AS Accounting for AQA

Transcription

1 a n s w e r s t o s e l e c t e d q u e s t i o n s i n t h e t e x t b o o k AS Unit 1 Introduction to Financial Accounting 1 What is financial accounting? 1 2 Double-entry book-keeping: first principles 1 3 Double-entry book-keeping: further transactions 3 4 Business documents 5 AS Accounting for AQA second edition TUTOR SUPPORT MATERIAL: ANSWERS TO SELECTED QUESTIONS 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 The general journal and correction of errors Control accounts Adjustments to final accounts 19 AS Unit 2 Financial and Management Accounting 13 Business organisations Accounting concepts and inventory valuation Further aspects of final accounts 23 Osborne Books Limited 2012 All answers are the responsibility of the publisher. Published by Osborne Books Limited Tel books@osbornebooks.co.uk 16 Preparing sole trader final accounts Financial statements of limited companies Ratio analysis Budgeting and budgetary control The impact of computer technology in accounting 36

2 CHAPTER 1 What is financial accounting? 1.2 Purposes of accounting: 1. To quantify items such as sales, expenses and profit 2. To present the accounts in a meaningful way so as to measure the success of the business 3. To provide information to the owner of the business and to other stakeholders 1.3 documents processing of source documents relating to accounting transactions initial recording of transactions recording accounting transactions in subsidiary books (or books of prime entry) double-entry accounts system transfer from subsidiary books into the double-entry book-keeping system of accounts in the ledger trial balance extraction of figures from all the double-entry accounts to check their accuracy final accounts production of an income statement and a balance sheet Information from the accounting system includes: purchases of goods for resale to date assets owned turnover (cash and credit sales) to date liabilities owed overheads and expenses to date profit during a particular period trade receivables total amount owed to the business, and individual trade receivables trade payables total amount owed by the business, and individual trade payables 1.4 Other stakeholders any 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 the goods and services that they buy employees and trade unions, who wish to check on the financial prospects of the business the tax authorities, who will wish to see that tax due by the business on profits and for Value Added Tax has been paid competitors, who wish to assess the profitability of the business potential investors in the business the local community and national interest groups, who may be seeking to influence business policy government and official bodies, eg Companies House who need to see the final accounts of limited companies 1.5 (a) Business entity the accounts record and report on the financial transactions of a particular business, and not the owner's personal financial transactions. Money measurement the accounting system uses money as the common denominator in recording and reporting all business transactions; thus the loyalty of a firm's workforce or the quality of a product cannot be recorded because these cannot be reported in money terms. 1.6 assets items owned by a business; liabilities items owed by a business trade receivables individuals or businesses who owe money in respect of goods or services supplied by the business; trade payables individuals or businesses to whom money is owed by the business purchases goods bought, whether on credit or for cash, which are intended to be resold later; sales the sale of goods, whether on credit or for cash, in which the business trades credit purchases goods bought, with payment to be made at a later date; cash purchases goods bought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer 1.7 asset of bank increases by 8,000 capital increases by 8,000 asset 8,000 liability 0 = capital 8,000 asset of computer increases by 4,000 asset of bank decreases by 4,000 asset 8,000 liability 0 = capital 8,000 asset of bank increases by 3,000 liability of loan increases by 3,000 asset 11,000 liability 3,000 = capital 8,000 asset of van increases by 6,000 asset of bank decreases by 6,000 asset 11,000 liability 3,000 = capital 8,000 CHAPTER 2 Double-entry book-keeping: first principles 2.1 Dr Capital Account Cr Feb Bank 7,500 Dr Computer Account Cr Feb Bank 2,000 Dr Rent Paid Account Cr Feb Bank 750 Dr Wages Account Cr Feb Bank Feb Bank 380 Dr Bank Loan Account Cr Feb Bank 2,500 Dr Commission Income Account Cr Feb Bank 145 Dr Drawings Account Cr Feb Bank 200 1

3 Dr Van Account Cr Feb Bank 6, Dr Bank Account Cr Aug Capital 5,000 3 Aug Computer 1, Aug S Orton: loan 1,000 7 Aug Rent paid Aug Office fittings Aug Office fittings 2, Aug Commission received Aug S Orton: loan 150 Dr Capital Account Cr Aug Bank 5,000 Dr Computer Account Cr Aug Bank 1,800 Dr Rent Paid Account Cr Aug Bank 100 Dr Commission Income Account Cr Aug Cash Aug Bank 150 Dr Cash Account Cr Aug Commission received Aug Drawings 100 Dr Office Fittings Account Cr Aug Bank 2, Aug Bank 250 Dr Sally Orton: Loan Account Cr Aug Bank Aug Bank 1,000 Dr Drawings Account Cr Aug Cash Dr Bank Account Cr Nov Capital 75,000 3 Nov Photocopier 2,500 7 Nov Bank loan 70, Nov Office premises 130, Nov Cash Nov Business rates 3, Nov Office fittings Nov Office fittings 1, Nov Commission received Nov Wages 250 Dr Capital Account Cr Nov Bank 75,000 Dr Photocopier Account Cr Nov Bank 2,500 Dr Bank Loan Account Cr Nov Bank 70,000 Dr Office Premises Account Cr Nov Bank 130,000 Dr Rates Account Cr Nov Bank 3,000 Dr Office Fittings Account Cr Nov Bank 1, Nov Bank 200 Dr Cash Account Cr Nov Commission received Nov Drawings Nov Bank 100 Dr Commission Income Account Cr Nov Cash Nov Bank 200 Dr Drawings Account Cr Nov Cash 125 Dr Wages Account Cr Nov Bank 250 2

