Table Of ContentF R A N K W O O D ’ S
1
TENTH EDITION
Every year, thousands of students rely on
Frank Wood's best-selling books to help them
pass their accountancy exams. business
b
Business Accounting Volume 1is the world’s best- Features:
TENTH EDITION
selling textbook on bookkeeping and accounting. ➤ Easy-to-follow explanations of contemporary u
Now in its tenth edition, it has become the accounting practice, including double entry accounting
standard introductory text for accounting students bookkeeping and the preparation of financial s F
and professionals alike. statements W
➤ Clear and logical progression through topics i R
New to this edition: ➤ Activities designed to reinforce your O n
➤ Over 120 brand new review questions for exam understanding of key concepts O e A
practice ➤ Over 300 review questions, including past
➤ Coverage of International Accounting Standards Examination Board questions D s N
2005 ➤ 100 multiple choice questions with answers s
➤ Additional and updated worked examples for ➤ Regularly updated Companion Website including & K
areas of difficulty further self-test questions and accounting
➤ Treatment of VAT for companies operating standards updates S a
within the United Kingdom W
➤ Expanded introduction to the language and Business Accounting Volume 1is used on a wide A c
history of accounting variety of courses in accounting and business, both N c
at secondary and tertiary level and for those O FRANK WOOD &
studying for professional qualifications. G o
O
S u ALAN SANGSTER
T
D
n
'A classic textbook that has set thousands of students on a straight path since it was first
E
published, Wood & Sangster's Business Accountingcan be recommended without reservation to all
R t ’
accounting students.'
S
Dr George Iatridis, University of Athens, Greece and University of Manchester i
n
g
'I highly recommend Business Accountingbecause 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
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BA10_A01.qxd 21/12/04 10:18 am Page i
FRANK WOOD’S
1
business accounting
Visit the Business Accounting, tenth editionCompanion 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
© Frank Wood 1967
© Longman Group UK Limited 1972, 1979, 1984, 1989, 1993
© Pearson Professional Limited 1996
© Financial Times Professional Limited 1999
© 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 sales 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
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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 introduct ion 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/woodto 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
FFoorr iinnssttrruuccttoorrss
l Complete, downloadable Solutions Manual
l PowerPoint slides that can be downloaded and used as OHTs
AAllssoo:: 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 information 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
2 5
Balancing off accounts
THE FINANCIAL
STATEMENTS OF SOLE
TRADERS
Learning objectives
After you have studied this chapter, you should be able to: Learning objectives
lclose accounts when appropriate
lbalance off accounts at the end of a period and bring down the opening balance outline what you will
to the next period
ldistinguish between a debit balance and a credit balance need to have
ldescribe and prepare accounts in three-column format
learned by the end
Introduction
In this chapter, you’ll learn how to discover what the amount outstanding on an of the chapter.
account is at a particular point in time. You’ll also learn how to close accounts that
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
89 BTraaldainncge a snhde eptrsofit and loss accounts and balance sheets: 83 rmtheusep ceehnc dot uotorf ecpauacsrhtto immcuoelrnasrt h oa.wcceo uusn tfso.r Pgrooobdasb wlye thhaev me osostld o tbov itohuems r. eIans omno sfto rb uthsiins eisss etso tfihnisd i so duot nheo awt
further considerations 91
10 Accounting concepts 104 Ac5ti.v1ity Wacchoyu dnot iynogu b tohoinkks aws eo wfteonu lads w oanncet tao m looonkt ha?t the debtor accounts in the
49
A wide range of exhibitsoffer clear examples
of accounting practice and methodology.
Chapter 27lDouble entry records for depreciation Part 3lBooks of original entry
ThTe hdeo udbelper eencitaryti oisn: is posted directly into the cumulative provision for depreciation account. 11.8 Types of accounts
DeCbrite dthite tphreo afictc aunmdu lloastse da cpcroouvnistion for depreciation account Some people describe all accounts as personal accounts or as impersonal accounts.
lPersonal Accounts– these are for debtors and creditors (i.e. customers and suppliers).
