Frank Wood’s Business Accounting: An Introduction To Financial Accounting, Fifteenth Edition
By Alan Sangster and Lewis Gordon
Notes for teachers and lecturers viii
Notes for students xii
The Last Lecture xxii
Publisher’s acknowledgements xxiii
part 1 Introduction to financial accounting
1 The background and the main features of financial accounting 3
2 Recording transactions 21
3 Inventory 43
4 The effect of profit or loss on capital and the double entry system for
expenses and revenues 54
5 Balancing-off accounts 67
6 The trial balance 76
Multiple-choice questions: Set 1 85
part 2 The financial statements of sole proprietors
7 Income statements 91
8 Balance sheets 103
9 Income statements and balance sheets: further considerations 111
10 Accounting concepts and the conceptual framework 125
part 3 Books and transactions
11 Books of original entry and ledgers 151
12 Cash books 157
13 The analytical petty cash book and the imprest system 173
14 Accounting for sales, purchases and returns 181
15 The journal 206
16 Value added tax (VAT) 218
Multiple-choice questions: Set 2 232
part 4 Adjustments to financial statements
17 Maths for accounting 237
18 Inventory valuation 253
19 Bad debts, allowances for doubtful debts, and allowances for prompt
payment discounts 273
20 Capital expenditure and revenue expenditure 292
21 Depreciation 304
22 Accruals and prepayments 338
Multiple-choice questions: Set 3 360
part 5 Controls, checks and errors
23 Control accounts 365
24 Bank reconciliations 381
25 Errors not affecting the balancing of the trial balance 395
26 Suspense accounts and errors 403
27 Single entry and incomplete records 419
Scenario questions 439
part 6 Further accounting procedures
28 Introduction to the statement of cash flows 447
29 Receipts and payments accounts and income and expenditure accounts 469
30 Joint ventures 482
Multiple-choice questions: Set 4 490
part 7 Accounting for partnerships
31 Partnerships 495
32 Goodwill for sole proprietors and partnerships 513
33 Revaluation of partnership assets 529
34 Partnership dissolution 537
part 8 Accounting for companies
35 Introduction to accounting for companies 559
36 The published financial statements of companies 586
37 The statement of cash flows for companies 619
part 9 An introduction to financial analysis
38 Accounting ratios 645
39 Analysis and interpretation of financial statements 658
part 10 Accounting today
40 Accounting today 691
Multiple-choice questions: Set 5 710
1 Answers to review questions 714
2 Answers to multiple-choice questions 794
3 Glossary 795
Notes for students
This textbook presents your topics in what has been found to be the most appropriate sequencing to build the foundations of your accounting knowledge. You will find that a number of features of the book, properly used, will enhance your understanding and extend your ability to cope with what will possibly appear, at first, to be a mystifying array of rules and procedures.
To make best use of this resource, you should consider the following as being a proven path to success:
At the start of each chapter, read the Learning Objectives. Then, while you work through the material, try to detect when you have achieved each of these objectives.
At the end of each chapter, check what you have learnt against the Learning Outcomes that follow the main text.
If you find that you cannot say ‘yes, I have learnt that’ to any of the Learning Outcomes, look back through the chapter and reread the topic you have not yet learnt.
Learn the meaning of each new term as it appears. Do not leave learning what terms mean until you are revising for an exam. Accounting is best learnt as a series of building blocks. If you don’t remember what terms mean, your knowledge and ability to ‘do’ accounting will be very seriously undermined, in much the same way as a wall built without mortar is likely to collapse the first time someone leans against it.
Attempt each of the Activities in the book at the point at which they appear. This is very important. They will reinforce your learning and help set in context some of the material that may otherwise appear very artificial and distant from the world you live in. The answers are at the end of each chapter. Do not look at the answers before you attempt the questions – you’ll just be cheating yourself. Once you have answered one, check your answer against the answer provided in the book and be sure you understand it before moving on.
Attempt each of the sets of multiple-choice questions when you reach them in the book. There are five sets of 20 questions, one at the end of each of Chapters.6, 16, 22, 30 and 40. The answers are in Appendix.2 at the back of the book. Do not look at the answers before you attempt the questions – you’ll just be cheating yourself. If you get any wrong, be sure you understand why before moving on to new material.
