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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 f inancial 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 stock 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
© Osborne Books Limited 2010
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 account ing:1. To quantify items such as sales, expenses and profit2. To present the accounts in a meaningful way so as to measure the success of the business3. 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 a trading and profit and loss account 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
• debtors – total amount owed to the business, and individual debtors
• creditors – total amount owed by the business, and individual creditors
1.4 Other stakeholders – any four from
• 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 thegoods 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 AddedTax 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 limitedcompanies
1.5 (a) Business entity – the accounts record and report on the financial transactions of a particularbusiness, and not the owner's personal financial transactions.
(b) Money measurement – the accounting system uses money as the common denominator in recordingand reporting all business transactions; thus the loyalty of a firm's workforce or the quality of a productcannot be recorded because these cannot be reported in money terms.
1.6 • assets – items owned by a business; liabilities – items owed by a business
• debtors – individuals or businesses who owe money in respect of goods or services supplied by thebusiness; creditors – 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 – goodsbought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer
1.7 • asset of bank increases by £8,000capital increases by £8,000asset £8,000 – liability £0 = capital £8,000
• asset of computer increases by £4,000asset of bank decreases by £4,000asset £8,000 – liability £0 = capital £8,000
• asset of bank increases by £3,000liability of loan increases by £3,000asset £11,000 – liability £3,000 = capital £8,000
• asset of van increases by £6,000asset of bank decreases by £6,000asset £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 42525 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
1
CHAPTER 1 What is financial accounting?
CHAPTER 2 Double-entry book-keeping: first principles
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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
Dr Rent Paid Account Cr
20-5 £ 20-5 £7 Aug Bank 100
Dr Commission Income Account Cr
20-5 £ 20-5 £10 Aug Cash 20025 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 Cr20-5 £ 20-5 £27 Aug Bank 150 15 Aug Bank 1,000
Dr Drawings Account Cr
20-5 £ 20-5 £17 Aug Cash 100
2.5 Dr Bank Account Cr
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 Cr20-7 £ 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
Dr Cash Account Cr
20-7 £ 20-7 £
15 Nov Commission received 300 18 Nov Drawings 125
23 Nov Bank 100
Dr Commission Income Account Cr
20-7 £ 20-7 £
15 Nov Cash 30028 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
2
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2.6 Bank Account20-7 Debit Credit Balance
£ £ £1 Nov Capital 75,000 75,000 Dr3 Nov Photocopier 2,500 72,500 Dr7 Nov Bank loan 70,000 142,500 Dr
10 Nov Office premises 130,000 12,500 Dr12 Nov Rates 3,000 9,500 Dr14 Nov Office fittings 1,500 8,000 Dr20 Nov Wages 250 7,750 Dr23 Nov Cash 100 7,850 Dr25 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 iscredited 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 moneyout is recorded on the credit side
• an explanation of various accounts including
– capital – the amount of money invested in the business by the owner
– fixed assets – items purchased by a business for use on a long-term basis (noting thedistinction 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
3.1 Dr Bank Account Cr
20-2 £ 20-2 £1 Oct Capital 2,500 2 Oct Purchases 2004 Oct Sales 150 6 Oct Purchases 908 Oct Sales 125 14 Oct Purchases 250
12 Oct K Smithson: loan 2,000 22 Oct Delivery van 4,00018 Oct Sales 155 25 Oct Wages 37530 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 2006 Oct Bank 90
14 Oct Bank 250
Dr Sales Account Cr
20-2 £ 20-2 £4 Oct Bank 1508 Oct Bank 125
18 Oct Bank 15530 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 2004 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 1507 Apr Bank 175
12 Apr Bank 11028 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 25022 Apr Pershore Patisserie 125
Dr Purchases Returns Account Cr
20-2 £ 20-2 £9 Apr Wyvern Producers Ltd 50
26 Apr A Larsen 45
3
CHAPTER 3 Double-entry book-keeping: further transactions
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Dr Sales Returns Account Cr
20-2 £ 20-2 £15 Apr Pershore Patisserie 25
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
Dr Cash Account Cr
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 40023 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
Dr Sales Account Cr
20-3 £ 20-3 £4 Jun Bank 2205 Jun Cash 115
10 Jun Wyvern Trade Supplies 35012 Jun Bank 17520 Jun Cash 180
Dr Bank Account Cr
20-3 £ 20-3 £4 Jun Sales 220 18 Jun Designs Ltd 250
12 Jun Sales 17528 Jun Wyvern Trade Supplies 300
Dr Cash Account Cr
20-3 £ 20-3 £
5 Jun Sales 115 26 Jun Rent paid 125
20 Jun Sales 180
Dr Purchases Returns Account Cr
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 Cr20-3 £ 20-3 £
10 Jun Sales 350 15 Jun Sales returns 50
28 Jun Bank 300
Dr Sales Returns Account Cr
20-3 £ 20-3 £
15 Jun Wyvern Trade Supplies 50
Dr Rent Paid Account Cr
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 t rainee:
• Separate accounts for purchases and sales enable the business to know the amount of goods boughtand 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 purchasesaccount 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 fixed asset, which will
be used on a long-term basis. As such the purchase of the van – which is an example of capitalexpenditure – is entered on the debit side of van account.
• Purchases returns (or returns out) is where we return goods to a creditor (supplier). The returnstransaction is recorded the opposite way round to a purchases transaction.
Sales returns (or returns in) is where a debtor (customer) returns goods to us. The transaction isrecorded the opposite way round to a sales transaction.
• Carriage inwards and carriage outwards are kept in separate accounts because they representdifferent transactions. Carriage inwards is where we pay the carriage cost of goods purchased to havethem 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’.
4
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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.
5
invoice to
deliver to
invoice no 2451account
your reference
date todayas above
product description quantity unit unit total trade net
code price discount %
£ £ £
Dresses 5 30.00 each 150.00 0.00 150.00Suits 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 Fashions49 Highland Street
Longton
Mercia LT3 2XL
INVOICE
JANE SMITH, FASHION WHOLESALERUnit 21, Eastern Industrial Estate, Wyvern, Wyvernshire, WY1 3XJ
TOTAL 492.50
invoice to
deliver to
invoice no 8234account
your reference
date todayas 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 Shop126 The Cornbow
Teamington Spa
Wyvernshire WY33 0EG
INVOICE
DEANSWAY TRADING COMPANYThe 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 1507 Feb G Patel 240
Dr G Lewis Cr20-4 £ 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
Dr Bank Account Cr
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, andindicated 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 theamount 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 f rom:
– cheque counterfoils
– paying-in slip counterfoils
– cash rece ip ts
– till rolls
– information from bank statements, such as standing orders, direct debits, BACS, credit transfers,bank charges
6
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
Net 30 days
TOTAL 787.50
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5.1 (a) and (c)
Dr Bank Account Cr
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
Dr Rent Paid Account Cr
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
1 Mar Balance b/d 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
1 Mar Balance b/d 17,000
7
CHAPTER 5 Balancing accounts – the trial balance4.8 (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)
(c) Wyvern Products Limited will pay £448.87 (£472.50 x 95%) for settlement in full within 14 days.