Exhibit 27.1 lI–mpReeraslo Ancacl oAucncotsun– tasc–c oduivnidtse din b ewtwhiecehn p‘roesasle’ sascioconus natrse a nredc ‘onrodmedin. aEl’x aacmcopulenst sa:re buildings,
A20 bXu5s. inIte isss thoa sb ae fidneapnrecicaial tyeeda ra et ntdh eo fr a3t1e Doefc 2e0m bpeerr. cAe ncto muspinugte trh ise broeduugchitn gfo rb a£l2a,n0c0e0 mone t1h oJadn. uTahrey –Nmoamchiinnaerl yA, cficxotuunretss a–n adc sctooucnkt.s in which expenses, income and capital are recorded.
records for the first three years are: A diagram may enable you to follow this better:
Computer
20X5 £
Jan 1Cash 2,000
Accumulated Provision for Depreciation – Computer
20X5 £ 20X5 £
Dec31Balance c/d 400 Dec31Profit and loss 400
20X6 20X6
Dec31Balance c/d 720 Jan 1Balance b/d 400
Dec31Profit and loss 320
720 720
20X7 20X7
Dec31Balance c/d 976 Jan 1Balance b/d 720
Dec31Profit and loss 256
976 976
2Ja0nX81Balance 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’)
2200XX56DDeepprreecciiaattiioonn 43£0200 aLitececdmogsue nwrt.hs I iancrh eo trshdoeem rp erttooi mperneiessu tkorereps p tw riinavn aatc Pytor fi ovkrae ettpeh esL eepcdrroegpte.rri.e tTohri(ss )p, rtehvee ncatsp iotfafil,c ed rsatawffin fgros,m a nsede ointgh edre staimilsil aorf
20X7 Depreciation 256
Ac1t1iv.2ity Wstrhayig bhott ihnetro wthiteh l ebdogoekrss o?f original entry? Why don’t we just enter transactions
Note: In this case, the depreciation for the period being posted to the profit and loss account is
being described as ‘depreciation’ and notby the name of the account it is being posted from. This
cisle vaerrlyy mis uncoht ‘tthhee ecoxncevpetniotino nth uastu parlolyv easd othpete rdu lwe’h.en posting entries between ledger accounts and 11.10 The accountant as a communicator
Ac2t7iv.3ity W’dehparte acdiavtaionnta’ graetsh aerre t thhaenr e‘a icnc ummaukliantge dth pisr oevxicseiopnti ofonr t doe tphree criualtei obny’ uinsi nthge profit Toseuhnses ewim oapfy rhse.u sTmsihooinus rih.s a Wosf htleeinlde gtitoiv iesa n tp rtuehreac tte hapaltlti otshnua ctthh a awnt oaarcckcc ooduuonnetsta atnnattk sde o auerpes iqbsu opirtrieon dag u,l ocpetr aofigfg muanrae tasi cca crporeuaonnpgtlaeend tw ’isni t thvima nreio-,
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
Activitiesoccur 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 examplesare provided
to guide you through more difficult concepts.
Chapter 45lAn introduction to the financial statements of limited liability companies Part 1lIntroduction to double entry bookkeeping
In Business Accounting 2you will be told more about the differences between ‘revenue reserves’ Cash
amrenusdec rh‘vc aecpsa’in,t a wbl ehr eitscreher avitneescd’l. u aTdshe be t emhineo gsp tar iovmafipitl oaabrntladen fltoo rrse sap saaocyncin ofgou rno ttu hbte a tdolai snsthicneac rtaeinhoodnl dhthearess t goae snd oedr iwvailid trehen sddeesrc.v ied‘R,i necgva enhn obuwee Aug25Drawings 5£0
totaorrne e maA pat erestoedsetep r atsmessor wtmawyvh ehaa ilnciieclhdagh b aa llslar eosen tm fdsaou,ter ubat sitlsmoustoarceyhn ss t rodiaeamipqvllpueiyd ei rraieeennrsmdsde iresisvnn.t ei t‘neCs, xgc(auaawpnmiishnthiiaoncalhta br tbleyieeoso e onturrnsv e heeai asstf ’vert,ode hw m anahtso ai otacn hfvyo a e‘wtfithul aimenlblrg e.lieitnb) cf lowleur ha dpisecas heryet mhsv’aea. vnlFuetu a otntofig o dbinbiev lr ieced rsaeeensarsdtveesetd.ss SygooomuoT dhelsete iaa mfrroneelt slw o tgwhitoahiontd dgwrs ae hwaxerannem igttpa oilksoe e dtinhlsl e ufa osprtruer arppctruehisvra casthhetesae saueecnsdcet,or. ituTehnshe tf e opwsrueh rtaichcrhihesa sfsaohelssro omua lc kdocn fob oduewrn cantrw e iasdi nsid tgdeesdbr:a.itwedin. gAs.s Ian rSeescutlito, nw 3h.e2n,
s A fully worked example On 28 August, the owner takes £400 of goods out of the business for his own use.