4 2.6 Bank Account 20-7 Debit Credit Balance 1 Nov Capital 75,000 75,000 Dr 3 Nov Photocopier 2,500 72,500 Dr 7 Nov Bank loan 70, ,500 Dr 10 Nov Office premises 130,000 12,500 Dr 12 Nov Rates 3,000 9,500 Dr 14 Nov Office fittings 1,500 8,000 Dr 20 Nov Wages 250 7,750 Dr 23 Nov Cash 100 7,850 Dr 25 Nov Office fittings 200 8,050 Dr 28 Nov Commission received 200 8,250 Dr 2.7 Guidance to the trainee to include: the use of accounts to record different types of transactions the principles of double-entry book-keeping whereby one account is debited and one account is credited for every business transaction the debit entry is made in the account which gains value, or records an asset, or an expense the credit entry is made in the account which gives value, or records a liability, or an income item examples can be given using bank account where money in is recorded on the debit side, and money out is recorded on the credit side an explanation of various accounts including capital the amount of money invested in the business by the owner non-current assets items purchased by a business for use on a long-term basis (noting the distinction between capital expenditure and revenue expenditure) expenses the day-to-day running expenses (revenue expenditure) of the business income amounts of income received by the business owner s drawings where the owner takes money in cash or by cheque (or sometimes goods) from the business for personal use loans where a business receives a loan, eg from a relative or the bank CHAPTER 3 Double-entry book-keeping: further transactions 3.1 Dr Bank Account Cr 1 Oct Capital 2,500 2 Oct Purchases Oct Sales Oct Purchases 90 8 Oct Sales Oct Purchases Oct K Smithson: loan 2, Oct Delivery van 4, Oct Sales Oct Wages Oct Sales 110 Dr Capital Account Cr 1 Oct Bank 2,500 Dr Purchases Account Cr 2 Oct Bank Oct Bank Oct Bank 250 Dr Sales Account Cr 4 Oct Bank Oct Bank Oct Bank Oct Bank Dr J Smithson: Loan Account Cr 12 Oct Bank 2,000 Dr Delivery Van Account Cr 22 Oct Bank 4,000 Dr Wages Account Cr 25 Oct Bank Dr Purchases Account Cr 2 Apr Wyvern Producers Ltd Apr A Larsen 250 Dr Wyvern Producers Ltd Cr 9 Apr Purchases returns 50 2 Apr Purchases Apr Bank 150 Dr A Larsen Cr 26 Apr Purchases returns 45 4 Apr Purchases 250 Dr Sales Account Cr 5 Apr Pershore Patisserie Apr Bank Apr Bank Apr Cash 100 Dr Pershore Patisserie Cr 5 Apr Sales Apr Sales returns Apr Bank 125 Dr Bank Account Cr 7 Apr Sales Apr Wyvern Producers Ltd Apr Sales Apr Amery Scales Ltd Apr Pershore Patisserie 125 Dr Purchases Returns Account Cr 9 Apr Wyvern Producers Ltd Apr A Larsen 45

5 Dr Sales Returns Account Cr 15 Apr Pershore Patisserie 25 Dr Weighing Machine Account Cr 17 Apr Amery Scales Ltd 250 Dr Amery Scales Ltd Cr 30 Apr Bank Apr Weighing machine 250 Dr Cash Account Cr 28 Apr Sales Apr Wages 90 Dr Wages Account Cr 29 Apr Cash Dr Purchases Account Cr Jun Designs Ltd Jun Mercia Knitwear Ltd Jun Designs Ltd 285 Dr Designs Ltd Cr Jun Purchases returns Jun Purchases Jun Bank Jun Purchases 285 Dr Sales Account Cr Jun Bank Jun Cash Jun Wyvern Trade Supplies Jun Bank Jun Cash 180 Dr Bank Account Cr Jun Sales Jun Designs Ltd Jun Sales Jun Wyvern Trade Supplies 300 Dr Cash Account Cr Jun Sales Jun Rent paid Jun Sales Dr Purchases Returns Account Cr Jun Designs Ltd Jun Mercia Knitwear Ltd 80 Dr Mercia Knitwear Ltd Cr Jun Purchases returns 80 7 Jun Purchases 400 Dr Wyvern Trade Supplies Cr Jun Sales Jun Sales returns Jun Bank 300 Dr Sales Returns Account Cr Jun Wyvern Trade Supplies 50 Dr Rent Paid Account Cr Jun Cash Transaction Account debited Account credited (a) purchases bank bank sales (c) purchases Teme Traders (d) L Harris sales (e) Teme Traders purchases returns (f) sales returns L Harris (g) bank D Perkins: loan (h) cash bank 3.8 Answers to the trainee: Separate accounts for purchases and sales enable the business to know the amount of goods bought and sold. A combined account for goods would not provide this information so readily. Purchases and sales accounts follow the principles of book-keeping in that the debit side of purchases account gains value when the business buys goods for resale, while the credit side of sales account gives value when the business sells goods. The purchase of a new delivery van for use in the business is the purchase of a non-current asset, which will be used on a long-term basis. As such the purchase of the van which is an example of capital expenditure is entered on the debit side of van account. Purchases returns (or returns out) is where we return goods to a trade payable (supplier). The returns transaction is recorded the opposite way round to a purchases transaction. Sales returns (or returns in) is where a trade receivable (customer) returns goods to us. The transaction is recorded the opposite way round to a sales transaction. Carriage inwards and carriage outwards are kept in separate accounts because they represent different transactions. Carriage inwards is where we pay the carriage cost of goods purchased to have them delivered to us. Carriage outwards is where we pay the carriage charge for goods we have sold, that is we have sold the goods to our customers as delivery free.

