AS Accounting for AQA

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 14 10 The general journal and correction of errors 15 11 Control accounts 18 12 Adjustments to final accounts 19 AS Unit 2 Financial and Management Accounting 13 Business organisations 21 14 Accounting concepts and inventory valuation 22 15 Further aspects of final accounts 23 Osborne Books Limited 2012 All answers are the responsibility of the publisher. Published by Osborne Books Limited Tel 01905 748071 Email books@osbornebooks.co.uk www.osbornebooks.co.uk 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

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 20-1 20-1 1 Feb Bank 7,500 Dr Computer Account Cr 20-1 20-1 6 Feb Bank 2,000 Dr Rent Paid Account Cr 20-1 20-1 8 Feb Bank 750 Dr Wages Account Cr 20-1 20-1 12 Feb Bank 425 25 Feb Bank 380 Dr Bank Loan Account Cr 20-1 20-1 14 Feb Bank 2,500 Dr Commission Income Account Cr 20-1 20-1 20 Feb Bank 145 Dr Drawings Account Cr 20-1 20-1 23 Feb Bank 200 1

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 200 25 Aug Bank 150 Dr Cash Account Cr 20-5 20-5 10 Aug Commission received 200 17 Aug Drawings 100 Dr Office Fittings Account Cr 20-5 20-5 12 Aug Bank 2,000 20 Aug Bank 250 Dr Sally Orton: Loan Account Cr 20-5 20-5 27 Aug Bank 150 15 Aug Bank 1,000 Dr Drawings Account Cr 20-5 20-5 17 Aug Cash 100 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 Cr 20-7 20-7 12 Nov Bank 3,000 Dr Office Fittings Account Cr 20-7 20-7 14 Nov Bank 1,500 25 Nov Bank 200 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 300 28 Nov Bank 200 Dr Drawings Account Cr 20-7 20-7 18 Nov Cash 125 Dr Wages Account Cr 20-7 20-7 20 Nov Bank 250 2

2.6 Bank Account 20-7 Debit Credit Balance 1 Nov Capital 75,000 75,000 Dr 3 Nov Photocopier 2,500 72,500 Dr 7 Nov Bank loan 70,000 142,500 Dr 10 Nov Office premises 130,000 12,500 Dr 12 Nov Rates 3,000 9,500 Dr 14 Nov Office fittings 1,500 8,000 Dr 20 Nov Wages 250 7,750 Dr 23 Nov Cash 100 7,850 Dr 25 Nov Office fittings 200 8,050 Dr 28 Nov Commission received 200 8,250 Dr 2.7 Guidance to the trainee to include: the use of accounts to record different types of transactions the principles of double-entry book-keeping whereby one account is debited and one account is credited for every business transaction the debit entry is made in the account which gains value, or records an asset, or an expense the credit entry is made in the account which gives value, or records a liability, or an income item examples can be given using bank account where money in is recorded on the debit side, and money out is recorded on the credit side an explanation of various accounts including capital the amount of money invested in the business by the owner non-current assets items purchased by a business for use on a long-term basis (noting the distinction between capital expenditure and revenue expenditure) expenses the day-to-day running expenses (revenue expenditure) of the business income amounts of income received by the business owner s drawings where the owner takes money in cash or by cheque (or sometimes goods) from the business for personal use loans where a business receives a loan, eg from a relative or the bank CHAPTER 3 Double-entry book-keeping: further transactions 3.1 Dr Bank Account Cr 1 Oct Capital 2,500 2 Oct Purchases 200 4 Oct Sales 150 6 Oct Purchases 90 8 Oct Sales 125 14 Oct Purchases 250 12 Oct K Smithson: loan 2,000 22 Oct Delivery van 4,000 18 Oct Sales 155 25 Oct Wages 375 30 Oct Sales 110 Dr Capital Account Cr 1 Oct Bank 2,500 Dr Purchases Account Cr 2 Oct Bank 200 6 Oct Bank 90 14 Oct Bank 250 Dr Sales Account Cr 4 Oct Bank 150 8 Oct Bank 125 18 Oct Bank 155 30 Oct Bank 110 3 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 375 3.5 Dr Purchases Account Cr 2 Apr Wyvern Producers Ltd 200 4 Apr A Larsen 250 Dr Wyvern Producers Ltd Cr 9 Apr Purchases returns 50 2 Apr Purchases 200 20 Apr Bank 150 Dr A Larsen Cr 26 Apr Purchases returns 45 4 Apr Purchases 250 Dr Sales Account Cr 5 Apr Pershore Patisserie 150 7 Apr Bank 175 12 Apr Bank 110 28 Apr Cash 100 Dr Pershore Patisserie Cr 5 Apr Sales 150 15 Apr Sales returns 25 22 Apr Bank 125 Dr Bank Account Cr 7 Apr Sales 175 20 Apr Wyvern Producers Ltd 150 12 Apr Sales 110 30 Apr Amery Scales Ltd 250 22 Apr Pershore Patisserie 125 Dr Purchases Returns Account Cr 9 Apr Wyvern Producers Ltd 50 26 Apr A Larsen 45

