Cambridge International AS and A Level PNK! lan Harrison 6 HRRRER AN HACHETTE UK COMPANYAcknowledgements ‘The Publishers would like vo thank the following for persion o reproduce copysght ates Photo credits Bi © SIA KAMBOU/AFP/Gety Inayes; p58 © saxo - Fotis: p91 © Pater Homes / Alan: 1.263 © Kaveh Kezemi/Gety mages p.269 © NAN -Fotaia.comy 291 Per-Ancers Ptteson/ Gey Images, p:336 © pore_bw ets, p-387 © Papesarmages- Fetoincom, pH? © Aes Images Group Pe Lid / Alay: poi86 © terex- Fotolia {Questions fom the Cambyidge International AS and A Level Accounting papers are repose hy Iced permission of Cambridge Intcnasceal Examinations. rigs eerie Renato nea a cereal Fert erage eee ueions take from is past quesion papers which are contined inthis book/CD, Every effort has been made to trace all copyright holder, but iFany have been inadvertenlly overlooked the Publishers wil be leased 10 alk the necessry anangoments atthe fst epporuity. 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Ue, Pondicheny, India Printed ia Dubai ‘Acatalogne record for this ite avalable from the Hrtish Libary ISBN. 978 1444 181 432Contents Introduction. vi AS Level Diener eee) 1 Chapter 1 The double-entry system Chapter 2 The books of prime entry... Chapter 3 The ledger accounts in deta... Chapter 4 The cash book... Chapter 5 Discount Chapter 6 Preparing simple financial statements. Chapter 7 Accounting principles, concepts and conventions Chapter 8 Closing down the double-entry system.nn Chapter 9 Accruals and prepayments... Chapter 10 Control systems - the trial balance. Chapter 11 Suspense accounts Chapter 12 Control systems — bank reconciliations... Chapter 13 Control systems ~ ledger control accounts.. Chapter 14 Statements of financial position. Chapter 15 Profits. Chapter 16 The trading account.. Chapter 17 The profit and loss account... Chapter 18 irrecoverable debts and provision for doubtful debts Chapter 19 Depreciation of non-current assets... Chapter 20 The valuation of inventories... Chapter 21 Financial statements Chapter 22 Incomplete records. Chapter 23 Partnership accounting Chapter 24 Partnership accounting — structural changesContents Chapter 25 The financial statements of limited companies... 235 Chapter 26 Company financing aes = 1262 Chapter 27 Interpretation and analysis of financial data re 267 2 Cost and management accounting 281 Chapter 28 Absorption (total) costing, 1281 Chapter 29 Marginal costing 301 322 Chapter 30 Unit, job and batch costing..... Chapter 31 Business plannin 327 AS Level examination-style questions 330 ALevel DET] 336 Chapter 32 Manufacturing accOUMtS ...o.nesumnnnnonnnnaninnnn sii Chapter 33 Clubs and societies... nnmn SHERMER | Chapter 34 Published financial statements o 368 Chapter 35 IAS 7 Statements of cash flows 372 Chapter 36 International accounting standards.. 385 Chapter 37 The role of the auditor and directors.. 401 Chapter 38 Business purchase and merger... Chapter 39 Consignment accounts.. Chapter 40 Joint venture accounts. Chapter 41 Computerised accounting systems Chapter 42 Investment and other ratios... PR eC RULE ue rel LC Te) Chapter 43 Activity based costin Chapter 44 Budgeting and budgetary control Chapter 45 Standard costing Chapter 46 Capital investment appraisal. A Level examination-style questions 503 Index 509Contents Student's CD contents © ‘Additional questions Interactive tests Revision checklists Examination structure Glossary of command words Planning your revision ‘Answers to Additional questions ‘Appendix 1: Ratios Appendix 2: Layouts of financial statementsIntroduction The textbook ‘This hook has heen writen with the needs of students in mind, and I have tid to maximise, as fr as is possible, the achicvement of positive lesming. also, the book has been developed based on my many years of experience as both an ‘examiner and a teucher of the subject to Advanced Level students both ia the UK and overseas. “The book has been endorsed by Cambridge Intemational Examinations, sted as an endowsed textbook for students who study the Cambridge International Examinations syllabus 9706, The text covers the whole of the syllabus, onganised andl spit in accordance with the examination papers in the syllabis, and fellows as far as is possible the order in which topics apps in the published syllabus, The sections covered by each chapter arc listed. Each area of the syllabus is given as a reference point. Syllabus coverage ‘The first 31 chapters cover the AS syllabus in its entiety. At the end of the AS Level