6 CHAPTER 4 Business documents 4.2 INVOICE JANE SMITH, FASHION WHOLESALER Unit 21, Eastern Industrial Estate, Wyvern, Wyvernshire, WY1 3XJ 4.3 INVOICE DEANSWAY TRADING COMPANY The Model Office, Deansway, Rowcester, RW1 2EJ invoice to Excel Fashions 49 Highland Street Longton Mercia LT3 2XL invoice no 2451 account your reference invoice to The Card Shop 126 The Cornbow Teamington Spa Wyvernshire WY33 0EG invoice no 8234 account your reference deliver to as above date today deliver to as above date today product description quantity unit unit total trade net code price discount % Dresses each Suits each Coats each product description quantity unit unit total trade net code price discount % Assorted rubbers box Shorthand notebooks Ring Binders each terms 2.5% cash discount for full settlement within 14 days Net 30 days TOTAL terms 2.5% cash discount for full settlement within 14 days Net 30 days TOTAL Excel Fashions will pay ( x 97.5%, rounded down) for settlement in full within 14 days. The Card Shop will pay ( x 97.5%) for settlement in full within 14 days. 5

7 4.4 Dr Purchases Account Cr Feb G Lewis Feb G Lewis 160 Dr Sales Account Cr Feb L Jarvis Feb G Patel 240 Dr G Lewis Cr Feb Bank Feb Purchases Feb Discount received Feb Purchases Feb Bank Feb Discount received Dr L Jarvis Cr Feb Sales Feb Bank Feb Discount allowed Dr G Patel Cr Feb Sales Feb Bank Feb Discount allowed Dr Bank Account Cr Feb L Jarvis Feb G Lewis Feb G Patel Feb G Lewis 152 Dr Discount Received Account Cr Feb G Lewis Feb G Lewis (a) product description quantity unit unit total trade net code price discount % 45B Trend tops (black) each W Trend trousers (white) each terms 5% cash discount for full settlement within 7 days Net 30 days (c) Trade discount is given, if prearranged: to businesses, often in the same trade (but not to the general public) for buying in bulk (this discount is also known as bulk discount) by wholesalers, as a discount off list price to retailers Cash discount (also known as settlement discount) is given, for prompt payment, if prearranged, and indicated on the invoice Fashion Shop will pay ( 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. TOTAL (i) An invoice is a source document prepared by the seller and states the value of goods sold and, hence, the amount to be paid by the buyer. (ii) A credit note is a source document which shows that the buyer is entitled to a reduction in the amount charged by the seller; it is used if: some of the goods delivered were faulty, or incorrectly supplied the price charged on the invoice was too high Dr Discount Allowed Account Cr Feb L Jarvis 3 20 Feb G Patel 6 6 (c) Any three from: cheque counterfoils paying-in slip counterfoils cash receipts till rolls information from bank statements, such as standing orders, direct debits, BACS, credit transfers, bank charges

8 4.8 (a) 5 computer desks were ordered (not 10 as shown on the invoice) 10 office chairs were ordered (not 5 as shown on the invoice) the unit price of the computer desks is each (not as shown on the invoice) the net amount for computer desks is (not as shown on the invoice) the net amount for office chairs is (not as shown on the invoice) the invoice total is (not as shown on the invoice) CHAPTER 5 Balancing accounts the trial balance 5.1 (a) and (c) Dr Bank Account Cr Jan Capital 10,000 4 Jan Rent paid Jan Sales 1,000 5 Jan Shop fittings 1, Jan Sales 1, Jan Comp Supplies Ltd 5, Jan Sales 1, Jan Balance c/d 6,700 13,700 13,700 1 Feb Balance b/d 6,700 2 Feb Rent paid Feb Sales 1, Feb Shop fittings Feb Sales 1, Feb Comp Supplies Ltd 6, Feb Rowcester College Feb Balance c/d 5, Feb Sales 1, Feb Sales 1,100 13,000 13,000 1 Mar Balance b/d 5,300 Dr Capital Account Cr Jan Bank 10,000 Dr Rent Paid Account Cr Jan Bank 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 Jan Bank 1, Feb Balance c/d 2, Feb Bank 850 2,350 2,350 1 Mar Balance b/d 2,350 Dr Purchases Account Cr Jan Comp Supplies Ltd 5, Jan Balance c/d 11, Jan Comp Supplies Ltd 6,500 11,500 11,500 (c) Wyvern Products Limited will pay ( x 95%) for settlement in full within 14 days. 1 Feb Balance b/d 11, Feb Balance c/d 17, Feb Comp Supplies Ltd 5,500 17,000 17,000 1 Mar Balance b/d 17,000 7