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 250 17 Apr Weighing machine 250 Dr Cash Account Cr 28 Apr Sales 100 29 Apr Wages 90 Dr Wages Account Cr 29 Apr Cash 90 3.6 Dr Purchases Account Cr 20-3 20-3 2 Jun Designs Ltd 350 7 Jun Mercia Knitwear Ltd 400 23 Jun Designs Ltd 285 Dr Designs Ltd Cr 20-3 20-3 6 Jun Purchases returns 100 2 Jun Purchases 350 18 Jun Bank 250 23 Jun Purchases 285 Dr Sales Account Cr 20-3 20-3 4 Jun Bank 220 5 Jun Cash 115 10 Jun Wyvern Trade Supplies 350 12 Jun Bank 175 20 Jun Cash 180 Dr Bank Account Cr 20-3 20-3 4 Jun Sales 220 18 Jun Designs Ltd 250 12 Jun Sales 175 28 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 4 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 Cr 20-3 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 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.

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 5 30.00 each 150.00 0.00 150.00 Suits 3 45.50 each 136.50 0.00 136.50 Coats 4 51.50 each 206.00 0.00 206.00 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 TOTAL 492.50 terms 2.5% cash discount for full settlement within 14 days Net 30 days TOTAL 190.00 Excel Fashions will pay 480.18 ( 492.50 x 97.5%, rounded down) for settlement in full within 14 days. The Card Shop will pay 185.25 ( 190.00 x 97.5%) for settlement in full within 14 days. 5

4.4 Dr Purchases Account Cr 20-4 20-4 2 Feb G Lewis 200 16 Feb G Lewis 160 Dr Sales Account Cr 20-4 20-4 4 Feb L Jarvis 150 7 Feb G Patel 240 Dr G Lewis Cr 20-4 20-4 10 Feb Bank 190 2 Feb Purchases 200 10 Feb Discount received 10 16 Feb Purchases 160 24 Feb Bank 152 24 Feb Discount received 8 360 360 Dr L Jarvis Cr 20-4 20-4 4 Feb Sales 150 12 Feb Bank 147 12 Feb Discount allowed 3 150 150 Dr G Patel Cr 20-4 20-4 7 Feb Sales 240 20 Feb Bank 234 20 Feb Discount allowed 6 240 240 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 4.5 (a) 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 (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 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. TOTAL 787.50 (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 20-4 20-4 12 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

4.8 (a) 5 computer desks were ordered (not 10 as shown on the invoice) 10 office chairs were ordered (not 5 as shown on the invoice) the unit price of the computer desks is 65.00 each (not 70.00 as shown on the invoice) the net amount for computer desks is 292.50 (not 350.00 as shown on the invoice) the net amount for office chairs is 180.00 (not 20.00 as shown on the invoice) the invoice total is 472.50 (not 370.00 as shown on the invoice) CHAPTER 5 Balancing accounts the trial balance 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 (c) Wyvern Products Limited will pay 448.87 ( 472.50 x 95%) for settlement in full within 14 days. 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

