Book-Keeping L1 TG

(1)

How to Pass

Book-keeping

FIRST LEVEL

Teacher’s Guide

Keith F Bird

MSc BSc (Econ) ACIS

(2)

First published 1999 © LCCI CET 1999

British Library Cataloguing-in-Publication Data

Bird, Keith F

How to Pass Book-keeping, First Level – 2nd ed. Teacher’s guide

1. Book-keeping – Study and teaching I.Title

657.2’0071 ISBN 1 86247 060 X

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 the prior written permission of the Publisher. This book may not be lent, resold, hired out, or otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is published, without the prior consent of the Publisher. 10 9 8 7 6 5 4 3 2 1

Typeset by the London Chamber of Commerce and Industry Examinations Board

(3)

About the author

Keith Bird has had over 35 years’ experience lecturing in business studies in further and higher education and has taught professional courses at all levels. He is the author of the student’s book How to Pass Book-keeping, First Level, published by the London Chamber of Commerce and Industry Examinations Board (LCCIEB). He has also written several study manuals that have been published for professional courses.

Keith Bird’s association with the LCCIEB extends over 25 years and, for much of that time, he has served as a Chief Examiner in First Level Book-keeping and Second Level Book-keeping and Accounts.

Acknowledgements

In the preparation of this book, my thanks are due to Derek Skidmore MSc, FCCA, ACMA, co-author of How to Pass Book-keeping and Accounts, Second Level, for his review of the draft of the book and for his helpful suggestions. My thanks are also due to the staff of the LCCIEB Publishing Department for preparing this text for publication.

(6)

Introduction

The How to Pass Book-keeping, First Level: Teacher’s Guide is closely geared to the LCCIEB First Level Book-keeping Extended Syllabus. It is intended for a teaching course that extends over 60 hours.There are 24 lessons concerning book-keeping, each of 21_/

4 hours’

duration. The remaining teaching time should be used for Lesson 25, which covers the important topic of presenting examination answers, together with revision and pre-examination preparation.

The book is addressed to the teacher. It indicates the importance of particular topics and subject points and provides hints about how to present material. The Teacher’s Guide is intended to complement the student’s book How to Pass Book-keeping, First Level. At the same time, with a few exceptions, the explanations, examples, and exercises are ‘free standing’, providing the teacher with a store of additional teaching resource. The Teacher’s Guide should be used in combination with the student’s book and, for this purpose, cross-references between the two books are provided on page x. Individual cross-references are also given at certain points within the text.

The approach adopted in the Teacher’s Guide is that of keeping in mind the question ‘Why?’ At each stage, the stress should be on developing the student’s understanding of the need for, and effect of, the various book-keeping entries, as well as of the subject as a whole. Only by this means can inappropriate examination answers be prevented and a sound basis be provided for applying knowledge in the business world and/or for further accounting studies.

As the book progresses, the material becomes more difficult. The early stages of the book assume that the student has only a limited knowledge of business and accounts. Gradually, more elements, features, and terms are introduced that sometimes require the modification of methods for recording transactions already learnt. For example, at first, transactions are recorded in the ledger only. With the introduction of day books, the system of recording transactions changes. The time spent on the ‘ledger only’ entries is not, however, wasted because it enables the student to appreciate the relationship between the ledger and the day books. Inevitably, some students will come to the course with some knowledge or awareness of aspects of book-keeping and, understandably, they might question why a particular matter is not taken account of at a certain stage. This situation might apply in the case of the depreciation of fixed assets, which is not dealt with until Lesson 15. The progressive nature of the course is discussed at the beginning of Lesson 2. At that stage, the teacher might find it helpful to explain to the class that different features are to be included as the course develops.

The text includes numerous examples, together with short reinforcement exercises. Appendix 1 contains exercises for Lessons 1–24 and support material. Certain of the exercises are immediately followed by worked solutions; they are marked with an asterisk (*) both in the Appendix and in the main part of the book. The exercises are suitable for photocopying as required. Appendix 2 contains summarized answers, where appropriate, to questions for which solutions are not provided. These summarized answers include the

(7)

Introduction

results of certain calculations, key account entries, and other significant figures such as gross profit, net profit, asset totals, and trial balance totals. Other answers or parts of answers, too detailed for inclusion, such as account or journal entries, may be established by reference to the text of the book as well as by reference to the fully worked solutions in Appendix 1. It is advisable to make full use of the Glossary.

(8)

Cross-references to How to Pass Book-keeping,

First Level (student’s book)

How to Pass Book-keeping,

Teacher’s Guide First Level

Page Lesson Chapter Page

1 1 The accounting equation 1 1

Transactions through ‘double entry’ 2 9

10 2 Purchases, sales, and returns 3 15

17 3 Expenses: profit or loss 4 22

21 4 Balancing accounts: the trial balance 5 30

25 5 Trading and Profit & Loss Accounts 6 38

30 6 The balance sheet 7 49

33 7 Final accounts: more features 8 54

43 8 The division of the ledger 9 66

Vertical layout of the balance sheet 8 60

49 9 Bank facilities 10 73

Cash Book: 2 columns 11 79

56 10 Cash Book: 3 columns – cash discount 12 85

65 11 Purchases and Sales Day Books 13 96

73 12 Returns Day Books 14 104

83 13 Accruals and prepayments – expenses 15 120

94 14 Accruals and prepayments – income 15 120

99 15 Depreciation of fixed assets 16 133

113 16 Bad debts and provision for

doubtful debts 17 152

124 17 Bank reconciliation statements 18 164

132 18 Petty Cash Book – imprest system 19 180

142 19 Capital and revenue expenditure 20 189

148 20 The journal 21 201

157 21 Errors in the accounts 1

(types of error) 22 210

163 22 Errors in the accounts 2

(adjusting for errors; the effects

of errors) 22 210

167 23 Final accounts and adjustments

further considered 23 231

Stock valuation 23 237

177 24 Club and society accounts 24 246

187 25 The presentation of answers Appendices

(9)

Lesson 1: The accounting equation

Transactions through ‘double entry’

The underlying purpose of this lesson is to develop recognition of the need for, and purpose of, recording business transactions and their effects. Understanding the two-fold aspect of any transaction (benefit and detriment, and plus and minus) is essential for a grasp of double-entry book-keeping.

In the earlier stages of the lesson – especially in meeting the aims of Steps 1 to 3 – much can be done by using the question-and-answer method with the class, including a brief discussion of the students’ responses. The varied backgrounds and experiences of class members should be drawn on whenever possible. Always relate the discussion to a particular aim, listing points on the whiteboard or overhead projector as appropriate.

