MACMILLAN WORKOUT SERIES Work Out Accounting GCSE The titles in this series0 For examinations at 16+ Accounting Human Biology Biology Mathematics Chemistry Numeracy Computer Studies Physics Economics Sociology English Spanish French Statistics German For examinations at 'A' level Applied Mathematics Physics Biology Pure Mathematics Chemistry Statistics English Literature For examinations at college level Dynamics Operational Research Elements of Banking Engineering Thermodynamics Mathematics for Economists MACMILLAN WORKOUT SERIES P. Stevens M MACMILLAN © P. Stevens 1986, 1987 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended). Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1986 Reprinted with corrections 1986 (twice) This edition 1987 Published by MACMILLAN EDUCATION LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world Typeset by TecSet Ltd, Wallington, Surrey British Library Cataloguing in Publication Data Stevens, P. Work out accounting GCSE.-2nd ed.­ (Macmillan work out series) 1. Accounting-Examinations, questions, etc. I. Title II. Stevens, P. Work out principles of accounts 657'.076 HF5661 ISBN 978-0-333-44012-4 ISBN 978-1-349-09460-8 (eBook) DOl 10.1007/978-1-349-09460-8 To Darren and Dawn Acknowledgements ix Organisations Responsible for GCSE Examinations ix Introduction 1 1 Principles of Double-entry Book-keeping 2 1.1 Introduction 2 1.2 Types of account 2 1.3 Rules of double-entry book-keeping 3 1.4 An illustration of the account 4 1.5 Balancing off the account 4 1.6 Purchases and sales returns 5 1.7 Worked example 5 1.8 Further exercises 7 2 The Trial Balance 11 2.1 Introduction II 2.2 Purpose of the trial balance 13 2.3 Worked examples 13 2.4 Further exercises 15 3 Trading and Profit and Loss Accounts 16 3.1 Explanation 16 3.2 The trading section 16 3.3 The profit and loss section 17 3.4 Preparation of trading, profit and loss account 17 3.5 Other trading account expenses 18 3.6 Worked examples 18 3.7 Further exercise 20 4 Balance Sheet 21 4.1 Purpose 21 4.2 Preparation of the balance sheet 21 4.3 Balance sheet equation 22 4.4 Capital and revenue expenditure 23 4.5 Worked examples 23 4.6 Further exercises 25 5 Cash Book and Cash Discounts 26 5.1 Cash book 26 5.2 Cash discounts 27 5.3 Cash discounts in the cash book 27 5.4 Petty cash 28 5.5 Worked examples 28 5.6 Further exercises 34 6 Bank Reconciliation 39 6.1 Introduction 39 6.2 Types of differences 39 6.3 Identifying the differences 40 6.4 Preparing the reconciliation 40 6.5 Worked example 40 6.6 Further exercises 42 7 Day Books and VAT 45 7.1 Introduction 45 7.2 Cash book 45 7.3 Petty-cash book 45 7.4 Purchases day book 45 7.5 Purchases returns day book 46 7.6 Sales day book 46 7.7 Sales returns day book 47 7.8 The journal 47 7.9 Value added tax 47 7.10 Worked examples 48 7.11 Further exercise 49 8 Errors and Suspense Accounts 51 8.1 Errors not affecting the trial balance 51 8.2 Correction of errors 51 8.3 Suspense accounts 53 8.4 Worked examples 53 8.5 Further exercises 57 9 Bad Debts and Bad Debts Provision 59 9.1 Writing off bad debts 59 9.2 Making a provision for future bad debts 59 9.3 Adjusting the provision 60 9.4 Worked examples 60 9.5 Further exercise 62 10 Control Accounts 64 10.1 Introduction 64 10.2 Control accounts and double-entry 64 10.3 Maintaining control accounts 65 10.4 Transferring accounts 65 10.5 Sectionalisation of ledgers 65 10.6 Sales and purchases ledgers 66 10.7 Worked examples 66 10.8 Further exercises 69 11 Depreciation and Disposal of Assets 72 11.1 Introduction 72 11.2 Meaning of depreciation 72 11.3 Total depreciation charge 72 11.4 The balance sheet value of fixed assets 72 11.5 Methods of depreciation 73 11.6 Other factors 74 11.7 Accounting entries 75 11.8 Fixed asset disposals 75 11.9 Assets purchased/sold during year 76 11.10 Worked examples 76 11.11 Further exercises 79 12 Year End Adjustments 83 12.1 Introduction 83 12.2 Accrued expenses 83 12.3 Prepayments 84 12.4 Sundry stocks 84 12.5 Summary 85 12.6 Worked examples 85 12.7 Further exercises 90 13 Departmental Accounts 96 13.1 Introduction 96 13.2 Expenses 96 13.3 Preparation of departmental accounts 96 13.4 Worked examples 97 13.5 Further exercise 101 14 Incomplete Records 102 14.1 Introduction 102 14.2 Statement of affairs 102 14.3 Trading and profit and loss account from incomplete records 103 14.4 Goods stolen or lost 105 14.5 Worked examples 106 14.6 Further exercises 111 15 Income and Expenditure Accounts 117 15.1 Introduction 117 15.2 Accumulated fund 117 15.3 Members' subscriptions 117 15.4 Bar trading account 118 15.5 Other club