Notes and References

1 Introduction: the scope and historical background of accountancy

I. One recent example was the government enquiry into inflation accounting, set upunder the chairmanship of Sir Francis Sandi lands in 1973.

2. Similar disagreements about the nature of other subjects are not uncommon. Forexample, a series of lectures was given by the distinguished historian, E. H. Carr,in 1961 under the title, 'What is History?' These were later published byMacmillan in 1961 and more recently by Penguin in 1977 as a paperback entitledWhat is History?

3. Other simplistic definitions might also identify an accountant with membershipof one of the recognised chartered institutes.

4. J. B. Sykes (ed.) The Concise Oxford Dictionary, 6th edition (Oxford: ClarendonPress, 1976) p. 8.

5. E. L. Kohler, A Dictionary for Accountants, 4th edition (Englewood Cliffs NJ:Prentice-Hall, 1970) p. 6.

6. Ibid ., p. 7.7. The Companies Act 1967, s.14 (3)a.8. For a more complete description of the case, see E. Woolf, Auditing Today, 2nd

edition (London: Prentice-Hall/International, 1979) pp . 380-85 .9. S. Paul Garner, Evolution of Cost Accounting to /925 (University of Alabama

Press: Alabama, 1976) p. 2.10. Factory overheads include all costs of manufacturing additional to those labour

and material costs which are directly identified with a finished product. Furtherexplanation of factory overheads is provided in Ch . 9.

II. See H. R. Hatfield , 'An Historical Defence of Book-keeping', p. 2. The paper wasfirst presented to the American Association of University Instructors in Account­ing on 29 December 1923 and has since been reprinted in a number ofcompilations including W. T. Baxter and S. Davidson (cds) , Studies in Account­ing, 3rd edition (London: Institute of Chartered Accountants in England andWales 1977) pp. 1-10.

12. Luca Pacioli , Summa de Arithmetica, Geometria, Proportioni et Proportionalita(Venice, 1494).

13. B. S. Yamey , on p. 7 of the introduction to Studies in the History of Accounting,B. S. Yamey and A. G. Littleton (eds) . (First printed in 1956 by R. D. Irwin,Homewood, I1inois, reprinted by Arno Press Inc., New York, 1978.)

14. B. S. Yamey, 'The Development of Company Accounting Conventions', in T. A.Lee and R. H. Parker (eds), The Evolution of Corporate Financial Reporting(London : Nelson, 1979) p. 234.

15. Ibid. , p. 235.

396

Notes and References 397

16. 'Total net assets ' is defined as tot al assets less total liabilities. 'Net current assets'on the other hand , is defined as current assets minus current liabilities. Theseterms are explained more fully in Ch. 4.

17. Lee v. Neuchatel Asphalte Co. (1889) 41 Ch .D. I.18. Verner v. General and Commercial Investment Trust (1894) 2 Ch.D. 239.19. In Re National Bank of Wales Ltd (1899) 2 Ch.D . 629, and Amm onia Soda Co. v.

Chamberlain (1918) I Ch .D. 266.20. W. H. Beaver, Financial Reporting: An Accounting Revolution (Englewood Cliffs,

N.J.: Prentice-Hall, 1981) p. 2.21. Ibid ., p. 18.22. The Corporate Report (Accounting Standards Steerin g Committee, London,

1975)p. 17, para. 1.8.

2 Users and objectives of financial information

I. See, for example , R. W. Campbell, Accounting in Soviet Planning and manage­ment (Cambridge Mass.: Harvard University Press, 1963).

2. J. Boswell, The Rise and Decline of Small Firms (London: Allen and Unwin , 1973)particularly ch. 3.

3. Gospel of Luke, Ch. 19 verses 12-27.4. R. B. Jack, 'The Legal Aspects', in Financial Reporting and Accounting Standards :

Conference Papers (Glasgow: University of Glasgow, 1978) p. 65.5. The Accounting Standards Steering Committee, The Corporate Report (London,

1975).6. Ibid., p. 15 para . 1.5.7. Ibid., p. 17 para . 1.8.s. Ibid ., p. 9 para . 0.2.9. W. H. Beaver, 'What should be the FASB 's Objectives?', The Journal of

Accountancy , vol. 36, August 1973, pp . 45-56. Reprinted in R. Bloom and P. T.Elgars (eds), Accounting Theory and Policy (New York : Harcourt Brace Jovano­vich, 1981) p. 173.

10. The Times, 21 October 1982, p. 24.II . The Corporate Report, p. 25 para. 2.36.12. There is, however , a school of thought which views developments in accounting

theory from a scientific viewpoint. For a critical review of the scientific approachrefer to K. V. Peasnell , 'St atement of Accounting Theory and Theory Accep­tance: A Review Article ', Accounting and Business Research, vol. 8, no. 31,Summer 1978, pp . 217-28. Reprinted in Bloom and Elgars, Accounting Theoryand Policy , pp. 62-75.

13. The Corporate Report, p. 28 para. 3.2.14. APB Statement No .4, Basic Concepts and Accounting Principles underlying

Financial Statements of Business Enterprises (New York: AICPA, 1970).15. Ibid. , para. 73.16. Objectives of Financial Statements , Report of the Study Group on the objectives

of Financial Statements (New York: AICPA, 1973).17. This objective was also adopted later in Statement of Financial Accounting

Concepts No. J (SFAC I) (FASB , 1978).18. R. G. May and G. L. Sundem, ' Research for Accounting Policy: An Overview',

The Accounting Review, vol. 51, no. 4, Oct. 1976, pp. 747-63. Reprinted in Bloomand Elgars, Accounting Theory and Policy, pp. 2-19.

19. For a dissenting view, refer to D. Solomons, 'The Politicization of Accounting' ,The Journal of Accountancy, vol. 146, no. 5, Nov. 1978, pp. 65-72. Reprinted inBloom and Elgars, Accounting Theory and Policy , pp. 141-51.