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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
Creditors 1,442
Equipment 2,704Van 3,200
Sales returns 90
Debtors 1,174
Wages 1,500
Capital (missing figure) 6,000
9,566 9,566
8
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
1 Mar Balance b/d 5,500
Dr Sales Account Cr
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
1 Mar Balance b/d 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
1 Mar Balance b/d 1,050
Dr Sales Returns Account Cr20-9 £ 20-9 £
27 Jan Rowcester College 100
Dr Purchases Returns Account Cr
20-9 £ 20-9 £
5 Feb Comp Supplies Ltd 150
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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
Dr Sales Account Cr
20-2 £ 20-2 £
28 Feb Sales Day Book 1,080
9
5.5 Four from:
• Error of omission
Business transaction completely omitted from the accounting records. For example, cash sale omittedfrom 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 saleentered 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 THughes has been entered as debit A J Hughes' account, credit sales account.
• Error of principleTransaction entered in the wrong type of account. For example, cost of petrol for vehicles has beenentered 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 accountand the debtor'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
Date Details Invoice Reference Amount
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
CHAPTER 6 Division of the ledger – the use of subsidiary books
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GENERAL LEDGER
Dr Purchases Account Cr
20-2 £ 20-2 £
31 May Purchases Day Book 1,118.00
Dr Purchases Returns Account Cr
20-2 £ 20-2 £
31 May Purchases Day Book 108.00
6.5 (a)
10
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
Date Details Invoice Reference Amount
20-2 £
2 May M Roper & Sons 562 PL 302 190
4 May Wyper Ltd 82 PL 301 200
10 May Wyper Ltd 86 PL 301 210
18 May M Roper & Sons 580 PL 302 180
21 May Wyper Ltd 91 PL 301 240
25 May M Roper & Sons 589 PL 302 9831 May Total for month 1,118.00
Purchases Returns Day Book
Date Details Credit Reference AmountNote
20-2 £
18 May M Roper & Sons 82 PL 302 30
23 May Wyper Ltd 6 PL 301 40
28 May M Roper & Sons 84 PL 302 38
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) Cr20-2 £ 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
1 Jun Balance b/d 485
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7.3
Dr Cash Book Cr
Date Details Ref Disc Cash Bank Date Details Ref Disc Cash Bankallwd 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 50012 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 Bankallowed 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 2,00030 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 debitcash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.
11
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 regularcustomers
– 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 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 Sales returns S Johnson
S Johnson day book
(c) Credit note received Purchases returns Roper & Purchases
from Roper & Company day book Company returns
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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 GERRARDBANK 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 DOYLEBANK 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
12
CHAPTER 8 Bank reconciliation statements7.6 (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/Creditor CR Bank
(ii) Credit transfer for payment by a customer Amounts paid directly into the bank by a debtor, who has the necessary bank codeinformation.
DR Bank CR Customer/Debtor
7.8 (a) and (b)
Dr Cash Book Cr
Date Details Disc Cash Bank Date Details Disc Cash Bank20-6 £ £ £ 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 1,31931 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 £
31 Jan Cash book 3
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8.7 (a)
Dr Cash Book Cr
Date Details Bank Date Details Cheque Bank2003 £ 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 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 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
13
8.5 (a) (i) Standing orders
Credit
Regular payments of the same amount made directly from the bank on behalf of the companyon 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 thecustomer usually for changing amounts.
(iii) Credit transfers
Debit or Credit
Receipts from customers paid directly into the bank of the payee. Payments to suppliers orwages 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)
Tutorial note: brackets indicate an overdraft
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9.7 (a) (i) R MASTERS
PROFIT AND LOSS ACCOUNT 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
Net profit 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 Net profit 24,051
60,841 60,841
1 Apr Balance b/d 48,341
(b) Two from:
– i nc reased by ne t p ro fit
– more capital int roduced
– 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
2001 Details £ p 2001 Details £ p
1 Dec Balance b/d 1,269.43
31 Dec Monthly total 236.91
Dr Purchases Account Cr
2001 Details £ p 2001 Details £ p
1 Dec Balance b/d 10,276.41
31 Dec Monthly total 2,769.56
Dr Returns Outwards Account Cr
2001 Details £ p 2001 Details £ p
1 Dec Balance b/d 1,039.41
31 Dec Monthly total 127.50
14
9.2
9.5 CLARE LEWISTRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-4
£ £Sales 144,810Opening stock 16,010Purchases 96,318
112,328Less Closing stock 13,735Cost of sales 98,593Gross profit 46,217Less expenses:Salaries 18,465Heating and lighting 1,820
Rent and rates 5,647Sundry expenses 845Vehicle expenses 1,684
28,461Net profit 17,756
BALANCE SHEET AS AT 31 DECEMBER 20-4£ £ £
Fixed AssetsVehicles 9,820Office equipment 5,500
15,320Current AssetsStock 13,735Debtors 18,600
32,335Less Current LiabilitiesCreditors 12,140Bank overdraft 5,820
17,960Net Current Assets or Working Capital 14,375NET ASSETS 29,695
FINANCED BYCapitalOpening capital 25,250Add Net profit 17,756
43,006Less Drawings 13,311
29,695
CHAPTER 9 Introduction to final accounts
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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 sheetdate – 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 Stock GL 22,600
Trading GL 22,600Stock valuation at 31 December 20-8
transferred to trading account
(b)
Date Details Reference Dr Cr
20-8 £ £
31 Dec Profit and loss GL 890
Telephone expenses GL 890
Transfer to profit and loss account
of expenditure for the year
(c)
Date Details Reference Dr Cr
20-8 £ £
31 Dec Drawings GL 200
Motoring expenses GL 200
Transfer of private motoring to
drawings account
15
CHAPTER 10 The general journal and correction of errors
(b) AMARYLLIS TRADING
TRADING ACCOUNT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001
£ £ £
Sales 21,053.57
Less Returns inwards 1,506.34
19,547.23
Less Cost of sales:
Opening stock 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 stock 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) Turnover £19,547.23
9.10 MEMORANDUM
Date TodayTo Mary Arbuthnot, proprietor of Mary’s Doll Shop
From Financial Accounting Student
Subject Balance sheet queries
1. Cost of new delivery van
Section: Fixed 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. Stock 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
continued
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(c) error of principle
Date Details Reference Dr Cr
£ £
Delivery van GL 10,000
Vehicle expenses GL 10,000
Correction of error – vehicle no ............
invoice no ...............
(d) reversal of entries
Date Details Reference Dr Cr
£ £
Postages GL 55
Bank GL 55
Postages GL 55
Bank GL 55
110 110
Correction of reversal of entries
on ...................
(e) compensating error
Date Details Reference Dr Cr
£ £
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
Date Details Reference Dr Cr
£ £
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)....
16
(d)
Date Details Reference Dr Cr
20-8 £ £
31 Dec Drawings GL 175
Purchases GL 175
Goods taken for own use
by the owner
(e)
Date Details Reference Dr Cr
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
Date Details Reference Dr Cr
£ £
J Rigby SL 150
Sales GL 150
Sales invoice no ............. omitted from
the accounts.
(b) mispost/error of commission
Date Details Reference Dr Cr
£ £
H Price Limited PL 125
H Prince PL 125
Correction of mispost – cheque no .....:
to H Price Limited
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(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 bythe same amount, and will not be revealed by the trial balance. Such an error is not entered in thesuspense 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 ABrown entered to BBrown’s account
• explanation – although the entry has been misposted to the wrong person’s account, the trialbalance will still balance because the entry has been made on the correct side of the account.
