Business Management Study Manuals Certificate in Business Management INTRODUCTION TO ACCOUNTING The Association of Business Executives 5th Floor, CI Tower St Georges Square High Street New Malden Surrey KT3 4TE United Kingdom Tel: + 44(0)20 8329 2930 Fax: + 44(0)20 8329 2945 E-mail: info@abeuk.com © Copyright, 2008 The Association of Business Executives (ABE) and RRC Business Training 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, electrostatic, mechanical, photocopied or otherwise, without the express permission in writing from The Association of Business Executives. Certificate in Business Management INTRODUCTION TO ACCOUNTING Contents Unit Title Page 1 Nature and Scope of Accounting 1 Purpose of Accounting 2 Rules of Accounting (Accounting Standards) 7 Accounting Periods 12 The Fundamental Concepts of Accountancy 12 Case Study A: Global Holdings Ltd 15 2 Double-Entry Book-Keeping and the Ledger 17 Principles of Double-Entry Book-Keeping 18 Ledger Accounts 19 The Accounting Equation 22 Balancing Off 23 Classification of Ledger Accounts 28 3 Cash and Bank Transactions 33 Nature of the Cash Book 34 Bank Reconciliation Statement 44 Stale and Post-dated Cheques 47 The Petty Cash Book 48 4 Recording Business Transactions 61 The Journal 62 Opening Statement of Assets and Liabilities 63 Drawings 66 The Purchases Book 68 The Sales Book 72 Returns and Allowances Books 73 A Typical Transaction 77 5 The Trial Balance 89 Introduction to the Trial Balance 90 Errors in the Trial Balance 96 Correction of Errors 104 6 Final Accounts 1: The Trading Account 117 Introduction to Final Accounts 118 Trading Account 118 Stock 119 Unit Title Page 7 Final Accounts 2: The Profit and Loss Account 127 Nature of the Profit and Loss Account 128 Bad Debts 130 Discounts 133 Depreciation 133 Prepayments and Accruals 137 Allocation or Appropriation of Net Profit 142 8 Final Accounts 3: The Balance Sheet 151 Essentials of a Balance Sheet 152 Assets 154 Liabilities 157 Distinction Between Capital and Revenue 159 Preparation of a Balance Sheet 162 9 Final Accounts 4: Preparation 169 Preparation from Given Trial Balance 170 Depreciation and Final Accounts 178 Preparation from an Incorrect Trial Balance 181 10 Control Accounts 197 Purpose of Control Accounts 198 Debtors Control Account 199 Creditors Control Account 202 Sundry Journal Debits and Credits in both Debtors and Creditors Control Accounts 204 11 Partnerships 211 Nature of Partnership 212 Partnership Capital and Current Accounts 216 Partnership Final Accounts 218 12 Limited Companies 231 Nature of Limited Companies 232 Capital of a Company 234 Other Sources of Company Finance 238 Company Profit and Loss Account 239 Company Balance Sheet 244 13 The Published Accounts of Limited Companies 257 The Law and Company Accounts 258 The Balance Sheet 261 The Profit and Loss Account 269 Non-Statutory Information 275 14 Cash Flow Statements 277 Introduction 278 Contents of the Cash Flow Statement 279 Example 282 Use of Cash Flow Statements 286 Case Study A – Global Holdings Ltd (cont'd) 289 Unit Title Page 15 Budgets and Budgetary Control 301 Overview of Budgets and Budgetary Control 302 Budget Preparation 304 Types of Budgets 308 Budgetary Control Systems 309 Case Study B: Crest Computers plc 313 16 Interpretation of Accounts 317 Accounting Ratios 318 Profitability Ratios 320 Liquidity Ratios 322 Capital Structure 326 Investment Ratios 327 Limitations of Historical Cost Reporting 329 17 Introduction to Costs and Management Accounting 335 The Nature of Management Accounting 336 Elements of Cost 338 The Costing Process 340 Costing Principles and Techniques 344 Cost Behaviour Patterns 345 Case Study C: Reducing the Costs of High Street Banking 348 18 Overheads and Absorption Costing 351 Overheads 352 Cost Allocation and Apportionment 353 Absorption Cost Accounting 358 Treatment of Administration Overheads 362 Treatment of Selling and Distribution Overheads 362 Activity Based Costing (ABC) 363 19 Labour and Material Costing 369 Stock Control 370 Stock Valuation Methods 373 Labour Costing and Remuneration 379 20 Methods of Costing 391 Introduction 392 Job Costing 392 Batch Costing 396 Process Costing 397 21 Marginal Costing 403 The Principles of Marginal Cost Accounting 404 Uses of Marginal Cost Accounting 406 Contribution and the Key Factor 410 Opportunity Cost 413 Comparison of Marginal and Absorption Cost Accounting 413 Unit Title Page 22 Break-Even and Profit Volume Analysis 415 Break-Even Analysis 416 Break- Even Chart 419 Profit Volume Graph 422 The Profit/Volume or Contribution/Sales Ratio 423 Case Study D: Whizzo Ltd 428 23 Standard Costing and Variance Analysis 435 Standard Costing 436 Variances from Standard Costs 440 Summarising and Investigating Variances 443 24 Capital Investment Appraisal 449 Capital Investment and Decision Making 450 Payback 451 Accounting Rate of Return 454 Discounted Cash Flow (DCF) 455 1 Study Unit 1 Nature and Scope of Accounting Contents Page A. Purpose of Accounting 2 Financial and Management Accounting 2 The World of Accounting and Finance 2 Business Functions 3 Money as the Common Denominator 4 The Concept of the Business Entity 5 Users of Accounting Information 5 B. Rules of Accounting (Accounting Standards) 7 Development of Accounting Standards 7 Current Standards Setting Structure 8 Statements of Standard Accounting Practice 9 Financial Reporting Standards 1-7 11 C.
