105 Accounting O Level Theory and Practice

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105 Accounting O Level Theory and Practice | Read & Write Publications. TABLE OF CONTENTS PREFACE ( 105 Accounting O Level Theory and Practice )CHAPTER 1 BOOKKEEPING AND ACCOUNTING 1 BRANCHES OF ACCOUNTING 1 ACCOUNTING EQUATION 1 Assets 14 1 Liabilities 14 1 Equity 14 1 Drawings 14 1 The Entity Concept and the Accounting Equation 14 1 The Dual Aspect Concept and the Accounting Equation 15 1 TRANSACTION 1 Cash Transactions 15 1 Credit Transactions 15 1 STATEMENT OF FINANCIAL POSITION (STATEMENT OF FINANCIAL POSITION) 1 Statement of Financial Position (Horizontal Style) 17 1 Statement of Financial Position (Vertical Style) 17 REVIEW QUESTIONS CHAPTER 2 ACCOUNTING FOR ASSETS, LIABILITIES AND CAPITAL 2 EVOLUTION OF BOOK KEEPING 2 RULES OF DEBIT AND CREDIT 2 LEDGER 2 ACCOUNT 2 “T” Account 23 2 Three Column Ledger Account (Running Balance Method) 24 2 DOUBLE-ENTRY RELATING TO ASSETS AND LIABILITIES 2 EXAMPLE 24 2 BALANCING OF AN ACCOUNT 2 When should accounts be balanced? 28 2 TRIAL BALANCE 2 Uses of a Trial Balance 29 2 Why is it Necessary for a Trial Balance to ‘Balance’? 29 2 Trial Balance – An aid to Financial Statements 29 REVIEW QUESTIONS CHAPTER 3 ACCOUNTING FOR INVENTORIES 3 INVENTORY OF GOODS 3 BOOKKEEPING FOR INVENTORY OF GOODS 3 WHY INVENTORY ACCOUNT DOES NOT INCLUDE PURCHASES AND SALES OF GOODS 3 PURCHASES 3 Cash Purchases 34 3 Credit Purchases 34 3 SALES 3 Cash Sales 34 3 Credit Sales 35 3 PURCHASES RETURNS (RETURN OUTWARDS) 3 SALES RETURNS (RETURNS INWARDS) 3 TRADING SECTION OF INCOME STATEMENT 3 CLOSING OF INCOMES AND EXPENSES 3 CLOSING INVENTORY 3 OPENING INVENTORY REVIEW QUESTIONS CHAPTER 4 ACCOUNTING FOR INCOMES AND EXPENSES 43 4 INCOMES 4 EXPENSES 4 DOUBLE-ENTRY FOR EXPENSES AND INCOMES (REVENUES) 4 BOOKKEEPING FOR INCOMES AND EXPENSES 4 CALCULATION OF NET PROFIT 4 CLOSING OF INCOMES AND EXPENSES 4 SERVICE BUSINESSES 4 Difference between Trading and Service Businesses 46 REVIEW QUESTIONS CHAPTER 5 FINANCIAL STATEMENTS-AN INTRODUCTION 5 NEED FOR INCOME STATEMENT 5 USES OF INCOME STATEMENT 5 CARRIAGE INWARDS 5 CARRIAGE OUTWARDS 5 INCOME STATEMENT AND STATEMENT OF FINANCIAL POSITION-AN IMPORTANT CONSIDERATION 5 ACCOUNTING PERIOD 5 DRAWINGS 5 ASSETS 5 Non-Current Assets 51 5 Current Assets 51 5 LIABILITIES 5 Current Liabilities 51 5 Non-Current Liabilities 51 REVIEW QUESTIONS CHAPTER 6 BOOKS OF ORIGINAL ENTRY & DIVISION OF LEDGER 6 ADVANTAGES OF MAINTAINING BOOKS OF ORIGINAL ENTRY 6 COMPONENTS OF BOOKS OF ORIGINAL ENTRY 6 SALES JOURNAL 6 Posting from the Sales Journal to the Ledger 62 6 Trade Discount 62 6 Sales on Credit Card 63 6 PURCHASES JOURNAL 6 Posting from the Purchases Journal to the Ledger 63 6 RETURN INWARDS JOURNAL 6 Posting from the Returns Inwards Journal to the Ledger 64 6 RETURN OUTWARDS JOURNAL 6 Posting from the Returns Outwards Journal to the Ledger 65 6 GENERAL JOURNAL 6 CASH BOOK 6 Two Column Cash Book 67 6 Three Column Cash Book 67 6 PERSONAL LEDGERS 6 CASH BOOK 6 GENERAL LEDGER REVIEW QUESTIONS CHAPTER 7 CASH BOOK 7 TWO COLUMN CASH BOOK 7 FOLIO COLUMNS 7 DISHONOURED CHEQUES 7 CONTRA ENTRIES 7 BALANCING