398 NOles and References

20. An FASB discussion memorandum entitled, Conceptual Frameworkfor Account­ing and Reporting: Consideration of the Report of the Study Group on theObjectives ofFinancial Statements (Stamford, Conn: FASB, 1974), was producedas a follow-up to the report of the Trueblood Committee and led eventually to thepublication by the FASB of Objectives of Financial Reporting by BusinessEnterprises, Statement of Financial Accounting Concepts, no. I, in 1978.

21. R. Maeve, A Conceptual Framework for Financial Accounting Reporting: ThePossibilities for an Agreed Structure (London: ICAEW, 1981).

22. Ibid ., p. 17.23. Ibid ., p. 14.

3. Accounting principles and practice

I. May and Sundem , 'Research for Accounting Policy' , p. 3.2. Whether these reporting methods are allowed by law is another matter.3. Committee on Concepts and Standards for External Financial Reports, State­

ment of Accounting Theory and Theory Acceptance (American AccountingAssociation, 1977) (SOATATA).

4. The methods adopted by deductive and inductive theorists are not confined to the'classical' approach but are also found in the other two approaches.

5. Y. Ijiri, Theory ofAccounting Measurement, Studies in Accounting Research, No .10 (American Accounting Association, 1975) p. 28.

6. Ibid ., preface p. ix.7. SOATATA, p. 10.8. There are also two other forms of the EMH, the weak form in which security

prices are said to reflect all past information on security price movements, and thestrong form in which security prices are said to reflect all information relevant tothe security, whether publicly available or not. Further references to the EMHand its relevance to financial reporting may be obtained by consulting S. M.Keane, Stock Market Efficiency (Oxford : Philip Allan , 1983).

9. SOATATA, p. 21.10. For further discussion, see S. Zeff, 'The Rise of " Economic Consequences" ', The

Journal ofAccountancy, vol. 146, no. 6, Dec. 1978, pp. 56-63 . Repr inted in Bloomand Elgars, Accounting Theory and Policy, pp. 152-62.

I I. Solomons, 'The Politicization of Accounting', p. 148.12. Peasnell, 'Statement of Accounting Theory and Theory Acceptance', p. 224.13. J. R. Hicks, Value and Capital, 2nd edn (Oxford : Clarendon Press, 1946) p. 172.14. For a readily accessible resume by Fisher , see I. Fisher , 'Income and Capital', in

R. H. Parker and G. C. Harcourt (eds), Readings in the Concept and Measurementof Income (The University Press, Cambridge, 1969) pp. 33-53 .

15. See, for example , E. O. Edwards and P. W. Bell, The Theory and Measurement ofBusiness Income (Berkeley: University of California Press, 1961).

16. See L. Revsine, Replacement Cost Accounting (Englewood Cliffs, NJ : Prent ice­Hall, 1973).

17. See R. J. Chambers, Accounting, Evaluation and Economic Behavior (EnglewoodCliffs, NJ : Prentice-Hall, 1966).

18. The Companies Act, 1948, s.149, as amended by the Companies Act 1967, s.9.19. Jack , 'The Legal Aspects' , p. 61.20. The comm ittee was originally formed as the Accounting Standards Steering

Committee.21. Accounting Standards Steering Committee, 'Disclosure of Accounting Policies',

SSAP No .2 (1971).

Notes and References 399

22. The Companies Act 1981, Schedule 1, Part II, Section A, paras 10-14.23. SSAP, No .2, p. 2.24. E. S. Hendriksen, Accounting Theory , 4th edn (Homewood, Illinois: R. D. Irwin,

1982) p. 64,25. Ibid ., p. 65.26. Ibid ., p. 83.27. R. R. Sterling, Theory of the Measurement of Enterprise Income (Lawrence:

University Press of Kansas, 1970) p. 259.28. SSAP No .2, part 2, para. 14 (b).29. AICPA Professional Standards, Statement of Financial Accounting Concepts No.

3, para. 1230.028.30. M. Moonitz, The Basic Postulates of Accounting, Accounting Research Study

No . I (AICPA, 1962).31. There is, however, a growing body of opinion which believes that accounting for

human resources is both desirable and possible.

4 Financial statements and income measurement

I. B. S. Yamey, 'Some reflections on the writing of a general history of account­ancy' , Accounting and Business Research, vol. XI , no. 42, Spring 1981, p. 132.

2. 'Accounting Principles No . 18' , Preparation of Balance Sheet and Profit and LossAccount (Institute of Chartered Accountants in England and Wales, 1958).

3. There are also a number of sub-categories, including intangible assets andinvestments , which are considered later , in Ch. 8.

4. In order to distinguish total gains or losses earned on all transactions undertakenduring an accounting period from the gain or loss on a single transaction, theterm business income is used temporarily to describe the former. In later chaptersterminology adopted will revert back to that commonly used in the UnitedKingdom, i.e., 'net profit' rather than 'business income' .

5 The accounting recording process (I)

I. Not all business accounting systems record expenses in the Purchase Journal.Many adopt an alternative method of recording, involving the posting of actualpayments made directly to the relevant expense ledger account with subsequentend-of-year journal entry adjustments for any prepaid or accrued expenses.

6 The accounting recording process (II)

I. A suspense account is the title given to an account in which a transaction isinitially entered when there is some doubt as to the nature of the transaction.Once the transaction has been analysed an adjusting entry will be made totransfer the suspense account entry to the appropriate ledger account.

7 Fixed asset measurement (I)

1. Corporate legislation did not, in fact, include any formal requirement fordepreciation to be provided on fixed assets until after the passage of theCompanies Act 1981 .

400 Notes and References

2. A. L. Thomas, The Allocation Problem in Financial Accounting Theory: Studies inAccounting Research. 3 (Amer ican Accounting Association, 1969) p. I.

3. M. Chatfield , A History of Accounting Thought, revised edition (New York :Robert E. Krieger Publishing Company, 1977) p. 234.