Topic summary

● The need for accounting records

● The information that needs to be recorded

● The means of obtaining resources, ie assets: ownership v. external sources of funds ● The business as an entity

● The dual effect of a business transaction ● Double-entry recording of transactions

Extended Syllabus references

1.1 Explanation and use of the terms debtor, creditor, asset, liability, capital

1.2 The accounting equation: assets = capital + liabilities and its expression in the balance sheet

1.3 The effect upon the accounting equation of basic business transactions (including the single-side transaction, eg use of bank balance to buy fixed assets)

1.4 The effect upon the accounting equation of the dual-type transaction, ie where the effect upon one side of the equation is matched by a combination of 2 (or possibly more) effects on the other side

2.1 Purpose of the use of debit and credit for the recording of transactions 2.2 The preparation of T-type accounts

2.3 Specifying a transaction/entry within an account, ie date together with, normally, the name of the ‘other’ account/day book involved in that particular transaction/ entry

(10)

Step 1

Following a brief introductory ‘chat’ with the class, ask the students to form pairs and to discuss and write down answers to the question:‘Why does a business need to keep records of account?’

At this stage, the students are likely to give broadly based answers, such as:

● to run (more) effectively and efficiently;

● to know what money is coming in and going out; ● to know what the business is earning and spending; ● to control the business: to make adjustments as necessary; ● to make decisions about the future;

● to provide information for making decisions about the future; ● to deal with the tax authorities.

Step 2

From the answers to the questions in Step 1, identify areas of information that will be required; for example:

Cash: availability and movements Purchases

Amounts owed by the business Sales

Amounts owed to the business Expenses

The possessions - ‘assets’ Profit

Amount of money invested in the business Capital

Step 3

While the students remain in pairs,

1 Ask them to imagine that they are establishing a business, such as a shop or factory. Ask them to write down the resources that they would need.

The accounting equation

Aim: to develop an appreciation of the need for business records of account

Aim: to recognize the key areas of information that need to be recorded

Aim: to recognize the resources needed and, broadly, the means of obtaining them: proprietor versus external sources

(11)

2 As the students suggest the resources, list these on the whiteboard in two categories, those that are:

(a) measurable in money terms, eg cash, premises, machines, and motor vehicles; and (b) less measurable, eg skills, contacts, and experience.

Show that category (a) is recorded in the accounts as assets. Category (b) is less easily recorded, but may be, for example, as skills as part of wage payments. It will be dealt with at a later stage.

Explain how the assets might be obtained. Show that, in establishing a business, a proprietor might:

(a) treat his or her own motor vehicle to be for use within the business; (b) put his or her money into the business, so that assets can be bought; (c) borrow money, ie obtain a loan.

Emphasize that (a) + (b) = capital, ie the proprietor’s stake; and that (c) = liability.

Step 4

1 Explain to the students that a business is an entity that is distinct from its owner. As a result, the accounts are to be kept for the business and they are separate from the owner’s accounts.You may illustrate the concept like this:

2 Explain, with reference to Step 3, that the money a proprietor invests to set up and run a business is usually supplemented by borrowed money. The means of financing a business may be expressed as ‘the accounting equation’:

Assets = capital + liability (eg a loan)

eg Assets £15,000 = capital £12,000 + liability £3,000

Alternatively, the equation may be expressed as:

Assets less liabilities = capital

eg Assets £15,000 less £3,000 = £12,000

Aim: to understand the business as an entity and to appreciate the ‘accounting equation’

Business accounts Personal accounts invests in withdraws from

(12)

3 Ask the students to work through the following exercise, inserting the missing figure in each of the columns.

Assets Capital Liabilities

£ £ £ (1) 2,430 1,920 (2) 3,060 1,040 (3) 2,500 780 (4) 6,530 0 (5) 5,830 4,120

Step 5

1 Show that the financial position of a business at any point in time – the accounting equation – can be expressed in the form of a balance sheet, eg:

F Lim

Balance sheet at 1 March Year 3

£ £

Office furniture 800 Capital 7,000

Motor vehicle 5,300 Loan from J Black 1,000

Cash at bank 1,900

8,000 8,000

2 Explain the term ‘business transaction’.

Show, using the following example, the effect of transactions, stage by stage, upon a balance sheet. It is important not to confuse the students with transaction moves that are too rapid. Ensure they fully understand the effect of each transaction before you move onto the next.

The transactions (which are defined in brackets) of F Lim in Year 3 are as follows: (a) On 2 March, a typewriter (classed as office equipment) is bought by drawing a

cheque on the bank for £150.

(Purchase of an asset, with payment by cheque.)

(b) On 4 March, goods are bought from T Smith on credit for £500. (Purchase of an asset on credit.)

(c) On 9 March, Lim sells some of the goods that had cost £200 for the same amount, receiving a cheque in exchange.

(Sale of asset, with immediate payment.)

(13)

(d) On 12 March, Lim sells some goods that had cost £200 to K Woolf ‘on credit’ for the same amount.

(Sale of asset on credit.)

(e) On 16 March, Lim sends a cheque for £300 towards the amount owing to T Smith. (Payment of an amount owing.)

(f) On 21 March, Lim receives a cheque for £200 from his debtor, K Woolf. (Receipt of money from a debtor.)

3 Use the following example to show the effect of transaction (a) on F Lim’s balance sheet:

F Lim

£ £

Office equipment (+ 150) 150 Loan from J Black 1,000 Motor vehicle 5,300

Cash at bank (- 150) 1,750

8,000 8,000

This example shows that only the assets have changed.

4 Use the following example to show the effect of transaction (b) on the balance sheet:

F Lim

£ £

Office equipment 150 Loan from J Black 1,000

Motor vehicle 5,300 Creditor – T Smith 500

Goods 500

Cash at bank 1,750

8,500 8,500

This balance sheet shows that both the assets and liabilities have increased.

5 Use the following example to show the effect on the balance sheet after transaction (c):

F Lim

£ £

Goods (- 200) 300

Cash at bank (+ 200) 1,950

8,500 8,500

Here, there has been a switch between two assets.

(14)

6 Use the following to show the effect after transaction (d):

F Lim

£ £

Goods (-200) 100

Debtor – K Woolf (+ 200) 200 Cash at bank 1,950

8,500 8,500

From this balance sheet, a change of assets can be seen.

7 Use the following to show the effect after transaction (e):

F Lim

£ £

Motor vehicle 5,300 Creditor – T Smith (-300) 200 Goods 100

Debtor – K Woolf 200 Cash at bank (- 300) 1,650

8,200 8,200

From this balance sheet, a reduction in assets matched by a reduction in liabilities can be seen.

8 Use the following to show the effect after transaction (f ):

F Lim

£ £

Office equipment 150 Loan from J Black 1000

Goods 100 Cash at bank (+ 200) 1,850

8,200 8,200

Here, there is a change of assets: an increase in bank and the removal of the debtor balance from the balance sheet.

