AS Accounting for AQA

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a n s w e r s t o s e l e c t e d q u e s t i o n s i n t h e t e x t b o o k

AS Unit 1

Introduction to Financial Accounting

1 What is financial accounting? 1

2 Double-entry book-keeping: first principles 1

3 Double-entry book-keeping: further transactions 3

4 Business documents 5

5 Balancing accounts – the trial balance 7

6 Division of the ledger – the use of subsidiary books 9

7 The main cash book 11

8 Bank reconciliation statements 12

9 Introduction to final accounts 14

10 The general journal and correction of errors 15

11 Control accounts 18

12 Adjustments to final accounts 19

AS Unit 2

Financial and Management Accounting

13 Business organisations 21

14 Accounting concepts and inventory valuation 22

15 Further aspects of final accounts 23

16 Preparing sole trader final accounts 25

17 Financial statements of limited companies 28

18 Ratio analysis 31

19 Budgeting and budgetary control 34

20 The impact of computer technology in accounting 36

AS Accounting for AQA

second edition

TUTOR SUPPORT MATERIAL:

ANSWERS TO SELECTED QUESTIONS

All answers are the responsibility of the publisher. Published by Osborne Books Limited

Tel 01905 748071

Email [email protected] www.osbornebooks.co.uk

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1.2 Purposes of accounting:

1. To quantify items such as sales, expenses and profit

2. To present the accounts in a meaningful way so as to measure the success of the business 3. To provide information to the owner of the business and to other stakeholders

1.3 • documents

processing of source documents relating to accounting transactions • initial recording of transactions

recording accounting transactions in subsidiary books (or books of prime entry) • double-entry accounts system

transfer from subsidiary books into the double-entry book-keeping system of accounts in the ledger • trial balance

extraction of figures from all the double-entry accounts to check their accuracy • final accounts

production of an income statement and a balance sheet Information from the accounting system includes:

• purchases of goods for resale to date • assets owned • turnover (cash and credit sales) to date • liabilities owed

• overheads and expenses to date • profit during a particular period • trade receivables – total amount owed to the business, and individual trade receivables • trade payables – total amount owed by the business, and individual trade payables 1.4 Other stakeholders – any fourfrom

• providers of finance, eg the bank manager if the business wants to borrow from the bank • suppliers, who wish to assess the likelihood of receiving payment from the business

• customers, who wish to ensure that the business has the financial strength to continue selling the goods and services that they buy

• employees and trade unions, who wish to check on the financial prospects of the business • the tax authorities, who will wish to see that tax due by the business on profits and for Value Added

Tax has been paid

• competitors, who wish to assess the profitability of the business • potential investors in the business

• the local community and national interest groups, who may be seeking to influence business policy • government and official bodies, eg Companies House who need to see the final accounts of limited

companies

1.5 (a) Business entity – the accounts record and report on the financial transactions of a particular business, and not the owner's personal financial transactions.

(b) Money measurement– the accounting system uses money as the common denominator in recording and reporting all business transactions; thus the loyalty of a firm's workforce or the quality of a product cannot be recorded because these cannot be reported in money terms.

1.6 • assets – items owned by a business; liabilities – items owed by a business

• trade receivables – individuals or businesses who owe money in respect of goods or services supplied by the business; trade payables – individuals or businesses to whom money is owed by the business • purchases – goods bought, whether on credit or for cash, which are intended to be resold later; sales

– the sale of goods, whether on credit or for cash, in which the business trades

• credit purchases – goods bought, with payment to be made at a later date; cash purchases – goods bought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer

1.7 • asset of bank increases by £8,000 capital increases by £8,000

asset £8,000 – liability £0 = capital £8,000 • asset of computer increases by £4,000

asset of bank decreases by £4,000 asset £8,000 – liability £0 = capital £8,000 • asset of bank increases by £3,000

liability of loan increases by £3,000

asset £11,000 – liability £3,000 = capital £8,000 • asset of van increases by £6,000

asset of bank decreases by £6,000

asset £11,000 – liability £3,000 = capital £8,000

2.1 Dr Capital Account Cr 20-1 £ 20-1 £ 1 Feb Bank 7,500 Dr Computer Account Cr 20-1 £ 20-1 £ 6 Feb Bank 2,000

Dr Rent Paid Account Cr

20-1 £ 20-1 £ 8 Feb Bank 750 Dr Wages Account Cr 20-1 £ 20-1 £ 12 Feb Bank 425 25 Feb Bank 380

Dr Bank Loan Account Cr

20-1 £ 20-1 £

14 Feb Bank 2,500

Dr Commission Income Account Cr

20-1 £ 20-1 £

20 Feb Bank 145

Dr Drawings Account Cr

20-1 £ 20-1 £

23 Feb Bank 200

CHAPTER 1 What is financial accounting?

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Dr Van Account Cr

20-1 £ 20-1 £

28 Feb Bank 6,000

2.3 Dr Bank Account Cr

20-5 £ 20-5 £

1 Aug Capital 5,000 3 Aug Computer 1,800

15 Aug S Orton: loan 1,000 7 Aug Rent paid 100

20 Aug Office fittings 250 12 Aug Office fittings 2,000

25 Aug Commission received 150 27 Aug S Orton: loan 150

Dr Capital Account Cr 20-5 £ 20-5 £ 1 Aug Bank 5,000 Dr Computer Account Cr 20-5 £ 20-5 £ 3 Aug Bank 1,800

20-5 £ 20-5 £

7 Aug Bank 100

20-5 £ 20-5 £

10 Aug Cash 200

25 Aug Bank 150

Dr Cash Account Cr

20-5 £ 20-5 £

10 Aug Commission received 200 17 Aug Drawings 100

Dr Office Fittings Account Cr

20-5 £ 20-5 £

12 Aug Bank 2,000 20 Aug Bank 250

Dr Sally Orton: Loan Account Cr

20-5 £ 20-5 £

27 Aug Bank 150 15 Aug Bank 1,000

Dr Drawings Account Cr

20-5 £ 20-5 £

17 Aug Cash 100

20-7 £ 20-7 £

1 Nov Capital 75,000 3 Nov Photocopier 2,500

7 Nov Bank loan 70,000 10 Nov Office premises 130,000

23 Nov Cash 100 12 Nov Business rates 3,000

25 Nov Office fittings 200 14 Nov Office fittings 1,500

28 Nov Commission received 200 20 Nov Wages 250

Dr Capital Account Cr 20-7 £ 20-7 £ 1 Nov Bank 75,000 Dr Photocopier Account Cr 20-7 £ 20-7 £ 3 Nov Bank 2,500

Dr Bank Loan Account Cr

20-7 £ 20-7 £

7 Nov Bank 70,000

Dr Office Premises Account Cr

20-7 £ 20-7 £

10 Nov Bank 130,000

Dr Rates Account Cr

20-7 £ 20-7 £

12 Nov Bank 3,000

Dr Office Fittings Account Cr

20-7 £ 20-7 £

14 Nov Bank 1,500 25 Nov Bank 200

20-7 £ 20-7 £

15 Nov Commission received 300 18 Nov Drawings 125

23 Nov Bank 100

20-7 £ 20-7 £ 15 Nov Cash 300 28 Nov Bank 200 Dr Drawings Account Cr 20-7 £ 20-7 £ 18 Nov Cash 125 Dr Wages Account Cr 20-7 £ 20-7 £ 20 Nov Bank 250