4. Accounting Standards Committee, Accounting for Depreciation, SSAP 12 (1977)para. I.

5. Ibid ., para. I.6. The Companies Act 1981, Schedule I, Part II, para. 26.3(b).7. Thomas, The Allocation Problem in Financial Accounting Theory, p. 77.8. SSAP 12, para . 7.9. Ibid ., para. 8.

Appendix

I. Chambers, Accounting . Evaluation and Economic Behavior.2. W. T. Baxter, Depreciation (London: Sweet and Maxwell, 1971) p. 32.3. Ibid., p. 36.4. Inflation Accounting: Report of the Inflation Accounting Committee (Chairman F.

E. P. Sandi lands) , Cmnd 6225 (London: HMSO, 1975).5. Accounting Standards Committee, Current Cost Accounting . SSAP 16 (1980).

8 Fixed asset measurement (II)

I. SSAP 12, par a. 9.2. Ibid ., para . 6.3. B. S. Yamey, 'The Development of Company Accounting Conventions', in Lee

and Parker (1979), The Evolution of Corporate Financial Reporting, p. 235.4. Goodwill may also arise from other causes including the establishment of a

skilled workforce or an experienced management team, etc.5. Accounting Standards Committee, Accountingfor Goodwill, ED30 (1982) part 3,

para. 56.6. Accounting Standards Committee, Accounting for Research and Development ,

SSAP 13 (1977).7. The Accountant . vol. 164, no . 5017, II Feb . 1971 , pp . 169-71.8. SSAP 13, para. 5.9. Accounting Standards Committee, Accounting for Investment Properties, SSAP

19 (1981) para. 2.10. In the 1984 Budget Statement, made on 13 March 1984, the Chancellor of the

Exchequer proposed a staged reduction in the rate of first year allowance asfollows:

To 75 per cent , in respect of expenditure incurred on or after 14 March 1984;To 50 per cent, in respect of expenditure incurred on or after I April 1985;To nil, in respect of expenditure incurred on or after I April 1986.

II . The 1984 Budget Statement proposed a staged reduction in the rate of initialallowance as follows:

To 50 per cent , in respect of expenditure incurred on or after 14 March 1984;To 25 per cent , in respect of expenditure incurred on or after I April 1985;To nil, in respect of expenditure incurred on or after I April 1986.

12. Accounting Standards Committee, The Accounting Treatment of GovernmentGrants. SSAP 4 (1974) part I, para. 5.

Notes and References

9 Current assets (I)

401

1. Accounting Standards Committee, Stocks and Work- in-Progress. SSAP 9 (1975)para. 17.

2. Ibid ., para. 3.3. Ibid ., para. 2.4. Ibid ., para. 6.

10 Current assets (II)

I. Accounting Standards Committee, Stocks and Work-in-Progress. SSAP 9 (1975)Appendix I, para. 12.

2. Ibid. , para. 22.3. Ibid ., para. 27.4. Ibid., Appendix I, para. 23.5. Formerly M. J. H. Nightingale and Co. Ltd .

11 Forms of business organisation (I): sole traders and partnerships

I. Other less common forms include workers co-operatives, syndicates and jointventures .

2. Report of the Committee of Inquiry on Small Firms (Chairman: J. E. Bolton) ,Cmnd 4811 (London: HMSO, 1971).

3. Report of the Committee to review the fun ctioning of Financial Institutions(Chairman: The Rt Hon. Sir Harold Wilson), Cmnd 7937 (London: HMSO,1980).

4. Notes on the preparation and presentation of accounts from incomplete records(lCAEW, Guidance Notes 57, Dec. 1965) para 1.

5. Ibid., para. 7.6. Value Added Tax: Scope and Coverage, HM Customs and Excise Notice No . 701 ,

revised Nov. 1977.7. Accounting Standards Committee, Accounting for Value Added Tax . SSAP 5

(April 1974) part 1, para. 5.8. The Partnership Act, 1890, Section I(I).9. E. H. Scamell, Lindley on Partnership. 13th edn (London: Sweet and Maxwell,

1971) p. 10.10. An alternative course of action involving limited partnership liability is possible,

but only if responsibility for day to day management is given up by the limited(liability) partners.

12 Forms of business organisation (II): incorporated businesses

I. Companies Act, 1948, part I section I, amended by the Companies Act 1981 ,Schedule 3.

2. The sole director of a private company cannot also be the company secretary.3. Companies Act, 1948, part 4, section I96(i).4. Committee to review the funct ioning of Financial Institutions, p. 209, para. 735.5. Companies Act 1981, part III s.46(i).6. In the case of companies defined as close companies, shareholders may also be

liable to income tax on their share of non-trading profits of the company, whetherdistributed or not.

402 Notes and References

A close company is any UK resident company which:

(a) is under the control of its directors who are also participators (i.e., have afinancial interest in the profits of the company); or

(b) is controIled by five or fewer participators (Section 282, Income andCorporation Taxes Act 1970).

7. Minimum apply ing for the 1983--4 tax year.8. The Stock Exchange Fact Book, various years.9. 'The Unlisted Security Market', Bank of England Quarterly Bulletin, vol. 23, no.

2, June 1983, p. 228.10. The Times, 15 August 1983, p. 14, Investors' Notebook.II. Investors Chronicle, vol. 65, no. 821, 29 July--4 August 1983, p. 44.12. The Times, 19 May 1978, p. 21; 25 May, p. 24.13. Investors Chronicle, vol. 65, no. 823, 12-18 August 1983, p. 53.14. The Times, 19 August 1983, p. 13.15. Investors Chronicle, vol. 65, no. 817, 1-7 July 1983, p. 43.16. The Companies Act 1981, Schedule 1,3(2). Preliminary expenses may alternati­

vely be written off against share premium account, if available.