syllabus chapters there are examination style questions, Some of the questions are from past exam papers. Where appropriate the original questions have heen modified to reflec recent changes in accounting terminology and practice, Readers are advtsed that all topics in the AS section of the syllabus may also be examined at Advanced Level, Chapters 32 v0 46 deal with topics that may be examined at Advanced Level. The exumination style questions at the end of the A Level chapters are writen to reflec recent changes in accounting exam papers Features of the book Each chapter stats with the relevant syllabus statement, Throughout the chapters there are Examples and Worked examples, with answers, fo illustrate the inuoduced concepts. They are followed by a few ‘Now uy ..” questions leading students co additional questions in the GD as well as some selftest questions, which allow students to further explore the concept and test themselves Meanwhile, important terms ate explained and sometimes tips are given to help students to better understand the related ‘concepts, Each chapter ends with a summary, which covers all the key points How: the syllabus points are covered In the 46 chapters 1a Chapters 1-7and 14 | 1.1.1 Chapter 32 1. (Chapters 6 and 79 wiz Chapter 33 13 Chapters 10-12 143 Chapters 34 and 35, tat Chapter 9 and 18-20 | 1.1.4 Chapter 36 a2 Chapter 15-17 and 22 | 1.15 Chapter 37 1.43 CChopters 23 and 24 12. Chapter 36 tad Chapter 25 and 26 13 Chapters 39 nd 40 15 Chapter 27 14 Chapter at 24 Chapters 20 and 28 1s. Chapter 42 224 Chapter 28 2A Chapter 43 222 Chapter 29 22 Chapter 223 Chapters 29 and 30 23 Chapter 45 23 Chapter 31 24 Chapter 5Introduction Key concepts “The 9706 syllabus is built around five fundamental concepts that should be applied to all accounting transactions. They are: 2 A true and fair view ‘The concept of true and fair view ensures that financial siatements accurately and wuihfully rellect the transactions of the business, GQ Prats done cote) he ctl pny cing acon i air he gig Sr wali Consistency ‘The treatment of similar transactions and! items in the same way each year so that the results of business activity can be compared swith previous results @ Bovine eatiy ‘The separation of the ownership of a business from the actual business itself, Only business assets and transactions are recorded {nthe business books of account. @ Money mewurement ‘The business financial records only deal with transactions that can be measured in monetary terms. These key concepts will dictate the way that you study accounting. They underpin the work that you will study during your ‘course. You should find that they provide themes that sun through all the accounting topics that you study, The above icons appear in the text, indicating where each Key concept is covered, ‘When you are studying a topic, relate one or mote of these key concepts to that topic. The Student's CD-ROM ‘Thete is a student's CD-ROM accompanying the book to help students further their sudy in accounting, It includes: ‘© Additional questions ~ they are referred to in the book as ‘Now try .." questions which illustrate more about the conceps where introchiced and test if you have grasped the knowledge. 16 Interactive tests — these are diferent types of questions such as tric or false and mulkiple choice, designed to improve the understanding of accounting. ‘© Revision checklia to check if you have understood every syllabus point covered in the chapter, ‘© Answers to additional questions |@ Materials to help you prepare for the examinations in Accounting In accounting, there are certain layouts that you must lean so its important that you practise questions based on exch topic area cn a regular basis. Use each piece of work inthe book and the CD to build up a hank of knowledge and skills that you may be able to apply to subsequent picces of work, Asa subject, accounting is rather ike a detective selving a crime; the pieces of Information collected some moeks ago might help 10 solve today’s problem, Most importanty, yous mus learn the concepts foreach topic. This usullycasier that you might first think; dhe dificult pat is applying the appropriate knowledge to the questions Thope you enjoy exploring in accounting andl may you have good pesformance in your AS/A Level examinations Ian HarrisonThis page intentionally left blankAS Level 1 Financial ac 4d The double-entry system eee eean sey @ ‘An income statement i a statement ‘that calculates the profit that a business has made fora period of time (usualy a financial ye. Like all areas of study, accounting oY its awn jargon. Whenever a new word or term is introduced, an explanation or definition will be given. Make sure you read and understand wat these ‘terms mean and haw they are used in accounting. By the end of this chapter you should be able to: (© use double-entry book-keeping to record financial transactions «© enter financial transactions into a ledger using debit and credit entries ‘© understand and explain the purpose af using a ledger ‘© understand and explain why a ledger is generally divided into three parts. 