(c) Sales ledger control account (see Chapter 11)
17
10.6 (a) Two from:
– trial balance
– bank reconci liat ion 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
Premises 65,000
Motor vehicles 5,000
Motor expenses 1,650
Purchases 38,900Sales 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
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(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 receivedfrom debtors 911.43
28 Feb Cash discount allowed 23.37
28 F eb 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 debtor 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 108.40 427.91Sales 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 notinvolve the accounts of creditors – it is a cash purchase (ie debit purchases; credit bank/cash)
18
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. Fixed asset add 9,500
5. Error of commission – no effect on profi t
6. Closing stock (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 £ p1 Feb Balance b/d 826.40 20 Feb Bank 805.743 Feb Sales 338.59 20 Feb Discount allowed 20.66
28 Feb Balance c/d 338.591,164.99 1,164.99
1 Mar Balance b/d 338.59
Dr B Brick (Builders) Limited Cr
20-8 £ p 20-8 £ p1 Feb Balance b/d 59.28 28 Feb Bad debts written off 59.28
Dr Mereford Manufacturing Company Cr
20-8 £ p 20-8 £ p1 Feb Balance b/d 293.49 24 Feb Sales returns 56.293 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 £ p1 Feb Balance b/d 724.86 7 Feb Sales returns 165.38
17 Feb Sales 394.78 28 Feb Balance c/d 954.261,119.64 1,119.64
1 Mar Balance b/d 954.26
Dr Wyvern Warehouse Limited Cr
20-8 £ p 20-8 £ p1 Feb Balance b/d 108.40 15 Feb Bank 105.69
17 Feb Sales 427.91 15 Feb Discount allowed 2.7128 Feb Balance c/d 427.91
536.31 536.31
1 Mar Balance b/d 427.91
CHAPTER 11 Control accounts
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12.1 (a) Expense in profit and loss account of £56,760; balance sheet shows wages and salaries accrued(current liability) of £1,120.
(b) Expense in profit and loss account of £2,852; balance sheet shows rates prepaid (current asset) of£713.
(c) Expense in profit and loss account of £1,800; balance sheet shows computer rental prepaid (currentasset) of £150.
12.2 SOUTHTOWN SUPPLIES
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-9
£ £
Sales 420,000
Opening stock 70,000
Purchases 280,000
350,000
Less Closing stock 60,000
Cost of sales 290,000
Gross profit 130,000
Less expenses:
Rent and rates 10,250 – 550 9,700
Electricity 3,100
Telephone 1,820
Salaries 35,600 + 450 36,050
Vehicle expenses 13,750
64,420
Net profit 65,580
12.7 HAZELHARRIS
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-4
£ £
Sales 614,000
Opening stock 63,000Purchases 465,000
528,000
Less Closing stock 88,000Cost of sales 440,000
Gross profit 174,000
Add Discount received 8,140182,140
Less expenses:
Building repairs 8,480Vehicle expenses 2,680
Wages and salaries 86,060 + 3,180 89,240
Discount allowed 10,610Rates and insurance 6,070 – 450 5,620
General expenses 15,860Depreciation: vehicles 12,000 x 20% 2,400
furniture and fittings 2 5,000 x 10% 2,500
137,390
Net profit 44,750
19
CHAPTER 12 Adjustments to final accounts11.6 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 thesales ledger, but has no effect on the control account.
11.7 (a)
Dr Sales Ledger Control Account Cr
2003 Details £ 2003 Details £
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
2003 Details £ 2003 Details £
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 debtors in the sales ledger are totalled.
• The balances of the individual accounts of creditors in the purchases ledger are totalled.
• These totals should agree with the balances of sales ledger control account and purchases ledgercontrol account respectively.
(c) • Some types of errors (such as a mispost/error of commission) will not be revealed by the controlaccount. 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 pinpointwhere the error has occurred.
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BALANCE SHEET AS AT 31 DECEMBER 20-8
£ £ £
Fixed Assets
Shop fittings at cost 12,000
Less provision for depreciation 2,400 + 2,400 4,800
Net book value 7,200
Current Assets
Stock 28,176
Debtors 3,641
Cash 163
Prepayment of expenses 310
32,290
Less Current Liabilities
Creditors 10,290
Bank 3,084
Accrual of expenses 85
13,459
Net Current Assets or Working Capital 18,831
NET ASSETS 26,031
FINANCED BY
Capital 20,806
Add Net profit 27,421
48,227
Less Drawings 22,19626,031
12.10 (a)
Dr Telephone Account Cr
Date Details £ Date Details £
2007 2007
31 May Cash/bank 2,400 31 May Profit and loss account 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
20
BALANCE SHEET AS AT 31 DECEMBER 20-4
£ £ £
Fixed 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
Stock 88,000
Debtors 52,130Prepayment of expenses 450
140,580
Less Current Liabilities
Creditors 41,850
Accrual of expenses 3,180
Bank 2,000
47,030
Net Current Assets or Working Capital 93,550
220,750
Less Long-term Liabilities
Bank loan 75,000
NET ASSETS 145,750
FINANCED BY
CapitalOpening capital 125,000
Add Net profit 44,750
169,750
Less Drawings 24,000
145,750
12.9 BETH DAVIS
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-8
£ £
Gross profit 95,374
Less expenses:
Wages and salaries 55,217Heating 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
Net profit 27,421
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13.2 • The final accounts of a sole trader comprise:
– trading and profit and loss account
– balance sheet
• The trading and profit and loss account shows:
income minue expenses equals net profit (or loss)
• The trading account shows gross profit, while the profit and loss account shows net profit (or loss)
• The balance shows shows:
assets minus liabilities equals capital
• Assets are items owned by the business; liabilities are amounts owed by the business; capital is theamount of the owner’s investment.
13.3 (a) The Partnership Act 1890 defines a partnership as “the relation which subsists between personscarrying on a business in common with a view of profit”.
(b) Where no partnership agreement exists, then the following accounting rules from the Partnership Act1890 must be followed:
• profits and losses are to be shared equally between the partners
• no partner is entit led 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 atfive 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 di rectors
• Types of compani es
– public l imited company
– private limited company
– company l imited by guarantee
• Advantages of forming a limited company
– l imited liabil ity
– separate legal entity
– abi li ty to raise f inance
– membership
– other factors
21
(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 profit and loss
account as an expense:
– debit profit and loss account
– credit bad debts written off account
The effect of writing off this bad debt will be to reduce your net profit by £350 and, at the same time,
the debtors’ figure in your balance sheet will be reduced by the amount, so reducing the net assets
of the business.
CHAPTER 13 Business organisations
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14.1 • Going concern concept
This presumes that the business to which the final accounts relate will continue to trade in the foreseeablefuture. The trading and profit and loss account and balance sheet are prepared on the basis that there isno intention to reduce significantly the size of the business or to liquidate the business. If the business wasnot a going concern, assets would have very different values, and the balance sheet would be affectedconsiderably.
Example: As a going concern, fixed assets are valued at cost, less accumulated depreciation to date; stockis 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 profit and loss account which has been used in the accountingperiod but not yet paid for. The prepayment of an expense for the next accounting period. The recording ofopening and closing stocks in the trading account. The use of debtors' and creditors' accounts to recordamounts 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 worthwhilerecording 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 stocks of office stationery are often not valued for the purpose of final accounts becausethe amount is not material and does not justify the time and effort involved
– low-cost fixed assets are often charged as an expense in profit and loss account because, whilestrictly these should be treated as fixed assets and depreciated each year, in practice they are treatedas profit and loss account expenses as the amounts involved are not material – such as a calculator,
a staplerMateriality depends very much on the size of the business – what is material and what is not becomes amatter of judgement.
