ACCOUNTING. BrightRED Study Guide. National 5 ACCOUNTING. William Reynolds. BrightRED Study Guides. Curriculum for Excellence

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1 BrightRED BrightRED Study Guides William Reynolds This BrightRED Study Guide is just the thing you need to takle your ourse and gain the exam skills essential to sueed at National 5 Aounting. Written by trusted author and experiened Aounting teaher William Reynolds, this book is paked with brilliant examples, tasks and advie. It is the ultimate ompanion to your studies: Contains all of the essential ourse information, arranged in easily digestible topis. Don t forget! pointers offer advie on key fats and on how to avoid ommon mistakes. Things to do and think about setions at the end of eah topi allow for further pratie and researh. REYNOLDS Designed in full olour, highly illustrated, aessible and engaging to make sure all that study stiks! Paked with exerises to perfet your aounting skills. A glossary of key terms helps you really learn and revise important ourse onepts. htred ur Let Brig ss in yo e u s u to and lead yo studies 5 l a n o i Nat! beyond BrightRED Study Guide Stationers Company Innovation Exellene Award 2014 Highly Commended Bookseller Industry Awards 2014 BE BRIGHT BE READY Bright Red Publishing s easy to use, high-quality eduational resoures are trusted by teahers and ustom designed to improve students study experiene to help them to ahieve their potential. To see more of what we do and stay up to date with all things Bright Red: follow us on like us on faebook at Chek out the BrightRED Digital Zone for a world of tests, games, links and more at visit us at or all us on we d be delighted to hear from you! Aounting.indd 1 ISBN Don t forget to hek out the BrightRED Digital Zone 13/12/ :50

2 INTRODUCTION Introdution National 5 Aounting INTRODUCING Aounting is often defined as the language of business. Aountants aim to ollet, lassify, organise, analyse, present and ommuniate finanial information to the owners of business organisations and other interested stakeholders. Aounting is one of the oldest and most respeted professions in the world, and aountants an be found in every industry from entertainment to mediine. COURSE CONTENT The National 5 ourse ontains three main units of study: Preparing Finanial Information (National 5) This unit will fous on the role of finanial aounting. You will gain an understanding of the purpose of a range of business douments and how these provide information whih an be used to prepare double-entry ledger aounts. You will also develop an understanding and aquire the skills neessary to prepare the final aounting statements of a sole trader (trading and profit and loss aount and balane sheet) in aordane with finanial aounting onepts. Finally, this unit will help develop an understanding of year-end adjustments for aruals and prepayments as well as the aounting proedures for reording the depreiation of fixed assets. Preparing Management Information (National 5) This unit will fous on the role of management aounting. You will develop the knowledge and understanding of internal aounting information and the ability to prepare COURSE ASSESSMENT: INTERNAL ASSESSMENT Eah of the three ourse units above will have a formal unit assessment. Unit assessments will require you to prepare aounting statements as well as be able to apply knowledge and understanding of key aounting onepts. All internal assessments will be undertaken in aordane with SQA assessment speifiations. All unit assessments will be marked as a pass or a fail. This National 5 Study Guide will help you to understand and interpret both finanial and management aounting information and will equip you with the neessary skills to prepare a range of aounting statements. It will also help you to develop and apply skills for learning, skills for work and skills for life. suh information, using a range of basi aounting tehniques. The information produed will be used by management in making deisions about the future planning and ontrol of the business. There will be a fous on the main elements of ost materials (stok ontrol), labour remuneration, overhead analysis and the preparation of job osting statements. In addition, this unit will develop the knowledge and skills neessary for effetive budgetary ontrol and breakeven analysis. Analysing Aounting Information (National 5) In this unit, you will develop the skills, knowledge and understanding