13 Corporate financial reporting requirements

1. The Companies Act, 1948, Schedule 8, part II section A. Revised by theCompanies Act 1981, Section (I) .

2. Ibid., Schedule 8, part II, Section A 14.3. Ibid ., Schedule 8, part III, paras 38-51.4. Accounting Standards Committee, Accounting for Contingencies. SSAP 18

(1980).5. The Companies Act, 1948, Schedule 8, part III , paras 52-57 .6. Accounting Standards Committee, Extraordinary Items and Prior Year Adjust­

ments, SSAP 6 (1974).7. Accounting Standards Committee, Accounting for post Balance Sheet Events,

SSAP 17 (1980).8. That is, those recognised as qualified by the Chartered Institutes of England and

Wales, Scotland, and Ireland, and the Association of Certified Accountants andpersons with overseas qualifications recognised by the Department of Trade.

9. The Companies Act 1967, section 14, (3) (a).10. The Companies Act 1980, part III , section 39 (2).II . 'The determination of realised profits and disclosure of distributable profits in the

contex t ofthe Companies Acts 1948 to 198/' (TR 481), para. 10, Accountancy, vol.93, no. 1070, October 1982, pp. 122-6. See also the Companies Act 1948, 8 Sch.90; Sec. I(2), I Sch.

12. Ibid., Appendix para. 3.13. The Companies Act, 1980, part III, section 40.14. M. A. Firth, 'An empirical investigation of the impact of the announcement of

capitalisation issues on share prices', Journal ofBusiness Finance and Accounting,vol. 14, no. I, Spring 1977, pp. 47--60.

15. Accounting Standards Committee, The Treatment of Taxation under the Impu­tation System in the Accounts of Companies. SSAP 8 (1974), part I, para. 8.

16. Accounting Standards Committee, Accountingfor Deferred Tax, SSAP 15(1978),part II, para. 26.

17. Accounting Standards Committee, Accounting for Deferred Tax , ED33 (1983),part 3, para . 20.

Notes and R eferences

14 Analysis of accounting statements

403

I. Institute of Chartered Accountants in England and Wales, Stat ement of Intent onAccounting Standards in the 1970s (ICAEW, 1969).

2. See Keane, Stock Market Efficiency , Ch . 4.3. Named after the company which is often given credit for the initial formulation of

a pyramidal structure of rat ios for management control purposes.4. See, for example, W. H. Beaver, 'M arket Prices, Financial Ratios and the

Prediction of Failure ', Journal of Accounting Research, vol. 6, no. 2, Autumn1968, pp. 179-92.

5. Accounting Standards Committee, St atements of Sources and Applications ofFunds, SSAP 10 (1978), para. 7.

6. American Institute of Cert ified Public Accountants, Reporting Changes inFinancial Position, Accounting Principles Board , Opinion No. 19 (March 1971),para. 2021.05.

7. P. Mason, Cash Flow Analysis and the Funds Stat ement . Accounting ResearchStudy , no. 2 (AICPA, 1961).

8. APB Opinion 19, para. 2021.06.9. SSAP 10, part II, para . 8.

10. Ibid ., Appendix A, Example 1.

15 Accounting for inflation

I. Some observers may have described this rather as 'government interference' .2. D. R. Myddelton, 'The Neglected Merit s of CPP ', p. 90, from Leach and Stamp

(eds), British Accounting Standards: The First Ten Years' (Cambridge: Wood­head-Faulkner, 1981).

3. H. W. Sweeney, Stab ilised Accounting (New York : Harper, 1936).4. The Accountancy of Changing Price Levels (Institute of Cost and Works

Accountant s, 1952), and Accounting f or Inflation (Association of Cert ified andCorporate Account ant s, 1952).

5. Research Foundation of the Institute of Chartered Accountant s in England andWales, Accounting fo r St ewardship in a Period of Inflation (ICAEW, 1968).

6. Financial Accounting Standards Board , Financial Reporting and Changing Prices,Statement of Financial Accounting Stand ard s, No .3 (Sept. 1979).

7. Accounting Standards Steering Committee, Accounting for Changes in thePurchasing Power of Money , PSSAP 7 (1974).

8. Accounting Stand ard s Committee, Inflation Accounting - An Interim Recommen­dation (1977).

9. It may be argued that business A has indeed operated in a more efficient mannerthan business B as the same level of profits has been generated in the former,although on an older asset. In order to avoid controversy caused by sucharguments the asset in the illustration may be considered to be one of infiniteuseful life, e.g., farm grazing land .

10. See, for example , W. Godley and A. Wood, Srock Appreciation and the Crisis ofBritish Industry (1974), available from the Department of Appl ied Economics ,Sidgewick Avenue, Cambridge. Also, a series of articles was published by variousauthors on this point in the Financial Times, during November 1974.

II . These different perceptio ns do not , however, refer to the legal nature of thebusiness enterprise.

12. See, R. S. Gynther, 'Why use General Purch asing Power?', Accounting andBusiness Research, vol. 4, no. 14, Spring 1974, pp. 141-57.

404 Notes and References

13. This conclusion may also apply to any proposal to include CPP adjustments inaddition to specific price change adjustments.

14. PSSAP 7, part III, para. 28.15. Ibid ., part II, para. 29.16. J. C. Bonbright, The Valuation of Property (New York: McGraw-HilI, 1937), p.

71, quoted in Sandi lands, para. 208.17. Sandi lands Report, para. 222.18. Ibid., para. 70.19. Ibid., para. 535.20. Ibid ., para. 537.21. Accounting Standards Committee, Current Cost Accounting. SSAP 16 (1980),

para . 3.22. Ibid., para. II .23. Ibid ., para. 6.24. Ibid., para. 54.25. Issued by the ASC together with SSAP 16.26. G. Whittington, 'Inflation Accounting - What Next?', from Leach and Stamp,

British Accounting Standards, p. 75.27. According to G. Whittington, ibid., 'the present (SSAP 16) gearing adjustment

carries compromise and caution to the extent of satisfying neither the proponentsnor the opponents of the gearing method', p. 79.