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 Cr 20-9 20-9 27 Jan Rowcester College 100 Dr Purchases Returns Account Cr 20-9 20-9 5 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 100 21,050 21,050 (d) Trial balance as at 28 February 20-9 Dr Cr Name of Account Bank 5,300 Capital 10,000 Rent paid 1,000 Shop fittings 2,350 Purchases 17,000 Comp Supplies Limited 5,500 Sales 11,150 Rowcester College 1,050 Sales returns 100 Purchases returns 150 26,800 26,800 5.2 Trial balance of Jane Greenwell as at 28 February 20-1 Dr Cr Name of account Bank 1,250 Purchases 850 Cash 48 Sales 730 Purchases returns 144 Trade payables 1,442 Equipment 2,704 Van 3,200 Sales returns 90 Trade receivables 1,174 Wages 1,500 Capital (missing figure) 6,000 9,566 9,566 8

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 320 19 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 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 LEDGER Dr High Street Stores Cr 8 Feb Sales 440 25 Feb Sales 200 Dr Peter Lounds Ltd Cr 14 Feb Sales 120 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 Dr Carpminster College Cr 18 Feb Sales 320 GENERAL LEDGER Dr Purchases Account Cr 28 Feb Purchases Day Book 720 28 Feb Total for month 1,080 9 Dr Sales Account Cr 28 Feb Sales Day Book 1,080

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 98 31 May Total for month 1,118.00 GENERAL LEDGER Dr Purchases Account Cr 31 May Purchases Day Book 1,118.00 Dr Purchases Returns Account Cr 31 May Purchases Day Book 108.00 Purchases Returns Day Book Date Details Credit Reference Amount Note 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 6.5 (a) product quantity details unit price unit total amount code X24 96 Trend tops 8.50 each each 816.00 and (c) PURCHASES LEDGER Dr Wyper Ltd (account no 301) Cr 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 Y36 20 Jeans 15 each each 300.00 1,116.00 trade discount 20% 223.20 total 892.80 1 Jun Balance b/d 710 Dr M Roper & Sons (account no 302) Cr 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 terms 5% cash discount for full settlement within 7 days Net 30 days 1 Jun Balance b/d 485 10

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 20-7 20-7 1 Aug Balances b/d 276 4,928 5 Aug T Hall Ltd 24 541 1 Aug Wild & Sons Ltd 398 8 Aug Wages 254 11 Aug Bank C 500 11 Aug Cash C 500 12 Aug A Lewis Ltd 20 1,755 18 Aug F Jarvis 457 21 Aug Harvey & Sons Ltd 261 22 Aug Wages 436 29 Aug Wild & Sons Ltd 15 595 25 Aug J Jones 33 628 29 Aug Bank C 275 27 Aug Salaries 2,043 28 Aug Telephone 276 29 Aug Cash C 275 31 Aug Balances c/d 361 3,217 35 1,051 7,937 57 1,051 7,937 1 Sep Balances b/d 361 3,217 7.4 Dr Cash Book Cr Date Details Ref Discount Cash Bank Date Details Ref Discount Cash Bank allowed received 20-5 20-5 1 Mar Balances b/d 106 3,214 2 Mar Rent 10674 250 3 Mar Sales* 100 950 5 Mar Cleaning expenses 35 8 Mar Sales 1,680 9 Mar Purchases 10675 1,200 11 Mar Bank C 150 11 Mar Cash 10676 C 150 13 Mar Sales 1,800 16 Mar Postages 50 22 Mar Bank C 150 18 Mar Telephone 10677 168 25 Mar Sales 2,108 20 Mar Stationery 128 29 Mar Sales* 200 2,000 22 Mar Cash 10678 C 150 31 Mar Hobbs Ltd 30 720 26 Mar Misc expenses 70 31 Mar Pratley & Co 50 1,160 27 Mar Wages 10679 2,000 30 Mar Electricity 10680 106 31 Mar Evans & Co 10681 45 855 31 Mar A Bennett 10682 26 494 31 Mar Balances c/d 423 8,259 80 706 13,632 71 706 13,632 1 Apr Balances b/d 423 8,259 * An alternative way of showing the transactions of 3 March and 29 March is to record the full amount of sales in the debit cash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.

