Principles of accounting
J. Ireland
2790025
2005
Undergraduate study in
Economics, Management,
Finance and the Social Sciences
This guide was prepared for the University of London External Programme by:
Jennifer Ireland, Department of Accounting and Finance, London School of Economics
and Political Science.
This is one of a series of subject guides published by the University. We regret that due
to pressure of work the author is unable to enter into any correspondence relating to,
or arising from, the guide. If you have any comments on this subject guide, favourable
or unfavourable, please use the form at the back of this guide.
This subject guide is for the use of University of London External students registered for
programmes in the fields of Economics, Management, Finance and the Social Sciences
(as applicable). The programmes currently available in these subject areas are:
Access route
Diploma in Economics
BSc Accounting and Finance
BSc Accounting with Law/Law with Accounting
BSc Banking and Finance
BSc Business
BSc Development and Economics
BSc Economics
BSc (Economics) in Geography, Politics and International Relations, and Sociology
BSc Economics and Management
BSc Information Systems and Management
BSc Management
BSc Management with Law/Law with Management
BSc Mathematics and Economics
BSc Politics and International Relations
BSc Sociology.
The External Programme
Publications Office
University of London
34 Tavistock Square
London WC1H 9EZ
United Kingdom
Web site: www.londonexternal.ac.uk
Published by: University of London Press
University of London 2005
Printed by: Central Printing Service, University of London, England
Contents
Contents
Introduction 1
The study of accounting 1
Aims of the unit 2
Learning outcomes 2
Reading 2
Structure of the subject guide 3
How to use the subject guide 4
Examination advice 6
List of abbreviations used in this subject guide 8
Chapter 1: Accounting in context 11
Aims and learning objectives 11
Essential reading 11
Further reading 11
Introduction 11
What is accounting? 12
Accounting theory and practice 15
Accounting information and its uses 16
Financial accounting 16
Management accounting 17
Summary 17
Sample examination question 18
Chapter 2: Fundamentals of financial accounting 19
Aims and learning objectives 19
Essential reading 19
Further reading 19
Introduction 19
An introduction to the financial statements 20
Accounting concepts, bases and policies 27
Summary 29
Sample examination question 30
Chapter 3: Data processing 31
Aims and learning objectives 31
Essential reading 31
Further reading 31
Introduction 31
One transaction: two effects 32
Recording transactions: books of prime entry 34
Getting it right: internal control 37
Double-entry bookkeeping 38
Trial balance 45
Summary 47
Sample examination question 47
Chapter 4: Preparing financial statements 1 49
Aims and learning objectives 49
Essential reading 49
Further reading 49
Introduction 49
Inventory, purchases and sales 50
Accruals and prepayments 53
i
Principles of accounting
Bad and doubtful debts 56
Depreciation of fixed assets 57
Disposal of fixed assets 60
Summary 61
Examination questions 61
Chapter 5: Preparing financial statements 2 63
Aims and learning objectives 63
Essential reading 63
Introduction 63
Preparing the balance sheet and profit and loss account 64
Incomplete information 72
A note on suspense accounts 76
Summary 81
Sample examination question 81
Chapter 6: Preparing financial statements 3 83
Aims and learning objectives 83
Essential reading 83
Further reading 83
Introduction 83
Different formats for different purposes 84
Preparing company accounts 87
Preparing the cash flow statement 92
Summary 99
Sample examination questions 99
Chapter 7: Using and understanding financial statements 105
Aims and learning objectives 105
Essential reading 105
Further reading 105
Introduction 105
Ratio analysis 106
Writing a report 117
Summary 118
Sample examination question 119
Chapter 8: Alternative valuation approaches 121
Aims and learning objectives 121
Essential reading 121
Introduction 121
Accounting profit and economic income 122
Historic cost accounting and current values 126
Summary 129
Sample examination question 129
Chapter 9: Fundamentals of management accounting 131
Aims and learning objectives 131
Essential reading 131
Introduction 131
Planning and co-ordination 132
Control, communication and motivation 134
Information for decision-making 135
Summary 135
Chapter 10: Cost accounting 137
Aims and learning objectives 137
Essential reading 137
Further reading 137
ii
Contents
Introduction 137
Understanding costs 138
Stock valuation marginal costing 141
Stock valuation full costing 141
Effects of different stock valuation methods 146
Summary 148
Sample examination questions 148
Chapter 11: Making decisions 1 151
Aims and learning objectives 151
Essential reading 151
Further reading 151
Introduction 151
Cost-volume-profit analysis 152
Relevant costs 156
Limiting factors 159
Summary 161
Sample examination questions 161
Chapter 12: Making decisions 2 165
Aims and learning objectives 165
Essential reading 165
Further reading 165
Introduction 165
Capital investments 166
Payback period 166
Accounting rate of return (ARR) 169
Summary 171
Sample examination question 171
Chapter 13: Making decisions 3 173
Aims and learning objectives 173
Essential reading 173
Further reading 173
Introduction 173
Discounted cash flow techniques 174
Summary 182
Sample examination questions 182
Chapter 14: Planning for the future 185
Aims and learning objectives 185
Essential reading 185
Further reading 185
Introduction 185
Goals and objectives 186
Budgets and forecasts 187
Working capital management 191
Summary 193
Sample examination question 194
Chapter 15: Budgets for control 195
Aims and learning objectives 195
Essential reading 195
Further reading 195
Introduction 195
Standard costs 196
Behavioural effects of using budgets 197
Variance analysis an introduction 198
iii
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