relating to the interpretation and analysis of aounting information. The information will be used to assess the organisation s urrent finanial position and performane and assist with deision-making and future planning. This unit will fous partiularly on ratio analysis and profit maximisation under onditions of a limiting fator. COURSE ASSESSMENT: EXTERNAL ASSESSMENT Question Paper The question paper will have 100 marks and 10% of these will be alloated to theoretial questions. You will be expeted to attempt all questions. This will be an end-of-ourse examination paper set by the SQA. The examination paper has two setions: Setion one will have 60 marks and will ontain omputational and theoretial questions Setion two will have 40 marks and will ontain omputational and theoretial questions. The question paper will be a losed-book assessment and you will not know in advane what areas of the ourse ontent will be assessed. Assignment The assignment will have 50 marks. It will require you to work through a series of tasks to prepare aounting information and finanial statements using a spreadsheet. You may be required to use this information to aid deision-making, analyse the organisation s finanial position or to make reommendations for the future. The assignment will make appropriate use of spreadsheets. You will be required to enter data with auray, and selet and use appropriate formulae, formatting and printing funtions to present information and aurately omplete all aounting work. HOW THIS BOOK CAN HELP YOU This Study Guide (supported by the Digital Zone) explains learly and preisely all the finanial and management aounting onepts you need to know and understand to pass the internal and external elements of the National 5 Aounting ourse. It also has a wide range of hallenging tasks and ativities whih provide you with the opportunity to develop your aounting skills. The Study Guide will also ensure that the following generi skills for learning, life and work are fully developed: Numeray ICT Deision-making Presentation Analysing Evaluating Thinking Employability Enterprise Analytial While you omplete all oursework tasks and ativities manually on paper, you will make use of spreadsheet software as well. Tasks and ativities an be ompleted following the templates shown throughout this Study Guide and the Digital Zone. The new Sottish advoates providing you with the opportunity to work independently to develop a deeper understanding of areas of learning that interest you. Some extension material has been inluded to hallenge you and further develop your interest in the subjet. Extension material will not be examined by SQA at National 5 level. However, it will be useful if you plan to go on to study Aounting at Higher level. INTERNATIONAL STANDARDS (IAS) Adoption of International Aounting Standards (IAS) requires a hange in the terminology used in the preparation of the final aounts of business organisations. Whilst there are no ompulsory requirements for the presentation of the aounts of sole traders to use IAS, it is reommended that you beome familiar with preparing all aounting statements in the IAS format. This will ensure you are well prepared if you are progressing to study Aounting at SQA Higher level or at ollege or university. Throughout this Study Guide key terminology used in the preparation of aounting statements are presented using IAS terminology. The most frequently used IAS terminology used at National 5 is listed below. International Aounting Terminology Non-urrent assets Inventory Trade reeivables Other reeivables Trade payables Sales Allowane for doubtful debts Carrying amount Non-urrent liabilities Inome statement Statement of finanial position Cost of sales Property Profit for the year To gain an overall award at National 5 Aounting, you must seure a pass in all of the units as well as in the external ourse assessments. 4 5