Attempt the Scenario Questions at the end of Part.5. They will help you see how the items covered in Parts.4 and 5 affect the preparation of financial statements.
Learn the accounting equation when you first come across it in Chapter 1 It is the key to understanding many of the aspects of accounting that students find difficult. Make sure that you learn it in both the forms presented to you or that you can rearrange it to produce the alternative form when appropriate.
Do not be disillusioned by the mystery of double entry. The technique has been in common use for over 700 years and is probably the most tried and trusted technique for doing anything you are ever likely to encounter. It really is not difficult, so long as you remember to identify what to do with the form of settlement you will learn about in Chapter.1. Like riding a bike, once you understand it, you’ll never forget it and, the more you do it, the easier it gets.
Because of time pressure, some teachers and lecturers will need to omit Chapter.30 (Joint ventures). Make sure that you work through it on your own before you look at the material in Chapter.31, the first chapter on accounting for partnerships. This is very important, as accounting for joint ventures bridges the gap between accounting for sole proprietors and accounting for partnerships and will make it much easier for you to understand the differences between them.
Above all, remember that accounting is a vehicle for providing financial information in a form that assists decision-making. Work hard at presenting your work as neatly as possible and remember that pictures (in this case, financial figures) only carry half the message. When you are asked for them, words of explanation and insight are essential in order to make an examiner appreciate what you know and that you actually understand what the figures mean.
There are two subjects we would like you to consider very carefully – making best use of the end-of-chapter Review Questions, and your examination technique.Review questions: the best approach Review questions are included at the end of most chapters. They are there for you to gauge how well you understand and can apply what you have learnt. If you simply read the chapters without attempting the questions, you will not pass your examinations. You should first attempt each question, then check your answer fully against the answers at the back of the book. Do not simply compare the question with the answer and tick off the bits of the answer against the relevant part of the question. No one ever learnt to do accounting properly that way. It is tempting to save time, but you will regret it eventually.
Need for practice
Try to find the time to answer as many exercises as possible. This is why:
1. Even though you may think you understand, when you come to answer the questions you may find you don’t. The true test of understanding is whether or not you can tackle the questions competently.
2. Practice makes perfect. If you don’t practice doing accounting questions, you will almost certainly not become good at accounting.
3. You need to be able to answer questions quickly: many students fail accounting exams because they run out of time. A lot is expected from you in an accounting exam in a very short time because examining boards believe, and have always believed, that an ‘adequately prepared’ student will be able to work quickly on the problems set. By an ‘adequately prepared’ student, they mean a student who not only has the knowledge, but has been trained to work quickly and, at the same time, maintain accuracy and neatness.
4. Speed is not enough. You also have to be neat and tidy and follow all the proper practices and procedures while working at speed. Fast, correct, but really scruffy and unreadable work can also cause you to fail the exam. Why? At this level, the accounting examiner is mainly concerned about your practical ability in the subject. Accounting is a practical subject, and your practical competence is being tested. The examiner will, therefore, expect the answers to be neat and well set out. Untidy work with numbers spread over the page in a haphazard way, badly written numbers, and columns of figures in which the vertical columns are not set down in straight lines, will be penalised and can easily mean the difference between a pass and a fail.
5. Appropriate presentation of information is important. Learn how to present the various financial statements you may need to produce in an examination. Examiners expect to see the items in statements of profit or loss, statements of financial position, and statements of cash flow in the correct order and will probably deduct marks if you don’t do this. Practise by writing down examples of these statements without any numbers until you always get the layout correct. One exam trick most students overlook is that the layout of a financial statement is often included in an examination paper as part of one question while another question asks you to produce an answer using the format of that financial statement. The one you need to produce will contain different numbers but the general layout should be very similar.