9 Dr Comp Supplies Limited Cr Jan Bank 5,000 7 Jan Purchases 5, Jan Balance c/d 6, Jan Purchases 6,500 11,500 11,500 5 Feb Purchases returns Feb Balance b/d 6, Feb Bank 6, Feb Purchases 5, Feb Balance c/d 5,500 12,000 12,000 1 Mar Balance b/d 5,500 Dr Sales Account Cr Jan Balance c/d 4, Jan Bank 1, Jan Bank 1, Jan Rowcester College Jan Bank 1,450 4,550 4, Feb Balance c/d 11,150 1 Feb Balance b/d 4,550 4 Feb Bank 1, Feb Bank 1, Feb Bank 1, Feb Bank 1, Feb Rowcester College 1,050 11,150 11,150 1 Mar Balance b/d 11,150 Dr Rowcester College Cr Jan Sales Jan Sales returns Jan Balance c/d Feb Balance b/d Feb Bank Feb Sales 1, Feb Balance c/d 1,050 1,800 1,800 1 Mar Balance b/d 1,050 Dr Sales Returns Account Cr Jan Rowcester College 100 Dr Purchases Returns Account Cr Feb Comp Supplies Ltd 150 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 ,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 ,800 26, Trial balance of Jane Greenwell as at 28 February 20-1 Dr Cr Name of account Bank 1,250 Purchases 850 Cash 48 Sales 730 Purchases returns 144 Trade payables 1,442 Equipment 2,704 Van 3,200 Sales returns 90 Trade receivables 1,174 Wages 1,500 Capital (missing figure) 6,000 9,566 9,566 8

10 5.5 Four from: Error of omission Business transaction completely omitted from the accounting records. For example, cash sale omitted from both cash account and sales account. Reversal of entries Debit and credit entries on the wrong side of the two accounts concerned. For example, cash sale entered wrongly as debit sales account, credit cash account. Mispost/error of commission Transaction entered to the wrong person's account. For example, a sale of goods on credit to A T Hughes has been entered as debit A J Hughes' account, credit sales account. Error of principle Transaction entered in the wrong type of account. For example, cost of petrol for vehicles has been entered as debit motor vehicles account, credit bank account. Error of original entry (or transcription) Amount entered incorrectly in both accounts. For example, sale of 45 entered in both sales account and the trade receivable's account as 54. Compensating error Two errors cancel each other out. For example, balance of purchases account calculated wrongly at 10 too much, compensated by the same error in sales account. PURCHASES LEDGER Dr Softseat Ltd Cr 1 Feb Purchases Feb Purchases 160 Dr PRK Ltd Cr 2 Feb Purchases 80 Dr Quality Furnishings Cr 15 Feb Purchases 160 CHAPTER 6 Division of the ledger the use of subsidiary books 6.2 (a) Purchases Day Book Date Details Invoice Reference Amount Feb Softseat Ltd Feb PRK Ltd Feb Quality Furnishings Feb Softseat Ltd Feb Total for month 720 SALES LEDGER Dr High Street Stores Cr 8 Feb Sales Feb Sales 200 Dr Peter Lounds Ltd Cr 14 Feb Sales 120 Sales Day Book Date Details Invoice Reference Amount Feb High Street Stores Feb Peter Lounds Ltd Feb Carpminster College Feb High Street Stores Dr Carpminster College Cr 18 Feb Sales 320 GENERAL LEDGER Dr Purchases Account Cr 28 Feb Purchases Day Book Feb Total for month 1,080 9 Dr Sales Account Cr 28 Feb Sales Day Book 1,080

11 6.3 (a) Purchases Day Book Date Details Invoice Reference Amount May M Roper & Sons 562 PL May Wyper Ltd 82 PL May Wyper Ltd 86 PL May M Roper & Sons 580 PL May Wyper Ltd 91 PL May M Roper & Sons 589 PL May Total for month 1, GENERAL LEDGER Dr Purchases Account Cr 31 May Purchases Day Book 1, Dr Purchases Returns Account Cr 31 May Purchases Day Book Purchases Returns Day Book Date Details Credit Reference Amount Note May M Roper & Sons 82 PL May Wyper Ltd 6 PL May M Roper & Sons 84 PL May Total for month (a) product quantity details unit price unit total amount code X24 96 Trend tops 8.50 each each and (c) PURCHASES LEDGER Dr Wyper Ltd (account no 301) Cr 23 May Purchases Returns 40 1 May Balance b/d May Balance c/d May Purchases May Purchases May Purchases Y36 20 Jeans 15 each each , trade discount 20% total Jun Balance b/d 710 Dr M Roper & Sons (account no 302) Cr 18 May Purchases Returns 30 1 May Balance b/d May Purchases Returns 38 2 May Purchases May Balance c/d May Purchases May Purchases terms 5% cash discount for full settlement within 7 days Net 30 days 1 Jun Balance b/d

12 6.8 (i) Purchases day book (ii) Sales day book (c) (i) Trade discount: given for bulk buying (also known as bulk discount), or for being in the trade, or for regular customers deducted from the invoice before entry in the books usually a larger percentage than cash discount (ii) Cash discount (also known as settlement discount): given for prompt payment not deducted until account is paid can be disallowed if terms are not met usually a smaller percentage than trade discount 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 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 11 CHAPTER 7 The main cash book 7.3 Dr Cash Book Cr Date Details Ref Disc Cash Bank Date Details Ref Disc Cash Bank allwd recd Aug Balances b/d 276 4,928 5 Aug T Hall Ltd Aug Wild & Sons Ltd Aug Wages Aug Bank C Aug Cash C Aug A Lewis Ltd 20 1, Aug F Jarvis Aug Harvey & Sons Ltd Aug Wages Aug Wild & Sons Ltd Aug J Jones Aug Bank C Aug Salaries 2, Aug Telephone Aug Cash C Aug Balances c/d 361 3, ,051 7, ,051 7,937 1 Sep Balances b/d 361 3, Dr Cash Book Cr Date Details Ref Discount Cash Bank Date Details Ref Discount Cash Bank allowed received Mar Balances b/d 106 3,214 2 Mar Rent Mar Sales* Mar Cleaning expenses 35 8 Mar Sales 1,680 9 Mar Purchases , Mar Bank C Mar Cash C Mar Sales 1, Mar Postages Mar Bank C Mar Telephone Mar Sales 2, Mar Stationery Mar Sales* 200 2, Mar Cash C Mar Hobbs Ltd Mar Misc expenses Mar Pratley & Co 50 1, Mar Wages , Mar Electricity Mar Evans & Co Mar A Bennett Mar Balances c/d 423 8, , ,632 1 Apr Balances b/d 423 8,259 * An alternative way of showing the transactions of 3 March and 29 March is to record the full amount of sales in the debit cash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.