28. SSAP 16, para. 18.29. Statement by the Accounting Standards Committee on SSAP 16 'Current Cost

Accounting', para. 4.10, published in Accountancy, June 1983, pp. 116-18.

16 Group accounts

I. For information on accounting treatment of groups of companies see Survey ofPublished Accounts, London, ICAEW, various years.

2. R. M. Wilkins, Group Accounts: The fundamental principles. form. and content(London: ICAEW , 1975) p. 16.

3. Hein, L. W., The British Companies Acts and the Practice of Accountancy1844-1962 (New York : Arno Press Inc., 1978) p. 272.

4. 'Report of the Company Law Amendment Committee', House of Commons,Sessional Papers, 1926 (Cmnd 2657), IX, 477.

5. 'Report of the Committee on Company Law Amendment', House of Commons,Sessional Papers, 1944-45 (Cmnd 6659) IV, 793.

6. The Companies Act, 1948, Section 150 (2) (b).7. Accounting Standards Committee, Group Accounts, Statement of Standard

Accounting Practice, 14 (Sept., 1978).8. The distinction between fixed, or permanent, and floating , or current, assets owes

much to the writings of Dicksee in the late nineteenth century. Dicksee dis­tinguished between permanent assets, i.e. ' those with which [a firm] carries onbusiness'; and 'floating' assets, i.e. 'those in which [a firm] carries on business' . L.R. Dicksee, Auditing - a Practical Manual for Auditors (London: Gee & Co.,1892) p. 121.

9. R. G. Walker, Consolidated Statements: A History and Analysis (New York :Arno Press, 1978) p. 41.

10. Ibid., p. 74.II . For further information refer to Sir Patrick Hastings, 'The Case of the Royal

Mail', in W. T. Baxter and S. Davidson (eds), Studies in Accounting Theory(London : rCAEW, 1977) 3rd edition, pp. 339-46 .

N otes and References 405

12. Walker, Consolidated Statements, p. 81.13. R. H. Parker, 'Concepts of Con solidation in the EEC' , Accountancy, vol. 88, no.

1002 (February 1977), pp. 72- 5.14. M. Moonitz, The Entity Theory of Consolidated Statements (American Account-

ing Associat ion, 1944).15. Parker, 'Concepts of Consolidat ion in the EEC', p. 72.16. Walker , Consolidated Statements, p. III.17. 'Report of the Company Law Committee' [The Jenkins Co mmittee Report]

(London: HMSO, 1962 Cmnd 1749).18. For a comment on the likely implications of the Seventh Directi ve for UK

company legislation see P. Rutteman, 'Scru tinising the Seventh Directi ve',Accountancy , vol. 94, no. 1078, June 1983, pp . 129-30.

19. Walker , Consolidated Statements, p. 270.20. Accounting Standards Committee, Accountingfor Associated Companies, SSAP I

(Jan . 1971, revised April 1982), para . 4.21. Ibid ., para. 13.22. Jenkins Committee Report, para . 187.23. Shearer ( Inspector of Taxes) v. Bercain Ltd. Times Law Report 7, March 1980,

See also Simons Tax Cases, 1980, p. 359.24. Accounting Standards Committee, Accounting for Acquisitions and Mergers .

ED31 (November, 1982).25. Statement of Intent, ICAEW April 25, 1984, TR 545.

Glossary of Terms

The following is a glossary of the more important accounting terms used in the earlychapters of the book . It is not intended that the glossary should be comprehensive,rather the purpose is to provide a brief introduction to terms which are explained toreaders in more detail in later chapters of the text.

Allocat ionThe process by which costs are charged to cost centres in proportion to some measureof use. The cost centre may be a product, process, department or some otheridentifiable area of activity .

AssetAn economic resource , owned by an enterprise, giving rise to a claim as to potentialfuture benefits or services. Assets may be categorised as either current or fixed assets .

Balance sheetA statement of financial position of an organisation, disclosing the assets, liabilitiesand net worth of that organisation at a particular point in time.

CapitalThe amount invested in an enterprise by its owners .

Capital expenditureExpenditure which is normally expected to benefit future periods, in contrast torevenue expenditure. Capital expenditure involves the acquisition of fixed assets.

Capital ReserveReserves of a company which are regard ed as not being available for withdrawal bythe owners.

Capital structureThe permanent long-term financing of a business .

Contingent liabilityAn obligation relating to some past event or transaction, which may arise depend ingon the outcome of some future event.

Current assetAssets which are reasonably expected to be realised in cash, or sold, or otherwiseconsumed during the normal operating cycle of the business or within one accountingyear , if longer.

406

Glossary of Terms 407

Current liabilityA short-term debt or obligation which is expected to be satisfied within oneaccounting year.

DepreciationThe diminution in value of a tangible fixed asset, however arising .

Distr ibutable profitsThe proportion of the profits of a business which is available for distribution tomembers or owners, in accordance with legal requirements or the constitution of thebusiness.

DividendsThe part of the profits of a company which is distributed to the shareholders,normally by means of a cash payment in proportion to the number of shares held.

Double-entry book-keepingThe method of recording the dual aspect of an accounting transaction.

Expen seCost , or other decrease in an asset, associated with the revenues earned during thataccounting period.

Fixed assetAssets which are held for use rather than realisat ion and which are intended toprovide services or generate revenues over future accounting periods.

GoodwillAn intangible asset representing the value of a business in excess of the combinedvalue of the individual net assets.

Gross profitThe trading profit of a business represented by sales revenue less the cost of the goodssold. Also described as gross margin .

Income statementA summary statement of the revenues and expenses of a business organisation for aspecified period .

Intangible assetAn asset which has no physical existence but which none the less gives rise to futureexpected benefits.

