Accounting Simplified

665 Pages·2010·3.755 MB·English

by  Dr Hilary Fortes

A Accounting Simplifi ed
Accounting Simplifi ed is a step-by-step introduction to fi nancial accounting written in plain simple language.
Taking students from the very basics to the elementary principles of management accounting, the text
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emphasises the real-world application of accounting methods and the importance of practising skills in
order to reinforce learning. c

Hilary Fortes
Drawing on years of experience as a university lecturer marking student exam papers, the author uses o
plenty of worked examples to set out the details of each topic before providing self-test questions for quick
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revision.
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Working through Accounting Simplifi ed will help you:
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• Learn how to prepare, read and interpret cash fl ow budgets, profi t and loss
accounts, balance sheets and more. g
• Appreciate how accounting methods are used in practice, from double-entry

book-keeping to the basics of cost and management accounting. S
• Try out your new skills on over 200 self-test questions and check your answers
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against detailed worked solutions.
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• Prepare for exams with dedicated revision chapters specially-designed to recap
key concepts.
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Visit the student companion website at www.pearsoned.co.uk/fortes to fi nd additional practice
exam questions (including hints to help you complete them) and the latest advice from chief d
examiners on how to do well in your exams.

Accounting Simplifi ed is a straightforward introduction to fi nancial accounting suitable for AQA, Edexcel and

