Financial Accounting: An Introduction

753 Pages·2010·25.501 MB·English

by  Augustine Benedict, Barry Elliott

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Financial Accounting
Second Edition
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An Introduction
Second Edition Financial Accounting
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An Introduction
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Barry Elliott o
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Financial Accounting: An Introduction is an essential companion for students on introductory financial
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accounting modules within undergraduate accounting and business degrees. Starting from first
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principles and written in straightforward language, the text provides extensive opportunities for you to c A
reinforce, develop and apply what you learn.
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The text builds your skill and confidence in recording transactions up to Trial Balance, preparing and i
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analysing financial statements for sole traders, partnerships, limited companies and groups. The
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experienced authors also encourage you to critically consider how your knowledge could be applied
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within different situations. o
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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.
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• Develop problem-solving skills by working through progressive questions, using detailed n
solutions to build up your ability to deal with increasingly difficult problems.
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• 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.
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Visit the student Companion Website at www.pearsoned.co.uk/benedict to check your answers
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to over 800 multiple choice questions against fully-worked solutions.
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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
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professional levels. e
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Barry Elliott is a training consultant with extensive teaching experience at undergraduate,
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postgraduate and professional levels in the UK, China, Hong Kong, New Zealand and Singapore. He has c
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Financial Accounting
An Introduction
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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.
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■ Online help and support to assist with website usage and troubleshooting.
For more information, please contact your local Pearson Education sales represen-
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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