(15)

9 A list of terms and their definitions follows. Explain the terms to the students.

credit sales goods sold with payment to be received by an agreed future date

debtor a person or organization to whom goods have been sold on credit and from whom money is due

creditor a person or organization from whom goods have been bought on credit and to whom money is owed

on account payment towards an amount owing; part payment

It is vital that students understand the meaning of terms as they are used. For the following lessons, reference should be made to the Glossary on pages 321–5.

10 Explain that a transaction may involve a combination of assets or liabilities. For example, a motor vehicle is bought for £6,000.The purchase is paid for by:

(a) drawing on the bank account; and (b) a loan from Birclays Finance Limited. Consequently:

Assets Liabilities

£ £

+ 6,000 Motor vehicle Birclays Finance Limited + 4,000 - 2,000 Bank

4,000 4,000

11 Emphasize the equation:

assets = capital + liabilities

12 Give the students each a copy of exercises T/1.1, T/1.2, and T/1.3 in the Appendix (page 201) and ask them to work through them.

Step 6

1 Explain the necessity of keeping separate accounts for information and control needs. Updating the balance sheet each time a transaction occurs takes up too much time; keeping separate accounts is a quicker and clearer method of updating records.

(16)

2 Explain that the two-sided form of recording accounts (which has long been in use) is to be followed:

3 Set out the rules for double entry, which are as follows, on the overhead projector or whiteboard:

Assets an increase debit

a decrease credit

Liabilities an increase credit

a decrease debit

Capital an increase credit

a decrease debit

Alternatively, you may show the following layout:

4 Emphasize that the purpose of debit and credit is to allow for the two-fold effect of each transaction. Always ensure that, for each transaction, students understand the logic of the entries. By making sure that the logic is clear, the account entries will have mean-ing, helping the students to avoid making mistakes.

5 Explain the form of entries for T-type accounts thoroughly. Illustrate the following layout on the whiteboard or overhead projector:

Dr Cr

Date Details £ Date Details £

The ‘details’ column should always show the name of the matching account (ie where the double entry is completed) eg:

Asset account increases decreases + -Liability account decreases increases - + Capital account decreases increases - +

Left-hand side Right-hand side

= debit side = credit side

(17)

Bank Year 6 £ 1 Jul Capital 10,000 Capital Year 6 £ 1 Jul Bank 10,000

6 Work through the exercise below with the students. For each transaction: (a) emphasize the transaction effect;

(b) stress how the double entry is achieved.

Exercise

(i) Gladys Lane sets up in business on 1 July Year 6 by placing £10,000 into a new business bank account.

(ii) On 4 July Year 6, she buys office equipment, paying £400 by cheque. (iii) On 7 July Year 6, she buys goods from Landau Limited for £360 on credit. (iv) On 26 July Year 6, Gladys Lane pays the amount owing to Landau Limited by

cheque.

Solution

Bank

Year 6 £ Year 6 £

1 Jul Capital 10,000 4 Jul Office equipment 400

26 Jul Landau Ltd 360 Capital Year 6 £ 1 Jul Bank 10,000 Office equipment Year 6 £ 4 Jul Bank 400 Goods Year 6 £ 7 Jul Landau Ltd 360 Landau Limited Year 6 £ Year 6 £

26 Jul Bank 360 7 Jul Goods 360

(18)

7 Emphasize that entries in accounts should not be cramped together, but should be clearly spaced without being too far apart.

8 Remind the students that, in making the entries, they need to: (a) record the date correctly; and

(b) correctly enter the name of the related account in the ‘details’ column.

9 Stress that, in the examination, marks may be lost if account entries are poor.An example of an avoidable error is writing the word ‘Cheque’ instead of ‘Bank’ for the name of the matching account, when ‘Cheque’ is not the name of the account.

10 Ask the students to work through exercises T/1.4 and T/1.5 in the Appendix (page 202).

(19)

Lesson 2: Purchases, sales, and returns

The approach adopted in the students’ book, How to Pass Book-keeping, First Level, is to explain the reasons for particular book-keeping methods and to build up understanding of the subject progressively. This approach may mean using a simplified method on a certain matter at one stage to avoid introducing too many points at once. Later, that simplified method might need to be modified as more features are covered. This approach applies because this session deals with the entries concerning purchases and sales.

Step 1

1 Explain that the term ‘goods’ is used for goods bought as part of trade, for selling in due course. The buying and selling of office furniture, motor vehicles, etc, for use in the business, is not included under goods: they are shown separately.

Topic summary

● The various meanings of the term ‘purchases’ ● Account entries for purchases and sales transactions ● The return of goods: allowances

● Account entries for returns inwards and outwards

5.1 The various possible accounting meanings of the term purchases 5.2 The effects on (double-entry) accounts of purchases of goods:

5.2.1 for cash 5.2.2 on credit

5.3 The effects on (double-entry) accounts of the sale of goods/services: 5.3.1 for cash

5.3.2 on credit

5.4 The process of the return of goods previously bought or sold (or alternatively of an allowance being made in lieu of actual return of goods)

5.5 Use of the term Returns, both inwards and outwards; the alternative terms in use 5.6 The effects on (double-entry) accounts of the return of goods (or of an allowance

being made for the defective supply of goods/services)

(20)

2 Goods are now to be divided into:

● purchases; and ● sales

with a separate account for each.This division gives more information and helps to keep control of the business.

3 Describe the various meanings of the term ‘purchases’, that they are: (a) goods bought to sell, ie as part of trading;

(b) goods bought to use in the manufacture and/or retailing of other goods.

Stress that just the word ‘purchases’ or the words ‘bought goods’ are referring to a part of trading.

4 You may also give the students the alternative terms below.

(a) Purchases ‘for cash’ which are bought with immediate payment.The payment may be in cash or it may be by drawing on a bank account.

(b) Purchases ‘on credit’ which are bought with payment to be made at a later date.

Step 2

1 Purchase of goods for cash

Show the students the following example to illustrate the account entries made for the purchase of goods for cash.

Example

In the account entries given below, goods were bought on 15 March Year 3 for £295 and paid for by cheque, which can be understood as immediate payment.

Purchases Year 3 £ 15 Mar Bank 295 Bank Year 3 £ 15 Mar Purchases 295

Purchases, sales, and returns

Aim: to be able to record in double-entry form the purchase and the sale of goods for cash and on credit

(21)

This involves:

● addition to purchases = debit ● deduction from bank = credit

2 Purchase of goods on credit

Show the students the following example to illustrate the account entries made for the purchase of goods on credit.

Example

In the account entries that follow, goods were bought on credit, at 19 March Year 3, from L Johnson for £614.

Purchases Year 3 £ 19 Mar L Johnson 614 L Johnson Year 3 £ 19 Mar Purchases 614

A liability has arisen, so a credit entry is made in the account for Johnson, who is a ‘creditor’.

