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Financial Accounting: An Introduction PDF

753 Pages·2010·25.501 MB·English
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A F Financial Accounting Second Edition n i n An Introduction Second Edition Financial Accounting I a n n Augustine Benedict t An Introduction r c Barry Elliott o i d a Financial Accounting: An Introduction is an essential companion for students on introductory financial u l accounting modules within undergraduate accounting and business degrees. Starting from first Augustine Benedict principles and written in straightforward language, the text provides extensive opportunities for you to c A reinforce, develop and apply what you learn. t Barry Elliott c The text builds your skill and confidence in recording transactions up to Trial Balance, preparing and i o analysing financial statements for sole traders, partnerships, limited companies and groups. The c experienced authors also encourage you to critically consider how your knowledge could be applied n within different situations. o u n Throughout the text, the self-directed learning approach offers you chances to: • Reinforce understanding as you read by trying out in-text activities, before checking your t answers at the end of each chapter. i • Develop problem-solving skills by working through progressive questions, using detailed n solutions to build up your ability to deal with increasingly difficult problems. g • Apply in-depth understanding by answering over 800 challenging multiple choice questions, checking your responses at the end of each chapter and accessing detailed worked solutions online. Second Visit the student Companion Website at www.pearsoned.co.uk/benedict to check your answers Edition to over 800 multiple choice questions against fully-worked solutions. E B l e Augustine Benedict is an accounting lecturer known for his innovative approach and ability to bring the l subject to life. He has substantial experience teaching and examining the subject at undergraduate and i n o professional levels. e t t d Barry Elliott is a training consultant with extensive teaching experience at undergraduate, i postgraduate and professional levels in the UK, China, Hong Kong, New Zealand and Singapore. He has c acted as an external examiner within both higher and professional education. t www.pearson-books.com Front cover image: © Getty Images CVR_BENE7650_02_SE_CVR.indd 1 17/11/2010 09:37 Financial Accounting An Introduction Visit the Financial Accounting: An Introduction, Second Edition, Companion Website at www.pearsoned.co.uk/benedictto find valuable student learning material including: ■ Detailed worked solutions for over 800 multiple choice ques- tions featured within the book. 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 that help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk. Financial Accounting An Introduction Second Edition Augustine Benedict Formerly London South Bank University, now London College of Accountancy Barry Elliott Formerly Brighton University 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 2008 Second edition published 2011 © Pearson Education 2008, 2011 The rights of Augustine Benedict and Barry Elliott to be identified as the authors of this work have been asserted by them 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 authors or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of the book by such owners. Pearson Education is not responsible for the content of third party internet sites. ISBN: 978-0-273-73765-0 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 Benedict, Augustine. Financial accounting : an introduction / Augustine Benedict, Barry Elliott. — 2nd ed. p. cm. Rev. ed. of: Financial accounting : an introduction. 2008. Includes bibliographical references and index. ISBN 978-0-273-73765-0 1. Accounting. 2. Financial statements. I. Elliott, Barry. II. Title. HF5636.B46 2011 657–dc22 2010036352 10 9 8 7 6 5 4 3 2 1 15 14 13 12 11 Typeset in 9/12pt Stone Serif by 35 Printed and bound by Ashford Colour Press, Gosport Contents in brief Acknowledgements xvii Guided tour xviii Part A THE FINANCIAL ACCOUNTING SYSTEM 1 The need for accounting 3 2 Accounting for cash 15 3 The double-entry accounting system 29 4 The Statement of financial position and Statement of income 49 5 Accounting for credit transactions 80 6 Inventories, profit margin and gross profit ratio 106 7 Accruals, prepayments, depreciation and bad debts 141 8 Disposal, revaluation and impairment of non-current assets 178 Part B FINANCIAL STATEMENTS OF LIMITED COMPANIES, SOLE TRADERS, GROUPS AND PARTNERSHIPS 9 Accounting for limited companies 211 10 Incomplete records 263 11 Statements of cash flows 282 12 Accounting ratios and interpretation of financial statements 315 13 Consolidation of financial statements 355 14 Accounting for partnerships 400 Part C ACCOUNTING FOR CURRENT ASSETS AND LIABILITIES 15 Bank account and bank reconciliation 451 16 The Journal and correction of errors 479 17 Control accounts 502 18 Accounting for Sales tax (VAT) and payroll 527 Part D THE CONCEPTUAL FRAMEWORK 19 Conceptual framework of accounting 553 20 Revenue recognition 583 vi Contents in brief Part E ACCOUNTING FOR NON-CURRENT ASSETS, LIABILITIES AND PROVISIONS 21 Accounting for tangible non-current assets 597 22 Accounting for intangible assets and government grants 621 23 