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FrankWood's Business Accounting volume 1 11 Edition

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by Ferdnando Nseso on May 03rd, 2012 at 09:26 am
am advance level in Tanzania
by f Mukombe on May 14th, 2013 at 11:29 pm
These books are very helpful even to someone doing accounts on his own
by f Mukombe on May 14th, 2013 at 11:30 pm
These books are very helpful even to someone doing accounts on his own
by adnan khan on March 06th, 2014 at 08:43 am
these are very important books helping mba students
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Content Preview
F R A N K W O O D ' S
T E N T H E D I T I O N
Every year, thousands of students rely on
Frank Wood's best-selling books to help them
pass their accountancy exams.
business accounting
Business Accounting Volume 1 is the world's best-
Features:
T E N T H E D I T I O N
selling textbook on bookkeeping and accounting.
Easy-to-follow explanations of contemporary
FRANK W
W
OOD & SANGSTER
1
business
Now in its tenth edition, it has become the
accounting practice, including double entry
standard introductory text for accounting students
bookkeeping and the preparation of financial
and professionals alike.
statements
Clear and logical progression through topics
New to this edition:
Activities designed to reinforce your
accounting
Over 120 brand new review questions for exam
understanding of key concepts
practice
Over 300 review questions, including past
Coverage of International Accounting Standards
Examination Board questions
2005
100 multiple choice questions with answers
Additional and updated worked examples for
Regularly updated Companion Website including
areas of difficulty
further self-test questions and accounting
Treatment of VAT for companies operating
standards updates
within the United Kingdom
Expanded introduction to the language and
Business Accounting Volume 1 is used on a wide
history of accounting
variety of courses in accounting and business, both
OOD'S
at secondary and tertiary level and for those
F R A N K W O O D &
studying for professional qualifications.
A L A N S A N G S T E R
'A classic textbook that has set thousands of students on a straight path since it was first
published, Wood & Sangster's Business Accounting can be recommended without reservation to all
accounting students.'
Dr George Iatridis, University of Athens, Greece and University of Manchester

'I highly recommend Business Accounting because it is clear and to the point, which makes it easy
1
for students to understand. This is especially true for students who want to study accounting for
the first time or have little knowledge of the accounting subject.'
Caroline Teh, Inti College, Malaysia.
An imprint of
Additional student support at
www.pearsoned.co.uk/wood
www.pearson-books.com
Additional student support at
www.pearsoned.co.uk/wood

BA10_A01.qxd 21/12/04 10:18 am Page i
FRANK WOOD'S
business accounting 1
Visit the Business Accounting, tenth edition Companion Website
at www.pearsoned.co.uk/wood to find valuable student learning
material including:
l Learning objectives for each chapter
l Multiple choice questions to help test your learning
l Review questions and answers
l Links to relevant sites on the web
l Searchable online glossary
l Flashcards to test your knowledge of key terms and definitions


BA10_A01.qxd 21/12/04 10:18 am Page ii
Frank Wood
1926-2000


BA10_A01.qxd 21/12/04 10:18 am Page iii
F R A N K W O O D ' S
1
business TENTH EDITION
accounting
FRANK WOOD BSc (Econ), FCA
and
ALAN SANGSTER BA, MSc, Cert TESOL, CA


BA10_A01.qxd 21/12/04 10:18 am Page iv
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
and Associated Companies throughout the world.
Visit us on the World Wide Web at
www.pearsoned.co.uk

First edition published in 1967
Second edition published under the
Longman imprint in 1972
Third edition published in 1979
Fourth edition published in 1984
Fifth edition published in 1989
Sixth edition published in 1993
Seventh edition published in 1996
Eighth edition published under the
Financial Times Pitman Publishing imprint in 1999
Ninth edition published in 2002
Tenth edition published 2005
(c) Frank Wood 1967
(c) Longman Group UK Limited 1972, 1979, 1984, 1989, 1993
(c) Pearson Professional Limited 1996
(c) Financial Times Professional Limited 1999
(c) Pearson Education Limited 2002, 2005
The rights of Frank Wood and Alan Sangster to be identified as
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,
90 Tottenham Court Road, London W1T 4LP.
ISBN 0 273 68149 4
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
A catalog record for this book is available from the Library of Congress
10
9
8
7
6
5
4
3
2
1
08
07
06
05
Typeset in 9.5/11.5 pt Sabon by 35.
Printed and bound in China.
SWTC /01
Also available:
Frank Wood's Business Accounting Vol 2 - 0273 693107
Book-keeping & Accounts - 0273 685481
Frank Wood's A-level Accounting - 0273 685325