• Business entity concept
This refers to the fact that final accounts record and report on the activities of a particular business. Forexample, the personal assets and liabilities of those who play a part in owning or running the business arenot 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 stock, at the lower of cost and net realisable value
– depreciation of fixed assets, to measure the amount of the fall in value of fixed assets over time
– bad debts written off, to reduce the debtors’ figure to give a realistic view of the amount that thebusiness can expect to receive
– provision for doubtful debts (see Chapter 15), to reduce the debtors’ figure
(c) The concept of consistency means that, when a business adopts particular accounting policies, itshould continue to use such policies consistently
(d) Examples (question asks for one example)
– valuation of stock
– depreciation of fixed 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 yearscan 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) Stock 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 Net Current Current CapitalProfit Profit 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 decreaseConsistency £18,000 £18,000 £18,000 change £18,000
4. Business no increase no no noentity 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 aconservative figure for profit or the valuation of assets.
• In stock valuation it is applied by using the lower of cost and net realisable value. (Note that netrealisable value is the selling price of the goods, less further costs to get the stock into a saleablecondition.)
• A lower closing stock figure means that profits are not overstated – thus the amount drawn by theowner(s) will be reduced, so helping to ensure the continued financial viability of the business.
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CHAPTER 14 Accounting concepts and stock valuation
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15.2
Dr Commission Income Account Cr
20-7 £ 20-7 £
31 Dec Balance b/d 100 31 Dec Bank/Cash 1,250
(accrual of income) (receipts for year)
31 Dec Profit and loss account 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 Profit and loss account 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 Profit and loss account 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 Profit and loss account 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 Profit and loss account 1,000
20-0 20-0
1 Jan Balance b/d 1,000
(c) • Profit and loss account (expenses)
debit bad debts written off £420debit provision for doubtful debts £1,000
Explanation: profit for the year is reduced by £1,420
• Balance sheet
debtors £39,000
Workings: £40,420 – £420 bad debts = £40,000 – £1,000 provision for doubtful debts = £39,000 netdebtors
Explanation: current assets are reduced by £420 + £1,000 = £1,420
15.6
Year Profit and loss account Balance sheet
Expense Income Debtors Less prov for Net(a fte r bad doubtf ul debt s debt ors
Bad Increase in Bad Decrease in debts
debts provision for debts provision for written off)
written off doubtful debts recovered doubtful debts
£ £ £ £ £ £ £
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 provision20-6 (£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
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CHAPTER 15 Further aspects of final accounts
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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 ) • Deprecia tion 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 assetat the end of its life
• Profits are lower after depreciation has been deducted – this may discourage drawings from thebusiness
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 £
1 Jan Balance b/d 15,000
(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 Profit and loss account 3,000
10,200 10,200
20-9 £ 20-9 £
1 Jan Balance b/d 3,000(c)
Dr Disposals Account – Vehicles Cr
20-8 £ 20-8 £
1 O ct Vehicles 12,000 1 Oct Vehicles 5,50031 Dec Profit and loss account 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
Fixed assetsVehicles 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
Fixed Assets £
Vehicle at cost 25,000
Less provision for depreciation 3,125
Net book value 21,875
Tutorial note: Do not deduct the trade in allowance from the cost price of the new vehicle – thecost price is £25,000.
15.13 (a) Profi t 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
£
Fixed Assets
Machinery at cost 176,000 (£170,000 – £24,000 + £30,000)
Less prov for depreciation 123,500 (£105,000 – £18,000 + £36,500)
Net book value 52,500
Current Liabilities
Cred ito r – inst alment due on mach ine (11, 000)
Tutorial notes:
• depreciation for 2003 is calculated at 25% straight-line method (being the rate applied to the oldmachine)
• therefore depreciation on remaining machinery is £170,000 – £24,000 = £146,000 x 25% = £36,500
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15.16 THOMAS SALMON
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 NOVEMBER 2004
£ £
Gross profit 68,772
Add income:
Discount received 119
Rent receivable 720
69,611
Less expenses:
Wages 26,320
Bad debts 340
Rent and rates 4,630
Other expenses 21,435
Discount allowed 286
Income in provision for doubtful debts *230
Depreciation of fixed assets **9,000
Loss on sale of van ***100
62,341
Net profit 7,270
* £1,120 – £890 = £230
** £27,000 provision for depreciation at start of year – £6,000 depreciation on van sold = £21,000,which is deducted from £30,000 provision for depreciation at end of year = £9,000 depreciation
for year (as shown in profit and loss account)
*** £
Net book value (£8,000 – £6,000) 2,000
Sale price 1,900
Loss on sale 100
16.1 (a) Capital expenditure £
cost of van 11,650
air conditioning 550
fitted shelving 350
total 12,550
(b) Revenue expenditure
tax disc 165
cost of extended warranty 220
tank of fuel 40
insurance premium 450
total 875
16.4 (a) ABEL BROWN
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001
£ £
Sales 278,400
Less Cost of sales:
Opening stock 12,700
Purchases 153,900
166,600
Less Closing stock 14,100 152,500
Gross profit 125,900
Less expenses:
Wages 75,400Rent 2,280
Other expenses 25,120
Depreciation 15,000 117,800
Net profit 8,100
Workings: • Wages £74,750 + £650 owing
• Rent £2,500 – £220 prepaid
• Depreciation £150,000 x 10%
(b) New net profi t: £11 ,100
Workings:
• Depreciation, using the straight-line method, at present is £15,000 (see above)
• Reducing balance depreciation will be 20% (£150,000 – £90,000) = 20% x £60,000 = £12,000
• Therefore reducing balance depreciation is £3,000 less this year than straight-line method, soprofits will increase from £8,100 (see above) to £11,100.
16.5 JOHN HENSONTRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-8
£ £
Sales 122,000
Opening stock 6,250
Purchases 71,600
77,850
Less Closing stock 8,500
Cost of sales 69,350
Gross profit 52,650
Add income:
Discounts received 28552,935
Less expenses:
Vehicle running expenses 1,480 + 230 1,710
Rent and rates 5,650
Office expenses 2,220 – 120 2,100
Wages and salaries 18,950
Depreciation: office equipment 1,000
vehicle 3,000
32,410
Net profit 20,525
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CHAPTER 16 Preparing sole trader final accounts
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BALANCE SHEET AS AT 31 DECEMBER 20-8
£ £ £
Fixed Assets Cost Prov fo r dep 'n Net book value
Office equipment 10,000 1,000 9,000
Vehicle 12,000 3,000 9,000
22,000 4,000 18,000
Current Assets
Stock 8,500
Debtors 5,225
Prepayment of expenses 120
Bank 725
14,570
Less Current Liabilities
Creditors 4,910
Accrual of expenses 230
5,140
Net Current Assets or Working Capital 9,430
NET ASSETS 27,430
FINANCED BY
Capital
Opening capital 20,000
Add Net profit 20,525
40,525
Less Drawings 13,095
27,430
16.6 (a) KEN TUCKY
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2006
£ £
Sales 587,461
Less Returns inwards 837
586,624
Opening stock 39,771
Purchases 280,797 – 2,170 goods for own use 278,627
318,398Less Closing stock 40,135
Cost of sales 278,263
Gross profit 308,361
Less expenses:
Wages 128,528 + 1,383 129,911
Motor expenses 47,870 – 18,500 29,370
Rates 7,810
Insurances 7,780 – 286 7,494
Bad debts written off 1,368
General expenses 33,713
Provision for depreciation:
premises 2,900
equipment 1,140motor vehicles 13,448
227,154
Net profit 81,207
Depreciation calculations
• Premises: £145,000 x 2% = £2,900
• Equipment: £11,400 x 10% = £1,140
• Motor vehicles £42,000 + £18,500 acquisition = £60,500 – £26,880 depreciation to date =£33,620 x 40% = £13,448
(b) Additional information 4
• This is a prepayment of expenses.• The amount is deducted from the expense to be shown in profit and loss account, ie £7,780
expense – £286 prepayment = £7,494 to profit and loss account.