13 7.6 (i) Standing order Money paid out of the bank directly, at regular intervals, on the business s order. Usually for the same fixed amount for goods and services supplied DR Supplier/Trade payable CR Bank (ii) Credit transfer for payment by a customer Amounts paid directly into the bank by a trade receivable, who has the necessary bank code information. DR Bank CR Customer/Trade receivable CHAPTER 8 Bank reconciliation statements 8.2 (a) Dr Cash Book (bank columns) Cr 20-7 p 20-7 p 1 Jan Balance b/d Jan Direct debit: Omni Finance Jan BACS credit: T K Supplies Jan Balance c/d , , Feb Balance b/d (a) and Dr Cash Book Cr Date Details Disc Cash Bank Date Details Disc Cash Bank Jan Balance b/d 50 1 Jan Balance b/d 1,236 6 Jan R Reed Jan Bilton Office Supplies Jan B Brown Jan Rent Jan Sales Jan Wages Jan Sales Jan British Gas S/O Jan C Denton & Co Ltd C/T Jan Bank interest Jan Cash C 1, Jan Bank C 1, Jan Balances c/d ,444 2, ,444 2,500 1 Feb Balance b/d (c) Dr Discounts Allowed Account Cr Jan Cash book 4 Dr Discounts Received Account Cr Jan Cash book 3 12 P GERRARD BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7 Balance at bank as per cash book Add: unpresented cheques Bryant & Sons cheque no P Reid cheque no , Less: outstanding lodgement G Shotton Limited Balance at bank as per cash book 1, (a) Dr Cash Book (bank columns) Cr May Balance b/d May P Stone May Cash May Alpha Ltd May C Brewster May E Deakin May Cash May Standing order: A-Z Insurance May Cash May Bank charges May Balance c/d Jun Balance b/d 428 JANE DOYLE BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7 Balance at bank as per cash book 428 Add: unpresented cheque E Deakin cheque no Less: outstanding lodgement cash banked 40 Balance at bank as per bank statement 498

14 8.5 (a) (i) Standing orders Credit Regular payments of the same amount made directly from the bank on behalf of the company on the order of the company. (ii) Direct debits Credit Payments made from the bank for the customer collected by the payee on the order of the customer usually for changing amounts. (iii) Credit transfers Debit or Credit Receipts from customers paid directly into the bank of the payee. Payments to suppliers or wages into the bank of the payee. 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 (a) Dr Cash Book Cr Date Details Bank Date Details Cheque Bank 2003 p 2003 number p 1 Nov Balance b/d 2, Nov Banks Ltd Nov Toys for You Nov Books & Paints Nov B J Patel 3, Nov Wages Nov Dolls and Things 1, Nov Jones and Son , Nov J A Smith Ltd Nov Smith and Son Nov Cash banked Nov HGF Finance Nov Toy Designs , Nov Balance c/d 2, , , Nov Balance b/d 2, Nov Business rates S/O Nov J Black Ltd C/T Nov Proper Ins Co S/O Nov Bank charges Nov Balance c/d 1, , , Dec Balance b/d 1, (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 Balance at bank as per bank statement (600) Tutorial note: brackets indicate an overdraft JAMES JOLLY AND CO BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 2003 Balance at bank as per cash book 1, Add: unpresented cheques HGF Finance Toy Designs , , , Less: outstanding lodgement cash banked Balance at bank as per bank statement 2,

15 CHAPTER 9 Introduction to final accounts 9.2 FINAL ACCOUNTS TRIAL BALANCE INCOME BALANCE SHEET STATEMENT Debit Credit Debit Credit Debit Credit (a) Salaries Purchases (c) Trade receivables (d) Sales returns (e) Discount received (f) Vehicle (g) Capital 9.7 (a) (i) R MASTERS INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2002 Gross profit 56,231 Add Discount received ,581 Less expenses: Wages 23,980 Carriage outwards 3,600 Motor expenses 4,500 Bank charges ,530 Profit for the year 24, CLARE LEWIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 Revenue 144,810 Opening inventory 16,010 Purchases 96, ,328 Less Closing inventory 13,735 Cost of sales 98,593 Gross profit 46,217 Less expenses: Salaries 18,465 Heating and lighting 1,820 Rent and rates 5,647 Sundry expenses 845 Vehicle expenses 1,684 28,461 Profit for the year 17,756 (ii) Dr Capital Account Cr 2002 Details 2002 Details 31 Mar Drawings 12, Mar Balance b/d 36, Mar Balance c/d 48, Mar Profit for the year 24,051 60,841 60,841 Two from: increased by profit more capital introduced reduced by losses reduced by drawings 1 Apr Balance b/d 48,341 BALANCE SHEET AS AT 31 DECEMBER 20-4 Non-current Assets Vehicles 9,820 Office equipment 5,500 15,320 Current Assets Inventory 13,735 Trade receivables 18,600 32,335 Less Current Liabilities Trade payables 12,140 Bank overdraft 5,820 17,960 Net Current Assets or Working Capital 14,375 NET ASSETS 29,695 FINANCED BY Capital Opening capital 25,250 Add Profit for the year 17,756 43,006 Less Drawings 13,311 29, (a) Dr Sales Account Cr 2001 Details p 2001 Details p 1 Dec Balance b/d 16, Dec Monthly total 4, Dr Returns Inwards Account Cr 2001 Details p 2001 Details p 1 Dec Balance b/d 1, Dec Monthly total Dr Purchases Account Cr 2001 Details p 2001 Details p 1 Dec Balance b/d 10, Dec Monthly total 2, Dr Returns Outwards Account Cr 2001 Details p 2001 Details p 1 Dec Balance b/d 1, Dec Monthly total

