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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


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