1.1 Debit and credit entries in the double-entry system “There are two main ways in which the managers of businesses record their nancial transactions. They use either 2 double-cntry system of recording transactions © a single-entry system of recording transactions. “This chapter looks at the double-cntcy system, which provides the accountant with the information needed in erder to produce the data requited to prepare an income statement that will show whether or not the business has been profitable. You will ‘encounter the singleentry system in Chapters 22 and 23. ‘As the name implies, double-entry hook keeping recognises that there are two sides or aspects to every business transaction. See, for example, the two sides of each Of the following transactions: Til my car with $20 of fuel. @ receive the fuel. The filing sation attendant puts the fuel into my vehicle buy a pair of soccer boots costing $13. @ receive the boots. The sports shop ‘gives’ me the boots ‘There are two mote aspects to each of these transactions: ‘When I give the fling station attendant my $20 @ she receives the cash © Tgive' the cash When | give the shop assistant my $13 # he receives the cash, give the cash. ‘This way of recording both sides of any transaction is known as the dual aspect principle of accounting.EE tre couble-entry system All financial transactions involving the business are recorded in a format called a ‘ledger account comtans the detaied sede account or simply an aceouat record of financial transactions undertaken Tyabusines, Since al somone oppeer ‘You would find each account on a separate page in the Ledger. In fac, if great imaledger (or book, the term & often ‘many transactions of « similar nature are undertaken, an account may spread over shortened the single word account. several pages For the sake of convenience this one book (the ledge) is divided into several smaller books. You can imagine that large businesses like the Toyota Motor ‘ledgers the Look where all accounts Corporation o¢ McDonalds could net possibly keep all their financial records in are kept eet Initially, to make our tsica litle simpler, we shall keep all our records together. ‘When the other books are introduced, you will see that it does muke sense 10 split the ledger into several dlfferent parts, Do not worry if allthis scems a litle strange. You will scon be familiar with i but it does require practice. The key to success in accounting is practice An account looks like a ‘T shape, lke this Fach account has two sides. (© The lef side is known as the debit side. (© The right sil is known as the credit side ‘An account Debit Credit “The debit sce ofan account is always the | The cmiltside ofan account i aaye the receiving side or the sie that shows gains | giving or losing side —the side that shows in value value given. Debit soften abbreviated to Dr Credit is often abbreviated 10 Cr. Dr ‘An account @ Receives Gives Gains Lowes ‘An account in the ledger would be headed thus: i FE wccour Note “There should always be a heading, i the account shown is not a personal account, the heading should include the word ‘account “The golden rule of the game of Mlouble entry’ is that every time you enter something on dhe debit side (left side) of an account you must enter an equivalent amount on the credit side (right side) of another account, “This is all fairly staightferwaed, but i does requine practicePurchases are any items that ae purchased with the intanton of sling them to Sales are any items that are sold inthe normal course of business to customers. / 1.1 Debit and credit entries in the double-entry system. (Err Bola owns a business selling meat: During one week the following financial teansactions take place: 1 Bola purchases meat $210 from Scragg, a meat wholesaler. She will pay for the meat in 2 couple of weeks! time 2 Bolas cash sales for the week amount to $742. 