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2.6 Bank Account

20-7 Debit Credit Balance

£ £ £

1 Nov Capital 75,000 75,000 Dr

3 Nov Photocopier 2,500 72,500 Dr

7 Nov Bank loan 70,000 142,500 Dr

10 Nov Office premises 130,000 12,500 Dr

12 Nov Rates 3,000 9,500 Dr

14 Nov Office fittings 1,500 8,000 Dr

20 Nov Wages 250 7,750 Dr

23 Nov Cash 100 7,850 Dr

25 Nov Office fittings 200 8,050 Dr

28 Nov Commission received 200 8,250 Dr

2.7 Guidance to the trainee to include:

• the use of accounts to record different types of transactions

• the principles of double-entry book-keeping whereby one account is debited and one account is credited for every business transaction

• the debit entry is made in the account which gains value, or records an asset, or an expense • the credit entry is made in the account which gives value, or records a liability, or an income item • examples can be given using bank account where money in is recorded on the debit side, and money

out is recorded on the credit side

• an explanation of various accounts including

– capital – the amount of money invested in the business by the owner

– non-current assets – items purchased by a business for use on a long-term basis (noting the distinction between capital expenditure and revenue expenditure)

– expenses – the day-to-day running expenses (revenue expenditure) of the business – income – amounts of income received by the business

– owner’s drawings – where the owner takes money in cash or by cheque (or sometimes goods) from the business for personal use

– loans – where a business receives a loan, eg from a relative or the bank

20-2 £ 20-2 £

1 Oct Capital 2,500 2 Oct Purchases 200

4 Oct Sales 150 6 Oct Purchases 90

8 Oct Sales 125 14 Oct Purchases 250

12 Oct K Smithson: loan 2,000 22 Oct Delivery van 4,000

18 Oct Sales 155 25 Oct Wages 375

30 Oct Sales 110 Dr Capital Account Cr 20-2 £ 20-2 £ 1 Oct Bank 2,500 Dr Purchases Account Cr 20-2 £ 20-2 £ 2 Oct Bank 200 6 Oct Bank 90 14 Oct Bank 250 Dr Sales Account Cr 20-2 £ 20-2 £ 4 Oct Bank 150 8 Oct Bank 125 18 Oct Bank 155 30 Oct Bank 110

Dr J Smithson: Loan Account Cr

20-2 £ 20-2 £

12 Oct Bank 2,000

Dr Delivery Van Account Cr

20-2 £ 20-2 £ 22 Oct Bank 4,000 Dr Wages Account Cr 20-2 £ 20-2 £ 25 Oct Bank 375 3.5 Dr Purchases Account Cr 20-2 £ 20-2 £

2 Apr Wyvern Producers Ltd 200

4 Apr A Larsen 250

Dr Wyvern Producers Ltd Cr

20-2 £ 20-2 £

9 Apr Purchases returns 50 2 Apr Purchases 200

20 Apr Bank 150

Dr A Larsen Cr

20-2 £ 20-2 £

26 Apr Purchases returns 45 4 Apr Purchases 250

Dr Sales Account Cr

20-2 £ 20-2 £

5 Apr Pershore Patisserie 150

7 Apr Bank 175

12 Apr Bank 110

28 Apr Cash 100

Dr Pershore Patisserie Cr

20-2 £ 20-2 £

5 Apr Sales 150 15 Apr Sales returns 25

22 Apr Bank 125

Dr Bank Account Cr

20-2 £ 20-2 £

7 Apr Sales 175 20 Apr Wyvern Producers Ltd 150

12 Apr Sales 110 30 Apr Amery Scales Ltd 250

Dr Purchases Returns Account Cr

20-2 £ 20-2 £

9 Apr Wyvern Producers Ltd 50

26 Apr A Larsen 45

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Dr Sales Returns Account Cr

20-2 £ 20-2 £

Dr Weighing Machine Account Cr

20-2 £ 20-2 £

17 Apr Amery Scales Ltd 250

Dr Amery Scales Ltd Cr

20-2 £ 20-2 £

30 Apr Bank 250 17 Apr Weighing machine 250

20-2 £ 20-2 £

28 Apr Sales 100 29 Apr Wages 90

Dr Wages Account Cr 20-2 £ 20-2 £ 29 Apr Cash 90 3.6 Dr Purchases Account Cr 20-3 £ 20-3 £ 2 Jun Designs Ltd 350

7 Jun Mercia Knitwear Ltd 400

23 Jun Designs Ltd 285

Dr Designs Ltd Cr

20-3 £ 20-3 £

6 Jun Purchases returns 100 2 Jun Purchases 350

18 Jun Bank 250 23 Jun Purchases 285

20-3 £ 20-3 £

4 Jun Bank 220

5 Jun Cash 115

10 Jun Wyvern Trade Supplies 350

12 Jun Bank 175

20 Jun Cash 180

20-3 £ 20-3 £

4 Jun Sales 220 18 Jun Designs Ltd 250

12 Jun Sales 175

20-3 £ 20-3 £

5 Jun Sales 115 26 Jun Rent paid 125

20 Jun Sales 180

20-3 £ 20-3 £

6 Jun Designs Ltd 100

17 Jun Mercia Knitwear Ltd 80

Dr Mercia Knitwear Ltd Cr

20-3 £ 20-3 £

17 Jun Purchases returns 80 7 Jun Purchases 400

Dr Wyvern Trade Supplies Cr

20-3 £ 20-3 £

10 Jun Sales 350 15 Jun Sales returns 50

28 Jun Bank 300

20-3 £ 20-3 £

26 Jun Cash 125

3.7 Transaction Account debited Account credited

(a) purchases bank

(b) bank sales

(c) purchases Teme Traders

(d) L Harris sales

(e) Teme Traders purchases returns

(f) sales returns L Harris

(g) bank D Perkins: loan

(h) cash bank

3.8 Answers to the trainee:

• Separate accounts for purchases and sales enable the business to know the amount of goods bought and sold. A combined account for ‘goods’ would not provide this information so readily.

• Purchases and sales accounts follow the principles of book-keeping in that the debit side of purchases account gains value when the business buys goods for resale, while the credit side of sales account gives value when the business sells goods.

• The purchase of a new delivery van for use in the business is the purchase of a non-current asset, which will be used on a long-term basis. As such the purchase of the van – which is an example of capital expenditure – is entered on the debit side of van account.

• Purchases returns (or returns out) is where we return goods to a trade payable (supplier). The returns transaction is recorded the opposite way round to a purchases transaction.

Sales returns (or returns in) is where a trade receivable (customer) returns goods to us. The transaction is recorded the opposite way round to a sales transaction.

• Carriage inwards and carriage outwards are kept in separate accounts because they represent different transactions. Carriage inwards is where we pay the carriage cost of goods purchased to have them delivered to us. Carriage outwards is where we pay the carriage charge for goods we have sold, that is we have sold the goods to our customers as ‘delivery free’.

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4.2

Excel Fashions will pay £480.18 (£492.50 x 97.5%, rounded down) for settlement in full within 14 days.