Need for headings
Your work should not only be neat, it should be well presented. Headings should always be given, and any dates should be inserted. The test you should apply is to imagine that you are a partner in a firm of professional accountants and have taken a few weeks holiday. During that time your assistants have completed all sorts of work including reports, drafting final accounts, various forms of other computations, and so on. All of this is waiting for you when you return. When you return you look at each item in the pile. Suppose the first one looks like a balance sheet as at 31 December in respect of one of your clients. When you look at it you can see that it is a balance sheet, but you don’t know for which client, neither do you know which year it is for. Would you be annoyed with your assistant who prepared it? Of course, you would. So, in an exam, why should the examiner give you high marks if you prepare a balance sheet answer without the date, or the name of the business, or the fact that it is a balance sheet position written clearly across the top? If proper headings are not given you will lose a lot of marks. Don’t wait until your examination to do this. You also need to take similar care with sub-totals and sub-headings that need to be shown, such as those for non-current assets or for current liabilities.
When answering an examination question, think about what you would say if you were employing an accounts assistant who gave you a sheet of paper with accounting entries written in the same style as your own efforts in answering the exam question. Would you have told your assistant to go back and do the work again because it is untidy? If you say that about your own work, why should the examiner think any differently?
Anyone who works in accounting knows that untidy work leads to completely unnecessary errors. This is why examiners penalise unclear, untidy, poorly-presented work. Examiners want to ensure that you are not going to mess up the work of an accounting department. Even today, accountants still write down many things on paper, so don’t imagine that examiners will overlook such messy work just because most accounting is now done using a computer. Imagine going to the savings bank and the manager saying to you: ‘We don’t know whether you’ve got £5 in the account or £5,000. You see, the work of our clerks is so untidy that we can never sort out exactly how much is in anybody’s account.’ We would guess that you would not want to put a lot of money into an account at that bank. How would you feel if someone took you to court for not paying a debt of £100 when, in fact, you owed them nothing? This sort of thing would happen all the time if we simply allowed people to keep untidy accounts. The examiner is there to ensure that the person to whom they award a pass will be worthy of it and will not continually mess up the work of any firm at which they may work in the future. If you want to pass your accounting exam, and your work is untidy, what can you do about it? Well, the answer is simple enough: start right now to be neat and tidy in your work. I did. My writing was so bad that my accounting teacher at school told me to print everything in capital letters. I thought he was mad, but my marks improved immediately, and so did my handwriting and my overall neatness in preparing answers. Start being neat now. You cannot suddenly become neat in an examination.
The structure of the questions
The review questions in each chapter generally start with the easiest and then get gradually more difficult. Some are very difficult and time consuming. If all the questions were easy, the shock of meeting more complicated questions for the first time in an examination could lead you to fail it. By giving you a mixture of straightforward and complicated questions, you will learn how to deal with the complex issues before meeting them in an exam. It’s in your best interests not to ignore review questions you find hard. Put in the effort, the practice will increase your knowledge and understanding, and your performance in the exam will improve as a result.
At the back of the book, you will find answers to approximately half of the Review Questions. The answers to the other review questions (indicated by the letter ‘A’ after the question number) are only available to you from your teacher or lecturer. Don’t worry if you are studying this subject on your own. There are still more than sufficient review questions with answers in the book to ensure you know and understand the material you are learning.
Let’s look at the way in which you should tackle the examination paper. One of the problems with accounting exams is that students are expected to do a lot of work in a relatively short time. It will be the same for every other student taking your exam, so it is not unfair so far as any one student is concerned. Working at speed does bring various disadvantages and makes the way you tackle the examination of even greater importance.
- Read the instructions.
- Plan your time before you start.
- Tackle the easiest questions first.
- Finish off answering each question when your time allocation for the question is up.
- Hand in all your workings.
- Do remember to be neat, and to include all proper headings, dates, sub-totals, etc. A lot of marks can be lost if you don’t.
- Only answer as many questions as you are asked to tackle by the examiner. Extra answers will not normally be marked and certainly won’t get credit.
- Underline the key words in each question to ensure that you answer the question set, and not the question you wrongly take it to be.
- Never copy the question onto your answer. Good luck with your exam. We hope you get the rewards you deserve!
Alan Sangster and Lewis Gordon