6 The accounting equation
8 Double Entry Summary for Chapter 6
8.1 Closing inventory adjustment:
8.2 Opening inventory adjustment:
8.3 The accounting equation:
Dr Inventories (B/S) Cr Closing inventories (I/S)
Dr Opening inventories (I/S) Cr Inventories (B/S)
Assets = Liabilities
Assets = Capital + Profit + Payables
Chapter 6: Questions
6.1 At the end of the accounting period and after the balance sheet and income statement have been prepared for a sole trader:
A All journals are reversed
B The balances on asset and liability accounts are transferred to the capital account
C The balances on the income statement and drawings account are transferred to the capital account D Balances are carried forward on all the accounts in the nominal ledger (2 marks) 6.2 A business has cash of $1,100, trade payables of $2,500, a mortgage liability of $8,000 and land of
$16,000.
What is the proprietor's interest? $ (2 marks)
6.3 Joe, a sole trader, set up business on 1 October 20X6 with $40,000 of his own money. During the year to 30 September 20X7 he won $50,000 on the lottery and paid $30,000 of this into his business. He took cash drawings of $5,000 during the year and at 30 September 20X7 the net assets of the business totalled $59,000.
What was the profit or loss of the business for the year ended 30 September 20X7?
A $4,000 profit B $6,000 profit C $16,000 loss
D $6,000 loss (2 marks)
6.4 Joan
Joan, a second hand bookseller, has been in business for two months. In this time she:
(1) paid in cash $5,000 as capital;
(2) took the lease of a stall and paid two months’ rent. The annual rental was $1,200;
(3) purchased, on credit from J Fox, books at cost of $825;
(4) spent $420 cash on the purchase of other books from W Smith;
(5) paid an odd-job man $75 to paint the exterior of the stall and repair a broken lock;
(6) put an advertisement in the local paper at a cost of $10;
(7) sold three volumes containing "The Complete Works of Shakespeare" to an American for $60 cash;
(8) sold six similar sets on credit to a local school for $300;
(9) paid J Fox $525 on account for the amount due to him;
(10) received $200 from the school;
(11) purchased cleaning materials at a cost of $10 and paid a char lady $30;
(12) took $100 from the business to pay for her own personal expenses;
(13) made other cash sales during the two months of $1,500;
(14) all books had been sold by the end of two months.
Required
(a) Write up the relevant ledger accounts for these transactions.
(b) Balance off all of the ledger accounts.
(c) Prepare a trial balance, an income statement and a balance sheet.
6.5 Brian
Brian set himself up in business on 1 January selling ice creams. During his first two months in business he:
(1) Introduced $20,000 of cash as capital into the business;
(2) Purchased a second hand ice cream van from John. He paid John $10,500 cash;
(3) Paid Terry $200 to repair the ice cream machine in the van;
(4) Purchased on credit, inventories totalling $750;
(5) Spent $400 on petrol;
(6) Sold goods for $750 in cash;
(7) Paid $600 in tax and insurance;
(8) Made additional cash purchases of $80 for strawberry sauce and chocolate flakes;
(9) Withdrew $300 for his own expenses;
(10) The cost of goods remaining unsold was $500.
Required
(a) Post transactions (1) – (9) to the relevant ledger accounts.
(b) Balance off the ledger accounts.
(c) Prepare a trial balance.
(d) Prepare an income statement in ledger account form (remembering to deal with item 10).
(e) Draw up an income statement for the period and a balance sheet at the end of the period.
(f) Transfer the loss and drawings to the capital account.
6.6 Dealers
On 1 January the proprietor’s interest in a business, Dealers, was $18,500. At 31 January the assets and liabilities of the business were as follows.
$
Plant and equipment 10,000
Motor vehicles 5,000
Trade payables 3,000
Trade receivables 2,000
Inventories 4,500
Accrued expenses 250
Balance in the bank 3,500
Cash in the till 250
On 7 January the proprietor had paid in additional capital of $2,000. On 14 January he had taken goods at a cost of $350 for his own consumption and on 30 January had drawn cash of $1,250 from the business, for his own personal expenditure.