BA10_A01.qxd 21/12/04 10:18 am Page v
Contents
Notes for teachers and lecturers
xiii
Notes for students
xv
part 1
Introduction to double entry bookkeeping
1 The accounting equation and the balance sheet
3
2 The double entry system for assets, liabilities and capital
18
3 The asset of stock
28
4 The effect of profit or loss on capital and the double entry system for
expenses and revenues
38
5 Balancing off accounts
49
6 The trial balance
57
part 2
The financial statements of sole traders
7 Trading and profit and loss accounts: an introduction
71
8 Balance sheets
83
9 Trading and profit and loss accounts and balance sheets: further
considerations
91
10 Accounting concepts
104
part 3
Books of original entry
11 Books of original entry and ledgers
119
12 The banking system in the UK
125
13 Cash books
136
14 The sal

es day book and the sales ledger
153
15 The purchases day book and the purchases ledger
162
16 The returns day books
168
17 The journal
180
18 The analytical petty cash book and the imprest system
191
19 Value added tax
200
20 Columnar day books
218
21 Employees' pay
226
22 Computers and accounting
234
23 Computerised accounting systems
244
part 4
Adjustments for financial statements
24 Capital expenditure and revenue expenditure
259
v

BA10_A01.qxd 21/12/04 10:18 am Page vi
Contents
25 Bad debts, provisions for doubtful debts, and provisions for discounts
on debtors
269
26 Depreciation of fixed assets: nature and calculations
284
27 Double entry records for depreciation
294
28 Accruals and prepayments and other adjustments for financial
statements
315
29 The valuation of stock
336
30 Bank reconciliation statements
351
31 Control accounts
364
32 Errors not affecting trial balance agreement
378
33 Suspense accounts and errors
386
Scenario questions
404
part 5
Special accounting procedures
34 Introduction to accounting ratios
411
35 Single entry and incomplete records
423
36 Receipts and payments accounts and income and expenditure accounts
443
37 Manufacturing accounts
457
38 Departmental accounts
480
39 Cash flow statements
488
40 Joint venture accounts
505
part 6
Partnership accounts and company accounts
41 Partnership accounts: an introduction
515
42 Goodwill for sole traders and partnerships
533
43 Revaluation of partnership assets
548
44 Partnership dissolution
556
45 An introduction to the financial statements of limited liability companies
576
46 Purchase of existing partnership and sole traders' businesses
608
part 7
An intr

oduction to financial analysis
47 An introduction to the analysis and interpretation of accounting
statements
623
part 8
An introduction to management accounting
48 An introduction to management accounting
657
Appendices
1
Answers to review questions
667
2 Answers to multiple choice questions
741
3 Glossary
742
Index
753
vi

BA10_A01.qxd 21/12/04 10:18 am Page vii
Supporting resources
Visit www.pearsoned.co.uk/wood to find valuable online resources
Companion Website for students
l Learning objectives for each chapter
l Multiple choice questions to help test your learning
l Review questions and answers
l Links to relevant sites on the web
l Searchable online glossary
l Flashcards to test your knowledge of key terms and definitions
For instructors
l Complete, downloadable Solutions Manual
l PowerPoint slides that can be downloaded and used as OHTs
Also: The Companion Website provides the following features:
l Search tool to help locate specific items of content
l E-mail results and profile tools to send results of quizzes to instructors
l Online help and support to assist with website usage and troubleshooting
For more inf

ormation please contact your local Pearson Education sales
representative or visit www.pearsoned.co.uk/wood