3 Bola supplies meat to the Grand Hotel $217. They will pay for the meat at the end of the month, 4 Bola pays the rent for her shop $75. 5 She pays her telephone bill $45, Required Enter the transactions in Bol's ledger, Answer 1 Bola receives meat .., and Scragg ‘loses' the meat Dr___Purchares account Cr Dr Scragg @ $ $ 210 210 2 Bola ‘loses (ells) some meat... and she gains cash « Dr Sales account Cr Dr Cash account o 5 3 782 782 3 Hola ‘loses’ meat .. and the Grand Hotel gains the meat Dr Sales account Cr Dr Grand Hotel o s 5 27 217 4 Hola gains the use of her premises ... and she ‘loses’ (pays) cash Dr ___Rentaccount co Dr Cash account o § $ 5 ® {This is can be a confusing entry hecause we are used totalling about ‘paying cent + Bola pays money to a landlord for the use of his building, + Bola receives/gains the use of the premises, + In cases like this, think of the cash entry frst and then put in the second entry 5 Hola gains the use of her telephone ... and she loses cash Dr___Telephone account or Cath account Ga $ $ 4a a + Another confusing entry. Hola seceives/gains the use of the telephone. + Hola gives the telephone company cash for the service they provide to her,EE tre couble-entry system > Now try Question 2. you are uncertain about the telephone account ask whether Bola has gained cash fr ‘lost’ cash, You know that Bola has paid cash to the telephone company so the cash has to be a credit entry (right side), the other entry has to be a debit entry (eft side) according to the rules of double entry. @ 1.2 Treatment of similar transactions IW there are a number of similar transactions that need to be recorded, we enter them all in one account. Greta Teer owns and suns a store selling newspapers, magazines and candies, The following transactions toole place over the past few days: 1 Gash sales of newspapers amounted to $68. 2 Cash sales of chocolate and candies amounted to $151, 3 Greta purchased candies, potato chips and soft drinks $135, paying cash to her wholesaler, 4 She paid $160 casi for local taxes. 55 Greta sold four boxes of potato chips to a local club for cash $30. Required Enter the wransactions in Greta’ ledger, Answer Dr Soles account o Dr Cash account o s s $ 6 cy 135 151 15 160 20 30 Dr Purchases account G Dr Local taxes account Cr $ s 135 160 Note All the transactions involving cash have been entered in one cash account, All the sales transactions have also been entered in one account, It should be obvious that as well as keeping, money in the business, the owners of businesses will bank money and will pay many bills by means of cheques. So, #8 well as having a cash account in the lelger, the business would also keep a bark account to record transactions using the business bank account Cs Sven Drax owns and runs a hovel. He supplies the following information: 1 Sven purchases a deep freeze unit $415, paying by cheque. 2 He purchases for cash $127 feuit and vegetables for the hore restaurant, 3 Sven purchases petrol $45 for the hotel minF-bus using cash,Drawings isthe term used to describe the withdrawal ef resources (ash or goed) from the usiness by the owner for pivate use outside the business, 1.3 The division of the ledger 4 He pays Tor a family holiday $1500 paying with a business cheque. 5 He pays $2178 cash takings into the bank account. Required Enter the transactions in the hotel ledger, Answer Dr Freezer account cr o $ 3 ans 2078 ais 1500 br Purchases account cr Dr Cash account o 3 $ 127 17 4 Dr__Motorexpenses account __ Cr 3 45 Dr Sales (or takings) account $ 2178 Note “The freezer unit is not purchases ~ itis capital expenditure. There was not already an account, so when in doubt open an account. The cheque paid out 10 the holiday ‘company is drawings — it is not a business expense. Semen 1 bey, 2 Define the term ‘account. 3 In which account would goods purchased for resale be entered? 4 Denzil pays the rent on his factory with $300 cash. The entries to record this, reeds a corresponding debit entry transaction are debit rent account $300; credit cash account $300. TruefFalse? Bradley pays the telephone bill $120 cash. The entries to record this transaction ate debit cash account $120; credit telephone account §120. True/False? ‘Which side of an account is the ‘receiving’ side? ‘Which side of an account is the giving’ side? @ 1.3 The division of the ledger All accounts are entered in one book called the ledger. Because the number of accounts could nan into many hundreds, iis more convenient to split the ledger iato ‘a number of different books