• The amount will be shown as a current asset in the balance sheet.
• The £286 will be included in the cost for insurances charged to next year’s profit and lossaccount.
• The accounting concept is accruals (or matching) – expenses and revenues for goods andservices are matched to the same time period, here the year ended 31 March 2006.
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(b) Additional information 5
• The owner has taken some of the goods in which the business trades for his own use.
• The amount, here £2,170, is deducted from purchases and added to the owner’s drawings(which will be deducted from capital in the balance sheet).
• The reason for reducing purchases is to ensure that only those purchases used in the businessare recorded, which are then matched to the sales derived from them.
• The accounting concept is business entity which keeps separate from the business the personalassets and liabilities of the owner.
(c) • A provision for doubtful debts should be created so that the balance sheet figure of net debtorsis a reliable estimate of the amount that will be received.
• If a provision is not made, then profits will be overstated by the amount of doubtful debts.
• Creation of a provision for doubtful debts is shown as an expense in profit and loss account, anddeducted from debtors in the balance sheet.
• The accounting concept is prudence.
16.8 (a) SIOBHAN HUGGETT
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2004
£ £
Sales 293,100Opening stock 7,800
Purchases 123,400
131,200
Less Closing stock 8,700
Cost of sales 122,500
Gross profit 170,600
Add income:
Reduction in provision for doubtful debts 40
170,640
Less expenses:
Wages and general expenses 117,800
Business rates 13,330
Bad debts written off 750
Provision for depreciation:
fixtures and fittings 10,800
vehicles 31,840
174,520
Net loss 3,880
Workings:
• Purchases: £149,400 – £3,000 goods for own use – £23,000 fixtures = £123,400
• Closing stock: valued at the lower of cost, £8,700, and net realisable value, £11,500
• Provision for doubtful debts: £9,000 debtors x 3% provision = £270, which is deducted from £310existing provision = £40 reduction in provision for doubtful debts
• Wages and general expenses: £116,200 + £1,600 accrual = £117,800
• Business rates: £13,510 – £180 prepayment = £13,330
• Provision for depreciation of fixtures and fittings: £85,000 + £23,000 acquisition =£108,000 x 10% = £10,800
• Provision for depreciation of vehicles: £160,000 – £80,400 depreciation to date = £79,600 x 40%= £31,840
(b) Example of capital expenditure: purchase of fixtures
Example of revenue expenditure: wages and general expenses
(c) Capital expenditure is expenditure incurred on the purchase, alteration or improvement of fixedassets.
Revenue expenditure is expenditure incurred on running expenses.
Capital expenditure is shown on the balance sheet (subject to the accounting concept of materiality),while revenue expenditure is an expense in the profit and loss account. It is important to classify theseitems of expenditure correctly in the accounting system so that the final accounts report reliably onthe financial state of the business – profit is stated accurately and the balance sheet shows the assets
owned by the business.
16.9 (a) WULLIE McDUFF
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 2005
£ £
Gross profit 807,850
Add income:
Bad debts recovered 100
Reduction in provision for doubtful debts 65
808,015
Less expenses:
Wages 748,432
Rent and rates 12,140General expenses 37,898
Bad debts written off 760
Loss on sale of vehicle 200
Provision for depreciation:
premises 2,400
vehicles 7,500
809,330
Net loss 1,315
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Workings:
• Provision for doubtful debts: £35,000 debtors x 2.5% provision = £875, which is deducted from£940 existing provision = £65 reduction in provision for doubtfut debts.
• Rent and rates: £12,460 – £320 prepayment = £12,140
• General expenses: £36,980 + £918 accrual = £37,898
• Loss on sale of vehicle: £20,000 cost – £15,000 depreciation to date = £5,000 net book value atdate of sale – £4,800 sale proceeds = £200 loss on sale.
• Provision for depreciation of premises: £120,000 x 2% = £2,400
• Provision for depreciation of vehicles: £60,000 – £30,000 depreciation to date = £30,000 x 25%
= £7,500
(b) The private limited is the most common form of limited company and is defined as ‘any company thatis not a public company’ (Companies Act 2006). Many private limited companies are smallcompanies, often in family ownership and it would seem appropriate for Wullie McDuff to consider thisform of business organisation.
Advantages include:
• limited liability – the shareholders of the company can only lose the amount of their investment(together with any money unpaid on their shares); the personal assets of the shareholders arenot available to the company’s creditors
• separate legal entity – a limited company is separate from the owners
• ability to raise finance – the smaller company can raise funds from venture capital companies,relatives and friends; debentures can be issued to raise long-term finance from lenders andinvestors
• a limited company may have a higher standing and status in the business community,allowing itto benefit from economies of scale, and making it of sufficient size to employ specialists
Disadvantages include
• membership – all ordinary shareholders have voting rights, so Wullie may lose some control ofthe business
• documentation – there is more documentation – eg the preparation of formal annual accounts –for a company to produce than for a sole trader business; the costs of administering a companyare higher than for a sole trader
Conclusion • Wullie must consider the advantages and disadvantages of changing his business into a private
limited company. If he is seeking to expand the business and raise finance, it would be sensibleto consider this option. At the same time he would gain the benefit of limited liability.
17.1 (a) • Ordinary shares are the most commonly issued class of share. They take a share of the profitswhich remain after all other expenses of the business. The main risk of ordinary shares is that partor all of the value of the shares will be lost if the company loses money or becomes insolvent.
• Preference shares usually carry a fixed rate of dividend which is paid in preference to that ofordinary shareholders. In the event of the company ceasing to trade, the preference shareholderswill also receive repayment of capital before the ordinary shareholders.
(b) • Nominal value is the face value of a share which is entered in the accounts, eg 5p, 10p, 25p, 50por £1.
• Market value is the price at which issued shares are traded, ie bought and sold.(c) • Capital reserves are created as a result of a non-trading profit; examples include revaluation
reserve, share premium account.
• Revenue reserves are retained profits from the profit and loss account; examples include profit andloss account, retained profits, general reserve.
(d) • Abonus issue is the capitalisation of reserves – either capital or revenue – in the form of free sharesissued to existing shareholders in proportion to their holdings; no cash flows into the company.
• A rights issue is the raising of cash by offering shares to existing shareholders, in proportion to theirholdings, at a favourable price.
17.2 (a) debenture interest is shown as an expense in profit and loss account
(b) directors' remuneration is shown as an expense in profit and loss account
(c) corporation tax is shown in the appropriation section of the profit and loss account, and any amount
not yet paid is shown as a current liability on the balance sheet(d) dividends proposed are shown in the appropriation section of profit and loss account and as a
current liability on the balance sheet
(e) revaluation reserve is shown as a capital reserve as a part of the shareholders' funds section of thebalance sheet
(f) goodwill is shown as an intangible asset in the fixed assets section of the balance sheet; it isamortised in the same way as tangible fixed assets are depreciated
17.4 (a) MASON MOTORS LTDPROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-1
£
Net profit before taxation 75,000
Less corporation tax 20,050
Profit for year after taxation 54,950
Less final ordinary dividend proposed 10,000
44,950
Less transfer to general reserve 20,000
Retained profit for year 24,950
Add balance o f re ta ined pro fit s a t beg inni ng o f year 100, 000
Balance of retained profits at end of year 124,950
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(b) Retained profits is profit which has been kept in the company. It belongs to the shareholders, but isrepresented by assets in the balance sheet and is not a bank balance available to rebuild thegarage forecourt.