4.3

The Card Shop will pay £185.25 (£190.00 x 97.5%) for settlement in full within 14 days.

invoice to

deliver to

invoice no

2451

account

your reference

date

today

as above

product description

quantity unit unit total trade net

code

price discount %

£ £ £

Dresses

5 30.00 each 150.00 0.00 150.00

Suits

3 45.50 each 136.50 0.00 136.50

Coats

4 51.50 each 206.00 0.00 206.00

terms

2.5% cash discount for full settlement

within 14 days

Net 30 days

Excel Fashions

49 Highland Street

Longton

Mercia LT3 2XL

INVOICE

JANE SMITH, FASHION WHOLESALER

Unit 21, Eastern Industrial Estate, Wyvern, Wyvernshire, WY1 3XJ

TOTAL 492.50

invoice to

deliver to

invoice no

8234

account

your reference

date

today

as above

product description

quantity unit unit total trade net

code

price discount %

£ £ £

Assorted rubbers

5 5.00 box 25.00 0.00 25.00

Shorthand notebooks

100 4.00 10 40.00 0.00 40.00

Ring Binders

250 0.50 each 125.00 0.00 125.00

terms

2.5% cash discount for full settlement

within 14 days

Net 30 days

The Card Shop

126 The Cornbow

Teamington Spa

Wyvernshire WY33 0EG

INVOICE

DEANSWAY TRADING COMPANY

The Model Office, Deansway, Rowcester, RW1 2EJ

TOTAL 190.00

CHAPTER 4 Business documents

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4.4 Dr Purchases Account Cr 20-4 £ 20-4 £ 2 Feb G Lewis 200 16 Feb G Lewis 160 Dr Sales Account Cr 20-4 £ 20-4 £ 4 Feb L Jarvis 150 7 Feb G Patel 240 Dr G Lewis Cr 20-4 £ 20-4 £

10 Feb Bank 190 2 Feb Purchases 200

10 Feb Discount received 10 16 Feb Purchases 160

24 Feb Bank 152

24 Feb Discount received 8

360 360

Dr L Jarvis Cr

20-4 £ 20-4 £

4 Feb Sales 150 12 Feb Bank 147

12 Feb Discount allowed 3

150 150

Dr G Patel Cr

20-4 £ 20-4 £

7 Feb Sales 240 20 Feb Bank 234

20 Feb Discount allowed 6

240 240

20-4 £ 20-4 £

12 Feb L Jarvis 147 10 Feb G Lewis 190

20 Feb G Patel 234 24 Feb G Lewis 152

Dr Discount Received Account Cr

20-4 £ 20-4 £

10 Feb G Lewis 10

24 Feb G Lewis 8

Dr Discount Allowed Account Cr

20-4 £ 20-4 £

12 Feb L Jarvis 3

20 Feb G Patel 6

4.5 (a)

(b) Trade discount is given, if prearranged:

– to businesses, often in the same trade (but not to the general public) – for buying in bulk (this discount is also known as bulk discount) – by wholesalers, as a discount off list price to retailers

Cash discount (also known as settlement discount) is given, for prompt payment, if prearranged, and indicated on the invoice

(c) Fashion Shop will pay £748.12 (£787.50 x 95%, rounded down) for settlement in full within 7 days. 4.7 (a) A source document is used to update the book-keeping records.

(b) (i) An invoice is a source document prepared by the seller and states the value of goods sold and, hence, the amount to be paid by the buyer.

(ii) A credit note is a source document which shows that the buyer is entitled to a reduction in the amount charged by the seller; it is used if:

– some of the goods delivered were faulty, or incorrectly supplied – the price charged on the invoice was too high

(c) Any three from: – cheque counterfoils – paying-in slip counterfoils – cash receipts

– till rolls

– information from bank statements, such as standing orders, direct debits, BACS, credit transfers, bank charges

product description quantity unit unit total trade net code price discount %

£ £ £

45B Trend tops (black) 30 12.50 each 375.00 10 337.50

35W Trend trousers (white) 20 25.00 each 500.00 10 450.00

terms

5% cash discount for full settlement within 7 days

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5.1 (a) and (c)

20-9 £ 20-9 £

1 Jan Capital 10,000 4 Jan Rent paid 500

11 Jan Sales 1,000 5 Jan Shop fittings 1,500

12 Jan Sales 1,250 20 Jan Comp Supplies Ltd 5,000

22 Jan Sales 1,450 31 Jan Balance c/d 6,700

13,700 13,700

1 Feb Balance b/d 6,700 2 Feb Rent paid 500

4 Feb Sales 1,550 15 Feb Shop fittings 850

10 Feb Sales 1,300 27 Feb Comp Supplies Ltd 6,350

12 Feb Rowcester College 750 28 Feb Balance c/d 5,300

19 Feb Sales 1,600 25 Feb Sales 1,100 13,000 13,000 1 Mar Balance b/d 5,300 Dr Capital Account Cr 20-9 £ 20-9 £ 1 Jan Bank 10,000

20-9 £ 20-9 £

4 Jan Bank 500 28 Feb Balance c/d 1,000

2 Feb Bank 500

1,000 1,000

1 Mar Balance b/d 1,000

Dr Shop Fittings Account Cr

20-9 £ 20-9 £

5 Jan Bank 1,500 28 Feb Balance c/d 2,350

15 Feb Bank 850

2,350 2,350

Dr Purchases Account Cr

20-9 £ 20-9 £

7 Jan Comp Supplies Ltd 5,000 31 Jan Balance c/d 11,500

25 Jan Comp Supplies Ltd 6,500

11,500 11,500

1 Feb Balance b/d 11,500 28 Feb Balance c/d 17,000

24 Feb Comp Supplies Ltd 5,500

17,000 17,000

CHAPTER 5 Balancing accounts – the trial balance 4.8 (a) • 5 computer desks were ordered (not 10 as shown on the invoice)

• 10 office chairs were ordered (not 5 as shown on the invoice)

• the unit price of the computer desks is £65.00 each (not £70.00 as shown on the invoice) • the net amount for computer desks is £292.50 (not £350.00 as shown on the invoice) • the net amount for office chairs is £180.00 (not £20.00 as shown on the invoice) • the invoice total is £472.50 (not £370.00 as shown on the invoice)

(b)

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(b) Trial balance as at 31 January 20-9 Dr Cr Name of Account £ £ Bank 6,700 Capital 10,000 Rent paid 500 Shop fittings 1,500 Purchases 11,500

Comp Supplies Limited 6,500

Sales 4,550

Rowcester College 750

Sales returns 100

21,050 21,050

(d) Trial balance as at 28 February 20-9

Dr Cr Name of Account £ £ Bank 5,300 Capital 10,000 Rent paid 1,000 Shop fittings 2,350 Purchases 17,000

Comp Supplies Limited 5,500

Sales 11,150

Rowcester College 1,050

Sales returns 100

Purchases returns 150

26,800 26,800

5.2 Trial balance of Jane Greenwell as at 28 February 20-1

Dr Cr £ £ Name of account Bank 1,250 Purchases 850 Cash 48 Sales 730 Purchases returns 144 Trade payables 1,442 Equipment 2,704 Van 3,200 Sales returns 90 Trade receivables 1,174 Wages 1,500

Capital (missing figure) 6,000

9,566 9,566

Dr Comp Supplies Limited Cr

20-9 £ 20-9 £

20 Jan Bank 5,000 7 Jan Purchases 5,000

31 Jan Balance c/d 6,500 25 Jan Purchases 6,500

11,500 11,500

5 Feb Purchases returns 150 1 Feb Balance b/d 6,500

27 Feb Bank 6,350 24 Feb Purchases 5,500

28 Feb Balance c/d 5,500

12,000 12,000

20-9 £ 20-9 £

31 Jan Balance c/d 4,550 11 Jan Bank 1,000

12 Jan Bank 1,250

16 Jan Rowcester College 850

22 Jan Bank 1,450

4,550 4,550

28 Feb Balance c/d 11,150 1 Feb Balance b/d 4,550

4 Feb Bank 1,550

10 Feb Bank 1,300

19 Feb Bank 1,600

25 Feb Bank 1,100

26 Feb Rowcester College 1,050

11,150 11,150

Dr Rowcester College Cr

20-9 £ 20-9 £

16 Jan Sales 850 27 Jan Sales returns 100

31 Jan Balance c/d 750

850 850

1 Feb Balance b/d 750 12 Feb Bank 750

26 Feb Sales 1,050 28 Feb Balance c/d 1,050

1,800 1,800

20-9 £ 20-9 £

27 Jan Rowcester College 100

20-9 £ 20-9 £

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PURCHASES LEDGER Dr Softseat Ltd Cr 20-2 £ 20-2 £ 1 Feb Purchases 320 19 Feb Purchases 160 Dr PRK Ltd Cr 20-2 £ 20-2 £ 2 Feb Purchases 80 Dr Quality Furnishings Cr 20-2 £ 20-2 £ 15 Feb Purchases 160 SALES LEDGER

Dr High Street Stores Cr

20-2 £ 20-2 £ 8 Feb Sales 440 25 Feb Sales 200 Dr Peter Lounds Ltd Cr 20-2 £ 20-2 £ 14 Feb Sales 120 Dr Carpminster College Cr 20-2 £ 20-2 £ 18 Feb Sales 320 GENERAL LEDGER Dr Purchases Account Cr 20-2 £ 20-2 £

28 Feb Purchases Day Book 720

20-2 £ 20-2 £

28 Feb Sales Day Book 1,080

5.5 Four from:

• Error of omission

Business transaction completely omitted from the accounting records. For example, cash sale omitted from both cash account and sales account.