3 Preparing Finanial Aounting Information Calulating Net Worth PREPARING FINANCIAL INFORMATION CALCULATING NET WORTH At any point in time we an alulate the net worth or equity invested in a business by subtrating all the business s liabilities from the total of all their business s assets. Assets Liabilities = Net Worth or Capital HOW TO CALCULATE NET WORTH EXERCISE 1 Copy and omplete the table below ompleting the missing figures: Assets Liabilities Net Worth 20000? 5000? ? 80000? EXERCISE 2 (a) Using the information given below write up the statement of finanial position of Sandra Smith as at 15 June 20.. Calulate the missing equity figure. Equipment Property Fixtures and Fittings Motor Vehiles Trade Reeivables Trade Payables 900 Cash and Cash Equivalents Mahinery Inventory Equity? EXERCISE 3 Inventory 760 Trade Reeivables 700 Property Mahinery 6500 Fixtures and Fittings Trade Payables 2100 Cash and Cash Equivalents 880 Bank Overdraft 150 Motor Vehiles 6340 Loan 100 Equity? (b) Open the spreadsheet template BSSS. Enter the details from Exerise 2 under the appropriate heading. Insert appropriate formulae to undertake all alulations. Insert your name, exerise 2b and today s date in the footer. Save the doument as Ex2bss and print one opy. (a) Using the information below write up the statement of finanial position of B Thomson as at 18 June 20.. Calulate the figure for apital. (b) Open the spreadsheet template BSSS. Enter the details from Exerise 3 under the appropriate heading. Insert appropriate formulae to undertake all alulations. Insert your name, exerise 3b and today s date in the footer. Save the doument as Ex3bss and print one opy. EXERCISE 4 (a) Using the information given below write up the statement of finanial position of L Marshall as at 12 Deember 20.. Calulate the missing figure for equity. Property Equipment 5000 Cash Register 350 Fixtures and Fittings 2500 Cash and Cash 4000 Equivalents Inventory 3250 Trade Payables 1800 Bank Overdraft 460 Motor Vehiles 3200 Mahinery 2000 Loan 245 Equity? SUMMARY A statement of finanial position is simply a list of a business s ASSETS and LIABILITIES at a partiular point in time. We know that: ASSETS LIABILITIES = NET WORTH In other words, if you simply add up all the assets of a business and take away all the liabilities, you will know the net value of the business, or how muh the business is worth. THINGS TO DO AND THINK ABOUT (b) Open the spreadsheet template BSSS. Enter the details from Exerise 4 under the appropriate heading. Insert appropriate formulae to undertake all alulations. Insert your name, exerise 4b and today s date in the footer. Save the doument as Ex4bss and print one opy. Businesses are involved in finanial transations all the time, for example, purhasing inventory from suppliers, selling inventory to ustomers, buying new assets suh as motor vehiles, and using ash to pay bills suh as eletriity and telephone. It would take too muh time to produe a new statement of finanial position after every transation businesses would be produing many statements of finanial position every day! ONLINE Learn more about statements of finanial position by following the link at Aounting ONLINE TEST Test your knowledge of preparing statements of finanial position at Aounting 12 13

4 Preparing Finanial Aounting Information Business Douments: Cheques and Cheque Counterfoils PREPARING FINANCIAL INFORMATION BUSINESS DOCUMENTS: CHEQUES AND CHEQUE COUNTERFOILS WHAT ARE CHEQUES AND CHEQUE COUNTERFOILS? When goods are bought and sold on redit, payment is often made by heque. A heque is a doument that orders the payment of money from a bank aount usually a urrent aount. The purhaser (in response to invoies reeived) will write a heque (stating the amount in money and words, date of payment and the name of the payee) for the amount he owes the seller. He will sign the heque and forward it as a means of making payment. This is really an order to his bank to pay the person/business named on the heque. Upon reeiving the heque, the seller will update their reords by debiting the bank aount with the amount shown on the heque. They will also redit the trade reeivable aount (with the amount shown on the heque) as they have now made a payment. The purhaser will also omplete a heque ounterfoil at the same time as the heque is prepared. Cheque ounterfoils provide a reord of all payments made from a bank aount. When the purhaser sends a heque to pay the seller, he will use the heque ounterfoil to omplete his own double-entry, that is: 1. Credit bank aount 2. Debit the supplier aount. THINGS TO DO AND THINK ABOUT Study the redit note shown below. This redit note was sent to Corbit Cars on 5 July 20.. from a business alled Motopartz. Motopartz would keep a opy of the redit note to reord the transation in their own ledger aounts. On a sheet of A4 paper or in your workbook, you should open the appropriate ledger aounts in the ledger of Motopartz and show how the information in the (opy) redit note would appear in the ledger of Motopartz. Credit Note Motopartz 2 