Bookkeeping II

BOOK KEEPING ONLINE COURSE

"I was very satisfied with the service I received from ACS when I did my Bookkeeping Course. I emailed my assignments using my login at the ACS site and received them back, marked within a week. The comments of the tutor were comprehensive and helpful. The administrative staff also were very quick to reply to any of my emailed questions "
- Barbara Kale

This course has a stronger focus on "trading businesses" than Bookkeeping I; and in that way complements and adds to things not covered in Bookkeeping I. (NB: It can be undertaken alone if you so choose).

Trading businesses have a major asset which most service businesses do not. That asset, known as ‘stock’, ‘merchandise’ or ‘inventory’, is unique in character – it is obtained by the businesses for one purpose only – that is – selling to customers. Unlike other assets which are obtained and retained by a business, a trading business must rely for its survival on the constant sale of this asset. Because of this, trading businesses need to be able to account for this asset and the individual lines of merchandise which make it up.

Lesson Structure

There are 12 lessons in this course:

1. Trading firms and accounting rules
   • Accounting for a trading business
   • Ledger accounts for a trading business
   • Processing transactions
   • Trading firms and accounting rules; conventions, verifiability, prudence, the matching principle, etc
   • General accounting concepts; relevance, reliability, materiality. comparability
   • Accounting standards
   • The doctrine of materiality
   • Journals for trading firms
2. Physical Inventory System
   • Overview
   • Periodic inventory method
   • Fixed mark ups
   • Manual coding system
   • Computerised coding
   • Special journals and physical inventory
   • Cash receipts journal
   • Cash payments journal
   • Credit purchases journal
   • Credit sales journal
   • Accounting for returns and allowances
   • Double entry under the physical method
   • Calculating cost of goods sold and gross profit
   • Inventory and functional classification
   • Closing ledger accounts of a trading business
   • Closing entries in a General Journal
3. Perpetual Inventory System
   • Overview
   • Advantages and Disadvantages of perpetual inventory
   • Stock control account
   • General journal modifications required with perpetual inventory
   • Credit sales journal
   • Sales return journal
   • Double entry under perpetual inventory
   • Determining cost price of sales
   • Stock cards
   • Stock cards and the general ledger
   • Stock losses and gains
   • Closing general ledger accounts
4. Inventory Valuation
   • Introduction
   • Net realisable value and lower of cost
5. Accounting for bad and doubtful debts
   • Overview Bad debts recovered
   • Doubtful debts
   • Doubtful and bad debts combined
6. Classified Profit and Loss Statements for trading firms
   • Functional classification
   • Operating profit, abnormal and extraordinary items
   • Department classification and reporting
   • Allocation of direct expenses
7. Control Accounts
   • Control and subsidiary accounts
   • Advantages and disadvantages of control accounts
   • Debtors control accounts
   • Creditor control and subsidiary account
   • Control accounts and inventory
   • Control accounts and expenses
   • Control accounts and non current assets
   • Disposal of non current asset
8. Budgeting for Trading Firms
   • Overview
   • Cash budgets
   • Benefits of cash budget
   • Anticipated cash inflows and outflows
   • Preparing a cash budget
   • Budgeted profit and loss statement
   • Budgeted balance sheet
   • Budgeted performance reports
   • Depreciation of non current assets
   • Methods of calculating depreciation
   • Asset registers
   • The disposal of non current assets
   • Amortisation of intangible assets
9. Statement of Cash Flows
   • Overview
   • Definition of Cash
   • Classification of cash flows
   • Investing activities
   • Financing activities
   • Format of statements for cash flow
   • Calculating cash received from debtors
   • Calculating cash payments to creditors
   • Revenues received and expenses paid
   • Non current assets
   • Withdrawals by the proprietor
10. Alternatives in Accounting
    • Single or double entry accounting?
    • Cash accounting, modified cash accounting or accrual accounting?
    • Different depreciation methods
    • Physical versus perpetual inventory
    • Alternatives to historical cost accounting
11. Analysis and Interpretation of Accounting Reports
    • Overview
    • Analytical ratios
    • Ratio yardsticks
    • Types of analytical ratios
    • Profitability ratios
    • Operating efficiency ratios
    • Age analysis of debtors
    • Efficiency ratios and profitability
    • Liquidity ratios
    • Liquidity analysis and cash budgeting
    • Financial stability ratios
    • Limitations of ratio analysis
12. Business Expansions and Sources of Finance
    • Overdraft facility
    • Equity credit
    • Full drawn advances or term loans
    • Bills of exchange
    • Leasing
    • Inventory financing
    • Sources of funds
    • Considerations when seeking additional funds
    • Information required when sourcing funds
    • The balance sheet

Each lesson culminates in an assignment which is submitted to the school, marked by the school's tutors and returned to you with any relevant suggestions, comments, and if necessary, extra reading.

Aims

• Describe the nature of trading businesses, and the differences between recording and reporting for trading businesses and service businesses.
• Describe the nature of stock and the physical system of recording inventory.
• Explain the perpetual or continuous system of recording for inventory, the use of stock cards and methods of stock valuation.
• Distinguish between the main methods for valuing merchandise on hand and the procedures that need to be set up in order to maintain the different systems.
• Distinguish between bad debts and doubtful debts
• Explain how to prepare the journal entries and understand the effect of bad debts on final accounting reports.
• Extend your knowledge of the classification in accounting reports and how it is applied to trading firms.
• Acquire an understanding of control accounts and their uses.
• Explain of the use of budgets and to apply the skills learned.
• Explain the use and role played by statements of cash flows.
• Explain the different accounting alternatives available to business and the advantages and disadvantages of the various alternatives.
• Describe the tools used to measure the key areas of performance and financial position of a business and how they can aid in decision making.
• Describe the different sources of finance available to businesses, other methods of expanding a business and the impact of different equity structures on the accounting and decision making processes.