• Reversal of entries

Debit and credit entries on the wrong side of the two accounts concerned. For example, cash sale entered wrongly as debit sales account, credit cash account.

• Mispost/error of commission

Transaction entered to the wrong person's account. For example, a sale of goods on credit to A T Hughes has been entered as debit A J Hughes' account, credit sales account.

• Error of principle

Transaction entered in the wrong type of account. For example, cost of petrol for vehicles has been entered as debit motor vehicles account, credit bank account.

• Error of original entry (or transcription)

Amount entered incorrectly in both accounts. For example, sale of £45 entered in both sales account and the trade receivable's account as £54.

• Compensating error

Two errors cancel each other out. For example, balance of purchases account calculated wrongly at £10 too much, compensated by the same error in sales account.

6.2 (a) Purchases Day Book

Date Details Invoice Reference Amount

20-2 £

1 Feb Softseat Ltd 961 320

2 Feb PRK Ltd 068 80

15 Feb Quality Furnishings 529 160

19 Feb Softseat Ltd 984 160

28 Feb Total for month 720

Sales Day Book

20-2 £

8 Feb High Street Stores 001 440

14 Feb Peter Lounds Ltd 002 120

18 Feb Carpminster College 003 320

25 Feb High Street Stores 004 200

28 Feb Total for month 1,080

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GENERAL LEDGER

20-2 £ 20-2 £

31 May Purchases Day Book 1,118.00

20-2 £ 20-2 £

31 May Purchases Day Book 108.00

6.5 (a)

product quantity details unit price unit total amount

code

X24 96 Trend tops £8.50 each each 816.00 Y36 20 Jeans £15 each each 300.00 1,116.00 trade discount 20% 223.20

total 892.80

terms

5% cash discount for full settlement within 7 days Net 30 days

6.3 (a) Purchases Day Book

20-2 £

2 May M Roper & Sons 562 PL 302 190

4 May Wyper Ltd 82 PL 301 200

31 May Total for month 1,118.00

Purchases Returns Day Book

Date Details Credit Reference Amount Note

20-2 £

31 May Total for month 108

(b) and (c)

PURCHASES LEDGER

Dr Wyper Ltd (account no 301) Cr

20-2 £ 20-2 £

23 May Purchases Returns 40 1 May Balance b/d 100

31 May Balance c/d 710 4 May Purchases 200

10 May Purchases 210

21 May Purchases 240

750 750

1 Jun Balance b/d 710

Dr M Roper & Sons (account no 302) Cr

20-2 £ 20-2 £

18 May Purchases Returns 30 1 May Balance b/d 85

28 May Purchases Returns 38 2 May Purchases 190

31 May Balance c/d 485 18 May Purchases 180

25 May Purchases 98

553 553

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7.3

Dr Cash Book Cr

Date

Details

Ref Disc Cash Bank Date

Details

Ref Disc Cash Bank

allwd

recd

20-7

£

£ 20-7

£

1 Aug Balances b/d

276 4,928 5 Aug T Hall Ltd

24

541 1 Aug Wild & Sons Ltd

398 8 Aug Wages

254 11 Aug Bank

C

500 11 Aug Cash

C

500 12 Aug A Lewis Ltd

20 1,755 18 Aug F Jarvis

457 21 Aug Harvey & Sons Ltd

261 22 Aug Wages

436 29 Aug Wild & Sons Ltd

15 595 25 Aug J Jones

33

628 29 Aug Bank

C

275 27 Aug Salaries

2,043

28 Aug Telephone

276 29 Aug Cash

C

275 31 Aug Balances c/d

361 3,217

35 1,051 7,937

57 1,051 7,937

1 Sep Balances b/d

361 3,217

7.4 Dr

Cash Book

Cr

Date

Details

Ref Discount Cash Bank Date

Details

Ref Discount Cash Bank

allowed

received

20-5

£

£ 20-5

£ £

£

1 Mar Balances b/d

106 3,214 2 Mar Rent

10674

250 3 Mar Sales*

100 950 5 Mar Cleaning expenses

35 8 Mar Sales

1,680 9 Mar Purchases 10675

1,200

11 Mar Bank

C

150 11 Mar Cash

10676

C

150 13 Mar Sales

1,800 16 Mar Postages

50 22 Mar Bank

C

150 18 Mar Telephone 10677

168 25 Mar Sales

2,108 20 Mar Stationery

128 29 Mar Sales*

200 2,000 22 Mar Cash

10678

C

150 31 Mar Hobbs Ltd

30 720 26 Mar Misc expenses

70 31 Mar Pratley & Co

50 1,160 27 Mar Wages

10679

2,000

30 Mar Electricity

10680

106 31 Mar Evans & Co 10681

45

855 31 Mar A Bennett 10682

26

494 31 Mar Balances c/d

423 8,259

80 706 13,632

71 706 13,632

1 Apr Balances b/d

423 8,259

*

An alternative way of showing the transactions of 3 March and 29 March is to record the full amount of sales in the debit

cash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.

CHAPTER 7 The main cash book (b) (i) Purchases day book

(ii) Sales day book (c) (i) Trade discount:

– given for bulk buying (also known as bulk discount), or for being in the trade, or for regular customers

– deducted from the invoice before entry in the books – usually a larger percentage than cash discount (ii) Cash discount (also known as settlement discount):

– given for prompt payment – not deducted until account is paid – can be disallowed if terms are not met – usually a smaller percentage than trade discount 6.8

Source

Subsidiary

Account to

Document

Book

be debited

be credited

Invoice for goods sold on

Sales day book

V Singh

Sales

credit to V Singh

(a)

Invoice received for

goods bought on credit

Purchases day

Purchases

Okaro Limited

from Okara Limited

book

(b)

Credit note issued to

Sales returns

S Johnson

day book

(c)

Credit note received

Purchases returns

Roper &

Purchases

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8.2 (a)

Dr Cash Book (bank columns) Cr

20-7 £ p 20-7 £ p

1 Jan Balance b/d 415.15 23 Jan Direct debit: Omni Finance 207.95

13 Jan BACS credit: T K Supplies 716.50 31 Jan Balance c/d 923.70

1,131.65 1,131.65

1 Feb Balance b/d 923.70

(b) P GERRARD

BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7

£ £

Balance at bank as per cash book 923.70

Add: unpresented cheques

Bryant & Sons cheque no. 001354 312.00

P Reid cheque no. 001355 176.50

488.50 1,412.20

Less:outstanding lodgement

G Shotton Limited 335.75

Balance at bank as per cash book 1,076.45

8.3 (a)

Dr Cash Book (bank columns) Cr

20-7 £ 20-7 £

1 May Balance b/d 300 2 May P Stone 867714 28

7 May Cash 162 14 May Alpha Ltd 867715 50

16 May C Brewster 89 29 May E Deakin 867716 110

23 May Cash 60 16 May Standing order: A-Z Insurance 25

30 May Cash 40 31 May Bank charges 10

31 May Balance c/d 428

651 651

1 Jun Balance b/d 428

(b) JANE DOYLE

BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7 £

Balance at bank as per cash book 428

Add: unpresented cheque

E Deakin cheque no. 867716 110 538

Less: outstanding lodgement

cash banked 40

Balance at bank as per bank statement 498

CHAPTER 8 Bank reconciliation statements

7.6 (i)

Standing order

Money paid out of the bank directly, at regular intervals, on the business’s order.