Kilmaurs Road Inverness IV16 5DA Telephone: Credit Note Number: 155 VAT Number: Date: 5 July 20.. You would take a opy of the redit note prior to sending it to Corbit Cars. ONLINE For pratie ativities on preparing business douments, head to www. brightredbooks.net/ Aounting ONLINE TEST Test your knowledge of heques and heque ounterfoils at www. brightredbooks.net/ Aounting EXAMPLE: Examples of a heque and heque ounterfoil are shown below. Date 09 June 2015 To Offie Demisters For 1 Air Conditioner Balane bt Deposit Balane This heque Balane t COUNTERFOIL ABC Bank ABC Bank, 100 High St, Main Road, London, UK, SW10 2NO Business Aount Pay Offie Demisters Five Hundred and Seventy Pounds only Aount payee Cheque number Sort ode Aount number CHEQUE Not transferable Date June 2015 Handyman Hardware Store To: Corbit Cars 57 Swanston Avenue Inverness IV10 7BZ QUANTITY DESCRIPTION GOODS (PER UNIT) VAT (20%) TOTAL 2 Brake Pipes Oil Filters SUMMARY The key business douments used for reording doubleentry finanial transations in the ledger are: Invoies Copy invoies Credit notes Copy redit notes Cheques Cheque ounterfoils INVOICE Dr Purhases Aount Dr VAT Aount Cr Trade Payable Aount CREDIT NOTE Cr Purhases Returns Aount Cr VAT Aount Dr Trade Payable Aount COPY INVOICE Cr Sales Revenue Aount Cr VAT Aount Dr Trade Reeivable Aount COPY CREDIT NOTE Dr Sales Returns Aount Dr VAT Aount Cr Trade Reeivable Aount Answer the following questions on A4 paper or in your workbook. 1. Suggest two reasons why Corbit Cars might have returned these items to Motopartz. 2. Suggest two reasons why Motopartz might allow its ustomers a trade disount

5 Preparing Management Aounting Information Cash Budgets PREPARING MANAGEMENT INFORMATION CASH BUDGETS WHAT IS A CASH BUDGET? A budget is a plan of how muh money a business has and how they will spend it. The Management Aountant is responsible for ensuring that the business has suffiient ash funds flowing into the business to meet all ash payments. Preparing a ash budget should mean that: the business finanes are better ontrolled and monitored and any unneessary expenditure an be eliminated. the business an see where problems in its ash flow will arise, e.g. is there likely to be a shortage of ash in any partiular month or months? deisions an be taken about purhasing large items whih may require a lot of ash, e.g. the best time to make a big outlay of ash for non-urrent assets suh as motor vehiles or mahinery, et. As the ash budget is prepared ahead of time, sometimes, due to external and unexpeted fators, the budget does not go ompletely to plan. PREPARING A CASH BUDGET A ash budget begins with the opening balane. This is the amount expeted to be available to the firm at the start of the month. The next step is to antiipate the reeipts for the month and add to the opening balane. Then EXAMPLE The following example explains and illustrates the layout of a ash budget. The information is for Sean Devine, a sole trader, and applies to the first four months of the year: Cash Budget for Sean Devine 20.. Jan Feb Marh April Opening Cash and Cash Equivalents Balane Money In Cash Sales Credit Sales Money Out Purhases Advertising Wages A ash budget: shows how muh ash the organisation will have available, generally on a month to month basis; shows what money is expeted to ome in to the business during that time; shows what money is expeted to get spent during that time; alerts the business to any ash flow problems; is used to help management make deisions; an be used to foreast whether a loan or overdraft may be neessary and if so when. payments foreasted to be made by the firm are taken away. This gives the losing balane. This is the amount of money left at the end of the month. Rent 6000 Fixtures and Fittings 4000 Delivery Van 5000 Eletriity Closing Cash and Cash Equivalents Balane The opening balane is the amount of money in the bank or in ash in the business at the start of the month. This is added to the total ash in. This is any money reeived into the business, e.g. from selling goods or any other soures. This gives the total ash available for that month. Then, ash out (any amounts paid out of the business) is taken away. This gives the losing balane the amount of money left in the business at the end of the months trading. The losing balane at the end of one month is the opening balane for the next month. USING THE CASH BUDGET Using the example above, Sean an now use the ash budget to plan ahead and to help make