16 AMARYLLIS TRADING INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001 Revenue 21, Less Returns inwards 1, , Less Cost of sales: Opening inventory 2, Add Purchases 13, Less Returns out 1, , Add Carriage in , Less Closing inventory 2, , Gross profit 6, Telephone bill due to be paid in one month s time Section: Current liabilities Reason: Short-term liability an amount owed by the business which needs to be paid within the next 12 months Tutorial note: the accounting treatment for a bill which has not been paid at the balance sheet date called an accrual of expenses is covered in detail in Chapter 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. (c) (i) Cost of sales 12, (ii) Goods available for sale 15, (iii) Net revenue 19, CHAPTER 10 The general journal and correction of errors 10.2 (a) 9.10 MEMORANDUM Date Today To Mary Arbuthnot, proprietor of Mary s Doll Shop From Financial Accounting Student Subject Balance sheet queries Date Details Reference Dr Cr Dec Inventory GL 22,600 Income statement GL 22,600 Inventory valuation at 31 December 20-8 transferred to income statement 1. Cost of new delivery van Section: Non-current assets Reason: An asset purchased for use in the business not for resale used over a long period/more than one year will help generate profits will depreciate with use is a tangible asset Date Details Reference Dr Cr Dec Income statement GL 890 Telephone expenses GL 890 Transfer to income statement of expenditure for the year (c) 2. Inventory of dolls for resale Section: Current assets Reason: An asset remaining in the business for the short-term less than one year the business is expected to sell them shortly continued Date Details Reference Dr Cr Dec Drawings GL 200 Motoring expenses GL 200 Transfer of private motoring to drawings account 15

17 (d) (c) error of principle Date Details Reference Dr Cr Dec Drawings GL 175 Purchases GL 175 Goods taken for own use by the owner (e) Date Details Reference Dr Cr Delivery van GL 10,000 Vehicle expenses GL 10,000 Correction of error vehicle no... invoice no... Date Details Reference Dr Cr Dec Bad debts written off GL 125 N Marshall SL 125 Account of N Marshall written off as a bad debt - see memo dated (a) error of omission Date Details Reference Dr Cr J Rigby SL 150 Sales GL 150 Sales invoice no... omitted from the accounts. (d) reversal of entries Date Details Reference Dr Cr Postages GL 55 Bank GL 55 Postages GL 55 Bank GL 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)... mispost/error of commission (f) error of original entry Date Details Reference Dr Cr H Price Limited PL 125 H Prince PL 125 Correction of mispost cheque no...: to H Price Limited 16 Date Details Reference Dr Cr L Johnson SL 98 Bank GL 98 Bank GL 89 L Johnson SL Correction of error cheque for 89 received on...(date)...

18 10.6 (a) Two from: trial balance bank reconciliation statement control accounts (see Chapter 11) (c) Error Yes No An error of principle has occurred. 3 JOURNAL Account Dr Cr (1) Sales 270 Suspense 270 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 (2) Returns inwards 500 Suspense 500 Returns inwards 300 Suspense 300 (3) Suspense 400 Discount received 400 (4) J Jones 350 A Jones (a) Dr Suspense Account Cr Date Details Date Details Apr Balance per T/B Apr Sales Apr Rent paid (a) and 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. H G PATEL: TRIAL BALANCE AS AT 30 APRIL 2003 Account Dr Cr Wages 23,890 Administration costs 6,000 Capital 60,000 Property 65,000 Motor vehicles 5,000 Motor expenses 1,650 Purchases 38,900 Revenue (Sales) 98,000 Returns outwards 3,698 Carriage inwards 367 Carriage outwards 450 Discount received 2,135 Drawings 6,900 Suspense 15,676 TOTAL 163, ,833 Tutorial notes: Error (2) is an error of original entry which affects both the debit and credit side of the trial balance by the same amount, and will not be revealed by the trial balance. Such an error is not entered in the suspense account. Error (3) has been entered in the suspense account, above, as the net amount of 250 (ie ); 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) Error of commission (or mispost): example payment to A Brown entered to B Brown s account explanation although the entry has been misposted to the wrong person s account, the trial balance will still balance because the entry has been made on the correct side of the account. (c) Sales ledger control account (see Chapter 11) 17