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 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 7.8 (a) and Dr Cash Book Cr Date Details Disc Cash Bank Date Details Disc Cash Bank 20-6 20-6 1 Jan Balance b/d 50 1 Jan Balance b/d 1,236 6 Jan R Reed 567 2 Jan Bilton Office Supplies 3 164 13 Jan B Brown 4 366 11 Jan Rent 450 14 Jan Sales 752 27 Jan Wages 75 28 Jan Sales 642 20 Jan British Gas S/O 200 24 Jan C Denton & Co Ltd C/T 248 21 Jan Bank interest 28 31 Jan Cash C 1,319 31 Jan Bank C 1,319 31 Jan Balances c/d 50 422 4 1,444 2,500 3 1,444 2,500 1 Feb Balance b/d 50 422 (c) Dr Discounts Allowed Account Cr 20-6 20-6 31 Jan Cash book 4 Dr Discounts Received Account Cr 20-6 20-6 31 Jan Cash book 3 12 P GERRARD BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7 Balance at bank as per cash book 923.70 Add: unpresented cheques Bryant & Sons cheque no. 001354 312.00 P Reid cheque no. 001355 176.50 488.50 1,412.20 Less: outstanding lodgement G Shotton Limited 335.75 Balance at bank as per cash book 1,076.45 8.3 (a) Dr Cash Book (bank columns) Cr 20-7 20-7 1 May Balance b/d 300 2 May P Stone 867714 28 7 May Cash 162 14 May Alpha Ltd 867715 50 16 May C Brewster 89 29 May E Deakin 867716 110 23 May Cash 60 16 May Standing order: A-Z Insurance 25 30 May Cash 40 31 May Bank charges 10 31 May Balance c/d 428 651 651 1 Jun Balance b/d 428 JANE DOYLE BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7 Balance at bank as per cash book 428 Add: unpresented cheque E Deakin cheque no. 867716 110 538 Less: outstanding lodgement cash banked 40 Balance at bank as per bank statement 498

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 534 8.7 (a) Dr Cash Book Cr Date Details Bank Date Details Cheque Bank 2003 p 2003 number p 1 Nov Balance b/d 2,459.35 1 Nov Banks Ltd 11346 134.37 3 Nov Toys for You 234.00 1 Nov Books & Paints 11347 276.89 5 Nov B J Patel 3,219.00 10 Nov Wages 11348 92.50 5 Nov Dolls and Things 1,142.00 12 Nov Jones and Son 11349 3,781.95 23 Nov J A Smith Ltd 560.00 23 Nov Smith and Son 11350 139.43 26 Nov Cash banked 340.00 25 Nov HGF Finance 11351 256.00 25 Nov Toy Designs 11352 1,245.98 30 Nov Balance c/d 2,027.23 7,954.35 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 (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 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

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 350 56,581 Less expenses: Wages 23,980 Carriage outwards 3,600 Motor expenses 4,500 Bank charges 450 32,530 Profit for the year 24,051 9.5 CLARE LEWIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 Revenue 144,810 Opening inventory 16,010 Purchases 96,318 112,328 Less Closing inventory 13,735 Cost of sales 98,593 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 12,500 31 Mar Balance b/d 36,790 31 Mar Balance c/d 48,341 31 Mar Profit for the year 24,051 60,841 60,841 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 29,695 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

AMARYLLIS TRADING INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001 Revenue 21,053.57 Less Returns inwards 1,506.34 19,547.23 Less Cost of sales: Opening inventory 2,560.87 Add Purchases 13,045.97 Less Returns out 1,166.91 11,879.06 Add Carriage in 871.26 15,311.19 Less Closing inventory 2,640.96 12,670.23 Gross profit 6,877.00 3. Telephone bill due to be paid in one month s time Section: Current liabilities Reason: Short-term liability an amount owed by the business which needs to be paid within the next 12 months Tutorial note: the accounting treatment for a bill which has not been paid at the balance sheet date called an accrual of expenses is covered in detail in Chapter 12 4. Drawings for the year Section: Capital/Financed by/represented by Reason: It is cash or goods taken out of the business by the owner, therefore it reduces the capital invested in the business. (c) (i) Cost of sales 12,670.23 (ii) Goods available for sale 15,311.19 (iii) Net revenue 19,547.23 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 20-8 31 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 20-8 31 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 20-8 31 Dec Drawings GL 200 Motoring expenses GL 200 Transfer of private motoring to drawings account 15