3 Work through the following exercise with the students.

Exercise Year 7

3 Mar Purchased goods by cheque £915

12 Mar Purchased goods from T Watling on credit £736 30 Mar Paid by cheque the amount due to T Watling

Enter these transactions, as shown below, carefully reviewing each double entry before moving on to the next one.

Purchases Year 7 £ 3 Mar Bank 915 12 Mar T Watling 736 Bank Year 7 £ 3 Mar Purchases 915 30 Mar T Watling 736 (continued)

(22)

T Watling

Year 7 £ Year 7 £

30 Mar Bank 736 12 Mar Purchases 736

4 Sales

Any sale of goods is entered in a separate Sales Account.The account includes both cash sales and credit sales. Remember to point out that the account only includes the sale of goods that the firm trades in.

5 Sales for cash

Show the students the following example to illustrate the account entries made for sales for cash.

Example

At 21 March Year 3, goods were sold for £312 cash.

Sales Year 3 £ 21 Mar Cash 312 Cash Year 3 £ 21 Mar Sales 312

Emphasize that the entry in the Sales Account corresponds to what, so far, has been entered in the Goods Account, ie a credit entry.

Note

The Cash Account is for recording the receipt and payment of bank notes or coins. Transfers between the Bank Account and the Cash Account are made periodically.

6 Sales on credit

Show the students the following example to illustrate the account entries made for sales on credit.

Example

At 23 March Year 3, goods were sold to L Fell on credit for £260.

Sales

Year 3 £

23 Mar L Fell 260

Year 3 £

23 Mar Sales 260

(23)

7 To reinforce the students’ understanding, show the following summary of the entries below for a credit sale (preferably on the overhead projector):

(a) When a credit sale is made, the book-keeper should:

● debit the customer’s (debtor’s) account; and ● credit the Sales Account.

(b) When payment is received from the debtor, the book-keeper should:

● debit the Bank Account or Cash Account (depending on how the debtor pays,

whether by cheque or cash); and

● credit the debtor’s account.

Note

Point out that the Purchases Account and the Sales Account have now replaced the Goods Account.

8 Ask the students to work through the exercise below.

Exercise Year 7

6 Mar Sold goods for cash £327

15 Mar Sold goods to J Bean on credit £512

31 Mar Received cheque from J Bean in payment of the amount due

The transactions should be entered by the students as shown below. Review the transactions one by one (see below), ensuring that the concept of double entry is fully understood. Sales Year 7 £ 6 Mar Cash 327 15 Mar J Bean 512 Cash Year 7 £ 6 Mar Sales 327 J Bean Year 7 £ Year 7 £

15 Mar Sales 512 31 Mar Bank 512

Bank

Year 7 £

31 Mar J Bean 512

(24)

Step 3

1 Explain that purchased goods are sometimes returned to the supplier. Ask why this might be so.

2 Explain that an allowance is made by the supplier, ie that the amount of the return is set against the purchase amount.

3 Show that the returns are recorded in a separate account, called the Returns Outwards Account, using this example:

At 24 March Year 3, goods are returned to L Johnson for which £70 is allowed.

Returns outwards

Year 3 £

24 Mar L Johnson 70

L Johnson

Year 3 £ Year 3 £

24 Mar Returns outwards 70 19 Mar Purchases 614

4 Explain that the £70 credit in the Returns Outwards Account offsets the £614 previously shown on the debit of purchases. Ask the students to explain the two entries in Johnson’s account.

5 Explain that the opposite can occur: ie goods that have been sold may be returned by a customer, for which an allowance is given. For example, on 27 March Year 3, L Fell returns the goods sold to him on 23 March.

This occurrence is the reverse of a sale, so it is termed ‘returns inwards’. Ask the students to show the two entries for the returns inwards.Their accounts should look like the one below. Returns inwards Year 3 £ 27 Mar L Fell 260 L Fell Year 3 £ Year 3 £

23 Mar Sales 260 27 Mar Returns inwards 260

Aim: to understand the nature of ‘returns’ and to be able to make the required book-keeping entries

(25)

6 Hand out copies of, or show on the overhead projector, exercise T/2.1 in the Appendix (page 203). Ask the students to work through the exercise.

7 Review student answers, drawing attention to items (c) and (f ), in T/2.1, which involve assets for use in the business. Neither of these will be recorded in the Purchases Account.

Step 4

Below are a series of questions that you should ask the students, together with the answers.

1 Question (a)

What is the difference in wording between the two returns examples?

Answers

● The example 24 March specifically states that an allowance is made and the amount. ● The example 27 March merely states that the goods previously sold are returned.

If a question is worded as it is above, the students should assume that the amount of the original sale is fully allowed.

2 Question (b)

What is the reason for keeping separate returns accounts instead of making the entries in the Purchases or Sales Accounts?

Answer

The reason is to have separate totals for returns, otherwise the information would be ‘hidden’ in the Purchases or Sales Account.

3 Question (c)

What might be the various reasons for the return of goods?

Answers

The goods might be returned because:

● the wrong articles were sent; ● they were damaged in transit;

● they are not what was shown in the catalogue; ● parts do not fit.

(26)

4 Question (d)

When might an allowance be given although the goods are not returned?

Answers

When the goods:

● _{are difficult to repack or transport; or} ● _{are costly to send back.}

Stress that, provided an allowance is given, the book-keeping effect is the same as if the goods are actually returned.

5 Check that the students know the alternative names for the accounts, that they may be called:

● _{returns outwards or purchases returns;} ● _{returns inwards or sales returns.}

6 Hand out copies of, or show on the overhead projector, exercises T/2.3 and T/2.4 in the Appendix (pages 203 and 204). Ask the students to work through them.

(27)

Lesson 3: Expenses: profit or loss

This lesson is diverse in its content. All the topics are ones that can feature as elements in examination questions. With careful explanation and the familiarity that follows from practice, these subject areas need not be a cause of major difficulty.

Step 1

1 Suggest to the class a small business situation and ask what types of expense would be incurred, such as:

● employee wages;

● rent of the premises; and ● advertising.

Point out that the aim of setting up a business is to make a profit, ie a surplus:

sales less expenses = profit

Aim: to appreciate the nature and types of business expense and the book-keeping entries required

Topic summary

● The nature and types of ‘expense’

● Combination-type transactions: account entries ● Recording the withdrawal of profit by ‘drawings’

● Profit as the difference between opening and closing capital

18.1 Profit (or loss) as the difference between opening and closing capital balances; allowing for any drawings or the introduction of additional capital

18.2 The meaning of the term drawings; the various forms of drawings 18.3 The book-keeping entries for drawings

(28)

2 When you explain about recording expenses in the accounts, develop the concept of ‘paying as you go’. Illustrate the concept by contrasting, for example, renting premises and purchasing a building, which ties up money.