The Fundamental Concepts of Accountancy 12 The Four Fundamental Concepts 13 Other Concepts of Accountancy 13 Case Study A: Global Holdings Ltd 15 Background 15 Part 1 – Energy Saving Products 15 © ABE and RRC 2 Nature and Scope of Accounting A. PURPOSE OF ACCOUNTING A business proprietor normally runs a business to make money. He or she needs information to know whether the business is doing well. The following questions might be asked by the owner of a business: How much profit or loss has the business made? How much money do I owe? Will I have sufficient funds to meet my commitments? The purpose of conventional business accounting is to provide the answers to such questions by presenting a summary of the transactions of the business in a standard form.
Financial and Management Accounting Accounting may be split into financial accounting and management accounting. (a) Financial accounting Financial accounting comprises two stages: book-keeping, which is the recording of day-to-day business transactions; and preparation of accounts, which is the preparation of statements from the book- keeping records; these statements summarise the performance of the business – usually over the period of one year. (b) Management accounting Management accounting is defined by the Chartered Institute of Management Accountants as: "The application of professional knowledge and skill in the preparation and presentation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operations of the undertaking". Management accounting, therefore, seeks to provide information which will be used for decision-making purposes (e.
pricing, investment), for planning and control. The World of Accounting and Finance In everyday speech, the terms "data" and "information" are often used interchangeably. However, in the context of accounting systems, the terms have distinct meanings – data is raw facts, such as a group of figures, a list of names and such like, whereas information is data which has been processed in such a way as to be meaningful to the person who receives it. The difference might be summarised as follows: Data + Meaning = Information For example, the string of numbers 060463-413283-110985 does not have any meaning to you as you read this sentence for the first time.
It is data. This data can be given meaning if you are told that employee 413283 was born on 6th April 1963 and started work with the organisation on 11th September 1985. It has now become information. Similarly, the numbers 9180, 17689 and 9800 are, without further embellishment, data.
If you are told that they are actually the list prices of the three company cars in your department, required by the Inland Revenue for tax purposes, they become information. Today, the vast majority of organisations operate computerised bookkeeping and accounting systems. These systems take data from the various activities of the business and turn that data into meaningful financial information. The basis on which this transformation from data © ABE and RRC Nature and Scope of Accounting 3 to information takes place are the rules, principles and practices of accounting which we shall examine in this course.
You should note that, whilst most financial information is obtained from computerised systems, it is most important that these rules, principles and practices are fully understood so that you are able to acquire the right information and interpret it correctly. Indeed, there remain many managers and employees who face major problems in obtaining coherent and comprehensive information they need from these systems. Business Functions Having explained the purpose of accounting and the difference between "data" and "information", it is important to understand the nature of the different business functions in an organisation and the information they produce. Wages control and accounting A paramount feature of all business enterprises is the necessity to employ and remunerate a workforce.
The workforce usually comprises people with a wide of skills – manual, technical and managerial – all of whom must be paid. It is necessary to maintain a record for each employee containing full and absolutely accurate details of pay items. This record must be kept up-to-date in terms of amendments as well as the updating of totals-to-date. Sales control and accounting Customer order control entails procedures for ensuring that orders from customers/clients are received, recorded and acknowledged in an efficient organised manner.
At a later stage, order control is necessary to ensure that orders are actually fulfilled, i. customers receive the correct goods on time and at the right destination. The purpose of sales analysis is to forecast future sales demands and to plan marketing activities. Purchases control and accounting Purchasing involves the procedures for ensuring that all the materials, components, tools, equipment and other items needed by the company are made available at the right time, right place and right price.
The precise nature of the purchasing function depends upon the type of items purchased. It is beneficial to analyse the company's purchases in various ways – for example, in order to measure the effectiveness of suppliers, to ascertain the efficiency of the company in handling materials and reducing waste, etc. Stock control Stock control involves the maintenance of records relating to stock levels, issues, outstanding orders, reorder levels, and so on. From the accounting information viewpoint, an important requirement is stock valuation – i.
the book value of all stock- in-hand at a certain time. These figures should be accurate, and allow for stock losses, deterioration and enhanced value since these contribute to the firm's balance sheet. Production control Production planning covers what to make and how many to make, whilst production control ensures that the plans are achieved. The information required for production control purposes includes material requirements for each time period, quantities of components and subassemblies to be made by each period, the amounts of equipment and machines, etc.
needed for each stage, the amount of each labour category needed during each period, and the progress of each job and reasons for delays. © ABE and RRC 4 Nature and Scope of Accounting Marketing function The marketing function is concerned with researching the business potential of the market and for developing the right products and services to satisfy the needs of customers. Accounting records are a vital source of information concerning customers – they show buying patterns, types of products bought, etc. Customer services function Generating new customers is very important for any successful business.
However, customer retention is also vital if a company is going to continue to grow and develop. Therefore, the customer services function is responsible for liasing the customer and providing added valued services, such as where a garage would provide a courtesy car, etc. Human resources function This function is responsible for satisfying the personnel needs of the organisation.