Liability, provision, contingency and post reporting-date events 644 Suggested answers to progressive question 666 Index 724 Supporting resources Visit www.pearsoned.co.uk/benedict to find valuable online resources: Companion Website for students: ■ Detailed worked solutions for over 800 multiple choice questions featured within the book. For instructors: ■ Downloadable PowerPoint slides for use in lessons and lectures. ■ Detailed solutions to test questions from the text, designed for use as overhead slides. ■ Customisable multiple choice questions, ideal for testing and revision. Also: The Companion Website provides the following features: ■ Search tool to help locate specific items of content. ■ Online help and support to assist with website usage and troubleshooting. For more information, please contact your local Pearson Education sales represen- tative or visit www.pearsoned.co.uk/benedict. Contents in detail Acknowledgements xvii Guided tour xviii Part A THE FINANCIAL ACCOUNTING SYSTEM 1 1 The need for accounting 3 1.1 What is financial accounting? 3 1.2 The Statement of financial position 4 1.3 The impact of transactions on the Statement of financial position 4 1.4 The Statement of income 6 1.5 Why does a business need to keep accounting records? 7 1.6 Why those outside the business need accounting information 8 1.7 Why managers within a business need accounting information 9 1.8 Maintaining confidence in the accuracy of accounting information 10 1.9 Accounting terminology 11 Summary 12 Reference 12 Suggested answers to activities 12 Multiple choice questions 13 Progressive questions 14 2 Accounting for cash 15 2.1 Why cash should be controlled 15 2.2 How is cash controlled? 16 2.3 The Cash account 17 2.4 Possible misappropriation of cash 18 2.5 Writing up a Bank account 19 2.6 A two-column Cash Book 20 2.7 Accounting terminology 20 Summary 21 Suggested answers to activities 21 Multiple choice questions 24 Progressive questions 26 Test questions 28 3 The double-entry accounting system 29 3.1 Why do we need to analyse cash transactions? 29 3.2 Methods of analysing receipts and payments 29 viii Contents in detail 3.3 Checking the correctness of the analysis 31 3.4 The double-entry system of accounting 31 3.5 Recording transactions on the double-entry system 31 3.6 Illustration of how the double-entry system operates 32 3.7 Balancing each ledger account 35 3.8 The Trial Balance 36 3.9 More about the Trial Balance 37 Summary 38 Suggested answers to activities 38 Multiple choice questions 40 Progressive questions 43 Test questions 47 4 The Statement of financial position and Statement of income 49 4.1 Five classes of accounts 49 4.2 Identifying assets from expenses 49 4.3 Identifying income from liabilities and capital 50 4.4 Accounting treatment of payments 52 4.5 Accounting treatment of receipts 53 4.6 How the class of an account is identified 54 4.7 Statement of income 56 4.8 The Statement of financial position 59 4.9 Statement of financial position compared with Trial Balance 59 4.10 The set order of items in a Statement of financial position 60 4.11 The elements of financial statements 61 4.12 Accounting equation 62 4.13 Accounting errors 63 4.14 More accounting terminology 64 Summary 65 Suggested answers to activities 65 Multiple choice questions 68 Progressive questions 75 Test questions 78 5 Accounting for credit transactions 80 5.1 What is a credit transaction? 80 5.2 Accounting for credit sales 81 5.3 Accounting for sales returns 83 5.4 Accounting for credit purchases 84 5.5 Accounting for purchase returns 85 5.6 Trade discount 86 5.7 Day Books with analysis columns 87 5.8 Drawings by the owner of a business 87 5.9 Types of ledgers 89 Contents in detail ix Summary 89 Suggested answers to activities 89 Multiple choice questions 92 Progressive questions 98 Test questions 101 6 Inventories, profit margin and gross profit ratio 106 6.1 Reporting unsold purchases as an asset 106 6.2 Goods lost or disposed of otherwise than by sale 107 6.3 Accounting for closing and opening inventory 108 6.4 Goods removed for personal use by the proprietor 109 6.5 Expenses to be included within the cost of sales 110 6.6 Finding the quantity of closing inventory 111 6.7 Identification of goods remaining unsold 112 6.8 Controls needed when doing a physical count of inventory 112 6.9 When physical count results may need adjustment 113 6.10 Valuing the closing inventory 114 6.11 Goods with customers on a sale or return basis 117 6.12 Valuing closing inventory at net realisable value 118 6.13 The requirements of IAS 2 120 6.14 Profit margin and gross profit percentage 121 Summary 123 References 123 Suggested answers to activities 123 Multiple choice questions 127 Progressive questions 133 Test questions 139 7 Accruals, prepayments, depreciation and bad debts 141 7.1 The accruals concept 141 7.2 Accounting for accrued expenses 142 7.3 Accounting for prepaid expenses 143 7.4 Accounting for deferred income 144 7.5 Depreciation and the straight-line method of measurement 145 7.6 Accounting for depreciation 146 7.7 Reducing balance method of measuring depreciation 148 7.8 Sum of the years’ digits method of measuring depreciation 149 7.9 Bad debts and allowance for doubtful debts 150 Summary 154 References 154 Suggested answers to activities 155 Multiple choice questions 158 Progressive questions 167 Test questions 174

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