(d) (c) error of principle 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 Delivery van GL 10,000 Vehicle expenses GL 10,000 Correction of error vehicle no... invoice no... 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. (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)... 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 89 187 187 Correction of error cheque for 89 received on...(date)...

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 105. 3 (2) Returns inwards 500 Suspense 500 Returns inwards 300 Suspense 300 (3) Suspense 400 Discount received 400 (4) J Jones 350 A Jones 350 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 10.8 (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 163,833 163,833 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 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) 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

10.11 Jonathon Smith Corrected Profit for the year ended 30 November 2004 Profit calculated by Jonathon 26,790 1. Sales undercast add 450 2. Discount allowed (2 x 140) less 280 3. Wages less 2,500 4. Non-current asset add 9,500 5. Error of commission no effect on profit 6. Closing inventory (reduction in cost of sales) add 100 Corrected profit 34,060 Dr Sales Ledger Control Account Cr 20-8 p 20-8 p 1 Feb Balances b/d 2,012.43 28 Feb Sales returns 221.67 28 Feb Credit sales 1,288.76 28 Feb Cheques received from trade receivables 911.43 28 Feb Cash discount allowed 23.37 28 Feb Set-off: purchases ledger 364.68 28 Feb Bad debts written off 59.28 28 Feb Balances c/d 1,720.76 3,301.19 3,301.19 1 Mar Balances b/d 1,720.76 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 826.40 20 Feb Bank 805.74 3 Feb Sales 338.59 20 Feb Discount allowed 20.66 28 Feb Balance c/d 338.59 1,164.99 1,164.99 1 Mar Balance b/d 338.59 Dr B Brick (Builders) Limited Cr 20-8 p 20-8 p 1 Feb Balance b/d 59.28 28 Feb Bad debts written off 59.28 (c) Reconciliation of sales ledger control account with trade receivable balances 1 February 20-8 28 February 20-8 p p Arrow Valley Retailers 826.40 338.59 B Brick (Builders) Limited 59.28 Mereford Manufacturing Company 293.49 Redgrove Restorations 724.86 954.26 Wyvern Warehouse Limited 108.40 427.91 Sales ledger control account 2,012.43 1,720.76 Dr Mereford Manufacturing Company Cr 20-8 p 20-8 p 1 Feb Balance b/d 293.49 24 Feb Sales returns 56.29 3 Feb Sales 127.48 28 Feb Set-off: purchases ledger 364.68 420.97 420.97 Dr Redgrove Restorations Cr 20-8 p 20-8 p 1 Feb Balance b/d 724.86 7 Feb Sales returns 165.38 17 Feb Sales 394.78 28 Feb Balance c/d 954.26 1,119.64 1,119.64 1 Mar Balance b/d 954.26 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 Dr Wyvern Warehouse Limited Cr 20-8 p 20-8 p 1 Feb Balance b/d 108.40 15 Feb Bank 105.69 17 Feb Sales 427.91 15 Feb Discount allowed 2.71 28 Feb Balance c/d 427.91 536.31 536.31 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 427.91 18