Usually for the same fixed amount for goods and services supplied

DR Supplier/Trade payable CR Bank

(ii)

Credit transfer for payment by a customer

Amounts paid directly into the bank by a trade receivable, who has the necessary

bank code information.

DR Bank CR Customer/Trade receivable

7.8 (a) and (b)

Dr Cash Book Cr

Date

Details

Disc

Cash

Bank

Date

Details

Disc

Cash

Bank

20-6

£

20-6

£

1 Jan Balance b/d

50 1 Jan Balance b/d

1,236

6 Jan R Reed

567 2 Jan Bilton Office Supplies

3

164 13 Jan B Brown

4

366 11 Jan Rent

450 14 Jan Sales

752 27 Jan Wages

75 28 Jan Sales

642 20 Jan British Gas S/O

200 24 Jan C Denton & Co Ltd C/T

248 21 Jan Bank interest

28 31 Jan Cash C

1,319

31 Jan Bank C

1,319

31 Jan Balances c/d

50

422

4 1,444

2,500

3 1,444

2,500

1 Feb Balance b/d

50

422 (c)

Dr Discounts Allowed Account Cr

20-6 £ 20-6 £

31 Jan Cash book 4

Dr Discounts Received Account Cr

20-6 £ 20-6 £

(14)

8.7 (a)

Dr Cash Book Cr

Date

Details

Bank

Date

Details

Cheque

Bank

2003

£ p

2003

number

£ p

1 Nov Balance b/d

2,459.35

1 Nov

Banks Ltd

11346

134.37 √

3 Nov Toys for You

234.00 √

1 Nov

Books & Paints

11347

276.89 √

5 Nov B J Patel

3,219.00 √

10 Nov

Wages

11348

92.50 √

5 Nov Dolls and Things

1,142.00 √

12 Nov

Jones and Son

11349

3,781.95 √

23 Nov J A Smith Ltd

560.00 √

23 Nov

Smith and Son

11350

139.43 √

26 Nov Cash banked

340.00 25 Nov

HGF Finance

11351

256.00 25 Nov

Toy Designs

11352

1,245.98

30 Nov

Balance c/d

2,027.23

7,954.35

30 Nov Balance b/d

2,027.23

12 Nov

Business rates S/O

547.90 9 Nov J Black Ltd C/T

246.98 18 Nov

Proper Ins Co S/O

145.65 23 Nov

Bank charges

45.89 30 Nov

Balance c/d

1,534.77

2,274.21

1 Dec Balance b/d

1,534.77

(b) JAMES JOLLY AND CO

BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 2003

£ £

Balance at bank as per cash book 1,534.77

Add: unpresented cheques

HGF Finance 11351 256.00

Toy Designs 11352 1,245.98

1,501.98 3,036.75

Less: outstanding lodgement

cash banked 340.00

Balance at bank as per bank statement 2,696.75

8.5 (a) (i) Standing orders

Credit

Regular payments of the same amount made directly from the bank on behalf of the company on the order of the company.

(ii) Direct debits

Credit

Payments made from the bank for the customer collected by the payee on the order of the customer usually for changing amounts.

(iii) Credit transfers

Debit or Credit

Receipts from customers paid directly into the bank of the payee. Payments to suppliers or wages into the bank of the payee.

(b)

Dr Cash Book – Bank Account Cr

£ £

Credit transfer 540 Balance b/d 378

Balance c/d 534 Standing order 230

Direct debit 420

Bank charges 46

1,074 1,074

Balance b/d 534

(c) A SMITH AND CO

BANK RECONCILIATION STATEMENT AS AT 31 MARCH 2001

£ £

Balance at bank as per cash book (534)

Add: unpresented cheques 469

(65)

Less: outstanding lodgement (uncleared bankings) 270

cheque query 265

535

Balance at bank as per bank statement (600)

(15)

9.7 (a) (i) R MASTERS

INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2002

£ £

Gross profit 56,231

Add Discount received 350

56,581 Less expenses: Wages 23,980 Carriage outwards 3,600 Motor expenses 4,500 Bank charges 450 32,530

Profit for the year 24,051

(ii)

Dr Capital Account Cr

2002 Details £ 2002 Details £

31 Mar Drawings 12,500 31 Mar Balance b/d 36,790

31 Mar Balance c/d 48,341 31 Mar Profit for the year 24,051

60,841 60,841

1 Apr Balance b/d 48,341

(b) Two from:

– increased by profit – more capital introduced – reduced by losses – reduced by drawings

9.9 (a) Dr Sales Account Cr

2001 Details £ p 2001 Details £ p

1 Dec Balance b/d 16,493.27

31 Dec Monthly total 4,560.30

Dr Returns Inwards Account Cr

1 Dec Balance b/d 1,269.43 31 Dec Monthly total 236.91

1 Dec Balance b/d 10,276.41 31 Dec Monthly total 2,769.56

Dr Returns Outwards Account Cr

1 Dec Balance b/d 1,039.41

31 Dec Monthly total 127.50

9.2

9.5 CLARE LEWIS

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4

£ £

Revenue 144,810

Opening inventory 16,010

Purchases 96,318

112,328

Less Closing inventory 13,735

Cost of sales 98,593

Less expenses:

Salaries 18,465

Heating and lighting 1,820

Rent and rates 5,647

Sundry expenses 845

Vehicle expenses 1,684

28,461

BALANCE SHEET AS AT 31 DECEMBER 20-4

£ £ £ Non-current Assets Vehicles 9,820 Office equipment 5,500 15,320 Current Assets Inventory 13,735 Trade receivables 18,600 32,335 Less Current Liabilities

Trade payables 12,140

Bank overdraft 5,820

17,960

Net Current Assets or Working Capital 14,375

NET ASSETS 29,695

FINANCED BY Capital

Opening capital 25,250

Add Profit for the year 17,756

43,006

Less Drawings 13,311

29,695 CHAPTER 9 Introduction to final accounts

FINAL ACCOUNTS

TRIAL BALANCE INCOME BALANCE SHEET STATEMENT

Debit Credit Debit Credit Debit Credit (a) Salaries

(b) Purchases (c) Trade receivables (d) Sales returns (e) Discount received (f) Vehicle (g) Capital √ √ √ √ √ √ √ √ √ √ √ √ √ √

(16)

3. Telephone bill due to be paid in one month’s time Section: Current liabilities

Reason: Short-term liability

– an amount owed by the business

– which needs to be paid within the next 12 months

Tutorial note: the accounting treatment for a bill which has not been paid at the balance sheet date – called an accrual of expenses – is covered in detail in Chapter 12

4. Drawings for the year

Section: Capital/Financed by/Represented by

Reason: It is cash or goods taken out of the business by the owner, therefore it reduces the capital invested in the business.

