We are very grateful to teachers of accounting in many schools, colleges of further education and
universities whose generous advice has contributed to the development of this new edition. We
wish to thank, in particular:
Ann-Marie Ward, University of Ulster
Bhagwan Moorjani, University of Westminster
Georgios latridis, Manchester University
Chris McMahon, Liverpool John Moores University
Adil Mahmood, Bradford College
Graeme Reid, Hull University
Rohan Chambers, University of Technology, Jamaica
Mike Rogers, Basingstoke College of Technology
Lindsay Whitlow, Dudley College,
Paul Wertheim, Solihull College
David Gilding, Park Lane College, Leeds
Malcolm Rynn, Greencroft School, County Down
Eric Edwards, University of Northumberland
Helen Khoo, Sunway College, Petaling Jaya, Malaysia
Caroline Teh Swee Gaik, Inti College, Nilai, Malaysia.
We are grateful to the following for permission to reproduce examination questions:
Association of Accounting Technicians (AAT), Assessment and Qualifications Alliance
(NEAB/AQA and AEB/AQA), Association of Chartered Certified Accountants (ACCA),
Institute of Chartered Secretaries and Administrators (ICSA), London Qualifications Ltd
trading as Edexcel, Chartered Institute of Management Accountants (CIMA), Institute of
Chartered Accountants in England & Wales (ICAEW), Welsh Joint Education Committee
(WJEC), and Oxford, Cambridge and RSA Examinations; and the Accounting Standards
Boards (ASB) for permission to reproduce Exhibit 10.1 from their Board Statement of
Principles 1991.
All answers to questions are the authors’ own work and have not been supplied by any of the
examining bodies.
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➤ Over 120 brand new review questions for exam
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Features:
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F R A N K W O O D &
A L A N S A N G S T E R
2businessaccountingT E N T H E D I T I O N
F R A N K W O O D ’ S
2
T E N T H E D I T I O N
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business accounting
Every year, thousands of students rely on
Frank Wood's best-selling books to help them
pass their accountancy exams.
'A classic textbook that has set thousands of students on a straight path since it was first
published, Wood & Sangster's Business Accounting can be recommended without reservation to all
accounting students.'
Dr George Iatridis, University of Athens, Greece and University of Manchester
Additional student support at
www.pearsoned.co.uk/wood Additional student support at
www.pearsoned.co.uk/wood
The book is used on a wide variety of courses in accounting and business, both at secondary and tertiary
level and for those studying for professional qualifications. It builds on Business Accounting 1 to cover
advanced aspects of financial accounting. It also covers introductory aspects of management accounting
suitable for use at all levels up to and including professional foundation level courses and first-year
degree courses.
Business Accounting is the world’s best-selling textbook on bookkeeping and accounting. Now in its tenth
edition, it has become the standard introductory text for accounting students and professionals alike.
0273693107_COVER(Wood2) 9/2/05 9:34 am Page 1
FRANK WOOD’S
business accounting 2
Visit the Business Accounting, tenth edition Companion Website
at www.pearsoned.co.uk/wood to find valuable student learning
material including:
l Learning objectives for each chapter
l Multiple choice questions to help test your learning
l Review questions and answers
l Links to relevant sites on the web
l Searchable online glossary
l Flashcards to test your knowledge of key terms and definitions
BA2_A01.qxd 10/3/05 1:42 pm Page i
Frank Wood
1926–2000
BA2_A01.qxd 10/3/05 1:42 pm Page ii
F R A N K W O O D ’ S
2business accounting
FRANK WOOD BSc (Econ), FCA
and
ALAN SANGSTER BA, MSc, Cert TESOL, CA
TENTH EDITION
BA2_A01.qxd 10/3/05 1:42 pm Page iii
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world.
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First edition published in 1967
Second edition published under the
Longman imprint in 1972
Third edition published in 1979
Fourth edition published in 1984
Fifth edition published under the
Pitman Publishing imprint in 1989
Sixth edition published in 1993
Seventh edition published in 1996
Eighth edition published under the Financial Times
Pitman Publishing imprint in 1999
Ninth edition published in 2002
Tenth edition published in 2005
© Frank Wood 1967
© Longman Group UK Limited 1972, 1979, 1984, 1989, 1993
© Pearson Professional Limited 1996
© Financial Times Professional Limited 1999
© Pearson Education Limited 2002, 2005
The rights of Frank Wood and Alan Sangster to be identified as
authors of this work have been asserted by them in accordance with
the Copyright, Designs and Patents Act 1988.
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,
mechanical, photocopying, recording or otherwise, without either the prior
written permission of the publisher or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd,
90 Tottenham Court Road, London W1T 4LP.
ISBN 0 273 69310 7
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Wood, Frank.