LiabilityObligations, or debts of a business enterprise. Classified as either current, i.e.maturing within the next accounting year, or long-term.

Limited companyA company, whose members have their liability limited either by the amount ofguarantees made or else by the paid-up value of share capital subscribed for.

Net assetsTotal assets less total liabilities . Also known as net worth .

408 Glossary of Terms

Net current assetsTotal current assets less total current liabilities. Also described as working capital.

Prime costThe direct labour and materials component of the cost of manufacturing a product.

ProfitThe excess of revenues over expenses for a particular accounting period.

Profit and loss accountThe ledger account to which the totals of revenues and expenses are posted(transferred). The term is also used in the UK to refer to the published incomestatement.

Registered companyA company which has been formed through the process of registration with theRegistrar of Companies.

ReserveThe amount of net worth of a company which is in excess of the nominal value of theissued share capital.

Retained profitThat portion of the profits of the current year (or of previous years) which has notbeen distributed to owners but rather reinvested within the business .

RevenueIncome arising from the sale of goods or the provi sion of services.

Revenue expenditureExpenditure which is expected to benefit a current accounting period only .

Revenue ReserveReserves which are regarded as available for distribution to owners .

Share capitalThe nominal value of shares either authorised by a company or actu ally issued to themembers .

Statement offinancial positionAlternative name for a balance sheet.

Index

Absorption costi ng 171-9Accountant IAccountant. The 371Accounta ncy

defined 1- 2historical development s 6-1 1sub-classifications 2-6

Account ingconcepts and conventio ns 33-7histor ical development s 32-3model of the firm 41- 55, 62-3policy determinat ion 11, 21- 2, 29- 30

Account ing Standa rds Committee (ASC),formerly Accounting StandardsSteering Committee (ASSC) ,

aims 229-300and Cor po rate Report 17formation 33

Accounts payable see Trade credito rsAccruals 35-6, 53, 101- 5Accumulated fund 11 4--1 5Acid-tes t 312Acquisition method 376-7Adjusting ent ries 100-8Advanced Cor poration Tax (ACT ) 275Alloca tion 33, 123--4

asset cost 105- 8deprecia tion 125-3 1expense 40- 1, 52

Allotmen t, 256-7Altern ative accounting rules 261American Accounting Assocation

(AAA) 27American Institut e of Certified Public

Accountant s (AICPA) 21Amortisation 154Analysis of financial sta tements 299- 326APB No.4 21-2Application for shares 256-7Appropriatio n account 232- 3Articles of Association 242-3Assets

classification 43, 122--5cur rent 43definition 35fixed 43

409

intangible 154--7long-lived 135monetary 123non-monetary 123- 5revaluations 9, 142- 6, 142-6, 148- 50valuation 122- 3

Asset utilisati on rat ios 308- 10Associated company 158, 385-6Association of Certified Accountants 3,

334Attributable cost, and non-attributable

cost 169-70Attribut able profit 197- 201Auditor

appo intment and qualifications 3, 10, 272du ties 3, 270, 272external and interna l 3--4remun erat ion 267repo rt 272-3resignat ion 272

Authorised share capita l 244Average collection period 309- 10Average cost invento ry valuatio n 195-7

Bad and doubtful debtsgenera l and specific provi sions 96-100written-off 96

Balance sheetand acco unting equation 44form and content 277-82income measurement 41-9origin 7, 32structure 42- 6

Balancing allowance and balancingcha rge 160- 1

Bank balance 203-5Bank reconciliation 204--5Bankruptcy prediction 312Bank statement 204Baxter, W. T . 145Bespac pic 250Bolton Committee 215Bonbright , J. C. 340Bonus issue 273--4Books of prime entry 65-7 1Break-even analysis 173- 7

410

British Petroleum pic (BP) 257Britoil pic 253, 257

Capitalauthorised 244fixed and floating 9issued 293non-distributable 8-9partnership 232and revenue items 8-9,43, 73-4 , 128

Capital allowances 159-61Cap ital expend iture 128Capital gearing 249, 311Capital issues 273Capital maintenance 338-9Capital reserve 149, 374-5Cash 201

control 205-6day book (or journal) 66--71,202-4holding motives 206

Cash discounts 93-5, 129Cash flow

ratios 312statement 323-7

Cash sales 50, 69Changing prices, accounting for 334-5Chambers, R. J. 145Charitable contributions 270Charities 112Chartered Accountants see Institutes of, in

England and Wales, in Ireland, ofScotland

Classical approach 27-8Closing entries J11-2Cohen Committee 367, 369Companies Acts

1900 101907 101928 101929 3671948: disclosure requirements 260; filing

of accounts 10; groupaccounts 368, 370-1 , 388

1967 101976 2721981: basic accounting principles 34,

261; current cost accounting 344;form and content of accounts 10,262-269, 276--94; group accounts157-8,389; preliminaryexpenses 253; sharerepurchases 244; stockvaluation 177; see also Disclosurerequirements

Companycategories of 241-2conversion from partnership 254-5formation 253memorandum and articles 242-4separate legal entity 244-5

Index

Comparability 23Completeness 23Computerisation 3, II, 73Conceptual framework 22, 27-30Conservatism principle 33-6, 123Consistency 23, 36Consolidated accounts see Group accountsConsultative Committee of Accountancy

Bodies (CCAB) 33-4Contingent liabilities 266, 267Contra items 204Contracts, long-term see work-in-progressControl

accounts 91-3cash 205-8systems 108

Controlling interest 157,366,371Convertible securities 247, 248Corporate report 17-20Copyright 156Corporation tax 5, 274-6Cost and managerial accounting 4Cost allocation 169-71Cost convention see Historic costCost flow 182-4Cost of goods sold 194-7Cost of sales adjustment (COSA) 343,

346--7Credit entry 63Credit sales 50, 92-4Creditor(s) 93-4Cumulative preference shares 247Current account 232-5Current assets 167Current cost accounting 342-51Current cost balance sheet 351-2Current cost operating adjustments 344-9Current cost profit 341, 342. 343Current cost reserve 349-51Current liab ilities 43Current purchasing power accounting