Effect Action
ll 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
The following trial balance is extracted from the books of F W Ltd as on 31 December 20X5:
Trial balance as on 31 December 20X5 Drawings
D£r C£r Aug28Purchases 4£00
1O0r%din parreyf eshreanrec ec ashpaitrael capital 270000,,000000 Purchases
1GB0uo%ioldd idwnegiblsle aanttt cucooresstts (repayable 20X9) 1,025505,,000000 300,000 Aug28Drawings 40£0
Equipment at cost 120,000
MPPrroootvvoiissrii oovnne hffioocrrle ddsee apptrr ceeocciisaatttiioonn:: bequuildipinmgesn 1t. 11..210.2X05X5 172,000 10204,,000000 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: revisit and reinforce
SPaulrecshases 439,100 1,022,000 1How to calculate profit by comparing revenue with expenses.
DCDMDCBSBGGaaarueieeeorelnrsbbnnaetrdiknteeeroiciaoittnrrereogoaar stsesrellrsu sxas errr’ipen eanxresd ptewienen emwrasstnv erueaaesdsrnengsesedesrs taintsiounrances 1119812526563883,,,,,,,,,641021630000002990000000000 11530,,700000 234567TtWWWWHTrh-oahhhhaawdyyyycti cneearttooehngvvu veee eueenrr naxpyynttcps oueddc.eneriionff ffcuaiseesa nerr spstee eiihisnnntroa igttsew l tt.hseyyno qppo wuaeef sa neoo t xaffia op erscneex ra nvpei sesedd nenceit uebs aeeneintn t diiretss ran r ysslet hhritvnoyooe wwnitanhunnn etey hi i nanetepr xa aaapp nsprslaosepeanpprpcoaraaitptrraiiaoarotitentnaee s tr o er eeifen xv etvtpehxeonepen ntue uheseneefe sfa eaaeacccp ccatcpco cooroucuofunopnnturt.tn.i.att.e tcchoheva epmrteeadrjo. irn t tohpeics
PSInhrtoaefirreitm ap nroedrmd loiinusasm ray ac cdcocivouiundnte tn3d1. 1p2a.i2d0X4 35,000 10403,,020102 89WThhaatt d irsa mweinagnst abrye t haelw taeyrsma ‘rderdauwcintigosn’ .in capital and neveran expense of a
2,704,512 2,704,512 business.
The following adjustments are needed: 10How to record drawings of cash in the accounting books.
(i) Stock at 31.12.20X5 was £91,413. 11How to record drawings of goods in the accounting books.
((iiiii))DAeccprrueec idaeteb ebnutiuldrien ignst e£r1e0s,t0 0£01;5 m,00o0to.r vehicles £18,000; equipment £12,000. ‘
587 44
Five sets of multiple choice questions
Each chapter ends with a selection of allow you a quick and easy method of
practice questionsto prepare you for checking your own progress as you
your examinations. work through the book.