3 Liken expenses such as rent to very temporary assets; for instance, a purchased asset is debited to the asset account; similarly, an expense account is debited.

4 Explain that it is necessary to have several expense accounts, eg insurance, wages, office cleaning, office expenses, heating and lighting. One account for each category of expenditure helps to provide more information and improve control.

The following example illustrates the basic account entries relating to an expense item:

Example

At 28 March Year 3, insurance on a motor vehicle, costing £110 for the next 6 months, is paid by cheque. Insurance Year 3 £ 28 Mar Bank 110 Bank Year 3 £ 28 Mar Insurance 110

This can be explained as:

Cr = reduction of an asset (bank)

Dr = acquisition of a (temporary) asset, ie insurance ‘cover’ for a fixed period of time.

5 Copy and hand out or show exercises T/3.1 and T/3.2 in the Appendix (page 204) on the overhead projector. Ask the students to work through them.

Step 2

1 In Lesson 1, Step 5, reference was made to the possibility of a transaction involving a combination of assets and/or a combination of liabilities. In a combination-type transaction, the effect on one account side will be matched by a combination of two (or possibly more) effects on the other side. Use the following example to illustrate a combination-type transaction.

Expenses: profit or loss

Aim: to be familiar with combination-type transactions and to be able to make appropriate book-keeping entries

(29)

Example

At 14 April Year 6, a motor vehicle was purchased for £6,800 from Lagonda Garages. A payment of £2,000 was made by cheque and the balance on credit.

Assets Liabilities

£ £

+ 6,800 Increased by amount of Creditor – Lagonda Garages + 4,800 motor vehicle

- 2,000 Bank balance is reduced

+ 4,800 + 4,800

The accounts will appear as follows:

Motor Vehicle

Year 6 £

14 Apr Bank and Lagonda

Garages 6,800

Bank

Year 6 £

14 Apr Motor vehicle 2,000 Lagonda Garages

Year 6 £

14 Apr Motor vehicle 4,800

2 Copy and hand out or show exercise T/3.3 in the Appendix (page 205) on the overhead projector. Ask the students to work through the exercise.

Step 3

1 If the owner takes money out of the business for private use this results in a reduction of capital. Explain that the owner may draw out money in anticipation of the profits for the year, ie to pay for personal living expenses. If the owner’s withdrawals are more than the business’s profits, then capital is reduced.

2 Drawings are recorded in a separate account, further enabling the accounts to provide as much information as possible. Use the example overleaf to demonstrate this point.

(30)

Example

At 6 April Year 3, Joe Seng, the owner, withdrew £170 in cash for his own use.

Cash Year 3 £ 6 Apr Drawings 170 Drawings Year 3 £ 6 Apr Cash 170

3 Explain that, at the end of the year, the Drawings Account will be closed off to the Capital Account.

4 Point out that several drawings might be made over the course of the year and that the drawings could take forms other than cash. For example, the owner may take some of the business’s goods for personal use.

Step 4

1 The profit of a business for a given year might be obtained as follows:

profit for the year = number of transactions less expenses x profit on each for the year

transaction

or as

profit = capital at end of the year less capital at start of the year or increase of capital over the year

Alternatively, give the students the following formula:

start-of-year plus profit* = end-of-year

capital (or loss) capital

*or profit after deduction of drawings

(31)

Lesson 4: Balancing accounts: the trial balance

This lesson deals with the practical matter of the layout of accounts, including an alternative format. It is worthwhile giving time to this topic: marks may be lost in the examination if accounts are presented poorly.

The lesson also discusses a straightforward method of checking that all double entries have been completed satisfactorily.This checking is done by the preparation of a trial balance.

Step 1

1 Show that the balance on an account is the amount by which one side is greater than the other:

Aim: to be able to balance accounts and to recognize the significance of individual balances

Topic summary

● The balancing of accounts ● Running balance account format ● The preparation of a trial balance

3.1 The meaning of the term account balance 3.2 Balancing the T-type ledger account, including:

3.2.1 bringing the balance down for the start of the next accounting period 3.2.2 dealing with the nil balance

3.3 The significance of any particular account balance, eg a credit balance on a creditor account, a debit balance on an expense account

3.4 The significance of the term running balance account 3.5 The preparation of accounts in running balance form

3.7 The procedure for other end-of-period balancing, and ruling off, of accounts 11.1 The purpose of the trial balance

(32)

X expense account

Dr Cr

Year 3 £ Year 3 £

Entries totalling 680 Entries totalling 600

Here, there is a debit (Dr) balance of £80. The full balancing of this account at 31 March Year 3 is as follows:

X expense account

Year 3 £ Year 3 £

31 Mar Balance c/d 80

680 680

1 Apr Balance b/d 80

The balance is first carried down (c/d) and then brought down (b/d), which should always be done and not merely entered on one side.To fail to bring down the balance is to break the double-entry rule.

2 Ask the students to write out and then balance the following creditor account:

K Jacques

Year 5 £ Year 5 £

7 May Returns outwards 50 3 May Purchases 620

28 May Bank 570 21 May Purchases 415

3 Explain a ‘nil’ balance:

F Wiles

Year 6 £ Year 6 £

4 July Sales 370 12 July Returns inwards 40

29 July Bank 330

370 370

Or a variation on the nil balance:

T Stone

Year 6 £ Year 6 £

9 Aug 470 26 Aug Bank 470

Point out that no totals are required in this instance; just two lines under the figures.

4 Hand out copies of, or show on the overhead projector, exercises T/4.1 and T/4.2 in the Appendix (page 206). Ask the students to work through them.

Balancing accounts: the trial balance

(33)

Step 2

1 Emphasize that, so far, the format used for the accounts has been two-sided, ie:

Balances are calculated at the end of a fixed period – usually monthly for debtors and creditors; annually in some other cases; and so on.This layout does not reveal the balance easily or quickly. However, the running-balance format, which is a three-column layout, shows the balance after each transaction is entered. It is used by banks in the (monthly) statements they issue to customers.

2 An example of an account in running-balance format is included in the Appendix (see T/4.3, page 207). Point out that this example is not a specimen of the statements issued by banks. It is an example of the bank account as kept by the customer of the bank.

3 Explain the format, emphasizing that as each transaction is entered the balance on the account is brought up to date. Stress that the notation, either ‘Dr’ or ‘Cr’, must be shown beside the balance figure.

4 Ask the students to show T/4.3 as a two-sided layout, ie the format previously used in this course.Then compare running-balance format with the two-sided layout.

Exercise

Required

Using the information in T/4.2 (page 206), prepare debtor and creditor accounts in running-balance format.