activities 119 15.6 Receipts and payments account 119 15.7 Worked examples 119 15.8 Further exercises 124 16 Partnership Accounts: 1 129 16.1 Definition 129 16.2 The partnership agreement 129 16.3 Capital accounts 129 16.4 Partners' current accounts 130 16.5 Partners' loan accounts 130 16.6 Profit and loss appropriation account 130 16.7 Worked examples 130 16.8 Further exercises 135 17 Partnership Accounts: 2 142 17.1 Introduction 142 17.2 Goodwill 142 17.3 Goodwill on amalgamation of businesses 143 17.4 Goodwill on admission of new partner 143 17.5 Writing off goodwill 143 17.6 Worked examples 144 17.7 Further exercises 147 18 Manufacturing Accounts 151 18.1 Introduction 151 18.2 Types of cost 151 18.3 Opening and closing stocks 151 18.4 Transfer price of finished goods produced 152 18.5 Manufacturing accounts for separate products 153 18.6 Fixed and variable costs 153 18.7 Worked examples 153 18.8 Further exercises 157 19 Stock Valuation 163 19.1 Introduction 163 19.2 Bases of stock valuation 163 19.3 Valuation of stocks at cost 164 19.4 Choice of method 165 19.5 Effect on profits 165 19.6 Worked examples 166 19.7 Further exercises 167 20 Comprehension and Interpretation of Accounts 171 20.1 Introduction 171 20.2 Return on capital employed (ROCE) 171 20.3 Profitability ratios 171 20.4 Asset efficiency ratios 172 20.5 Liquidity ratios 173 20.6 Worked examples 174 20.7 Further exercises 177 21 Accounts of Limited Companies 180 21.1 Introduction 180 21.2 Share capital 180 21.3 Debentures 181 21.4 Dividends 181 21.5 Retained profits 181 21.6 General reserve 181 21.7 Shareholders' funds 182 21.8 Profit and loss appropriation account 182 21.9 Worked examples 182 21.10 Further exercises 186 22 Forecasts and Budgets 190 22.1 Introduction 190 22.2 Preparation of plans 190 22.3 Worked examples 190 22.4 Further exercises 193 23 Funds Flow Statements 198 23.1 Purpose of funds flow statements 198 23.2 Preparation of the funds flow statement 198 23.3 Worked examples 200 23.4 Further exercise 202 24 Multiple Choice Questions 204 24.1 Introduction 204 24.2 Worked examples 204 24.3 Further exercises 208 Index 212 Acknowledgements The University of London Entrance and School Examinations Council accepts no responsi­ bility whatsoever for the accuracy or method in the answers given in this book to actual questions set by the London Board. Acknowledgement is made to tl].e Southern Universities' Joint Board for School Examina­ tions for permission to use questions taken from their past papers but the Board is in no way responsible for answers that may be provided and they are solely the responsibility of the authors. The Associated Examining Board, the University of Oxford Delegacy of Local Examinations, and the Scottish Examination Board wish to point out that worked examples included in the text are entirely the responsibility of the author and have neither been provided nor approved by the Board. The author and publishers wish to thank the following who have kindly given permission for the use of copyright material: The Associated Examining Board, The Scottish Examination Board, the Southern Universities' Joint Board, The University of London School Examina­ tions Board, The University of Oxford Delegacy of Local Examinations for questions from past examination papers. Every effort has been made to trace all the copyright holders, but if any have been inadver­ tently overlooked, the publishers will be pleased to make the necessary arrangement at the first opportunity. Organisations Responsible for GCSE Examinations In the United Kingdom, examinations are administered by the following organi­ sations. Syllabuses and examination papers can be ordered from the addresses given here: Northern Examining Association (NEA) Joint Matriculation Board (JMB) North Regional Examinations Board Publications available from: Wheatfield Road, Westerhope John Sherratt & Son Ltd Newcastle upon Tyne NES SJZ 78 Park Road, Altrincham Cheshire WA14 SQQ Yorkshire and Humberside Regional Associated Lancashire Schools Examinations Board (YREB) Examining Board Scarsdale House 12 Harter Street 136 Derbyside Lane Manchester M 1 6HL Sheffield S8 SSE North West Regional Examinations Board (NWREB) Orbit House, Albert Street Eccles, Manchester M30 OWL Midland Examining Group (MEG) University of Cambridge Local Oxford and Cambridge Schools Examinations Syndicate (UCLES) Examination Board (0 & C) Syndicate Buildings, Hills Road 10 Trumpington Street Cambridge CB 1 2EU Cambridge CB2 lQB Southern Universities' Joint Board (SUJB) East Midland Regional Examinations Cotham Road