Part 2lThe financial statements of sole traders Chapter 13lCash books
Review questions aCcacsohu Bnot,o kth.e first part of the entry having been made when the transaction was recorded in the
7.1From the following trial balance of A Moore, extracted after one year’s trading, prepare a trad- 13.2Ihfa asn n eont tyrey th baes enno tm baedeen. Afisll ead r einsu, il.te, .l oifo tkhine gf otlhioro cuogluhm thne i se bnltarny kli nagesa iinns tt haen feonlitory c, otlhuem dnosu tbol ee nesnutrrey
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.
Trial Balance as at 31 December 20X6 Dr Cr 13.3Idatco csuohbuolnuet ld eo nbrt ertyh qeius d iwtiesci toohub ntvhito eru eCsc aewsivhhe edBt ohaoecrkc o dcuiosnlcuto miunnn ttsh ifeso Grre edcneiseicvroeaudl n Lote,rd ngaoelltro .w wAeittd ht.h eAei ntehdne,d rm otohf rete h deiim spcpoeoruirnotatd n a(tulllyos,uw atehlldey
SPaulrecshases 119£,832 190£,576 aal lmowonedth a) ntdh ed itsocotaulns to rfe ctehiev etdw aoc cdoiuscnotus nint tchoelu Gmennse rianl tLheed gCears.h Book are posted to the discount
Salaries 56,527
MReonttor expenses 12,,849146 Multiple choice questions: Set 2
Insurance 372
GPMreoenmteoirrsa evls eehxipcleensses 9156,,45829504 Ngiovwen a itnt eAmpppte nSdetix 2 2 o aft m thuelt eipnlde cohf otihcies qbuoeoskt.i)ons. (Answers to all the multiple choice questions are
DCCCDarareeassbhdhwt i oiatinnorts g rhbssaanndk 21686,,,743542410259 16,524 EsWqhauroceihtuse tldi ood fnor etswha lendast yeeeor a mucwhrui talqhtniuopseulwestt e hicrohasn ovo iiancnneg a d qt osute hetpersayntr i toadonte esicg pihndiaoeesrc ewef oyhoouifc urhp rs a acuphngeosgrwi.ec Yeset oreisusd f brwaoenimslslt w,tp hereeeirtnvsh,i e ob(rueA s ()aA ,a b)t( lBteoe) r,mt o((pCB rt))es .adonor d (tC h()De o )s.r e Yt( Doou)f.
Capital 345,166 133485,,016666 MC21Gross profit is
Stock at 31 December 20X6 was £12,408. ((AB))ESaxcleess sl eosfs sPaulercsh oavseers cost of goods sold
(Keep your answer; it will be used later in Question 8.1) (C)Cost of goods sold + Opening stock
7.2From the following trial balance of B Lane after his first year’s trading, you are required to (D)Net profit less expenses of the period.
dnroatw re uqpu iare tdra.ding and profit and loss account for the year ended 30 June 20X8. A balance sheet is (MAC)2T2radNinegt pacrocofiut nist calculated in the
Trial Balance as at 30 June 20X8 Dr Cr (((CDB)))TBPrraiolaafiln tbc aaenl asdhn ecloeests. account
£ £
SPaulrecshases 154,870 265,900 MC23To find the value of closing stock at the end of a period we
Rent 4,200 (A)do this by stocktaking
Lighting and heating expenses 530 (B)look in the stock account
SIBnausliualdrraiiennsgc asend wages 85521,,,014000000 ((CD))ddeedduucctt ocopsetn oinf gg ostoodcsk s forlodm fr coomst soafle gso.ods sold
DFiextbutroerss 311,,310000 MC24The credit entry for net profit is on the credit side of
SCCDVuraareansndhwdsi ratiynot g rebssxapneknses 311064,,,404510092000 15,910 ((((ACDB))))TTTThhhheeee tdcprarraapodwifitinatin gla ga nascd ccac olcooucusonsnut at.nctcount
MCaoptiotar lrunning expenses 4,110 114,202 MC25Which of these best describes a balance sheet?
396,012 396,012 (A)An account proving the books balance
Stock at 30 June 20X8 was £16,280. ((CB))AA lriestcionrgd ooff bcalolasinncge sentries ‘
(Keep your answer; it will be used later in Question 8.2) (D)A statement of assets.
80 147
ix