Step 3

1 Work through exercise T/4.4 in the Appendix (page 207) with the students, following the instructions below.

(a) Enter the transactions in appropriate accounts.

Balancing accounts: the trial balance

Aim: to appreciate and to be able to apply the running-balance format

Left-hand side Right-hand side

debits credits

(Dr) (Cr)

(34)

(b) Check with the class that the total of the debit entries equals the total of the credit entries.The total should be £27,220.

(c) Next ask the students to enter in pencil, in the margin, the balance on each account – either debit or credit.

(d) Now list these balances; the total of the debit balances should agree with the total of the credit balances. A trial balance has been produced.

2 Explain that the trial balance is used to check that double entry has been done correctly. If the totals of the two sides of the trial balance are in agreement, then entries have been made accurately. It does not, however, prove that. For example, transactions could have been omitted entirely.This limitation will be considered further in Lesson 21 (see entry 11.5 in the Extended Syllabus).

3 Hand out copies of, or show on the overhead projector, exercises T/4.5 and T/4.6 in the Appendix (page 208). Ask the students to work through them.

4 Show the class the following account, which is an example of a candidate’s solution to an examination question:

F Leonard

Year 5 £ Year 5 £

10 Apr Returns outwards 30 6 Apr Purchases 418

10 Apr Returns outwards 30

In this case, a candidate has entered the transaction twice – a common mistake. One entry cancels the other for returns outwards.The examiner can only conclude that the candidate does not know how to deal with returns outwards. As a result, no marks will be given for either entry for 10 April.

(35)

Lesson 5: Trading and Profit & Loss Accounts

This lesson reviews the structure of income, cost, and profit, and their relationship to one another. It also deals with the concluding stage of a period’s activities, which involves establishing either a profit or a loss. Establishing a profit or loss and showing how they are reached are achieved through ‘final accounts’, a broadly used book-keeping term that covers, in part, the Trading and Profit & Loss Account.

Step 1

1 Explain the different classes of profit, that they are:

● gross profit – the excess of sales income over cost of goods sold; and ● net profit – gross profit less other costs.

Aim: to be able to prepare a Trading and Profit & Loss Account

Topic summary

● Structure of income, cost, and profit

● The preparation of Trading and Profit & Loss Accounts

3.6 The transfer of a balance at period end to Trading Account or Profit & Loss Account, as appropriate

19.1 The Trading and Profit & Loss Accounts as part of the double-entry system 19.2 The basic structure of income, costs, and profit in a business

19.5 The calculation of costs of goods sold

19.7 The difference between trading income and other income 19.8 The difference between gross profit and net profit

19.12 The double entries for expense amounts between the Profit & Loss Account and the individual expense accounts

(36)

2 Draw the students attention to the structure of income, costs, and profit as it is shown in Figure 5.1. ‘Other income’ is the income arising from sources other than normal trading activities, eg interest earned on money lent or rent receivable.The composition of total income is as follows:

total income = income from sales + other income (‘trading income’)

3 Ask the students to work through 2 small exercises on the structure of costs, see T/5.1* in the Appendix (page 209).

Step 2

1 To show the students how to prepare a Trading and Profit & Loss Account, give them each a copy of the trial balance of T Avis at 31 December Year 5 to work through.The trial balance is labelled T/5.2 in the Appendix (page 210). Work through the example of T Avis with the students as set out below.

Trading and Profit & Loss Accounts

Gross profit Net profit Income from sales = sales revenue Running expenses Cost of goods sold Other income

Figure 5.1 The structure of income, costs, and profit

(37)

2 The first stage of working through the trial balance involves preparing a Trading Account. Preparing a Trading Account requires a calculation of the cost of goods sold, which is:

The closing stock has yet to be brought into the accounts. There is no opening stock in this instance because Year 5 was the first year of trading for T Avis.

3 The significant accounts at this stage are the Purchases and Sales Accounts.These would appear as follows: Purchases Year 5 £ Sundries 5,160 Sales Year 5 £ Sundries 6,320

4 Stress the word ‘account’ in Trading and Profit & Loss Account: it is part of the double-entry system. For every double-entry made in the account, there must be a corresponding double-entry elsewhere in the account system.

5 Prepare the following Trading and Profit & Loss Account with the class, using the data in T/5.2 in the Appendix (page 210):

T Avis

Trading and Profit & Loss Account for the year ended 31 December Year 5

£ £

Purchases 5,160 Sales 6,320

Gross profit c/d 3,260 Stock at 31 December Year 5 2,100

8,420 8,420

Gross profit b/d 3,260

6 Show the double-entry effect in the Purchases and Sales Accounts:

Purchases

Year 5 £ Year 5 £

Sundries 5,160 31 Dec Trading 5,160

Sales

Year 5 £ Year 5 £

31 Dec Trading 6,320 Sundries 6,320

Trading and Profit & Loss Accounts

purchases less closing stock

both stated at cost price

(38)

7 The entry for stock (at 31 December Year 5) requires careful explanation. So far, only a credit entry has been made.To complete the double entry, a new account is opened:

Stock

Year 5 £

31 Dec Trading 2,100

8 It has been stated that purchases less closing stock equals the cost of goods sold. To reflect this fact, it is usual to deduct stock on the debit side in the Trading Account instead of entering the stock on the credit side. The effect on gross profit is the same. Therefore, the Trading Account, together with the Profit & Loss Account, becomes:

T Avis

£ £

less Stock, 31 December Year 5 2,100

Cost of goods sold 3,060

Gross profit c/d 3,260

6,320 6,320

Rent payable 700 Gross profit b/d 3,260

Office expenses 360 Rent receivable 450

Lighting and heating 420

Net profit 2,230

3,710 3,710

9 While compiling the above Profit & Loss Account, the expense and income accounts are closed off as follows:

Rent Payable

Year 5 £ Year 5 £

Sundries 700 31 Dec Profit and loss 700

Office Expenses

Year 5 £ Year 5 £

Lighting and Heating

Year 5 £ Year 5 £

Rent Receivable

Year 5 £ Year 5 £

31 Dec Profit and loss 450 Sundries 450

(39)

The double entry for gross profit is the credit to the Profit & Loss Account. The double entry for net profit is a credit to the Capital Account: ie profit increases capital.

10 The Drawings Account is closed off to Capital Account.

Capital

Year 5 £ Year 5 £

31 Dec Drawings 800 1 Jan Bank 4,000

31 Dec Balance c/d 5,430 31 Dec Profit and loss:

net profit 2,230 6,230 6,230 Year 6 1 Jan Balance b/d 5,430 Drawings Year 5 £ Year 5 £

Sundries 800 31 Dec Capital 800

Note

Many examination answers show closing stock as a credit entry in the Trading Account, instead of as a deduction on the left-hand side. As a consequence of this error, students lose a mark because they fail to show the cost of goods sold.