17.7 (a) SRIAN PLCPROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 MAY 2003
£ £
Net profit before taxation *9,300,000
Less corporation tax 2,600,000
Profit for year after taxation 6,700,000
Less ordinary dividends – paid 800,000
– proposed 1,300,000
2,100,000
4,600,000
Less transfer to general reserve 1,000,000
Retained profit for year 3,600,000
* Draft profit 12,000,000
Less:
directors’ f ees 1,500,000
debenture interest 1,200,000
Net profit 9,300,000
(b) Issue of ordinary shares
– ordinary shares are not normally repayable, so the company will have the finance for theforeseeable future
– the new shareholders will have voting rights
– not essential to pay dividends every year, although a failure to do so might cause difficulties withfuture share issues
– the power of the existing shareholders will be diluted because there will be more shares in issue
– the company’s gearing ratio will be improved
Issue of debentures
– a different type of financing based on loans and interest, rather than shares and dividends
– the interest charge will rise by £1,800,000 from £1,200,000 to £3,000,000
– interest must be paid whether or not profits are made
– a failure to pay interest could lead the company into insolvency
– no voting rights, so no dilution of shareholders’ power
– debentures must be repaid at an agreed date in future
– interest rate is fixed, whatever may happen to the level of interest rates
– debenture holders likely to require security for their loan in the form of a mortgage over companyassets; this may restrict the use the company can make of the assets
– if repayment not made at due date, debenture holders can realise assets to obtain repayment
– the company’s gearing ratio will be worsened
Gearing ratio
Without having information on the company’s revenue reserves (retained profit and general reserve), thegearing ratio is currently:
Loan capital = £20,000,000 = 0.8:1 or 80%Share cap ita l £25 ,000,000
This is already a high gearing ratio which investors will not wish to see going above 1:1 or 100%.
If ordinary shares are issued to raise the money for expansion, the gearing ratio (including sharepremium account) becomes:
£20,000,000 = 0.36:1 or 36%£55,000,000*
* ordinary shares £25,000,000 + £20,000,000 and share premium account £10,000,000
This is a much improved gearing ratio.
If debentures are issued, the gearing ratio becomes:
£50,000,000* = 2:1 or 200%£25,000,000
* 6% debentures £20,000,000 + £30,000,000
This is an extremely high gearing ratio, well above the ‘normal’maximum of 1:1 or 100% acceptable toinvestors. It may be that Srian plc will have difficulty in meeting the annual interest costs of this option.
Conclusion
It seems to be preferable for Srian to finance its expansion scheme with an issue of ordinary shares.This has a much lower gearing ratio than the issue of debentures – the company may have difficulty inthe future meeting the extra annual interest cost of £1,800,000.
17.9 (a) STOULBY LIMITEDPROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2006
£ £
Net profit before taxation 650,000
Less corporation tax 155,000
Profit for year after taxation 495,000
Less ordinary dividends – paid 63,000
– proposed *100,000
163,000
332,000
Less transfer to general reserve 120,000
Retained profit for year 212,000
Add balance of retained profi ts (profit and loss account) at beginning of year 410,000
Balance of retained profits at end of year 622,000
* 4,000,000 ordinary shares x 2.5 pence per share
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(b) SHARE CAPITAL AND RESERVES AT 31 DECEMBER 2006
£ £
Issued Share capital
4,000,000 ordinary shares of 50p each 2,000,000
Capital Reserve
Share premium account 500,000
Revenue Reserves
General reserve *420,000
Profit and loss account 622,000
1,042,000
SHAREHOLDERS’FUNDS 3,542,000
* £300,000 + £120,000 transfer
(c) Revenue reserves are profits from trading activities which have been retained in the company to helpbuild the company for the future.
(d) Profit and loss account or general reserve
(e) Revenue reserves can be used to fund dividend payments or to provide bonus shares to shareholders.
17.10 (a)
£
Retained profit for year as per draft final accounts 150,000
Less transfer to general reserve 45,000
Less ordinary dividend 35,000
Less preference dividend 4,000
Corrected retained profit for year 66,000
(b) DAVID MARK LIMITED
SUMMARISED BALANCE SHEET AS AT 31 DECEMBER 2002
£ £ £
Fixed Assets 700,000
Current Assets
Stock 85,000
Debtors 60,000
Bank balance 167,000
312,000
Less Current Liabilities
Trade creditors 37,000
Proposed dividends *39,000
76,000
Net Current Assets or Working Capital 236,000
NET ASSETS 936,000
FINANCED BY
Ordinary shares 350,000
8% Preference shares 100,000
Share premium account 50,000
General reserve 120,000
Profit and loss account 316,000
SHAREHOLDERS’FUNDS 936,000
* £35,000 + £4,000
(c ) • Li mit ed company, o r
• Private Limited Company
(d) • The term ‘Ltd’means that the shareholders of David Mark Limited have limited liability.
• This means that they could lose their investment but cannot be asked to contribute further in thecase of liquidation (unless the shares are not fully paid).
• Thus the risk taken by shareholders is limited.
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18.3 Exton Frimley
(a) gross profit margin 13.4% 44.0%
(b) gross profit mark-up 15.5% 78.7%
(c) overheads in relation to revenue 12.0% 39.8%
(d) net profit margin (profit in relation to revenue) 1.4% 4.2%
(e) rate of inventory turnover 33 days or 95 days or
10.9 times per year 3.8 times per year
(f) net current asset (current) ratio 1.3:1 2.4:1
(g) liquid capital (acid test) ratio 0.05:1 1.3:1(h) trade receivable days 1 day* 60 days
(i) return on capital employed 11% 8.1%
* revenue figure used for this calculation; this is unrealistic because most supermarket sales will be for cash
rather than on credit
Exton is the supermarket; Frimley is the engineering company
Reasons:
Exton low overheads/revenue and net profit margin; high inventory turnover; quick trade receivable
days, low net current asset and liquid capital ratios; few trade receivables
Frimley higher overheads/revenue and net profit margin and low inventory turnover; slow trade
receivable days; good net current asset and liquid capital ratios; high figures for non-current
assets and trade receivables
18.4 (a) gross profit margin Gross profit x 100
Revenue 1
This ratio expresses, as a percentage, the gross profit in relation to revenue.
gross profit mark-up
Gross profit x 100
Cost of sales 1
This ratio expresses, as a percentage, the gross profit in relation to cost of sales; often used by
businesses to establish selling price.
(b) net current assets
Current assets – Current liabilities
Net current assets or working capital, are needed by all businesses in order to finance day-to-day
trading activities. Sufficient net current assets enable a business to hold adequate inventories, allow
a measure of credit to its customers (trade receivables) and to pay its suppliers (trade payables) aspayments fall due.
liquid capital
(Current assets – Inventories) – Current liabilities
Liquid capital is calculated in the same way as net current assets, except that inventories are omitted.
This is because inventories are the most illiquid current asset. Liquid capital provides a direct
comparison between the short-term assets of trade receivables and cash and short-term liabilities.
(c) cash
This is the actual amount of money held in the bank or as cash.
profit
This is a calculated figure which shows the surplus of income over expenditure for the year. It takes
note of adjustments for accruals and prepayments and non-cash items such as depreciation and
provision for doubtful receivables.