10.2 (a)

Date Details Reference Dr Cr

20-8 £ £

31 Dec Inventory GL 22,600

Income statement GL 22,600

Inventory valuation at 31 December 20-8 transferred to income statement

(b)

20-8 £ £

31 Dec Income statement GL 890

Telephone expenses GL 890

Transfer to income statement of expenditure for the year

(c)

20-8 £ £

31 Dec Drawings GL 200

Motoring expenses GL 200

Transfer of private motoring to drawings account

CHAPTER 10 The general journal and correction of errors

(b) AMARYLLIS TRADING

INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001

£ £ £

Revenue 21,053.57

Less Returns inwards 1,506.34

19,547.23 Less Cost of sales:

Opening inventory 2,560.87

Add Purchases 13,045.97

Less Returns out 1,166.91

11,879.06

Add Carriage in 871.26

15,311.19

Less Closing inventory 2,640.96

12,670.23

Gross profit 6,877.00

(c) (i) Cost of sales £12,670.23

(ii) Goods available for sale £15,311.19

(iii) Net revenue £19,547.23

9.10 MEMORANDUM

Date Today

To Mary Arbuthnot, proprietor of Mary’s Doll Shop From Financial Accounting Student

Subject Balance sheet queries

1. Cost of new delivery van Section: Non-current assets

Reason: An asset purchased for use in the business – not for resale

– used over a long period/more than one year – will help generate profits

– will depreciate with use – is a tangible asset 2. Inventory of dolls for resale

Section: Current assets

Reason: An asset remaining in the business for the short-term – less than one year

– the business is expected to sell them shortly

(17)

(c) error of principle

£ £

Delivery van GL 10,000

Vehicle expenses GL 10,000

Correction of error – vehicle no ... invoice no ...

(d) reversal of entries

£ £ Postages GL 55 Bank GL 55 Postages GL 55 Bank GL 55 110 110

Correction of reversal of entries on ...

(e) compensating error

£ £

Purchases GL 100

Purchases returns GL 100

Correction of under-cast on purchases account and purchases returns account on ...(date)...

(f) error of original entry

£ £ L Johnson SL 98 Bank GL 98 Bank GL 89 L Johnson SL 89 187 187

Correction of error – cheque for £89 received on ....(date)....

(d)

20-8 £ £

31 Dec Drawings GL 175

Purchases GL 175

Goods taken for own use by the owner

(e)

20-8 £ £

31 Dec Bad debts written off GL 125

N Marshall SL 125

Account of N Marshall written off as a bad debt - see memo dated ...

10.4 (a) error of omission

£ £

J Rigby SL 150

Sales GL 150

Sales invoice no ... omitted from the accounts.

(b) mispost/error of commission

£ £

H Price Limited PL 125

H Prince PL 125

Correction of mispost – cheque no ...: to H Price Limited

(18)

(c)

Error Yes No

An error of principle has occurred. 3

The sales account has been totalled incorrectly. 3

An invoice has been completely omitted from the books. 3 A cheque has been debited in the cash book as £150

but credited in the customer’s account as £105. 3

10.10 (a)

Dr Suspense Account Cr

Date Details £ Date Details £

2004 2004

30 Apr Balance per T/B 450 30 Apr Sales 200

30 Apr Rent paid 250

450 450

Tutorial notes:

• Error (2) is an error of original entry which affects both the debit and credit side of the trial balance by the same amount, and will not be revealed by the trial balance. Such an error is not entered in the suspense account.

• Error (3) has been entered in the suspense account, above, as the net amount of £250 (ie £650 – £400); as an alternative, it could have been entered as

– debit £400 (to take out the old amount in rent paid account) – credit £650 (to enter the correct amount in rent paid account) (b) Error of commission (or mispost):

• example – payment to A Brown entered to B Brown’s account

• explanation – although the entry has been misposted to the wrong person’s account, the trial balance will still balance because the entry has been made on the correct side of the account. (c) Sales ledger control account (see Chapter 11)

10.6 (a) Two from: – trial balance

– bank reconciliation statement – control accounts (see Chapter 11)

(b) JOURNAL Account Dr Cr £ £ (1) Sales 270 Suspense 270 (2) Returns inwards 500 Suspense 500 Returns inwards 300 Suspense 300 (3) Suspense 400 Discount received 400 (4) J Jones 350 A Jones 350

Tutorial note:The mispost between J Jones and A Jones needs to be corrected in the sales ledger, but has no effect on suspense account.

10.8 (a) and (b)

H G PATEL: TRIAL BALANCE AS AT 30 APRIL 2003

Account Dr Cr £ £ Wages 23,890 Administration costs 6,000 Capital 60,000 Property 65,000 Motor vehicles 5,000 Motor expenses 1,650 Purchases 38,900 Revenue (Sales) 98,000 Returns outwards 3,698 Carriage inwards 367 Carriage outwards 450 Discount received 2,135 Drawings 6,900 Suspense 15,676 TOTAL 163,833 163,833

(19)

(b)

Dr Sales Ledger Control Account Cr

20-8 £ p 20-8 £ p

1 Feb Balances b/d 2,012.43 28 Feb Sales returns 221.67

28 Feb Credit sales 1,288.76 28 Feb Cheques received

from trade receivables 911.43 28 Feb Cash discount allowed 23.37 28 Feb Set-off: purchases ledger 364.68 28 Feb Bad debts written off 59.28

28 Feb Balances c/d 1,720.76

3,301.19 3,301.19

1 Mar Balances b/d 1,720.76

(c) Reconciliation of sales ledger control account with trade receivable balances 1 February 20-8 28 February 20-8

£ p £ p

Arrow Valley Retailers 826.40 338.59

B Brick (Builders) Limited 59.28 –

Mereford Manufacturing Company 293.49 –

Redgrove Restorations 724.86 954.26

Wyvern Warehouse Limited 108.40 427.91

Sales ledger control account 2,012.43 1,720.76

11.5 Dr Purchase Ledger Control Account Cr

2001 £ 2001 £

1 Mar Balance b/d 465 1 Mar Balance b/d 23,437

31 Mar Returns 4,679 31 Mar Purchases 245,897

Set-off: sales ledger 475 Cash refunds 450

Discounts 3,674 Balance c/d 749

Cash paid 236,498

Balance c/d 24,742

270,533 270,533

Balance b/d 749 Balance b/d 24,742

Tutorial note: The cash purchases figure of £25,679 is not shown in the control account because it does not involve the accounts of trade payables – it is a cash purchase (ie debit purchases; credit bank/cash)

10.11 Jonathon Smith

Corrected Profit for the year ended 30 November 2004 £

Profit calculated by Jonathon 26,790

1. Sales undercast add 450

2. Discount allowed (2 x £140) less 280

3. Wages less 2,500

4. Non-current asset add 9,500

5. Error of commission – no effect on profit

6. Closing inventory (reduction in cost of sales) add 100

Corrected profit 34,060

11.3 (a) SALES LEDGER

Dr Arrow Valley Retailers Cr

20-8 £ p 20-8 £ p

1 Feb Balance b/d 826.40 20 Feb Bank 805.74

3 Feb Sales 338.59 20 Feb Discount allowed 20.66

28 Feb Balance c/d 338.59

1,164.99 1,164.99

1 Mar Balance b/d 338.59

Dr B Brick (Builders) Limited Cr

20-8 £ p 20-8 £ p

1 Feb Balance b/d 59.28 28 Feb Bad debts written off 59.28

Dr Mereford Manufacturing Company Cr

20-8 £ p 20-8 £ p

1 Feb Balance b/d 293.49 24 Feb Sales returns 56.29

3 Feb Sales 127.48 28 Feb Set-off: purchases ledger 364.68

420.97 420.97

Dr Redgrove Restorations Cr

20-8 £ p 20-8 £ p

1 Feb Balance b/d 724.86 7 Feb Sales returns 165.38

17 Feb Sales 394.78 28 Feb Balance c/d 954.26

1,119.64 1,119.64

Dr Wyvern Warehouse Limited Cr

20-8 £ p 20-8 £ p

1 Feb Balance b/d 108.40 15 Feb Bank 105.69

17 Feb Sales 427.91 15 Feb Discount allowed 2.71

28 Feb Balance c/d 427.91

536.31 536.31

(20)

12.1 (a) Expense in income statement of £56,760; balance sheet shows wages and salaries accrued (current liability) of £1,120.