11 Copy and hand out or show exercises T/5.3 and T/5.4 in the Appendix (pages 211 and 212) on the overhead projector. Ask the students to work through them. Both exercises involve businesses in their first year of trading. Because the businesses are new, there is no opening stock, a topic that is dealt with in Lesson 7. Explain that the usual practice is to value closing stock at its cost price.This method is considered further in Lesson 23.

(40)

Lesson 6: The balance sheet

Two aspects of study concerning the balance sheet require attention. First, the students need to be able to appreciate the meaning of the contents of a balance sheet. Second, they should be able to prepare one that is meaningful, ie easily understood by the reader.

Step 1

1 Refer to the trial balance of T Avis at 31 December Year 5 (see page 210). If it has not already been done, the accounts of those items that have already been closed off (eg transferred to Profit & Loss Account) should be ticked. Those left are Capital and Drawings, together with the Asset and Liability Accounts. These accounts and the closing stock are shown in the following balance sheet.

Topic summary

● The main elements of the balance sheet and its overall purpose

● The distinction between fixed assets and current assets, and between longer-term

liabilities and amounts due within 1 year (current liabilities)

● The effective grouping of assets and liabilities within the balance sheet

20.1 The function of the balance sheet and, in particular, the recognition that it stands outside the double-entry system

20.2 The significance and use of the terms fixed assets and current assets

20.3 The difference between longer-term liabilities and amounts payable within 12 months (current liabilities); the naming of accounts which might appear under each of these headings

20.4 The preparation of a balance sheet in effective format 20.5 The appropriate grouping of items within the balance sheet:

20.5.1 fixed assets 20.5.2 current assets

20.5.3 capital (or proprietor’s interest) 20.5.4 longer-term liabilities

20.5.5 amounts payable within 12 months (current liabilities)

(41)

2 Draw out the purpose of the balance sheet; that it is to show the financial position of the business at the date the books are made up.

3 Compare the balance sheet with the Trading and Profit & Loss Account, which is a record of performance over a past fixed period (usually a year).

4 Explain that the two sides of the balance sheet should agree in total if the double-entry rule has been followed fully.

Note

The accounts that have been entered in the balance sheet have not been closed off, ie the balances remain on the accounts. The balance sheet is only a list of balances, it is a ‘statement’. It is not itself part of the double-entry system.

Step 2

1 Explain why it is necessary to group balance sheet items. Grouping the items:

● gives meaning to the balance sheet, showing that it is comprised of significant elements

and is not just an array of items;

● shows long-term versus short-term liabilities;

● shows different timescales among assets, some of which can be quickly turned into

cash (‘liquidity’); others represent money tied up, possibly for many years.

2 In discussing this, refer to the balance sheet above. Using the question-and-answer method, review the terms ‘fixed assets’ and ‘current assets’. Ask the students for examples of each.

The balance sheet

T Avis

Balance sheet at 31 December Year 5

Assets £ Capital £ £

Fixtures and fittings 800 Placed in bank

account 4,000

Motor vehicle 1,600 add Net profit 2,230

Stock of goods 2,100 less Drawings 800 1,430

Debtors 750 5,430

Cash at bank 1,040 Liability

Cash in office 50 Creditors 910

6,340 6,340

(42)

3 Stress that the recognized sequence of listing assets begins with the most permanent and ends with those most easily turned into cash. Demonstrate the sequence as shown below.

Fixed Assets Current Assets

Land and buildings from Stock

Fixtures and fittings highly Debtors increasing

Machinery fixed Bank liquidity

Motor vehicles to less Cash

fixed

Other assets will be introduced in due course.

4 Explain that, with fixed assets, the more permanent the assets are likely to be, the more ‘fixed’ they are considered to be, eg compare land and buildings with motor vehicles. The more ‘liquid’ an asset, the more easily it can be turned into cash: eg compare the bank balance with stock.

5 Review the normal sequence for capital and liabilities on the right-hand side of the balance sheet.The sequence appears as follows:

● capital;

● longer-term liabilities: ie amounts payable in more than 1 year, such as a 2-year

loan (2 years to repayment from the date of the balance sheet);

● amounts due within 1 year (or ‘current liabilities’), eg creditors, bank overdraft, or

short-term bank loan.

6 Present the balance sheet of T Avis, grouping and arranging the items in the way shown below.

T Avis

Fixed Assets £ £ Capital £ £

Fixtures and fittings 800 Placed in bank account 4,000

2,400 less Drawings 800 1,430

Current Assets 5,430

Stock 2,100 Amount due within 1 year

Debtors 750 (current liabilities)

Bank 1,040 Creditors 910

Cash 50 3,940

6,340 6,340

(43)

7 Stress the importance of a good balance-sheet layout. The items need to be suitably grouped and also in a suitable sequence within each group. Marks are lost when a balance sheet is presented poorly.

8 Hand out copies of, or show on the overhead projector, exercises T/6.1*, T/6.2*, T/6.3*, and T/6.4* in the Appendix (pages 212–15). Ask the students to work through them.

(44)

Lesson 7: Final accounts: more features

This lesson is concerned with some very practical and detailed matters that appear, from the answers elicited in examinations, to be given limited attention during the course of study. Carriage, in particular, would seem to be neglected. The Stock Account is also a major point of weakness. Candidates are usually able to record opening and closing stocks in the Trading Account – although not always in the most favourable position in the Trading Account. However, candidates may have difficulty in correctly recording the Stock Account itself.

Topic summary

● Period-end entries for returns inwards and outwards

● The different forms of carriage and how they are recorded in final accounts ● Opening and closing stock figures in the Stock Account and final accounts ● The review and application of the end-of-year procedure

3.6 The transfer of a balance at period end to Trading Account and Profit & Loss Account, as appropriate

3.7 The procedure for other end-of-period balancing, and ruling off, of accounts 19.3 Showing returns inwards and returns outwards suitably deducted to reveal net

sales and net purchases respectively

19.6 Showing the make-up of ‘cost of goods sold’

19.9 The function of the Stock Account and the double-entry relationship between the Trading Account and the Stock Account

19.10 End-of-period transfer of balances from the General Ledger to the Trading Account (Purchases Account, Sales Account, Returns Outwards Account, Returns Inwards Account)

19.11 The difference between carriage inwards and carrriage outwards and recording them in the Trading Account and Profit & Loss Account respectively

19.13 Showing income and expenses within the final accounts, with related items being suitably brought together

(45)

Step 1

1 Remind the students that the Goods Account is divided into Purchases, Sales, Returns Outwards, and Returns Inwards Accounts. This type of division has not yet been brought fully into the Trading Account.