(CPP) 338-9, 352-9Current ratio 311-2Current value accounting 20, 31-2

Day book 65-71Debenture capital 247-9, 264Debit entry 63Debtor 44Decision usefulness approach 28-9Deferred expenditure 156Deferred liabilities 275-6Deferred revenues 162Deferred taxation 275--fJDe Lorean Motors 19Departmental accounts 186--9Depreciation 125-36

adjustments 147-52allocation 127-36current cost 343, 346

Index

Deprival value 145,340Development expenditure 156Direct cost 169Directors

appointment 243removal 243remuneration 243, 268-9report 269-71responsibilities 7, 243-4

Disclosure requirementsand 1981 Act 261-73origins 7-8, 260

Discounted present values 31, 140-4Distributable profits 273-4Dividends 267,270Division of profits , in partnership

accounts 232-3, 234-{iDouble-entry book-keeping

illustrated 76--80introduced 62-4origins 6--7

Double declining depreciation 133Doubtful debts 96--100Drawings 219, 232Dual aspect of accounting transactions 41,

62-3Du-pont system 302-3

Earn ings per share 264,291Economic income

and accounting income 30-2and asset valuation 139-46

Economic value 28, 145Efficient markets hypothesis (EMH) 29Employees

disclosure requirements 268information needs 18

Employment report 20Entity

consolidation 369-70convention 37

Entry value 145--6Environmental postulates 37Equity 41Equity accounting 369, 386Equity Funding Corporation 3Equivalent units of production 180-1Errors

of practice 72-3of principle 73-4of transposition 73

European Economic Community(EEC) 10, 274, 371

Eurotherm 252Exceptional items 269Exit value 146Expected benefits, and depreciation 130Expense

accrued 53definition 36

411

matching 51-3recognition 34-6

Exposure draftED8, Accounting for changes in the

purchasing power of money 338EDI8, Current cost account ing 335, 342ED24, Current cost accounting 335, 343ED30, Accounting for goodwill 155ED31, Accounting for mergers and

acquisitions 389-91ED33, Accounting for deferred tax 402

Extraordinary items 268, 269

Factory overhead, 169FIFO (first-in, first-out) 195-8Financial Accounting Stand ards Board

(FASB) 22Financial management 5--6Financial reports

desirable characteristics 23internal and external users 13-20objectives 17-20 , 20-3 , 26-7

Financing ratios 310-12Fisher, I. 31Fixed assets

acquisition cost 128-30, 151 -2classification 123-5defined 43depreciation 125-36, 147-54disclosure requirements 264-5 , 270and floating assets 368revaluations 148-51

Flow of cost 182-4Flow of information 74-5Fundamental accounting principles 33-8Funds

defined 313-4Funds flow statement 313-23

form and content 314-5objectives and uses 313preparation of 315-23

Gearing 249, 311Gearing adjustment 343, 348General purchasing power 338-9Generally accepted accounting

principles 33Going concern 34Goodwill 154-5,374-5Granville & Co. see Over the Counter

MarketGreen Committee 366--7, 368Gross profit (or gross margin) 56

percentage 221-2Group accounts

alternative concepts 369-70consolidated statements 371-85histor ical development 366--9

Guarantees 266--7

412

Hicks, J . R. 30-1Historic cost accounting 32-7

deficiencies 335-7disclosure requirements 261income measurement 40

Holding company 366, 367, 380Holding gains and losses 341-2Hyde Guidelines 335, 343

Imputation tax 274Income

concepts 30-2measurement 40---53

Income and expenditure account 113-5Income statements see Profit and loss

accountIncome tax 5Incomplete records 216--27Inflation accounting II

history of 333-5Information economics approach 29-30Information usefulness 26Institute of Chartered Accountants

in England and Wales 3,216,334,335,342

in Ireland 3of Scotland 3

Institute of Cost and ManagementAccountants 334

Institute of Taxation 5Intangible assets 154-7Internal control 3Intra-group trading 380-1Introduction (Stock Exchange) 249-50Inventories see StocksInvestments

classification 157-9disclosure requirements 265listed v. unlisted 208-9

Investment grants 161-2Investors' information requirements 18Issued share capital 293

Jenkins Committee 371Joint Stock Companies Acts

1844 71855 81856 8

Journal entries 6, 64-5

Ledger accounts 71Lee v Neuchatel Asphalte Co . 9Leverage see GearingLiabilities

classification 43contingent 266, 267current 43deferred 276defined 35-6long-term 43

Index

LIFO (Last-in, first-out) 195-8Limited liability 8, 33, 242, 245Lindley, L. J . 9Liquid assets 208Liquidity ratios 310-2Listed securities 208-9Long-term contracts 197-201

Maeve, R. 22Mainstream corporation tax 275Management accounting see cost and

managerial accountingManufacturing accounts 184-7Marginal cost 177Matching convention 52-3Materiality 37

(see also Relevance)Memorandum of Association 242--4Merger accounting 386--90Midland Bank pic 251Minority interests 372-6Monetary assets 123Monetary items 339Monetary working capital adjustment

(MWCA) 343, 347-8Money measurement convention 37Moonitz, M. 37, 369Morpeth, D. 335

Net realisable value 32, 145, 178-9,340-1Nominal value 244Non-monetary assets 123-5,339Non-trading organisations 112-5

Objectivity (or neutrality) 23,33, 123Obsolescence 127Oceonics pic 252Offer for sale 252Operating capacity 343Operating cycle 43Operating ratios 307-8Opportunity cost 129Ordinary shares 245-6Overheads 168-71Over the Counter Market (OTC) 209, 250