Frank Wood’s business accounting, 2 / Frank Wood and Alan Sangster.—10th ed.
p. cm.
Includes index.
ISBN 0-273-69310-7
1. Accounting. I. Title: Business accounting 2. II. Title: Business accounting two. III. Sangster, Alan.
IV. Title.
HF5635.W8633 2005
657—dc22
2004061993
10 9 8 7 6 5 4 3
08 07 06 05
Typeset in 9.5/11.5pt Sabon by 35.
Printed and bound in China.
EPC/03
Also available:
Frank Wood’s Business Accounting Vol 1 – 0273 681494
Book-keeping & Accounts – 0273 685481
Frank Wood’s A-level Accounting – 0273 685325
BA2_A01.qxd 10/3/05 1:42 pm Page iv
v
Contents
part 1
part 2
part 3
Notes for teachers and lecturers xii
Notes for students xiv
Special accounts
1 Accounting for branches 3
2 Hire purchase accounts 29
Companies
3 Limited companies: general background 49
4 The issue of shares and debentures 55
5 Companies purchasing and redeeming their own shares and debentures 70
6 Limited companies taking over other businesses 94
7 Taxation in company financial statements 113
8 Provisions, reserves and liabilities 130
9 The increase and reduction of the share capital of limited companies 136
10 Accounting standards and related documents 148
11 The financial statements of limited companies: profit and loss
accounts, related statements and notes 183
12 The financial statements of limited companies: balance sheets 205
13 Published financial statements of limited companies:
accompanying notes 218
14 Cash flow statements 240
15 Contract accounts 264
Groups
16 Group financial statements: an introduction 277
17 Consolidation of balance sheets: basic mechanics (I) 284
18 Consolidation of balance sheets: basic mechanics (II) 307
19 Intercompany dealings: indebtedness and unrealised profit in stocks 317
20 Consolidated financial statements: acquisition of shares in
subsidiaries at different dates 330
21 Intra-group dividends 333
22 Consolidated balance sheets: sundry matters 347
23 Consolidation of the financial statements of a vertical group of
companies 356
24 Consolidated profit and loss accounts 369
25 Consolidated financial statements: acquisitions and mergers 378
26 Standards covering subsidiary and associated undertakings and
joint ventures 386
BA2_A01.qxd 10/3/05 1:42 pm Page v
Contents
vi
part 4
part 5
part 6
part 7
part 8
part 9
part 10
Financial analysis
27 Accounting ratios 401
28 Interpretation of financial statements 422
Issues in financial reporting
29 Accounting theory 447
30 Current cost accounting 466
31 Social accounting 482
32 Corporate governance 491
33 Public sector accounting 496
34 Accounting for management control 505
Costing
35 Elements of costing 517
36 Absorption and marginal costing 531
37 Job, batch and process costing 555
Budgets
38 Budgeting and budgetary control 573
39 Cash budgets 582
40 Co-ordination of budgets 594
Standard costing and variance analysis
41 Standard costing 615
42 Materials and labour variances 620
43 Overhead and sales variances 638
Planning, control and decision making
44 Break-even analysis 657
45 Interest, annuities and leasing 674
46 Capital expenditure appraisal 689
47 The balanced scorecard 707
The emerging business environment of accounting
48 The supply chain and enterprise resource planning systems 717
49 E-commerce and accounting 724
Appendices
1 Interest tables 731
2 Answers to review questions 735
3 Glossary 804
Index 808
BA2_A01.qxd 10/3/05 1:42 pm Page vi
Supporting resources
Visit www.pearsoned.co.uk/wood to find valuable online resources
Companion Website for students
l Learning objectives for each chapter
l Multiple choice questions to help test your learning
l Review questions and answers
l Links to relevant sites on the web
l Searchable online glossary
l Flashcards to test your knowledge of key terms and definitions
For instructors
l Complete, downloadable Solutions Manual
l PowerPoint slides that can be downloaded and used as OHTs
Also: The Companion Website provides the following features:
l Search tool to help locate specific items of content
l E-mail results and profile tools to send results of quizzes to instructors
l Online help and support to assist with website usage and troubleshooting
For more information please contact your local Pearson Education sales
representative or visit www.pearsoned.co.uk/wood
BA2_A01.qxd 10/3/05 1:42 pm Page vii
viii
Guided tour of the book
ISSUES IN FINANCIAL
REPORTING
part
5
Introduction
This part looks at the theories upon which accounting practice is
based, considers issues affecting accounting and financial
reporting and reviews the place of accounting information in the
context of the environment in which business entities operate.