What You Will Do

• Describe the flow of financial information through a trading firm by preparing a flow chart.
• What are the four general objectives of accounting?
• Explain how a physical item may be classified as inventory for one business but as a non-current asset for another.
• Outline the two ways the value determined by a physical stocktake affects the final accounting report.
• What are the two processes involved in completing a physical stocktake?
• Write a brief description of what is involved in the perpetual inventory system.
• State and describe four advantages and four disadvantages of the perpetual inventory system.
• List the three special journals which need to be modified if a business changes from the physical method to the perpetual method or recording inventory.
• Explain the role of bar codes in recording inventory transactions.
• List four items of financial information that can be generated on a daily basis if a computerised bar coding system is used.
• Explain the relationship between the doctrine of conservatism and the lower of cost and NRV rule
• Distinguish between the terms doubtful debts and bad debts.
• Explain how the allowance for doubtful debts can incorporate both bad and doubtful debts for a period.
• Describe two different ways of estimating the value of an allowance for doubtful debts.
• List the benefits of classification to management.
• Describe the benefits of departmental reporting.
• State and describe the advantages and disadvantages of control accounts.
• Explain the importance of cash budgeting when accounting for a trading firm.
• Explain the purpose of a budget performance report.
• Prepare estimates of the future cash inflows for a business
• Prepare a table showing the breakdown between credit and cash sales for the six months July-Dec.
• Explain the role of the doctrine of disclosure when management decides to change depreciation methods.
• Explain why some accountants criticise the historical cost accounting system
• Distinguish between analysis and interpretation
• How is it possible for a business to show an increase in their gross profit
  • ratio but a decrease in their net profit ratio
• What does an asset turnover ratio tell a business owner?
• List five aspects of the profit report which are likely to be considered by the lender.
• What are the benefits of preparing a well researched finance application?

This Course is Particularly Relevant to Trading Businesses

Trading businesses have a major asset which most service businesses do not. That asset (known as ‘stock’, ‘merchandise’ or ‘inventory’) is unique in character – it is obtained by the businesses for one purpose only – that is – selling to customers. Unlike other assets which are obtained and retained by a business, a trading business must rely for its survival on the constant sale of this asset. Because of this, trading businesses need to be able to account for this asset and the individual lines of merchandise which make it up.

A trading business sells goods as its primary source of revenue. A milk bar, newsagent, chemist, sports shop, clothing store, butcher, supermarket are all trading businesses because they earn most of their revenue through the sale of goods.

This is in contrast to service businesses, which rely on the ability to provide some type of service to customers; for example, dry cleaners, doctors, electrician, plumber, accountant, etc.

There are, however, many businesses which both sell goods and provide services.  A trading business may provide services as well as sell goods.  A service business may sell goods as well as provide services.  However, businesses are classified according to their main source of revenue.

In accounting, the goods sold by a business are referred to as stock, inventory or merchandise.

The accounting needs of a trading business differ from those of a service business because of the existence of inventory, which is also known as trading stock.  Inventory includes all goods purchased by a trading business for the purpose of resale, which usually occurs at a higher price than the cost of the purchased item. 
The operation of a trading business creates a need to record both the buying and the selling of such goods.  This is in addition to the usual recording needs of the typical service business.

The definition of trading inventory excludes some items which may be sold from time to time by a business.  Non-current assets (fixed assets) such as equipment and vehicles may be sold for a profit at the end of their useful life, however, when such assets are purchased, they are usually purchased with the intention of not reselling the items to generate a profit.  An owner of a business usually buys non-current assets with the intention of owning them for several accounting periods for the purpose of earning income.

For example, a sporting store may have non-current assets such as shop fittings, office furniture and a computer. The inventory of such a business would include footballs, tennis rackets, sport shoes, gym equipment, etc. If the business was a furniture retailer Office Furniture would be in the inventory (as well as furniture items that are regarded as non-current assets). 

The owners of a trading business require different information from those involved with a service business.

As trading businesses rely on buying and selling merchandise, the owner of the business will need to know a great deal more about the goods handled by the business.
For example: the cost of goods sold, the fast and slow moving items, and which items are most profitable, are all important pieces of information for a trading business.

In a trading business, the cost of goods sold is normally the largest single expense of the business.  The owner will need to control this expense in order to maximise profit.  While a service business may use materials in the production of revenue, the cost of materials has less of an impact on the profitability of the business than the cost of goods sold has on a trading business.

In a trading business, the owner must also know the amount of any stock loss due to theft or damage, and the percentage mark-up on the merchandise sold.

The amount of stock on hand needs to be sufficient to meet the normal day to day demands of customers.  Remember, however, the more money spent on buying stock, the less money there is available to pay other bills or to start new and profitable projects.  As a result, the owner is constantly in discord between keeping enough stock on hand to meet the demands of customers and minimising the amount of stock on hand so that cash is available to pay bills or undertake new projects.