(b) Expense in income statement of £2,852; balance sheet shows rates prepaid (current asset) of £713. (c) Expense in income statement of £1,800; balance sheet shows computer rental prepaid (current asset)

of £150.

12.2 SOUTHTOWN SUPPLIES

£ £

Revenue 420,000

Purchases 280,000

350,000

Less expenses:

Rent and rates 10,250 – 550 9,700

Electricity 3,100

Telephone 1,820

Salaries 35,600 + 450 36,050

64,420

12.7 HAZEL HARRIS

£ £

Revenue 614,000

Purchases 465,000

528,000

Add Discount received 8,140

182,140 Less expenses:

Insurances 8,480

Wages and salaries 86,060 + 3,180 89,240

Discount allowed 10,610

Rates and insurance 6,070 – 450 5,620

General expenses 15,860

Depreciation: vehicles 12,000 x 20% 2,400

furniture and fittings 25,000 x 10% 2,500

137,390

CHAPTER 12 Adjustments to final accounts

11.6 Dr Sales Ledger Control Account Cr

20-5 £ 20-5 £

1 Jan Balance b/d 44,359 31 Jan Bank 23,045

31 Jan Sales 27,632 31 Jan Discount allowed 1,126

31 Jan Returned cheque 275 31 Jan Sales returns 2,964

31 Jan Set-off: purchases ledger 247

31 Jan Balance c/d 44,884

72,266 72,266

1 Feb Balance b/d 44,884

Tutorial note: The mispost of £685 between J Hampton and Hampton Limited needs to be corrected in the sales ledger, but has no effect on the control account.

11.7 (a)

Dr Sales Ledger Control Account Cr

1 Nov Balance b/d 5,476 30 Nov Returns inwards 590

30 Nov Sales 26,500 30 Nov Bank (receipts from customers) 18,900 30 Nov Set-off: purchases ledger 400

30 Nov Balance c/d 12,086

31,976 31,976

1 Dec Balance b/d 12,086

Dr Purchases Ledger Control Account Cr

30 Nov Returns outwards 450 1 Nov Balance b/d 2,960

30 Nov Bank (payments to 30 Nov Purchases 19,600

suppliers) 16,300

30 Nov Set-off: sales ledger 400

30 Nov Balance c/d 5,410

22,560 22,560

1 Dec Balance b/d 5,410

(b) • The balances of the individual accounts of trade receivables in the sales ledger are totalled. • The balances of the individual accounts of trade payables in the purchases ledger are totalled. • These totals should agree with the balances of sales ledger control account and purchases ledger

control account respectively.

(c) • Some types of errors (such as a mispost/error of commission) will not be revealed by the control account. Thus the accounts will be thought to be correct when they are not.

• A control account may indicate that there is an error within a ledger section but it will not pinpoint where the error has occurred.

(21)

£ £ £

Non-current Assets

Shop fittings at cost 12,000

Less provision for depreciation 2,400 + 2,400 4,800

Net book value 7,200

Current Assets Inventory 28,176 Trade receivables 3,641 Cash 163 Prepayment of expenses 310 32,290 Less Current Liabilities

Bank 3,084

Accrual of expenses 85

13,459

FINANCED BY

Capital 20,806

48,227

26,031

12.10 (a)

Dr Telephone Account Cr

Date Details £ Date Details £

2007 2007

31 May Cash/bank 2,400 31 May Income statement 2,320

31 May Balance c/d 130 31 May Balance c/d 210

2,530 2,530

1 Jun Balance b/d 210 1 Jun Balance b/d 130

£ £ £

Non-current Assets Cost Prov for dep'n Net book value

Freehold land 100,000 – 100,000

Vehicles 12,000 4,800 7,200

Furniture and fittings 25,000 5,000 20,000

137,000 9,800 127,200 Current Assets Inventory 88,000 Trade receivables 52,130 Prepayment of expenses 450 140,580 Less Current Liabilities

Accrual of expenses 3,180

Bank 2,000

47,030

220,750 Less non-current Liabilities

Bank loan 75,000

FINANCED BY Capital

Opening capital 125,000

169,750

145,750

12.9 BETH DAVIS

£ £

Less expenses:

Wages and salaries 55,217

Heating and lighting 1,864

Rent and rates 5,273 – 310 4,963

Advertising 2,246

Bad debts written off 395

General expenses 783 + 85 868

Depreciation of shop fittings 12,000 x 20% 2,400

67,953

(22)

13.2 • The final accounts of a sole trader comprise: – income statement

– balance sheet • The income statement shows:

incomeminus expensesequalsprofit (or loss)

• The balance sheet shows:

assetsminus liabilitiesequals capital

• Assets are items owned by the business; liabilities are amounts owed by the business; capital is the amount of the owner’s investment.

13.3 (a) The Partnership Act 1890 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”.

(b) Where no partnership agreement exists, then the following accounting rules from the Partnership Act 1890 must be followed:

• profits and losses are to be shared equally between the partners • no partner is entitled to a salary

• partners are not entitled to receive interest on their capital • interest is not to be charged on partners’ drawings

• when a partner contributes more capital than agreed, he or she is entitled to receive interest at five per cent per annum on the excess

Note: the question asks for any three provisions. 13.5 Points to cover include:

* Definition of a limited company – separate legal entity – owned by shareholders – managed by directors • Types of companies

– public limited company – private limited company – company limited by guarantee • Advantages of forming a limited company

– limited liability – separate legal entity – ability to raise finance – membership – other factors (b)

MEMORANDUM

To: The Owner, Beta Batteries From: Student Accountant

Date: Today

Subject: Account of J Booth

I note that a customer of Beta Batteries, J Booth, has been declared bankrupt whilst owing you £350. You are of the opinion that none of the debt will be recovered.

The accounting treatment is that the amount of £350 should be treated as a bad debt written off. To do this you will need to:

– debit bad debts written off account – credit J Booth’s account in your sales ledger

If you use a sales ledger control account you should also credit this memorandum account with the amount.

For the year end accounts, you will need to transfer the amount of the bad debt to income statement as an expense:

– debit income statement

– credit bad debts written off account

The effect of writing off this bad debt will be to reduce your profit for the year by £350 and, at the same time, the trade receivables’ figure in your balance sheet will be reduced by the amount, so reducing the net assets of the business.

(23)

14.1 • Going concern concept

This presumes that the business to which the final accounts relate will continue to trade in the foreseeable future. The income statement and balance sheet are prepared on the basis that there is no intention to reduce significantly the size of the business or to liquidate the business. If the business was not a going concern, assets would have very different values, and the balance sheet would be affected considerably. Example: As a going concern, non-current assets are valued at cost, less accumulated depreciation to date; inventory is valued at cost (unless net realisable value is lower).

• Accruals concept

This means that expenses and income for goods and services are matched to the same time period. Examples: The accrual of an expense in income statement which has been used in the accounting period but not yet paid for. The prepayment of an expense for the next accounting period. The recording of opening and closing inventories. The use of trade receivables' and trade payables' accounts to record amounts owing to the business, or owed by the business.

• Materiality concept

This means that some items in accounts have such a low monetary (money) value that it is not worthwhile recording them separately. Examples include:

– small expense items which may not justify their own separate expense account and are, instead, grouped together in a sundry expenses account

– end-of-year quantities of office stationery are often not valued for the purpose of final accounts because the amount is not material and does not justify the time and effort involved

– low-cost non-current assets are often charged as an expense in income statement because, while strictly these should be treated as non-current assets and depreciated each year, in practice they are treated as income statement expenses as the amounts involved are not material – such as a calculator, a stapler

Materiality depends very much on the size of the business – what is material and what is not becomes a matter of judgement.