(d) return on capital employed
Net profit x 100
Capital employed* 1
* limited companies: ordinary share capital + reserves + preference share capital + loan capital
sole traders: the amount of the owner’s capital in the business
Return on capital employed (ROCE) expresses the profit of a business in relation to the amount of
capital in the business by the owner.
gearing
Debt (loan capital + preference shares, if any)
Equity (ordinary shares + reserves)
Gearing is concerned with the long-term financial stability of a business. It measures how much of the
business is financed by debt (including preference shares) against capital – gearing is often referred
to as the debt/equity ratio. The higher the gearing, the less secure will be the ordinary share capital of
the business and, therefore, the future of the business. This is because debt is costly in terms of
interest payments.
In general terms, investors and lenders would not wish to see debt exceeding equity; thus a gearing
ratio of greater than 1:1 is undesirable.
18.6 (a) Trade receivables x 365 days
Revenues
(b) Trade payables x 365 days
Purchases
(c) trade receivable days 20-1 20-2
£43,000 x 365 days £32,550 x 365 days
£680,000 £660,000
= 23.08 days = 18 days
(d) trade payable days 20-1 20-2
£28,500 x 365 days £38,500 x 365 days
£520,000 £540,000
= 20 days = 26.02 days
(e) 20-1Trade payables are paid more quickly than trade receivables are paying, which will cause cash
management problems.
20-2
Trade payables are paid more slowly than trade receivables are paying, which aids cash
management.
Note: The figure for trade receivables has fallen during the period, while the figure for trade payables has
increased. The reasons for the changes need to be investigated to include:
– has sales revenue reduced, or is collection from trade receivables more efficient?
– does the company have the money to pay trade payables, or have generous credit terms been offered
by a supplier?
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CHAPTER 18 Ratio analysis
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18.7 (a ) • Net current asse ts (cur rent) r at io = Current assets
Current liabilities
• L iquid capit al (acid tes t) ra ti o = (Current asse ts – invent or ies)
Current liabilities
• Net p ro fit marg in (p rof it in re la tion = Net p ro fit x 100
to revenue) Revenue 1
• Rate of inventory turnover = Average inventories x 365 d ays
Cost of sales
or Cost of sales = number of times per year
Average inventories
• Return on capital employed = Net profit x 100Capital employed 1
(b) Green Ltd is the supermarket, while Hawke Ltd is the furniture store.
Green Ltd has a low net profit margin and a high inventory turnover. This is a characteristic of the way
in which supermarkets operate – low profit margins, but a high level of revenue. Liquidity ratios are
lower than the norms as supermarkets usually have few trade receivables.
Hawke Ltd has a higher net profit margin with a lower inventory turnover. This indicates a business
that sells higher value items which are not purchased on a regular basis. The liquidity ratios are close
to the norms indicating a business with higher inventories and trade receivables than a supermarket.
(c) • If inventory turnover could be increased above 20 times per year, this would generate more cash
and improve the liquidity ratios of the business (provided that selling prices do not have to be
cut to encourage sales).
• If expenses could be reduced, the net profit margin would improve, and also return on capitalemployed.
• A review of buying prices and selling prices may reveal opportunities for increasing profits and
return on capital employed.
• Advertising could increase sales, but only if the extra revenue generated covers the cost of
advertising.
• Inventory levels could be reduced, so improving the net current asset ratio.
• Any surplus non-current assets could be sold to improve liquidity ratios.
18.10 (a) Formula
Return on capital employed = Net profit x 100
Capital employed 1
(b) Ratio calculation
Proposal 1
£30,000 x 100 = 5%
*£600,000 1
* £300,000 ordinary shares (£200,000 + £100,000)
£160,000 share premium (£140,000 + £120,000)
£140,000 retained earnings
Proposal 2
£30,000 x 100 = 5.56%
**£540,000 1
** £380,000 equity (ordinary shares + capital and revenue reserves)
£160,000 long-term bank loan
Tutorial note: bank overdraft is a current liability and is not included in the figure of capital employed.
(c)
Report
To: Ordinary shareholder
From: Student Accountant
Date: Today
Subject: Proposals to raise finance
Proposal 1
• This proposal to issue more ordinary shares means that ownership of the company will be
diluted.
• Unless the amount paid out by the company in dividends is increased, then your dividend per
share will fall.
• Return on capital employed will be reduced from 7.89% (£30,000 ÷ £380,000) to 5%.
• The company’s gearing ratio is lowered (because equity has increased from £380,000 to
£600,000); no interest to pay on the share issue.
• Reserves will increase to £300,000, ie £160,000 share premium and £140,000 retained
earnings. the company may decide to make a bonus issue of shares in the future.
Proposal 2
• The proposal is to fund the expansion entirely from external borrowing – your ownership of the
company will not be diluted.
• Your dividend per share should remain the same and, if profits are increased after paying
interest on the loans, will increase.
• The company’s gearing ratio is increased by the borrowing, and the company must pay interest
on the borrowing.
• The overdraft is a current liability which will have the effect of reducing the company’s net
current asset (current) ratio and liquid capital (acid test) ratio.
• Return on capital employed will be reduced from 7.89% to 5.56% (a smaller reduction than
proposal 1).
• The company will need a repayment scheme for the external borrowing – this could cause
liquidity and cash flow problems in the future.
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18.11 (a)FALCON LIMITED
BALANCE SHEET AS AT 31 MARCH 2007
£ £
Non-Current Assets Net book value
Premises 200,000
Fixtures and fittings 17,500
217,500
Current Assets
Inventories 14,560Trade receivables 5,456
Cash and cash equivalents 31,058
51,074
Current Liabilities
Trade payables (7,842)
Tax liabilities (7,900)
(15,742)
Net Current Assets 35,332
252,832
Non-Current Liabilities
Debentures (2011-2013) (28,000)
NET ASSETS 224,832
EQUITY
Issued Share Capital
75,000 ordinary shares of £1 each 75,000
Capital Reserves
Share premium account 10,000
Revaluation reserve 120,000
130,000
Revenue Reserve
Retained earnings 19,832
TOTAL EQUITY 224,832
Tutorial notes:
• bank £1,058 + £30,000 (£25,000 + £5,000 premium) rights issue = £31,058
• share premium £5,000 + £5,000 premium on rights issue = £10,000
• revaluation reserve £200,000 revaluation – £80,000 net book value = £120,000
(b) Gearing ratio = Debt (loan capital + preference shares, if any) or Debt
Equity (ordinary shares + reserves) Equity
Before adjustments = £28,000 = 37.42%
*£74,832
* £50,000 + £19,832 + £5,000
After adjustments = £28,000 = 12.45%
*£224,832
* total equity from balance sheet
(c) • The rights issue has added £30,000 (£25,000 + £5,000 premium) to total equity.
• Revaluation of the premises has added £120,000 (£200,000 – £80,000) to total equity.
• The level of debt has remained at £28,000.
• The impact of the rights issue and the revaluation of the premises has been to reduce
considerably the gearing ratio from 37.42% to 12.45%. Even before the adjustments, the
company was relatively low-geared; the ratio is much lower after the adjustments.
• A lower gearing ratio reduces the level of risk to the company and enables it to borrow further
funds in the future if required.
18.12 (a) • profit is a calculated figure which shows the surplus of income over expenditure for the year.