19 10.11 Jonathon Smith Corrected Profit for the year ended 30 November 2004 Profit calculated by Jonathon 26, Sales undercast add Discount allowed (2 x 140) less Wages less 2, Non-current asset add 9, Error of commission no effect on profit 6. Closing inventory (reduction in cost of sales) add 100 Corrected profit 34,060 Dr Sales Ledger Control Account Cr 20-8 p 20-8 p 1 Feb Balances b/d 2, Feb Sales returns Feb Credit sales 1, Feb Cheques received from trade receivables Feb Cash discount allowed Feb Set-off: purchases ledger Feb Bad debts written off Feb Balances c/d 1, , , Mar Balances b/d 1, CHAPTER 11 Control accounts 11.3 (a) SALES LEDGER Dr Arrow Valley Retailers Cr 20-8 p 20-8 p 1 Feb Balance b/d Feb Bank Feb Sales Feb Discount allowed Feb Balance c/d , , Mar Balance b/d Dr B Brick (Builders) Limited Cr 20-8 p 20-8 p 1 Feb Balance b/d Feb Bad debts written off (c) Reconciliation of sales ledger control account with trade receivable balances 1 February February 20-8 p p Arrow Valley Retailers B Brick (Builders) Limited Mereford Manufacturing Company Redgrove Restorations Wyvern Warehouse Limited Sales ledger control account 2, , Dr Mereford Manufacturing Company Cr 20-8 p 20-8 p 1 Feb Balance b/d Feb Sales returns Feb Sales Feb Set-off: purchases ledger Dr Redgrove Restorations Cr 20-8 p 20-8 p 1 Feb Balance b/d Feb Sales returns Feb Sales Feb Balance c/d , , Mar Balance b/d Dr Purchase Ledger Control Account Cr Mar Balance b/d Mar Balance b/d 23, Mar Returns 4, 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, , ,533 Balance b/d 749 Balance b/d 24,742 Dr Wyvern Warehouse Limited Cr 20-8 p 20-8 p 1 Feb Balance b/d Feb Bank Feb Sales Feb Discount allowed Feb Balance c/d Tutorial note: The cash purchases figure of 25,679 is not shown in the control account because it does not involve the accounts of trade payables it is a cash purchase (ie debit purchases; credit bank/cash) 1 Mar Balance b/d

20 11.6 Dr Sales Ledger Control Account Cr Jan Balance b/d 44, Jan Bank 23, Jan Sales 27, Jan Discount allowed 1, Jan Returned cheque Jan Sales returns 2, Jan Set-off: purchases ledger Jan Balance c/d 44,884 72,266 72,266 CHAPTER 12 Adjustments to final accounts 12.1 (a) Expense in income statement of 56,760; balance sheet shows wages and salaries accrued (current liability) of 1,120. Expense in income statement of 2,852; balance sheet shows rates prepaid (current asset) of 713. (c) Expense in income statement of 1,800; balance sheet shows computer rental prepaid (current asset) of (a) 1 Feb Balance b/d 44,884 Tutorial note: The mispost of 685 between J Hampton and Hampton Limited needs to be corrected in the sales ledger, but has no effect on the control account. Dr Sales Ledger Control Account Cr 2003 Details 2003 Details 1 Nov Balance b/d 5, Nov Returns inwards Nov Sales 26, Nov Bank (receipts from customers) 18, Nov Set-off: purchases ledger 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 Nov Balance b/d 2, Nov Bank (payments to 30 Nov Purchases 19,600 suppliers) 16, Nov Set-off: sales ledger Nov Balance c/d 5,410 22,560 22,560 1 Dec Balance b/d 5,410 The balances of the individual accounts of trade receivables in the sales ledger are totalled. The balances of the individual accounts of trade payables in the purchases ledger are totalled. These totals should agree with the balances of sales ledger control account and purchases ledger control account respectively. (c) Some types of errors (such as a mispost/error of commission) will not be revealed by the control account. Thus the accounts will be thought to be correct when they are not. A control account may indicate that there is an error within a ledger section but it will not pinpoint where the error has occurred SOUTHTOWN SUPPLIES INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-9 Revenue 420,000 Opening inventory 70,000 Purchases 280, ,000 Less Closing inventory 60,000 Cost of sales 290,000 Gross profit 130,000 Less expenses: Rent and rates 10, ,700 Electricity 3,100 Telephone 1,820 Salaries 35, ,050 Vehicle expenses 13,750 64,420 Profit for the year 65, HAZEL HARRIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 Revenue 614,000 Opening inventory 63,000 Purchases 465, ,000 Less Closing inventory 88,000 Cost of sales 440,000 Gross profit 174,000 Add Discount received 8, ,140 Less expenses: Insurances 8,480 Vehicle expenses 2,680 Wages and salaries 86, ,180 89,240 Discount allowed 10,610 Rates and insurance 6, ,620 General expenses 15,860 Depreciation: vehicles 12,000 x 20% 2,400 furniture and fittings 25,000 x 10% 2, ,390 Profit for the year 44,750

21 BALANCE SHEET AS AT 31 DECEMBER 20-4 Non-current Assets Cost Prov for dep'n Net book value Freehold land 100, ,000 Vehicles 12,000 4,800 7,200 Furniture and fittings 25,000 5,000 20, ,000 9, ,200 Current Assets Inventory 88,000 Trade receivables 52,130 Prepayment of expenses ,580 Less Current Liabilities Trade payables 41,850 Accrual of expenses 3,180 Bank 2,000 47,030 Net Current Assets or Working Capital 93, ,750 Less non-current Liabilities Bank loan 75,000 NET ASSETS 145,750 FINANCED BY Capital Opening capital 125,000 Add Profit for the year 44, ,750 Less Drawings 24, , BETH DAVIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-8 Gross profit 95,374 Less expenses: Wages and salaries 55,217 Heating and lighting 1,864 Rent and rates 5, ,963 Advertising 2,246 Bad debts written off 395 General expenses Depreciation of shop fittings 12,000 x 20% 2,400 67,953 Profit for the year 27, (a) BALANCE SHEET AS AT 31 DECEMBER 20-8 Non-current Assets Shop fittings at cost 12,000 Less provision for depreciation 2, ,400 4,800 Net book value 7,200 Current Assets Inventory 28,176 Trade receivables 3,641 Cash 163 Prepayment of expenses ,290 Less Current Liabilities Trade payables 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 Profit for the year 27,421 48,227 Less Drawings 22,196 26,031 Dr Telephone Account Cr Date Details Date Details May Cash/bank 2, May Income statement 2, May Balance c/d May Balance c/d 210 2,530 2,530 1 Jun Balance b/d Jun Balance b/d