OCR A level students and those studying for intermediate professional accounting programmes with AAT,
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ABE, ACCA, CIPFA and IFA.
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Dr Hilary J Fortes is a lecturer, examiner and Chartered Accountant (SA). He has taught extensively in
Europe, India, America and South Africa and is a member of the Institute of Chartered Accountants (South r
Africa) and the Institute of Chartered Management Accountants. He feels passionately about the need for
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accounting students to read, study and absorb concepts before reinforcing their learning through practice
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and revision.
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www.pearson-books.com
Front cover image: © Getty Images
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ACCOUNTING SIMPLIFIED
Visit the Accounting Simplified Companion Website at
www.pearsoned.co.uk/fortes to find valuable student
learning material including:
■ Additional practice exam questions with hints and tips to
help you complete them
■ The latest advice from chief examiners on how to do
well in your exams
We work with leading authors to develop the strongest
educational materials in accounting, bringing cutting-edge
thinking and best learning practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high-quality print
and electronic publications which help readers to
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ACCOUNTING SIMPLIFIED
Dr Hilary J Fortes
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 2011
© Pearson Education Limited 2011
The right of Hilary Fortes to be identified as author of this work has been asserted
by him in accordance with the Copyright, Designs and Patents Act 1988.
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 or otherwise, without either the prior written permission of the
publisher or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.
All trademarks used herein are the property of their respective owners. The use of any
trademark in this text does not vest in the author or publisher any trademark ownership
rights in such trademarks, nor does the use of such trademarks imply any affiliation with
or endorsement of this book by such owners.
Pearson Education is not responsible for the content of third-party internet sites.
ISBN: 978-0-273-73446-8
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
Fortes, Hilary Jack.
Accounting simplified / Hilary Fortes.
p. cm.
ISBN 978-0-273-73446-8 (pbk.)
1. Accounting. I. Title.
HF5636.F67 2011
657—dc22
2010030668
10 9 8 7 6 5 4 3 2 1
15 14 13 12 11
Typeset in 9.5/12.5pt Stone Serif by 35
Printed by Ashford Colour Press Ltd., Gosport
Contents
Preface xiii
Acknowledgements xiv
1 Introduction to accounting 1
Objectives 1
1.1 Introduction 1
1.2 What is accounting? 2
1.3 Accounting groups 2
1.4 Financial and management accounting 3
1.5 The need for financial accounting 5
1.6 Users of business accounts 5
1.7 Revising the basics 7
2 Double entry 9
Objectives 9
2.1 Double-entry system 9
2.2 Source of transactions 10
2.3 The ledger 12
2.4 A ledger account 13
2.5 Subsidiary books 17
2.6 Understanding ledger entries 18
2.7 What the books tell us 23
3 Ledger accounts 25
Objectives 25
3.1 Balancing the ledger accounts 25
3.2 Carry forwards 28
4 Cash book 30
Objectives 30
4.1 Introduction 30
4.2 The 2-column cash book 31
4.3 Source documents 32
4.4 The 3-column cash book 32
4.5 Balancing the cash book 34
v
Contents
5 Bank reconciliation 36
Objectives 36
5.1 Introduction 36
5.2 Definitions 37
5.3 Bank reconciliation statement 37
6 Petty cash book 42
Objectives 42
6.1 Introduction 42
6.2 Petty cash vouchers 43
7 Value added tax 46
Objectives 46
7.1 Introduction 46
7.2 Adjustments to VAT 47
7.3 VAT ledger account 47
7.4 Trade discount 49
7.5 Cash discounts 50
8 Purchases and returns day books 53
Objectives 53
8.1 Books of original (prime) entry 53
8.2 Purchases day book 54
8.3 Purchases returns book 55
9 Sales and returns day books 58
Objectives 58
9.1 Sales day book 58
9.2 Sales returns book 59
10 Control accounts 62
Objectives 62
10.1 Introduction 62
10.2 Advantages of control accounts 63
10.3 Limitations of control accounts 63
10.4 Sales ledger (debtors) control account 64
10.5 Purchase ledger (creditors) control account 65
10.6 Contra accounts (set-offs) 65
10.7 Balances on both sides 67
11 Accruals and prepayments 70
Objectives 70
11.1 Accruals 70
11.2 Prepayments 72
vi
Contents
12 Depreciation 75
Objectives 75
12.1 Introduction 75
12.2 Straight line depreciation 76
12.3 Reducing balance method 77
12.4 Revaluation method 80
12.5 Sale of fixed assets 81
12.6 Summary of depreciation 82
12.7 Appreciation of fixed assets 83
13 Bad debts 86
Objectives 86
13.1 Introduction 86
13.2 Provision for bad debts 87
13.3 Recovery of bad debts 90
14 The journal 92
Objectives 92
14.1 Introduction 92
14.2 Why use a journal? 92
15 Trial balance 96
Objectives 96
15.1 Introduction 96
15.2 Errors affecting the trial balance 98
15.3 Period-end adjustments 99
15.4 From trial balance to financial statements 101
16 Errors and suspense accounts 104
Objectives 104
16.1 Introduction 104
16.2 Suspense account 105
17 Revision 112
Objectives 112
17.1 Introduction 112
18 The valuation of stock 120
Objectives 120
18.1 Introduction 120
18.2 Valuation methods 120
18.3 Using different methods 123
18.4 Net realisable value 123
vii
Contents
19 Trading account 126
Objectives 126
19.1 Introduction 126
19.2 Returns and carriage 126
19.3 Stock 127
19.4 Returns 128
19.5 Treatment of carriage charges 128
19.6 Sales 128
19.7 Transfer of balances 129
19.8 Cost of sales 130
19.9 Linking trading and profit and loss 131
20 Profit and loss account 133
Objectives 133
20.1 Introduction 133
20.2 Format of the profit and loss account 133
20.3 What is profit? 134
20.4 Classification of expenditure 134
20.5 Changes to net profit 136
21 Manufacturing account 140
Objectives 140
21.1 Introduction 140
21.2 Direct costs 141
21.3 Indirect costs 141
21.4 Stock 141
21.5 Apportioning expenses 142
22 Balance sheet 147
Objectives 147
22.1 Introduction 147
22.2 Definitions – assets 148
22.3 Definitions – liabilities 149
22.4 Definitions – capital 150
22.5 Additional definitions 150
22.6 Balance sheet layout 152
22.7 Balance sheet presentation 154
22.8 Valuation in the balance sheet 161
23 Revision 162
Objectives 162
23.1 Final accounts 162
23.2 Net worth 163
23.3 Revision questions 163
23.4 Summary 175
viii
Contents
24 Incomplete records 176
Objectives 176
24.1 Introduction 176
24.2 Preparing accounting records 176
24.3 Calculating the trading results 177
24.4 Financial statements 177
25 Accounting concepts 185
Objectives 185
25.1 Introduction 185
25.2 Fundamental concepts 186
25.3 Other concepts 187
25.4 Qualitative characteristics – a summing up 189
25.5 The requirements of accounting standards 190
26 Partnerships 192
Objectives 192
26.1 Introduction 192
26.2 Sole trader 192
26.3 Partnership 193
26.4 Accounting for partnerships 193
26.5 Partnership agreement 194
26.6 Profit and loss appropriation account 195
26.7 Changes in the partnership 200
26.8 Limited liability partnership 203
27 Non-profit making organisations 204
Objectives 204
27.1 Introduction 204
28 Limited liability companies 210
Objectives 210
28.1 Introduction 210
28.2 The nature of limited companies 210
28.3 Private limited companies (Ltd) 211
28.4 Public limited companies (Plc) 212
28.5 Share capital 212
28.6 Dividends 217
28.7 Bonus shares 219
28.8 Reserves 220
28.9 Rights issue 220
28.10 Debentures 221
28.11 Application and allotment of shares 222
28.12 Shares or debentures? 224
28.13 Amalgamations 225
ix