BA10_A01.qxd 21/12/04 10:18 am Page viii
Guided tour of the book
Part opening
part
chapter
Balancing off accounts
5
THE FINANCIAL
2
STATEMENTS OF SOLE
TRADERS

Learning objectives
After you have studied this chapter, you should be able to:
Learning objectives
l close accounts when appropriate
l balance off accounts at the end of a period and bring down the opening balance
to the next period
outline what you will
l distinguish between a debit balance and a credit balance
l describe and prepare accounts in three-column format
need to have
Introduction
learned by the end
In this chapter, you'll learn how to discover what the amount outstanding on an
account is at a particular point in time. You'll also learn how to close accounts that
of the chapter.
are no longer needed and how to record appropriate entries in accounts at the end
and beginning of periods. Finally, you'll learn that T-accounts are not the only way
to record accounting transactions.
5.1
Accounts for debtors
Introduction
This part is concerned with preparing, from double entry records,
Where debtors have paid their accounts
the financial statements of sole traders.
So far you have learnt how to record transactions in the accounting books by means of debit and
credit entries. At the end of each accounting period the figures in each account are examined in
order to summarise the situation they present. This will often, but not always, be a year if you
7
Trading and profit and loss accounts: an introduction
71
are calculating profit. It will be at least once a month if you want to see what is happening with
respect to particular accounts. Probably the most obvious reason for this is to find out how
8
Balance sheets
83
much our customers owe us for goods we have sold to them. In most businesses this is done at
9
Trading and profit and loss accounts and balance sheets:
the end of each month.
further considerations
91
10
Accounting concepts
104
Activity
5.1
Why do you think we would want to look at the debtor accounts in the
accounting books as often as once a month?
49
A wide range of exhibits offer clear examples
of accounting practice and methodology.
Chapter 27 l Double entry records for depreciation
Part 3 l Books of original entry
The depreciation is posted directly into the cumulative provision for depreciation account.
The double entry is:
11.8
Types of accounts
Debit the profit and loss account
Credit the accumulated provision for depreciation account
Some people describe all accounts as personal accounts or as impersonal accounts.
l Personal Accounts - these are for debtors and creditors (i.e. customers and suppliers).
l Impersonal Accounts - divided between `real' accounts and `nominal' accounts:
Exhibit 27.1
- Real Accounts - accounts in which possessions are recorded. Examples are buildings,
machinery, fixtures and stock.
A business has a financial year end of 31 December. A computer is bought for 2,000 on 1 January
- Nominal Accounts - accounts in which expenses, income and capital are recorded.
20X5. It is to be depreciated at the rate of 20 per cent using the reducing balance method. The
records for the first three years are:
A diagram may enable you to follow this better:
Computer
20X5

Jan
1
Cash
2,000
Accumulated Provision for Depreciation - Computer
20X5

20X5

Dec
31
Balance c/d
400
Dec
31
Profit and loss
400
20X6
20X6
Dec
31
Balance c/d
720
Jan
1
Balance b/d
400
Dec
31
Profit and loss
320
720
720
20X7
20X7
Dec
31
Balance c/d
976
Jan
1
Balance b/d
720
Dec
31
Profit and loss
256
976
976
20X8
Jan
1
Balance b/d
976
11.9
Nominal and private ledgers
Profit and Loss Account (extracts) for the year ended 31 December
The ledger in which the impersonal accounts are kept is known as the Nominal (or `General')
Ledger. In order to ensure privacy for the proprietor(s), the capital, drawings, and other similar

accounts are sometimes kept in a Private Ledger. This prevents office staff from seeing details of
20X5
Depreciation
400
items which the proprietors want to keep secret.
20X6
Depreciation
320
20X7
Depreciation
256
Activity
11.2
Why bother with books of original entry? Why don't we just enter transactions
straight into the ledgers?
Note: In this case, the depreciation for the period being posted to the profit and loss account is
being described as `depreciation' and not by the name of the account it is being posted from. This
clearly is not the convention usually adopted when posting entries between ledger accounts and
is very much `the exception that proves the rule'.

