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