OF CASH AND BANK COLUMNS 7 TRADE DISCOUNT 7 CASH DISCOUNTS 7 THREE COLUMN CASH BOOK 7 NATURE OF DISCOUNTS COLUMNS 7 CASH BOOK IN RECENT TIMES 7 PETTY CASH BOOK 7 IMPREST SYSTEM 7 Advantages 79 REVIEW QUESTIONS CHAPTER 8 BANK RECONCILIATION STATEMENTS 8 DIFFERENCE BETWEEN BANK STATEMENT AND CASH BOOK 8 REASONS FOR DIFFERENCE BETWEEN CASH BOOK AND BANK STATEMENT BALANCE 8 Items in the Bank Statement but not in the Cash Book 86 8 Items in the Cash Book but not in the Bank Statement 87 8 BANK RECONCILIATION STATEMENT 8 STEPS FOR PREPARING A BANK RECONCILIATION STATEMENT 8 USES OF BANK RECONCILIATION STATEMENT REVIEW QUESTIONS ( 105 Accounting O Level Theory and Practice ) CHAPTER 9 CAPITAL AND REVENUE 9 TREATMENT OF CAPITAL AND REVENUE ITEMS IN FINANCIAL STATEMENT 9 DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURES 9 Expenditures for Acquisition of a Non-current asset 99 9 Expenditures for Improving Efficiency /Capacity of a Non-current asset 99 9 Expenditure at the Initiation of Business 100 9 Expenditure on Extension of Business 100 9 Expenditures to Increase the Useful Life of an Asset 100 9 Expenditures of Abnormal Amounts 100 9 APPLICATION OF MATERIALITY CONCEPT 9 DIFFERENCE BETWEEN CAPITAL AND REVENUE RECEIPTS 9 Revenue Receipts 100 9 Capital Receipts 100 9 EFFECTS OF WRONG TREATMENT OF CAPITAL AND REVENUE ITEMS REVIEW QUESTIONS CHAPTER 10 ACCOUNTING FOR NON-CURRENT ASSET 10 DEPRECIATION 10 Amortisation and Depletion 106 10 EFFECTS ON CASH FLOWS 10 RELATIONSHIP WITH MARKET VALUE 10 CAUSES FOR DEPRECIATION 10 FACTORS FOR CALCULATING DEPRECIATION 10 The Original Cost of Asset 107 10 The Estimated Useful Life 107 10 The Approximate Residual Value 107 10 CHARACTERISTICS OF DEPRECIATION 10 WHY DEPRECIATION IS CHARGED? 10 METHODS FOR CALCULATING DEPRECIATION 10 Revaluation Method 108 10 Straight Line Method or Original Cost Method 108 10 Reducing Balance Method 109 10 ANNUAL DEPRECIATION UNDER REDUCING BALANCE & STRAIGHT LINE METHODS 10 DISTINCTIVE FEATURES OF STRAIGHT LINE AND REDUCING BALANCE METHOD 10 CHOICE OF A METHOD 10 DIFFERENCE BETWEEN DEPRECIATION AND PROVISION FOR DEPRECIATION 10 DEPRECIATION POLICIES 10 DEPRECIATION ACCOUNTING 10 DEPRECIATION AND ACCOUNTING CONCEPTS REVIEW QUESTIONS CHAPTER 11 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS 11 BAD DEBTS 11 BAD DEBTS RECOVERY 11 DOUBTFUL DEBTS 11 PROVISION FOR DOUBTFUL DEBTS 11 General Provision for Doubtful Debts 121 11 Specific Provision for Doubtful Debts 121 11 Calculation of Provision for Doubtful Debts 121 11 Treatment of Provision in Financial Statements 121 11 General Journal Entries 122 11 AGEING SCHEDULE 11 BAD DEBTS RECOVERY 11 CASH DISCOUNTS ALLOWED AND PROVISION FOR DISCOUNTS ALLOWED 11 Why Cash Discounts are offered? 124 11 WHY PROVISIONS ARE MADE FOR DOUBTFUL DEBTS AND DISCOUNTS ALLOWED 11 SALIENT POINTS TO NOTE REVIEW QUESTIONS CHAPTER 12 CONTROL ACCOUNTS 12 CONTROL ACCOUNTS IN CAMBRIDGE ORDINARY LEVEL SYLLABUS 12 THE FORMAT OF CONTROL ACCOUNTS 12 HOW CONTROL ACCOUNTS ARE PREPARED? 