11.10
The accountant as a communicator
The impression is often given that all that an accountant does is produce figures arranged in vari-
Activity
ous ways. This has led to a perception that accountants are boring, pragmatic people with no
27.3
What advantages are there in making this exception to the rule by using
'depreciation' rather than `accumulated provision for depreciation' in the profit
sense of humour. While it is true that such work does take up quite a lot of an accountant's time,
and loss account entry?
it does not acount for all of a typical accountant's work. Accountants also need to be good com-
municators
, not just in the way they present accounting information on paper, but also in how
they verbally communicate the significance of the information they prepare.
Now the balance on the Computer Account is shown on the balance sheet at the end of each
An accountant can obviously arrange the financial figures so as to present the information in
year less the balance on the Cumulative Provision for Depreciation Account.
as meaningful a way as possible for the people who are going to use that information. That is,
295
122
Activities occur frequently throughout the book
to test your understanding of new concepts.
viii

BA10_A01.qxd 21/12/04 10:18 am Page ix
A number of worked examples are provided
to guide you through more difficult concepts.
Chapter 45 l An introduction to the financial statements of limited liability companies
Part 1 l Introduction to double entry bookkeeping
In Business Accounting 2 you will be told more about the differences between `revenue reserves'
Cash
and `capital reserves'. The most important reason for the distinction has to do with deciding how
much can be treated as being available for paying out to shareholders as dividends. `Revenue

reserves', which include the profit and loss account balance and the general reserve, can be
Aug
25
Drawings
50
treated as available for such dividends. `Capital reserves', which will include revaluation reserves
Sometimes goods are taken for private use. These are also known as drawings. In Section 3.2,
on property and land, also some reserves (which you have not yet met) which have to be created
you learnt that when goods are purchased, the purchases account is debited. As a result, when
to meet some legal statutory requirement, cannot be treated as available for payment of dividends.
goods are withdrawn it is the purchases account which should be credited.
A term which sometimes appears in examinations is that of `fungible assets'. Fungible assets
The following example illustrates the entries for this form of drawings:
are assets which are substantially indistinguishable one from another.
On 28 August, the owner takes 400 of goods out of the business for his own use.
A fully worked example
Effect
Action
s
Exhibit 45.8
1 Capital is decreased by 400
Debit the drawings account 400
2 Stock is decreased by 400
Credit the purchases account 400
ll
The following trial balance is extracted from the books of F W Ltd as on 31 December 20X5:
Drawings
Trial balance as on 31 December 20X5

Dr
Cr
Aug
28
Purchases
400


10% preference share capital
200,000
Purchases
Ordinary share capital
700,000
10% debentures (repayable 20X9)
300,000

Goodwill at cost
255,000
Aug
28
Drawings
400
Buildings at cost
1,050,000
Equipment at cost
120,000
Motor vehicles at cost
172,000
Provision for depreciation: buildings 1.1.20X5
100,000
Provision for depreciation: equipment 1.1.20X5
24,000
Learning outcomes
Learning outcomes
Provision for depreciation: motor vehicles 1.1.20X5
51,600
Stock 1.1.20X5
84,912
You should now have learnt:
Sales
1,022,000
revisit and reinforce
Purchases
439,100
1 How to calculate profit by comparing revenue with expenses.
Carriage inwards
6,200
2 That the accounting equation is central to any explanation of the effect of
Salaries and wages
192,400
trading upon capital.
the major topics
Directors' remuneration
123,000
Motor expenses
3,120
3 Why every different type of expense is shown in a separate expense account.
Business rates and insurances
8,690
4 Why every different type of revenue is shown in a separate revenue account.
covered in the
General expenses
5,600
Debenture interest
15,000
5 Why an expense is shown as a debit entry in the appropriate expense account.
Debtors
186,100
6 Why revenue is shown as a credit entry in the appropriate revenue account.
Creditors
113,700
chapter.
Bank
8,390
7 How to enter a series of expense and revenue transactions into the appropriate
General reserve
50,000
T-accounts.
Share premium account
100,000
8 What is meant by the term `drawings'.
Interim ordinary dividend paid
35,000
Profit and loss account 31.12.20X4
43,212
9 That drawings are always a reduction in capital and never an expense of a
2,704,512
2,704,512
business.
The following adjustments are needed:
10 How to record drawings of cash in the accounting books.
(i )
Stock at 31.12.20X5 was 91,413.
11 How to record drawings of goods in the accounting books.
(ii )
Depreciate buildings 10,000; motor vehicles 18,000; equipment 12,000.
(iii ) Accrue debenture interest 15,000.
`
587
44
Five sets of multiple choice questions
Each chapter ends with a selection of
allow you a quick and easy method of
practice questions to prepare you for
checking your own progress as you
your examinations.
work through the book.
Part 2 l The financial statements of sole traders
Chapter 13 l Cash books
account, the first part of the entry having been made when the transaction was recorded in the
Review questions
Cash Book.
13.2 If an entry has not been filled in, i.e. if the folio column is blank against an entry, the double entry
7.1 From the following trial balance of A Moore, extracted after one year's trading, prepare a trad-
has not yet been made. As a result, looking through the entry lines in the folio columns to ensure
ing and profit and loss account for the year ended 31 December 20X6. A balance sheet is not required.
they have all been filled in helps detect such errors quickly.
13.3 It should be quite obvious whether discount is received or allowed. And, more importantly, the
Trial Balance as at 31 December 20X6
double entry is with the Cash Book columns for discount, not with either the discount allowed