• Business entity concept

This refers to the fact that final accounts record and report on the activities of a particular business. For example, the personal assets and liabilities of those who play a part in owning or running the business are not included on the business balance sheet.

14.2 (a) The concept of prudence means

– not anticipating profit until it is reasonably certain that it will be realised – providing for all known liabilities

– not giving an over-optimistic presentation of the business – not overstating the value of assets

(b) Examples (question asks for one example):

– valuation of inventory, at the lower of cost and net realisable value

– depreciation of non-current assets, to measure the amount of the fall in value of non-current assets over time

– bad debts written off, to reduce the trade receivables’ figure to give a realistic view of the amount that the business can expect to receive

– provision for doubtful debts (see Chapter 15), to reduce the trade receivables’ figure

(c) The concept of consistency means that, when a business adopts particular accounting policies, it should continue to use such policies consistently

(d) Examples (question asks for one example) – valuation of inventory

– depreciation of non-current assets – bad debts written off

– provision for doubtful debts (see Chapter 15)

By applying the consistency concept, direct comparison between the final accounts of different years can be made.

14.5 (a) The kettle should be valued at £16.

Workings: £31 – £15 = £16 net realisable value (which is lower than the cost of £18) (b) Inventory should be valued at the lower of cost or net realisable value whichever is the lower.

This is an example of using the prudence concept. 14.8

Concept Gross Profit Current Current Capital

Profit for the year Assets Liabilities

1. Accruals no decrease no increase decrease change £4,000 change £4,000 £4,000

2. Consistency no decrease no no decrease

change £15,000 change change £15,000

3. Prudence or decrease decrease decrease no decrease

Consistency £18,000 £18,000 £18,000 change £18,000

4. Business no increase no no no

entity change £13,000 change change change

14.10 (a) jacket, £40 (note: replacement cost is not applicable here) shirt, £25

suit, £80

trousers, £25 – £10 = £15 electric trouser press, £80

(b) • The prudence concept says that final accounts should always, where there is any doubt, report a conservative figure for profit or the valuation of assets.

• In inventory valuation it is applied by using the lower of cost and net realisable value. (Note that net realisable value is the selling price of the goods, less further costs to get the inventory into a saleable condition.)

• A lower closing inventory figure means that profits are not overstated – thus the amount drawn by the owner(s) will be reduced, so helping to ensure the continued financial viability of the business. CHAPTER 14 Accounting concepts and inventory valuation

(24)

15.2

20-7 £ 20-7 £

31 Dec Balance b/d 100 31 Dec Bank/Cash 1,250

(accrual of income) (receipts for year)

31 Dec Income statement 1,150

1,250 1,250

Dr Advertising Income Account Cr

20-7 £ 20-7 £

31 Dec Balance b/d 150 31 Dec Bank/Cash 2,720

(accrual of income) (receipts for year)

31 Dec Income statement 2,820 31 Dec Balance c/d 250

(accrual of income)

2,970 2,970

20-8 20-8

1 Jan Balance b/d 250

(accrual of income)

Dr Rent Income Account Cr

20-7 £ 20-7 £

31 Dec Income statement 19,260 31 Dec Balance b/d 850

(prepayment of income)

31 Dec Bank/Cash 18,290

(receipts for year)

31 Dec Balance c/d 120 (accrual of income) 19,260 19,260 20-8 20-8 1 Jan Balance b/d 120 (accrual of income) 15.4 (a)

Dr Bad Debts Written Off Account Cr

20-9 £ 20-9 £

31 Dec Webster Limited 110 31 Dec Income statement 420

31 Dec T Smith 210

31 Dec Khan and Company 100

420 420

(b)

Dr Provision for Doubtful Debts Account Cr

20-9 £ 20-9 £

31 Dec Balance c/d 1,000 31 Dec Income statement 1,000

20-0 20-0

1 Jan Balance b/d 1,000

(c) • Income statement (expenses)

debit bad debts written off £420 debit provision for doubtful debts £1,000

Explanation: profit for the year is reduced by £1,420 • Balance sheet

Trade receivables £39,000

Workings: £40,420 – £420 bad debts = £40,000 – £1,000 provision for doubtful debts = £39,000 net trade receivables

Explanation: current assets are reduced by £420 + £1,000 = £1,420 15.6

Year Income statement Balance sheet

Expense Income Trade Less prov for Net

receivables doubtful debts trade

Bad Increase in Bad Decrease in (after bad receivables

debts provision for debts provision for debts written off doubtful debts recovered doubtful debts written off)

£ £ £ £ £ £ £

20-5 1,800 2,585 103,400 2,585 100,815

20-6 2,400 245 113,200 2,830 110,370

20-7 1,400 150 110 108,800 2,720 106,080

Workings for doubtful debts provision:

20-5 (£105,200 – £1,800) x 2.5% = £2,585 creation of provision

20-6 (£115,600 – £2,400) x 2.5% = £2,830 – £2,585 = £245 increase in provision 20-7 (£110,200 – £1,400) x 2.5% = £2,720 – £2,830 = £110 decrease in provision CHAPTER 15 Further aspects of final accounts

(25)

15.8 (a) Straight-line method Reducing balance method £ £ Year 1 3,000 3,600 Year 2 3,000 1,440 (60%) or 2,400 (to disposal) (b) • Depreciation is a non-cash expense

• It is an accounting adjustment

• Depreciation is not a method of providing a fund of cash which can be used to replace the asset at the end of its life

• Profits are lower after depreciation has been deducted – this may discourage drawings from the business

15.11 (a)

Dr Vehicles Account Cr

20-8 £ 20-8 £

1 Jan Balance b/d 12,000 1 Oct Disposals 12,000

1 Oct Disposals 5,500 31 Dec Balance c/d 15,000

(part-exchange allowance)

1 Oct Bank 9,500

(balance paid by cheque)

27,000 27,000

20-9 £ 20-9 £

(b)

Dr Provision for Depreciation Account – Vehicles Cr

20-8 £ 20-8 £

1 Oct Disposals 7,200 1 Jan Balance b/d 7,200

31 Dec Balance c/d 3,000 31 Dec Income statement 3,000

10,200 10,200

20-9 £ 20-9 £

(c)

Dr Disposals Account – Vehicles Cr

20-8 £ 20-8 £

1 Oct Vehicles 12,000 1 Oct Vehicles 5,500

31 Dec Income statement 700 (part-exchange allowance)

(profit on sale) 1 Oct Prov for depreciation 7,200

12,700 12,700

(d) BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-8

£ £ £

Cost Prov for dep’n Net book value

Non-current assets

Vehicles 15,000 3,000 12,000

15.12 (a) £20,000 – £12,500 – £4,000 = loss of £3,500

(b) BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-9

Non-current Assets £

Vehicle at cost 25,000

Less provision for depreciation 3,125

Tutorial note:Do not deduct the trade in allowance from the cost price of the new vehicle – the cost price is £25,000.

15.13 (a) Profit on disposal of old machine = £2,000

Workings

£24,000 – £18,000 depreciation = £6,000 net book value £

Trade-in value 8,000

Net book value at date of trade-in 6,000

Profit on disposal 2,000

(b) GORG HAMMAN

BALANCE SHEET AS AT 31 DECEMBER 2003 £

Non-current Assets

Machinery at cost 176,000 (£170,000 – £24,000 + £30,000)

Less prov for depreciation 123,500 (£105,000 – £18,000 + £36,500)

Current Liabilities

Trade payable – instalment due on machine (11,000)

Tutorial notes:

• depreciation for 2003 is calculated at 25% straight-line method (being the rate applied to the old machine)