OF LIMITED COMPANIES 238
19.10 STATEMENT OF CHANGES IN EQUITY 239
19.11 EQUITY DIVIDENDS ON ORDINARY SHARES 146
19.12 SHAREHOLDERS' EQUITY 239
19.13 RESERVES 239
19.14 FINANCIAL STATEMENTS IN CIE EXAMS 241
19.15 A COMPARISON OF FINANCIAL STATEMENTS OF BUSINESS ORGANISATIONS 242
20 ISSUE OF SHARES & DEBENTURES 248
20.1 PRICES OF A SHARE 248
20.2 SELLING SHARES TO THE GENERAL PUBLIC. 248
20.3 RIGHTS ISSUE 249
20.4 BONUS OR SCRIP ISSUE 250
20.5 DIFFERENCE BETWEEN RIGHTS AND BONUS ISSUE/td> 252
20.6 ISSUE OF LOANS AND DEBENTURES 253
21 RATIO ANALYSIS 259
21.1 FINANCIAL RATIOS 259
21.2 ANALYSIS OF RATIOS. 259
21.3 DEMONSTRATION OF RATIOS 260
21.4 PROFITABILITY RATIOS 260
21.5 ACTIVITY RATIOS 263
21.6 LIQUIDITY RATIOS 236
21.7 USES OF RATIO ANALYSIS 236
21.8 LIMITATIONS OF RATIO ANALYSIS 266
21.9 USERS OF FINANCIAL RATIOS 266
21.10 PREPARATION OF FINANCIAL STATEMENTS WITH THE HELP OF RATIOS 268
22 STATEMENT OF CASH FLOWS 276
22.1 CLASSIFICATIONS OF CASH FLOWS - AN EXAMPLE 276
22.2 CASH AND CASH EQUIVALENTS. 227
22.3 PREPARATION OF A STATEMENT OF CASH FLOWS 277
22.4 CASH FLOW FROM OPERATING ACTIVITIES 277
22.5 CALCULATION OF CASH FLOW FROM OPERATING ACTIVITIES 277
22.6 INVESTING ACTIVITIES 280
22.7 FINANCING ACTIVITIES 280
22.8 CASH FLOW AT A GLANCE. 281
22.9 USES OF A STATEMENT OF CASH FLOWS 283
23 COST ACCOUNTING – AN INTRODUCTION 289
23.1 DIFFERENCE BETWEEN COST AND EXPENSE 289
23.2 COST CLASSIFICATION BY CHANGES IN ACTIVITY. 290
23.3 COST CLASSIFICATION BY TRACEABILITY 291
23.4 DIRECT LABOUR COST 291
23.5 INDIRECT LABOUR COST 291
23.6 LABOUR COST AND TIMEKEEPING 292
23.7 CALCULATION OF LABOUR COST 292
23.8 OVERTIME. 281
23.9 USES OF A STATEMENT OF CASH FLOWS 283
24 INVENTORY VALUATION - FURTHER ISSUES 300
24.1 INVENTORY VALUATION METHODS 300
24.2 RELATIONSHIP OF INVENTORY VALUATION METHODS WITH PHYSICAL FLOW OF GOODS. 302
24.3 BASES OF INVENTORY VALUATION 302
24.4 ROLE OF ACCOUNTING CONCEPTS IN INVENTORY VALUATION 302
24.5 SEPARATE VALUATION OF INVENTORY ITEMS 303
24.6 CALCULATION OF COST OF WORK IN PROCESS 303
24.7 EFFECTS OF ERRORS IN VALUING INVENTORY 303
24.8 GOODS ON SALE OR RETURN. 303
24.9 SYSTEMS OF INVENTORY ACCOUNTING 304
25 ABSORPTION COSTING 309
25.1 ABSORPTION COSTING 309
25.2 CALCULATION OF TOTAL PRODUCTION COST 310
25.3 FEATURES OF ABSORPTION COSTING 311
25.4 ABSORPTION COSTING IN PRICE SETTING 311
25.5 COST CENTER 312
25.6 CALCULATION OF COST OF WORK IN PROCESS 312
25.7 ALLOCATION OF PRODUCTION OVERHEADS 313
25.8 APPORTIONMENT OF PRODUCTION OVERHEADS 313
25.9 ALLOTMENT OF SERVICE DEPARTMENT COSTS TO PRODUCTION DEPARTMENTS 313
25.10 CALCULATION OF OVERHEAD ABSORPTION RATES 317
25.11 ABSORPTION OF OVERHEADS 320
25.12 OVER/UNDER ABSORBED OVERHEADS 320
25.13 COSTING SYSTEMS/METHODS 321
26 MARGINAL COSTING 309
26.1 MARGINAL COST 329
26.2 MARGINAL COSTING 330
26.3 THE PRINCIPLES OF MARGINAL COSTING 330
26.4 ADVANTAGES AND DISADVANTAGES OF MARGINAL COSTING TECHNIQUE 330
26.5 THE USES OF MARGINAL COSTING 331
26.6 CONTRIBUTION 331
26.7 BREAK EVEN ANALYSIS 331
26.8 MARGIN OF SAFETY 335
26.9 PROFIT-VOLUME CHART 336
26.10 INCOME STATEMENTS UNDER MARGINAL COSTING AND ABSORPTION COSTING 337
26.11 SHORT TERM DECISION MAKING 340
26.12 MAKE OR BUY DECISION 340
26.13 SPECIAL ORDER TO USE UP SPARE CAPACITY 342
26.14 ABANDONMENT OF A PRODUCT LINE/DEPARTMENT 344
26.15 LIMITING FACTOR 345
27 ACCOUNTING & BUSINESS PLANNING 359
27.1 DIFFERENCE BETWEEN BUDGETS AND BUDGETARY CONTROL 330
27.1 ADVANTAGES AND DISADVANTAGES OF MARGINAL COSTING TECHNIQUE 359
27.2 PURPOSES OF BUDGET 359
27.3 ADVANTAGES OF BUDGETARY CONTROL SYSTEM 360
27.4 LIMITATIONS OF BUDGETARY CONTROL SYSTEM 360
27.5 STAGES IN THE BUDGETARY PLANNING PROCESS 360
27.6 EFFECTS OF PRINCIPAL BUDGET FACTORS ON THE PREPARATION OF BUDGETS. 361
27.7 BEHAVIOURAL ASPECTS OF BUDGETARY CONTROL SYSTEM 361