29 Accounting theory 447
30 Current cost accounting 466
31 Social accounting 482
32 Corporate governance 491
33 Public sector accounting 496
34 Accounting for management control 505
Part opening
Chapter 36 l Absorption and marginal costing
543
On the full cost basis, only A and D appear to be profitable. Should production of B, C and E
be discontinued? You know that production should cease only when the selling price is less than
marginal cost. In Exhibit 36.10, you can see if following this brings more profit than following
the result of the full cost calculation. You can also see what would have happened if production
levels of all products continued as before.
Exhibit 36.9
Violet Ltd Products
A B C D E
Cost per unit: £ £ £ £ £
Direct labour and materials 8 9 16 25 11
Variable manufacturing costs 7 8 10 13 14
Marginal cost 15 17 26 38 25
Fixed costs 5 7 11 15 10
Full cost 20 24 37 53 35
Selling price per unit 30 21 31 80 20
Exhibit 36.10
(1) (2) (3)
Following Using marginal Ignore costing
full-cost pricing, costing, cease altogether and
cease producing producing E produce all
B, C and E only items
£ £ £
Sales: A 100 × £30 3,000 3,000 3,000
B 100 × £21 2,100 2,100
C 100 × £31 3,100 3,100
D 100 × £80 8,000 8,000 8,000
E 100 × £20 2,000
Total revenue 11,000 16,200 18,200
Less Costs:
Direct labour and materials:
100 × cost per product (£33) 3,300 (£58) 5,800 (£69) 6,900
Variable manufacturing costs: (£20) 2,000 (£38) 3,800 (£52) 5,200
100 × cost per product
Fixed costs (do not change) 4,800 4,800 4,800
Total costs (10,100) (14,400) (16,900)
Net profit 900 1,800 1,300
36.12 Using marginal costs
Let’s test what you’re just learnt in another example. A company produces five products and has
the following cost and sales data. It can sell exactly 100 of each product it manufactures. Total
fixed costs are £4,800, apportioned: A £5 (100), B £7 (100), C £11 (100), D £15 (100), E £10
(100), i.e. £4,800 total. Exhibit 36.9 presents this in a table.
A wide range of exhibits offer clear examples
of accounting practice and methodology.
55
The issue of shares and debentures
chapter
4
Learning objectives
After you have studied this chapter, you should be able to:
l explain the terminology relating to the issue of shares and debentures
l describe the steps in the process of issuing of shares and debentures
l record the accounting entries relating to the issue of shares and debentures
l make the necessary entries in the ledger accounts when shares are forfeited
Introduction
In this chapter, you’ll learn about the alternatives available to companies when they
wish to issue shares and of the various entries to be made in the ledger accounts.
You’ll learn about how to record the issue of shares at a price greater than their
nominal value and how to record the issue of shares to existing shareholders,
rather than to non-shareholders wishing to purchase them. You will also learn
about the difference in accounting entries made when debentures (a form of loan
capital) rather than shares, are issued.
4.1
Activity
4.1
The issue of shares
The cost of issuing shares can be very high. As a result, the number of shares issued must be suffi-
cient to ensure the cost of doing so is relatively insignificant compared to the amounts received.
When shares are issued, they may be payable, either (a) immediately on application, or (b) by
instalments. Issues of shares may take place on the following terms connected with the price of
the shares:
1 Shares issued at par. This would mean that a share of £1 nominal value would be issued for
£1 each.
2 Shares issued at a premium. In this case a share of £1 nominal value would be issued for more
than £1 each, say for £3 each.
Note: At one time, shares could be issued at a discount. Thus, shares each of £5 nominal value
might have been issued for £3 each. However, this was expressly forbidden in the Companies Act
1980.
Why do you think companies may wish to issue shares at a discount and how do
you think companies avoid being in this position?
Learning objectives
outline what you will
need to have
learned by the end
of the chapter.
Chapter 8 l Provisions, reserves and liabilities
131
8.3
Activity
8.1
Activity
8.2
8.4
should ever meet a situation where it would suffer loss because of foreign currency exchange rate
movements; or it could be a general reserve account that could be used for any purpose.
See Section 8.3 for a further look at general reserves.
Such transfers are an indication to the shareholders that it would be unwise at the time of the
transfer to pay out all the available profits as dividends. The resources represented by this part of
the profits should be retained, at least for the time being. Revenue reserves can be called upon in
future years to help swell the profits shown in the profit and loss appropriation account as being
available for dividend purposes. This is effected quite simply by debiting the particular reserve
account and crediting the profit and loss appropriation account.
Why do you think special revenue reserves are used, rather than simply leaving
everything in the profit and loss account (which is, itself, a revenue reserve)?