• cash is the actual amount of money held in the bank or as cash
(b) Example of how a business can make a good profit during a year when the bank balance reduces or
the bank overdraft increases (the question asks for two examples):
• purchase of non-current assets – cash decreases; no effect on profit (but there is likely to be an
amount for provision for depreciation in the income statement
• repayment of a loan – cash decreases; no effect on profit
• payment of drawings/dividends – cash decreases; no effect on profit
• an increase in trade receivables – cash decreases; no effect on profit
• a decrease in trade payables – cash decreases; no effect on profit
• an increase in inventory – cash decreases; profit increases
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19.1 (a) Benefits of budgetary control
• planning – by formalising objectives through a budget, a business can ensure that its plans
are achievable
• communication – because a budget is agreed by the business, all the relevant managers
and staff will be working towards the same end
• co-ordination – when a budget is being set, any anticipated problems should be resolved
• decision-making – by planning ahead through budgets, a business can make decisions on
how much output can be achieved
• monitoring – management is able to monitor and compare the actual results against the
budget
• control – action can be taken to modify the operation of the business
• motivation – a budget can be part of the techniques for motivating managers and other
staff to achieve the objectives of the business
(b) Any three budgets
• purchases budget
• sales budget
• production budget
• labour budget
• debtor budget
• creditor budget
• cash budget
The most likely three budgets for a small business such as Classic Furniture would be cash, sales
and production
(c) Relevant factors when implementing budgetary control
• costs and benefits – benefi ts must exceed the cost
• accuracy – o f in fo rmati on used
• demotivation – of staff may occur if they have not been involved in planning the budget
and/or where budgets are set at too high a level
• disfunctional management – ensure that the budgets co-ordinate
• set too easy – ensure that budgets are set at realistic levels to enable the business to use
its resources to best advantage
19.3 (a)
Sunshine Ltd
Cash budget for four months ending 31 October 2002
July Aug Sept Oct
£000 £000 £000 £000
Sales – cash 5.2 5.6 4.8 4.0
– 1 month 12.0 15.6 16.8 14.4
– 2 months 3.2 4.0 5.2 5.6
20.4 25.2 26.8 24.0
Purchases 16.0 18.0 14.0 12.0
Overheads 8.0 8.0 8.0 4.0
24.0 26.0 22.0 16.0
Net inflow/outflow (3.6) (0.8) 4.8 8.0
Opening balance (7.2) (10.8) (11.6) (6.8)
Closing balance (10.8) (11.6) (6.8) 1.2
(b) ( i) • At 31 October 2002, the bank balance is budgeted to be £1,200.
• Thus, over the four-month period there is expected to be a change from an overdraft
of £7,200 at the start, through a maximum overdraft of £11,600 in August, to £1,200
money in the bank at the end of October.
• The company sells beach buckets and spades, so the seasonal effect is over quickly.
• Expected amounts due from debtors in November are:
£
1 month £20,000 x 60% 12,000
2 months £24,000 x 20% 4,800
16,800
• It is likely that the company will go into overdraft again quite quickly, from November
onwards.
(ii) • The company needs to make arrangements for an overdraft facility for July,August and
September, with a limit of approximately £12,000.
• Other measures to improve the company’s cash position include:
– offering discounts to encourage increased sales
– allowing one month’s credit only,so receiving payment from sales quicker
– encouraging cash sales
– reducing purchases as the summer season draws to a close
– reducing overheads
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CHAPTER 19 Budgeting and budgetary control
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19.5 (a)
July August September October November December
£ £ £ £ £ £
Income
Cash from debtors 20,000 24,000 28,500 32,500 38,500 *47,760
Expenditure
Payments to creditors 10,000 11,000 14,000 18,000 24,500 12,500
Operating expenses 12,000 12,000 12,000 12,000 12,000 12,000
Purchase of fixed assets 8,500 19,510
Repayment of loan 20,000
22,000 31,500 26,000 30,000 36,500 64,010
Net cash flow (2,000) (7,500) 2,500 2,500 2,000 (16,250)
Opening balance 980 (1,020) (8,520) (6,020) (3,520) (1,520)
Closing balance (1,020) (8,520) (6,020) (3,520) (1,520) (17,770)
cash from December sales: £60,000 x 20% x 98% = £11,760
cash from November sales: £50,000 x 60% = £30,000cash from October sales: £30,000 x 20% = £6,000
£47,760
(b) £980 (opening balance 1 July) + £17,770 overdraft (closing balance 31 December)
= £18,750 total net cash outflow
(c)
Memorandum
To: The Directors of Hawk Limited
From: Student Accountant
Date: TodaySubject: Making profits whilst having a bank overdraft
Reasons
a company can make a profit but have a bank overdraft for a number of reasons, including:
• the application of the realisation concept – timing of receipts and payments
• purchase of fixed assets
• repayment of loans
Explanation
• receipts from debtors and payments to creditors are likely to occur some weeks after the sales
and purchases have been recorded in the trading account
• the purchase of fixed assets affects cash but has no effect on profit
• repayment of loans affects cash but has no effect on profits
Hawk Limited
• 20% of cash from sales is received in the month of sale; then 60% is paid in the next month,
with 20% two months after sale
• the sales of £60,000 forecast to be made in December are higher than each of October and
November; the cash received from December’s sales will be £11,760 in December, £24,000 inJanuary and £12,000 in February – thus, at the end of December, £36,000 is outstanding
• in December, the company plans to buy new fixed assets at a cost of £19,510
• in December, the company plans to make a repayment on the loan of £20,000
(d) See Chaper 20.
• Automatic updating – as amendments are made, the entire budget is changed easily.
• What-if calculations – the effect of possible changes can be considered, eg a reduction in the
period of credit allowed to customers.
19.7 (a)
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JIM SMITHCASH BUDGET FOR THE SIX MONTHS ENDING 30 JUNE 20...
Jan Feb Mar Apr May Jun
£ £ £ £ £ £
Receipts
Capital introduced 10,000
Debtors – 1,250 3,000 4,000 4,000 4,500
Total receipts for month 10,000 1,250 3,000 4,000 4,000 4,500
Payments
Van 6,000
Creditors – 4,500 4,500 3,500 3,500 3,500
Expenses 750 600 600 650 650 700Total payments for month 6,750 5,100 5,100 4,150 4,150 4,200
Net cash flow 3,250 (3,850) (2,100) (150) (150) 300
Add bank balance (overdraft)
at beginning of month – 3,250 (600) (2,700) (2,850) (3,000)
Bank balance (overdraft) at end
of month 3,250 (600) (2,700) (2,850) (3,000) (2,700)
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Notes:
• no depreciation – a non-cash expense – is shown in the cash budget
• customers pay one month after sale, ie debtors from January settle in February
• suppliers are paid one month after purchase, ie creditors from January are paid in February
(b) The cash budget shows the maximum bank overdraft to be £3,000 in May.
Jim Smith could avoid the need for a bank overdraft in one or more of the following ways (the question
asks for two ways):
• by commencing his business with a higher initial capital, eg £13,000
• by buying the van on hire purchase or leasing instead of outright purchase• by reducing his purchases to £3,000 for each of January and February
• by asking his suppliers for two months’ credit for the initial purchases of £4,500 made in January
• by asking his customers to pay more quickly
20.6 Two from each of:
(a) - single entry system which automatically makes entries in all relevant accounts
- accounts are normally already set up in the system
- all arithmetic in account entries is performed automatically
(b) - provided that the original figure entered is correct, all account entries will be correct
- all calculations are automatic and therefore accurate
(c) - error of omission (entries which have been left out in error)
- error of original entry (the wrong figure entered in error)
- error of principle (entry in the wrong type of account)
- mispost (entry in the wrong person’s account)
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CHAPTER 20 The impact of computer technology in accounting