12 CONTRA ENTRY 12 TWO BALANCES OF CONTROL ACCOUNTS 12 Reasons for Having Two Balances of a Control Account 133 12 Treatment of Two Balances in the Statement of Financial Position 133 12 ADVANTAGES OR USES OF CONTROL ACCOUNTS REVIEW QUESTIONS CHAPTER 13 CORRECTION OF ERRORS AND SUSPENSE ACCOUNT 13 TYPES OF ERRORS 13 Errors Not Affecting Agreement of Trial Balance 143 13 Errors Affecting Agreement of Trial Balance 145 13 SUSPENSE ACCOUNT 13 EFFECT ON PROFIT OF CORRECTING ERRORS 13 EFFECTS ON STATEMENT OF FINANCIAL POSITION OF CORRECTING ERRORS REVIEW QUESTIONS CHAPTER 14 INVENTORY VALUATION 14 BASIS FOR INVENTORY VALUATION 14 COST 14 NET REALISABLE VALUE 14 DIFFERENCE BETWEEN COST & NET REALISABLE VALUE 14 BASIS FOR INVENTORY VALUATION 14 WHY INVENTORY VALUED AT LOWER OF COST & NRV 14 INVENTORY VALUATION AND ACCOUNTING PRINCIPLES 14 SEPARATE VALUATION OF INVENTORY ITEMS 14 EFFECTS OF ERRORS IN VALUING INVENTORY REVIEW QUESTIONS CHAPTER 15 FINANCIAL STATEMENTS WITH ADJUSTMENTS 15 CASH AND ACCRUAL BASIS OF ACCOUNTING 15 NEED FOR ADJUSTMENTS 15 TYPES OF ADJUSTMENTS 15 INVENTORY AT YEAR END 15 Closing Inventory in Trial Balance 161 15 DRAWINGS OF GOODS FOR OWNER’S PERSONAL USE 15 ACCRUED EXPENSES 15 ACCRUED INCOMES 15 PREPAID EXPENSES (OTHER RECEIVABLES) 15 PRE-RECEIVED /DEFERRED INCOMES 15 TREATMENT OF OPENING ACCRUALS OR PREPAYMENTS 15 DEPRECIATION 15 Methods of Depreciation 164 15 Depreciation Policies 164 15 Recording of Depreciation 165 15 BAD DEBTS 15 Bad Debts written off 166 15 Bad Debts to be written off (given as an adjustment) 166 15 PROVISION FOR DOUBTFUL DEBTS 15 CALCULATION OF PROFITS FOR SERVICE BUSINESSES REVIEW QUESTIONS CHAPTER 16 ACCOUNTS FROM INCOMPLETE RECORDS 16 THE REASONS FOR INCOMPLETE RECORDS 16 NEED FOR PREPARING FINANCIAL STATEMENT FROM INCOMPLETE RECORDS 16 CALCULATING PROFITS AND LOSSES FROM CHANGES IN CAPITAL/NET ASSETS 16 Statement of Affairs 179 16 Statement of Profit or Loss 179 16 CALCULATION OF GROSS PROFIT FROM INCOMPLETE RECORDS 16 Calculation of Total Sales 180 16 Calculation of Total Purchases 181 16 MARK-UP AND MARGIN 16 Use of Mark-Up and Margin to calculate Missing Items in Trading Account 182 16 Conversion of Mark-Up into Margin 184 16 Conversion of Margin into Mark-Up 185 16 DISADVANTAGES OR DEFECTS OF ACCOUNTS PREPARED FROM INCOMPLETE RECORDS REVIEW QUESTIONS CHAPTER 17 ACCOUNTS OF NON PROFIT ORGANISATIONS 17 COMPARISON BETWEEN PROFIT AND NON- PROFIT MAKING ORGANISATIONS 17 INCOMES AND EXPENSES OF NON PROFIT ORGANISATIONS 17 Incomes of Non Profit Organisations 194 17 Expenses of Non Profit Organisations 194 17 SOME PECULIAR TERMS OF NON PROFIT ORGANISATIONS 17 Grants and Donations 195 17 Gift 195 17 Legacy 195 17 Life Membership fee 195 17 ACCOUNTING BY NON PROFIT ORGANISATIONS 17 Receipts and Payments Account 195 17 Income and Expenditure Account 196 17 Trading Account 196 17 Income and Expenses on Same Head 196 17 Calculation of Expenses to be shown in Financial Statements 197 17 Calculation of Incomes to be shown in Financial Statements 198 17 Accounting for Subscriptions 199 17 PREPARATION OF FINANCIAL STATEMENTS REVIEW QUESTIONS CHAPTER 18 ACCOUNTING CONCEPTS AND CONVENTIONS 18 CONVENTIONS AND CONCEPTS – AN IMPLICATION 18 DUAL ASPECT CONCEPT 18 BUSINESS ENTITY CONCEPT 18 MONEY MEASUREMENT CONCEPT 18 GOING CONCERN CONCEPT 18 REALISATION CONCEPT 18 