22 CHAPTER 13 Business organisations To: From: Date: Subject: MEMORANDUM The Owner, Beta Batteries Student Accountant Today Account of J Booth 13.2 The final accounts of a sole trader comprise: income statement balance sheet The income statement shows: income minus expenses equals profit (or loss) The balance sheet shows: assets minus liabilities equals capital Assets are items owned by the business; liabilities are amounts owed by the business; capital is the amount of the owner s investment. I note that a customer of Beta Batteries, J Booth, has been declared bankrupt whilst owing you 350. You are of the opinion that none of the debt will be recovered. The accounting treatment is that the amount of 350 should be treated as a bad debt written off. To do this you will need to: debit bad debts written off account credit J Booth s account in your sales ledger If you use a sales ledger control account you should also credit this memorandum account with the amount. For the year end accounts, you will need to transfer the amount of the bad debt to income statement as an expense: debit income statement credit bad debts written off account The effect of writing off this bad debt will be to reduce your profit for the year by 350 and, at the same time, the trade receivables figure in your balance sheet will be reduced by the amount, so reducing the net assets of the business (a) The Partnership Act 1890 defines a partnership as the relation which subsists between persons carrying on a business in common with a view of profit. Where no partnership agreement exists, then the following accounting rules from the Partnership Act 1890 must be followed: profits and losses are to be shared equally between the partners no partner is entitled to a salary partners are not entitled to receive interest on their capital interest is not to be charged on partners drawings when a partner contributes more capital than agreed, he or she is entitled to receive interest at five per cent per annum on the excess Note: the question asks for any three provisions Points to cover include: * Definition of a limited company separate legal entity owned by shareholders managed by directors Types of companies public limited company private limited company company limited by guarantee Advantages of forming a limited company limited liability separate legal entity ability to raise finance membership other factors 21

23 CHAPTER 14 Accounting concepts and inventory valuation 14.1 Going concern concept This presumes that the business to which the final accounts relate will continue to trade in the foreseeable future. The income statement and balance sheet are prepared on the basis that there is no intention to reduce significantly the size of the business or to liquidate the business. If the business was not a going concern, assets would have very different values, and the balance sheet would be affected considerably. Example: As a going concern, non-current assets are valued at cost, less accumulated depreciation to date; inventory is valued at cost (unless net realisable value is lower). Accruals concept This means that expenses and income for goods and services are matched to the same time period. Examples: The accrual of an expense in income statement which has been used in the accounting period but not yet paid for. The prepayment of an expense for the next accounting period. The recording of opening and closing inventories. The use of trade receivables' and trade payables' accounts to record amounts owing to the business, or owed by the business. Materiality concept This means that some items in accounts have such a low monetary (money) value that it is not worthwhile recording them separately. Examples include: small expense items which may not justify their own separate expense account and are, instead, grouped together in a sundry expenses account end-of-year quantities of office stationery are often not valued for the purpose of final accounts because the amount is not material and does not justify the time and effort involved low-cost non-current assets are often charged as an expense in income statement because, while strictly these should be treated as non-current assets and depreciated each year, in practice they are treated as income statement expenses as the amounts involved are not material such as a calculator, a stapler Materiality depends very much on the size of the business what is material and what is not becomes a matter of judgement. Business entity concept This refers to the fact that final accounts record and report on the activities of a particular business. For example, the personal assets and liabilities of those who play a part in owning or running the business are not included on the business balance sheet. (d) Examples (question asks for one example) valuation of inventory depreciation of non-current assets bad debts written off provision for doubtful debts (see Chapter 15) By applying the consistency concept, direct comparison between the final accounts of different years can be made (a) The kettle should be valued at 16. Workings: = 16 net realisable value (which is lower than the cost of 18) Inventory should be valued at the lower of cost or net realisable value whichever is the lower. This is an example of using the prudence concept Concept Gross Profit Current Current Capital Profit for the year Assets Liabilities 1. Accruals no decrease no increase decrease change 4,000 change 4,000 4, Consistency no decrease no no decrease change 15,000 change change 15, Prudence or decrease decrease decrease no decrease Consistency 18,000 18,000 18,000 change 18, Business no increase no no no entity change 13,000 change change change 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 Examples (question asks for one example): valuation of inventory, at the lower of cost and net realisable value depreciation of non-current assets, to measure the amount of the fall in value of non-current assets over time bad debts written off, to reduce the trade receivables figure to give a realistic view of the amount that the business can expect to receive provision for doubtful debts (see Chapter 15), to reduce the trade receivables figure (c) The concept of consistency means that, when a business adopts particular accounting policies, it should continue to use such policies consistently (a) jacket, 40 (note: replacement cost is not applicable here) shirt, 25 suit, 80 trousers, = 15 electric trouser press, 80 The prudence concept says that final accounts should always, where there is any doubt, report a conservative figure for profit or the valuation of assets. In inventory valuation it is applied by using the lower of cost and net realisable value. (Note that net realisable value is the selling price of the goods, less further costs to get the inventory into a saleable condition.) A lower closing inventory figure means that profits are not overstated thus the amount drawn by the owner(s) will be reduced, so helping to ensure the continued financial viability of the business. 22