Dr
Cr
account or the discount received account in the General Ledger. At the end of the period (usually
a month) the totals of the two discount columns in the Cash Book are posted to the discount


Sales
190,576
allowed and discount received accounts in the General Ledger.
Purchases
119,832
Salaries
56,527
Motor expenses
2,416
Rent
1,894
Multiple choice questions: Set 2
Insurance
372
General expenses
85
Premises
95,420
Now attempt Set 2 of multiple choice questions. (Answers to all the multiple choice questions are
Motor vehicles
16,594
given in Appendix 2 at the end of this book.)
Debtors
26,740
Each of these multiple choice questions has four suggested answers, (A), (B), (C) and (D). You
Creditors
16,524
should read each question and then decide which choice is best, either (A) or (B) or (C) or (D).
Cash at bank
16,519
Write down your answers on a separate piece of paper. You will then be able to redo the set of
Cash in hand
342
Drawings
8,425
questions later without having to try to ignore your answers from previous attempts.
Capital
138,066
345,166
345,166
MC21 Gross profit is
Stock at 31 December 20X6 was 12,408.
(A) Excess of sales over cost of goods sold
(B)
Sales less Purchases
(Keep your answer; it will be used later in Question 8.1)
(C)
Cost of goods sold + Opening stock
(D) Net profit less expenses of the period.
7.2 From the following trial balance of B Lane after his first year's trading, you are required to
draw up a trading and profit and loss account for the year ended 30 June 20X8. A balance sheet is
MC22 Net profit is calculated in the
not required.
(A) Trading account
Trial Balance as at 30 June 20X8
(B)
Profit and loss account
Dr
Cr
(C)
Trial balance
(D) Balance sheet.


Sales
265,900
MC23 To find the value of closing stock at the end of a period we
Purchases
154,870
Rent
4,200
(A) do this by stocktaking
Lighting and heating expenses
530
(B)
look in the stock account
Salaries and wages
51,400
(C)
deduct opening stock from cost of goods sold
Insurance
2,100
(D) deduct cost of goods sold from sales.
Buildings
85,000
Fixtures
1,100
MC24 The credit entry for net profit is on the credit side of
Debtors
31,300
Sundry expenses
412
(A) The trading account
Creditors
15,910
(B)
The profit and loss account
Cash at bank
14,590
(C)
The drawings account
Drawings
30,000
(D) The capital account.
Vans
16,400
Motor running expenses
4,110
MC25
Capital
114,202
Which of these best describes a balance sheet?
396,012
396,012
(A) An account proving the books balance
(B)
A record of closing entries
Stock at 30 June 20X8 was 16,280.
(C)
A listing of balances
`
(Keep your answer; it will be used later in Question 8.2)
(D) A statement of assets.
80
147
ix

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