Pacioli , Luca 6Parent company concept 369-70Parker, R. H. 369Partly paid shares 257Partnership 215

accounts 231agreement 230-1changes 233--4conversion to limited company 236,

254-5division of profits 232-6nature of 230

Patent rights 156--7Pay As You Earn (PA YE) 5

Index

Peasnell, K. V. 30Perfect market conditio ns 140, 145Performance measurement 304Period ic income measurement 40Periodic inventory systems 196Perpetual invento ry systems 196Petty cash 207-8Placements: private and stock

exchange 252Plant register 148Political contributions 270Pooling of interests see Merger acco untingPost-balance sheet events 269Pre-acquisition profits 377-80Preference sha res 246-7Preliminary expenses 253Prepayments 52, 101, 104-5Present value 340-1Price level accounting see Cur rent

purchasing powerProcess cost 179-82Production basis depreciation 135-6Profit and loss account

and income measurement 49- 57form and content 55- 7,283- 7origin 7, 32

Profitab ility ratios 303-7Propert y investment 158- 9Propor tional consolida tion 369Propr ietory concept of conso lida tion 369Prospectus issue 251-2Provisions 266Prudence concept see Conservati smPublic limited company 242Purchase Jo urna l (or Day Book ) 66-8Purchase method see Acqusi tion method

Quick rat io 312

Rate of return see Profitab ility ra tiosRat io analysis 301- 2Realisat ion account 254-5Realisable value 32, 145,340-1Realised pro fit 158, 273Receipts and payment s account 11 3Redeemable preference sha res 247Reducing balance depreciation 132-4Registered company 7Registrar of Companies 7, 10, 242Relevance 23Reliab ility 23, 32-3Repairs and renewals 153-4Replacement cost accounting 32, 145,

340- 1Research and development 154-6, 269Reserves 266, 270Residual value 131Retail price index (RPI) 338, 353Revaluat ion of assets 148- 51Revenue expenditure 129

413

Revenue recognition 34-6, 51-3Rights issue 251Rolls-Royce Ltd 156Royal Mail Steam Packet Company 368- 9

Sales Journal (or Day Book) 66-7Sandi lands Committee 145, 335, 338.

339-42. 343Scrip issue see Bonu s issueSecret reserves 368Secur ities

categories of 208-9, 245-9methods of issue 249-53

Securit y issues, acco unting for 253- 7Seventh Directive 371Share capital

authorised 244disclosure of 263-4issued 293ordinary 245-6partly paid 245, 257preferen ce 246-7

Share premium 255-6, 388Shearer v. Bercain Ltd 389Sherman Ant i Trust Laws 1890 (US) 366Short-term assets see Current assetsShort-term liab ility see Current liab ilitiesSole traders 215-6Source and applicatio n of funds

sta tement see Funds flow sta tementSources of finance 251S.R . Gent pic 253Stable monetary unit 333, 334State of affairs, and auditors ' report 272Statement of Accounting Theory and Theory

Acceptance (SOATATA) 27- 30Statement of added value 20Statement of changes in financial

position see Funds flow sta tementStatement of financial position see Balance

sheetStatem ent of Intent TR54 5 390Sta tement of Standa rd Account ing Practice

(SSAP)SSAPI , Accounting for associated

companies 386SSAP 2, Disclosure of accounting

policies 34-6, 175, 261, 262SSAP 4, The accounting treatment of

government grant s 161SSAP 5, Accountin g for value added

tax 228,401SSAP 6, Extraordinary items and prior

year adjustment 268SSAP 7, Accou nting for changes in the

purchasing power of money 335,338, 339, 353-9

SSAP, 8, The treatm ent of taxat ion underthe imputatio n system in theaccou nts of compan ies 402

414

SSAP 9, Stock and work-in-progress168,175,177,195,197,199

SSAP 10, Statements of source andapplications of fund s 313-23

SSAP 12, Accounting fordepreciation 127, 131, 148, 149

SSAP 13, Accounting for research anddevelopment 156

SSAP 14, Group accounts 367SSAP 15, Accounting for deferred

tax 402SSAP 16, Current cost accounting 145

335, 342-51SSAP 17, Accounting for post-balance

sheet events 269SSAP, 18, Accounting for

contingencies 267Sterling, R. R . 35Stewardship function 6-7, 17,26-7,32-3Stocks

categories 167-8cost allocation 169-82cost recognition 194-8lower of cost and net realisable

value 178-9marginal v. absorption cost 171-9valuation 168-9

Stock Exchange 208, 249, 368Straight line depreciation 132-3Striking pr ice in tender issues 253Subsidiary

defined 366, 370-1non-consolidation 367relationships 370-1

Sum-of-years-digits depreciation 134-5Suspense account 99Sweeney , H. W. 334

T-account 62-3Table A 243Tangible assets 125Taxation

company 274-6disclosure 267-8general 4-5

Technology for Business pic 252Tender issue 253Theory construction 27-30Thomas, A. L. 123, 130

Index

Time value of money see Discountedpresent values

Timeliness 23Trade discounts 95Trade mark 156-7Trade union 112Trading and profit and loss account 56Transaction analysis 50-71

comprehensive illustration 76-80Trial balance 71-4True and fair view, and

auditors' responsibility 2balance sheet 43disclosure 261

Trueblood report 21-2Turnover disclosure 268Turnover ratios 306-9

Underwriters 250Understandability 23Unit cost 169Unit of production depreciation see

Production basisUnlisted securities 209Unlisted Securities Markets

(USM) 249-50, 252Usage basis of depreciation see Production

basisUnsecured debentures 248Useful life, and depreciation 130Users and accounting information

external 17-20internal 14-17

Valuation bases 30-2Value added tax (VAT) 5, 227-31Value to the business 340-2, 343Variable costing 169-70

Walker, R. G. 368, 369Weighted-average cost 195-8Wilson Committee 215, 244Work-in-progress 44

long-term contracts 197-201process costs 179-82

Working capital 314Work sheet 108-9

Yamey, B.S. 42-3