General reserve
A general reserve is one that can be used for any purpose. For example, it may be needed because
of the effect of inflation: assume a company needs £4,000 working capital in 20X3 and that the
volume of trade remains the same for the next three years but that during that time, the general
level of prices increases by 25 per cent: the working capital requirement will now be £5,000. If
all the profits are distributed, the company will still have only £4,000 working capital which
cannot possibly finance the same volume of trade as it did in 20X3. Transferring annual
amounts of profits to a general reserve instead of paying them out as dividends is one way to
help overcome this problem.
In terms of the amount of working capital, what is the difference between doing
this and leaving the amount transferred in profit and loss?
On the other hand, it may just be the conservatism convention asserting itself, with a philo-
sophy of ‘it’s better to be safe than sorry’, in this case to restrict dividends because the funds they
would withdraw from the business may be needed in a moment of crisis. This is sometimes over-
done, with the result that a business has excessive amounts of liquid funds being inefficiently
used when, if they were paid out to the shareholders, who are, after all, the owners of the busi-
ness, the shareholders could put the funds to better use themselves.
This then leaves the question of the balance on the profit and loss appropriation account. If it
is a credit balance, is it a revenue reserve? Yes. If profits are not distributed by way of dividend,
they are revenue reserves until such time as they are converted into share capital or transfered to
other reserves.
Capital reserves
A capital reserve is a reserve which is not available for transfer to the profit and loss appropri-
ation account to swell the profits shown as available for cash dividend purposes. Most capital
reserves can never be utilised for cash dividend purposes – notice the use of the word ‘cash’, as it
will be seen later that bonus shares may be issued as a ‘non-cash’ dividend.
Let us look at the ways in which capital reserves are created.
Activities occur
frequently
throughout the
book to test your
understanding of
new concepts.
BA2_A01.qxd 10/3/05 1:42 pm Page viii
ix
Chapter 23 l Consolidation of the financial statements of a vertical group of companies
361
23.6
Profit and Loss
£000 £000
Minority interest S1 3 P 60
Minority interest S2 14 S1 15
Cost of control S1: pre-acquisition 4 S2 35
Cost of control S2: pre-acquisition 9
Cost of control: goodwill written off 20
Balance to consolidated balance sheet 60
110 110
General Reserve
£000 £000
Cost of control 80% × 10 8 S1 balance b/d 10
Minority interest 20% × 10 2
10 10
Now, let’s look at the same example but, this time, with the addition of proposed dividends.
A worked example with proposed dividends
Taking the same companies as in Example 1 but in this case the companies have proposed divi-
dends at 31 December 20X5 of P Ltd £16,000; S1 Ltd £5,000; S2 Ltd £20,000. The balance sheets
would have appeared:
Balance Sheets as at 31 December 20X5
P Ltd S1 Ltd S2 Ltd
£000 £000 £000
Fixed assets 40 4 27
Investments
Shares in S1 41
Shares in S2 25
Net current assets (as before) 19 6 28
Dividends to be received (80% of S1) 4 (75% of S2) 15
104 50 55
£000 £000 £000
Share capital 40 10 20
Profit and loss as at 31.12.20X4 24 5 15
Retained profits for 20X5
(see below) 24 20 –
48 25 15
General reserve 10
Proposed dividends 16 5 20
104 50 55
Note:
Retained profit P S1 S2
Net profits 20X5 36 10 20
Less Proposed dividends (16) ( 5) (20)
20 5 –
Add Dividends receivable
P 80% of S1 × 5 4
S1 75% of S2 × 20 15 –
24 20 –
Part 3 l Groups
282
16.9 Teaching method
This topic can be taught and learnt using either of two methods. One is to focus on the journal
entries required; this is quite abstract and, many feel, more difficult to understand than the other
method. Accordingly, the method used in this book for teaching consolidated financial state-
ments is that of showing the adjustments needed on the face of the consolidated balance sheet,
together with any workings required to explain the amounts included. This approach is adopted
because:
1 We believe our job is to try to help you to understand the subject, and not just to be able to
perform the necessary calculations. We believe that, given a clear explanation of what is
happening, the necessary accounting entries are much easier to understand. Showing the
adjustments on the face of the balance sheet gives a ‘bird’s-eye view’ so that it is easier to see
what is happening, rather than having to laboriously trace your way through a complex set of
double-entry adjustments made in ledger accounts.
2 This would be a much lengthier and more costly book if all of the double entry accounts were
shown. It is better for a first look at consolidated financial statements to be an introduction to
the subject only, rather than both an introduction and a very detailed analysis of the subject.
If you can understand the consolidated financial statements shown in this book, you will have
a firm foundation which will enable you, in your future studies, to tackle the more difficult
and complicated aspects of the subject.
Learning outcomes
You should now have learnt:
1 Ordinary shareholde