PRUDENCE CONCEPT 18 HISTORICAL COST CONCEPT 18 CONSISTENCY CONCEPT 18 MATERIALITY CONCEPT 18 MATCHING CONCEPT 18 ACCRUAL CONCEPT 18 INTERNATIONAL ACCOUNTING STANDARDS (IASS) 18 Aims of the Accounting Standards 210 18 Scope of the Accounting Standards 211 18 Benefits of International Accounting Standards 211 18 USERS OF FINANCIAL STATEMENTS 18 LIMITATIONS OF FINANCIAL STATEMENTS CHAPTER 19 PARTNERSHIP ACCOUNTS 19 ADVANTAGES AND DISADVANTAGES OF THE PARTNERSHIP 10 19 PARTNERSHIP AGREEMENT 19 Contents of Partnership Agreement 214 19 PROVISION OF PARTNERSHIP ACT 1890 IN THE ABSENCE OF PARTNERSHIP DEED 19 FINANCIAL STATEMENTS OF A PARTNERSHIP 19 Appropriations of profit 214 19 Statement of Financial Position of Partnership 216 19 ACCOUNTING RECORDS FOR PARTNERS 19 Partners’ Capital Accounts 216 19 Drawings Accounts 218 19 Partners’ Loan Account 218 19 CALCULATION OF INTEREST ON CAPITAL 19 CALCULATION OF INTEREST ON DRAWINGS 19 AMALGAMATION OF SOLE-PROPRIETORSHIPS 19 Reasons for Amalgamation 222 19 Accounting Procedure 222 19 Goodwill on Amalgamation 223 REVIEW QUESTIONS CHAPTER 20 MANUFACTURING ACCOUNTS 20 THE PRIME COST SECTION 20 Raw Materials Cost 232 20 Direct Labour Cost 232 20 Direct expenses 232 20 FACTORY (PRODUCTION) OVERHEADS 20 MANUFACTURING ACCOUNTS FOR SEPARATE PRODUCTS 20 PURPOSE OF MANUFACTURING ACCOUNTS 20 TRADING SECTION 20 PROFIT AND LOSS SECTION 20 STATEMENT OF FINANCIAL POSITION 20 Inventories in a Manufacturing Business 235 REVIEW QUESTIONS CHAPTER 21 COMPANY ACCOUNTS 21 THE NEED FOR COMPANIES 21 ADVANTAGES AND DISADVANTAGES OF FORMING A LIMITED COMPANY 21 Advantages of a Company 248 21 Disadvantages of Forming a Limited Company 249 21 SOURCES OF FINANCE FOR A COMPANY 21 TYPES OF SHARES 21 Ordinary Shares 249 21 Preference Shares 250 21 DEBENTURES 21 TYPES OF PREFERENCE SHARES 21 Redeemable Preference Shares 251 21 Non-Redeemable Preference Shares 251 21 FORMS OF CAPITAL 21 Authorised Share Capital 251 21 Issued Share Capital 251 21 Called Up Share Capital 252 21 Paid Up Capital 252 21 FINANCIAL STATEMENTS OF COMPANIES 11 21 FINANCIAL STATEMENTS OF LIMITED COMPANIES 21 STATEMENT OF CHANGES IN EQUITY 21 Dividends 253 21 Transfer to General Reserve 254 21 Retained Profits 254 21 STATEMENT OF FINANCIAL POSITION 21 A COMPARISON OF FINANCIAL STATEMENTS OF BUSINESS ORGANISATIONS REVIEW QUESTIONS CHAPTER 22 RATIO ANALYSIS 22 FINANCIAL RATIOS 22 ANALYSIS OF RATIOS 22 Comparing one year with another (Trend or Time Series Analysis) 263 22 Comparing One Business with another Business (Cross-Sectional Analysis) 263 22 DEMONSTRATION OF RATIOS 22 PROFITABILITY RATIOS 22 Gross Profit Ratio 264 22 Net Profit Ratio 264 22 Return on Capital Employed (ROCE) 265 22 LIQUIDITY RATIOS 22 Current Ratio 266 22 Liquid Ratio 267 22 TURNOVER RATIOS 22 Inventory Turnover Ratio 267 22 Trade Receivables’ Collection Period 268 22 Trade payables’ Payment Period 269 REVIEW QUESTIONS SOLUTION TO ODD-NUMBERED QUESTIONS CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 CHAPTER 6 CHAPTER 7 CHAPTER 8 CHAPTER 9 CHAPTER 10 CHAPTER 11 CHAPTER 12 CHAPTER 13 CHAPTER 14 CHAPTER 15 CHAPTER 16 CHAPTER 17 CHAPTER 19 CHAPTER 20 CHAPTER 21 CHAPTER 22 INDEX 350