deisions. More importantly, he will not run the risk of being unable to pay his bills. For example, suppose Sean has deided that in February he wants to buy a new delivery van for the business. The total ost of the delivery van will be By planning ahead and looking at his ash flow, he realises that he annot afford it just now as he does not have enough ash to buy it. Therefore, to ensure his business does not get into ash flow problems, he ould onsider: getting a loan for the van by applying for a loan Sean ould get the van straight away and pay it off month by month. However, interest would have to be paid to the bank in addition to the repayments for the loan. buying the van on redit again Sean ould get the van straight away but usually he would have to pay interest along with the monthly repayments. THINGS TO DO AND THINK ABOUT It is vital that ash omes into a business to ensure good ash flow. Therefore, aountants need to alulate both ash and redit sales. 1. From the following information, alulate ash and redit sales units and the sales revenues for inlusion in the ash budget for the three-month period February April for N Bates: unit selling prie 100 redit ustomers reeive trade disount of 40% and pay two months after delivery ash ustomers reeive an additional disount of 5% Estimated sales amount to: Deember January February Marh April N Bates estimates that 80% of all sales will be on redit. 2. From the following information, alulate ash and redit sales units and the sales revenues for inlusion in the ash budget for the three-month period February April for O King. unit selling prie 200 redit ustomers reeive trade disount of 50% and pay two months after delivery. ash ustomers reeive an additional disount of 5% Estimated sales amount to: Deember January February Marh April O King estimates that 60% of all sales will be on redit. Lease Sean ould lease the van. A lease is a kind of agreement to rent a van from a hire ompany. Sean would make monthly payments for the use of the van. While the van will never belong to him, he is not responsible for the maintenane of the van or any repairs whih may be neessary. The ash budget is therefore used for deision-making in businesses. It shows whether there is enough money for the business to do what it plans. It an also show whether a business needs to find ash from somewhere else. It an help a business answer questions like: Do I need to arrange an overdraft/loan? Do I have enough money to buy a new piee of equipment? Is there enough ash flowing into the business to allow the business to pay its overheads and other osts? An overdraft allows you to spend or take out more ash than you have in a urrent aount. Learn more about ash budgeting by wathing the lip at net/aounting ONLINE TEST Test your knowledge of ash budgeting at www. brightredbooks.net/ Aounting VIDEO 76 77

6 BrightRED BrightRED Study Guides William Reynolds This BrightRED Study Guide is just the thing you need to takle your ourse and gain the exam skills essential to sueed at National 5 Aounting. Written by trusted author and experiened Aounting teaher William Reynolds, this book is paked with brilliant examples, tasks and advie. It is the ultimate ompanion to your studies: Contains all of the essential ourse information, arranged in easily digestible topis. Don t forget! pointers offer advie on key fats and on how to avoid ommon mistakes. Things to do and think about setions at the end of eah topi allow for further pratie and researh. REYNOLDS Designed in full olour, highly illustrated, aessible and engaging to make sure all that study stiks! Paked with exerises to perfet your aounting skills. A glossary of key terms helps you really learn and revise important ourse onepts. htred ur Let Brig ss in yo e u s u to and lead yo studies 5 l a n o i Nat! beyond BrightRED Study Guide Stationers Company Innovation Exellene Award 2014 Highly Commended Bookseller Industry Awards 2014 BE BRIGHT BE READY Bright Red Publishing s easy to use, high-quality eduational resoures are trusted by teahers and ustom designed to improve students study experiene to help them to ahieve their potential. To see more of what we do and stay up to date with all things Bright Red: follow us on like us on faebook at Chek out the BrightRED Digital Zone for a world of tests, games, links and more at visit us at or all us on we d be delighted to hear from you! Aounting.indd 1 ISBN Don t forget to hek out the BrightRED Digital Zone 13/12/ :50