Example

A trader in Year 3 has total returns outwards and returns inwards of £450 and £610 respectively.The Returns Accounts might appear as follows:

With the debit transfer (to the Trading Account) entry in the Returns Outwards Account, the matching entry would be expected to appear to the credit of the Trading Account. However, the entry does not appear as a credit, but as a deduction – from purchases – on the debit side. Conversely, returns inwards appears as a deduction – from sales – on the credit side of the Trading Account. The aim of showing returns as deductions is to provide a neater and more informative picture of what has happened. This might be seen in a Trading Account as follows:

Point out that £9,760 is the sum of the net purchases and that £20,640 is the sum of the net sales.

Inform the students that the layout shown for returns in J Blunt’s Trading Account will always be followed from now onwards.

Final accounts: more features

Aim: to be able to show period-end entries for returns inwards and outwards

Returns Outwards

Year 3 £ Year 3 £

31 Dec Trading 450 Sundries 450

Returns Inwards

Year 3 £ Year 3 £

Sundries 610 31 Dec Trading 610

J Blunt Trading Account

for the year ended 31 December Year 3

£ £

less Returns outwards 540 less Returns inwards 760

9,760 20,640

less Stock at 31 Dec Year 3 2,100

Gross profit 12,980

(46)

Exercise

Required

Prepare a Trading Account for F Waldron for the year ended 31 December Year 5 from the following details:

£

Purchases 17,300

Sales 37,850

Returns inwards 1,320

Returns outwards 870

Stock at 31 Dec Year 5 3,200

Solution

Step 2

1 Explain carefully the nature of carriage; that carriage is an expense incurred in, or charge made for, the delivery of goods.

2 Make the distinction clear between carriage inwards and carriage outwards: (a) Carriage inwards

Carriage on goods coming into the firm, ie on purchases. Instead of paying an inclusive price for purchases that covers carriage, a separate charge is made. Therefore, carriage is added to the cost of purchases and is included in the Trading Account.

F Waldron Trading Account

for the year ended 31 December Year 5

£ £

less Returns outwards 870 less Returns outwards 1,320

16,430 36,530

Gross profit 23,300

36,530 36,530

Aim: to appreciate the different forms of carriage as an expense and how they are recorded in final accounts

(47)

(b) Carriage outwards

Carriage on goods going out of the firm, ie on sales. It is regarded as a cost of distributing goods to customers and is entered as a separate item in the Profit & Loss Account.

The layout of purchases including adjustments (using different figures) is as follows:

The adjustments for purchases and sales may be summarized as follows: Net sales = Sales less returns inwards

Net purchases = Purchase plus carriage inwards less returns outwards

Step 3

1 So far, these studies have been limited to the first year of trading, ie there has been no opening-stock figure. From the second year, there will be 2 stock figures: for example, the closing stock at 31 December Year 5 becomes the opening stock at 1 January Year 6.

2 Use the situation of T Avis as an example again (see T/7.2 in the Appendix, page 216). T Avis has prepared a trial balance at the end of his second year of trading.Work through the Trading and Profit & Loss Account, and the balance sheet, with the class.

£

Purchases 12,800

add Carriage inwards 430

13,230

less Returns outwards 520

12,710

less Closing stock 1,980

Aim: to be able to record opening and closing stock figures in the Stock Account and final accounts

(48)

3 Show the Stock Account for T Avis for his first and second years as follows:

T Avis

£ £ £

Stock at 1 Jan Year 6 2,100 Sales 13,050

Purchases 9,260 less Returns inwards 480

12,570

add Carriage inwards 430

9,690

less Returns outwards 340 9,350

11,450

Gross profit c/d 3,570

12,570 12,570

Rent payable 1,100 Gross profit b/d 3,570

Office expenses 590 Rent receivable 450

Lighting and heating 610

Carriage outwards 380

Net profit 1,340

4,020 4,020

£ £ £ £

Fixed Assets Capital

Fixtures and fittings 900 Balance at 1 Jan Year 6 5,430

2,500 less drawings 1,100 240

Current Assets 5,670

Stock 2,450

Debtors 1,170 Amount due within 1 year

Bank 1,230 Creditors 1,750

Cash 70 4,920

7,420 7,420

Stock

£ Year 5 £

Trading 2,100 31 Dec Balance c/d 2,100

Year 6 Year 6

1 Jan Balance b/d 2,100 31 Dec Trading 2,100

31 Dec Trading 2,450 31 Dec Balance c/d 2,450

Year 7

1 Jan Balance b/d 2,450 Year 5

(49)

4 Explain that the Stock Account is used only to carry the figure for the balance of stock from one year to the next. No transactions are entered into this account. It is a ‘holding’ account only.

5 Draw attention to the entry at 31 December Year 5 (encircled).This entry is frequently entered at 1 January Year 6. The correct way to enter it is as 31 December Year 5 initially and then to carry it down, as shown above.

6 Ask the students to work through the following exercise:

Exercise

Stock at 31 Mar Year 6 £31,680 Stock at 31 Mar Year 7 £34,270

Required

Show the Stock Account for the period 31 March Year 6 to 1 April Year 7.

Note

The stock at 1 April Year 6 is the same as the stock at 31 March Year 6.

Solution

Stock

Year 6 £ Year 6 £

31 Mar Trading 31,680 31 Mar Balance c/d 31,680

Year 7

1 Apr Balance b/d 31,680 31 Mar Trading 31,680

Year 7

31 Mar Trading 34,270 31 Mar Balance c/d 34,270

1 Apr Balance b/d 34,270

7 Copy and hand out or show exercises T/7.3 and T/7.4 in the Appendix (page 217) on the overhead projector. Ask the students to work through them.

Step 4

1 Review the end-of-year procedure by showing Figure 7.1 (overleaf) on the overhead projector. See also T/7.5 in the Appendix (page 218).

2 Draw the students’ attention to points (a) to (c) overleaf, which are highlighted by Figure 7.1.

Book-Keeping L1 TG

How to Pass

Book-keeping

FIRST LEVEL

Teacher’s Guide

Keith F Bird

Contents

About the author

Introduction

Cross-references to How to Pass Book-keeping,

First Level (student’s book)

Lesson 1: The accounting equation

Transactions through ‘double entry’

Topic summary

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Lesson 2: Purchases, sales, and returns

Step 1

Topic summary

Step 2

Step 3

Step 4

Lesson 3: Expenses: profit or loss

Step 1

Topic summary

Step 2

Step 3

Step 4

Lesson 4: Balancing accounts: the trial balance

Step 1

Topic summary

Step 2

Step 3

Lesson 5: Trading and Profit & Loss Accounts

Step 1

Topic summary

Step 2

Lesson 6: The balance sheet

Step 1

Topic summary

Step 2

Lesson 7: Final accounts: more features

Topic summary

Step 1

Step 2

Step 3

Step 4