Required
(a) Calculate the net asset value at 1 January.
(b) Calculate the net asset value of the business at 31 January.
(c) Calculate the profit of the business for the month of January.
(d) Show the accounting equation at 31 January.
Chapter 6: Answers
6.1 C
Mortgage liability 8,000
Land 16,000
Capital introduced 30,000
Drawings (5,000)
Trade payables (B/S)
Cleaning (I/S)
Trade payables 300
Purchases 1,245 Repairs 75 Advertising 10
Sales 1,860
Trade receivables 100
Cleaning materials 10
Cleaning 30
Drawings 100
7,160 7,160 Joan
Income statement for the two months ended……
$ $
Joan
Balance sheet as at….
$ Current Assets
Trade receivables 100
Bank 5,390
Repairs & Maintenance (I/S)
$ $
Petrol (I/S)
Tax & Insurance (I/S)
$ $
Repairs & Maintenance (I/S)
$ $
(3) Bank 200 Bal c/d 200
200 200
Bal b/d 200
Purchases (I/S)
Tax & Insurance (I/S)
$ $
Repairs and Maintenance 200
Purchases 830
(d) Income Statement
Repairs & Maintenance 200 Tax & Insurance 600
Net loss c/d 780
Repairs & Maintenance (I/S)
$ $
(3) Bank 200 Balance c/d 200
200 200
Balance b/d 200 Income statement 200
Tax & Insurance (I/S)
$ $
Inventories (B/S)
$ $
Closing inventories (I/S) 500
(e) Brian
Income statement for the two months ended 28 February
$ $
Sales 750
Less cost of sales:
Purchases 830
Less: closing inventories (500)
330
Gross profit 420
Less expenses:
Petrol 400
Repairs & Maintenance 200
Tax & Insurance 600
((1,200)
Net loss for the period (780)
Brian
Balance sheet as at 28 February
Non current assets $
Capital introduced on 1 January 20,000
Loss for the period (780)
Total capital and liabilities 19,670
(f)
Income statement
(a) Net assets = proprietor’s interest
∴ Net assets at 1 January are $18,500 (b) Net assets = assets – liabilities
At 31 January the assets total:
$ $
Plant and equipment 10,000
Motor vehicles 5,000
Trade receivables 2,000
Inventories 4,500
Balance in the bank 3,500
Cash in the till 250
25,250
At 31 January the liabilities total:
Trade payables 3,000
Accrued expenses 250 3,250
∴ Net assets at 31 January 22,000
(c) Profit = Increase in net Drawings between Additional capital assets between + the same two – paid in between two points in points in time the same two points
time in time
∴ Profit for the month of January =
(22,000 – 18,500) + (350 + 1,250) – 2,000 = $3,100
(d) Accounting equation at 31 January
ASSETS = CAPITAL + PROFIT – DRAWINGS + PAYABLES 25,250 = 20,500 + 3,100 – 1,600 + 3,250
$ $
Plant & equipment 10,000 Capital at 1 January 18,500 Motor vehicles 5,000 Additional capital 2,000
Inventories 4,500 Profit 3,100
Trade receivables 2,000 23,600
Balance in bank 3,500 Less: drawings 1,600
Cash in the till 250 22,000
Trade payables 3,000
Accrued expenses 250
25,250 25,250
END OF CHAPTER
Syllabus Guide Detailed Outcomes
Having studied this chapter you will be able to:
• Understand the general principles of the operation of a sales tax.
• Calculate sales tax on transactions and record the consequent accounting entries.
Exam Context
This topic is likely to be tested in two main ways. You may be asked to identify the correct journal entry to post sales and purchases transactions including sales tax. You may also be required to consider how sales tax affects the calculation of amounts to be capitalised for non-current assets and the amount for trade receivables where discounts are offered.
Qualification Context
Financial Accounting introduces accounting for sales tax. More detailed rules and calculations relating to this area are covered in the Fundamentals level paper, Taxation (F6).