11.6 Dr Sales Ledger Control Account Cr 20-5 20-5 1 Jan Balance b/d 44,359 31 Jan Bank 23,045 31 Jan Sales 27,632 31 Jan Discount allowed 1,126 31 Jan Returned cheque 275 31 Jan Sales returns 2,964 31 Jan Set-off: purchases ledger 247 31 Jan Balance c/d 44,884 72,266 72,266 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 150. 11.7 (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 5,476 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 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. 19 12.2 SOUTHTOWN SUPPLIES INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-9 Revenue 420,000 Opening inventory 70,000 Purchases 280,000 350,000 Less Closing inventory 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 Profit for the year 65,580 12.7 HAZEL HARRIS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-4 Revenue 614,000 Opening inventory 63,000 Purchases 465,000 528,000 Less Closing inventory 88,000 Cost of sales 440,000 Gross profit 174,000 Add Discount received 8,140 182,140 Less expenses: Insurances 8,480 Vehicle expenses 2,680 Wages and salaries 86,060 + 3,180 89,240 Discount allowed 10,610 Rates and insurance 6,070 450 5,620 General expenses 15,860 Depreciation: vehicles 12,000 x 20% 2,400 furniture and fittings 25,000 x 10% 2,500 137,390 Profit for the year 44,750

BALANCE SHEET AS AT 31 DECEMBER 20-4 Non-current Assets Cost Prov for dep'n Net book value Freehold land 100,000 100,000 Vehicles 12,000 4,800 7,200 Furniture and fittings 25,000 5,000 20,000 137,000 9,800 127,200 Current Assets Inventory 88,000 Trade receivables 52,130 Prepayment of expenses 450 140,580 Less Current Liabilities Trade payables 41,850 Accrual of expenses 3,180 Bank 2,000 47,030 Net Current Assets or Working Capital 93,550 220,750 Less non-current Liabilities Bank loan 75,000 NET ASSETS 145,750 FINANCED BY Capital Opening capital 125,000 Add Profit for the year 44,750 169,750 Less Drawings 24,000 145,750 12.9 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 5,273 310 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 Profit for the year 27,421 12.10 (a) BALANCE SHEET AS AT 31 DECEMBER 20-8 Non-current Assets Shop fittings at cost 12,000 Less provision for depreciation 2,400 + 2,400 4,800 Net book value 7,200 Current Assets Inventory 28,176 Trade receivables 3,641 Cash 163 Prepayment of expenses 310 32,290 Less Current Liabilities 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 2007 2007 31 May Cash/bank 2,400 31 May Income statement 2,320 31 May Balance c/d 130 31 May Balance c/d 210 2,530 2,530 1 Jun Balance b/d 210 1 Jun Balance b/d 130 20

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. 13.3 (a) The Partnership Act 1890 defines a partnership as the relation which subsists between persons carrying on a business in common with a view of profit. Where no partnership agreement exists, then the following accounting rules from the Partnership Act 1890 must be followed: profits and losses are to be shared equally between the partners no partner is entitled to a salary partners are not entitled to receive interest on their capital interest is not to be charged on partners drawings when a partner contributes more capital than agreed, he or she is entitled to receive interest at five per cent per annum on the excess Note: the question asks for any three provisions. 13.5 Points to cover include: * Definition of a limited company separate legal entity owned by shareholders managed by directors Types of companies public limited company private limited company company limited by guarantee Advantages of forming a limited company limited liability separate legal entity ability to raise finance membership other factors 21

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. 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) Inventory should be valued at the lower of cost or net realisable value whichever is the lower. This is an example of using the prudence concept. 14.8 Concept Gross Profit Current Current Capital Profit for the year Assets Liabilities 1. Accruals no decrease no increase decrease change 4,000 change 4,000 4,000 2. Consistency no decrease no no decrease change 15,000 change change 15,000 3. Prudence or decrease decrease decrease no decrease Consistency 18,000 18,000 18,000 change 18,000 4. Business no increase no no no entity change 13,000 change change change 14.2 (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 14.10 (a) jacket, 40 (note: replacement cost is not applicable here) shirt, 25 suit, 80 trousers, 25 10 = 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

CHAPTER 15 Further aspects of final accounts 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 Income statement 1,150 1,250 1,250 Dr Advertising Income Account Cr 20-7 20-7 31 Dec Balance b/d 150 31 Dec Bank/Cash 2,720 (accrual of income) (receipts for year) 31 Dec Income statement 2,820 31 Dec Balance c/d 250 (accrual of income) 2,970 2,970 20-8 20-8 1 Jan Balance b/d 250 (accrual of income) 15.6 Dr Provision for Doubtful Debts Account Cr 20-9 20-9 31 Dec Balance c/d 1,000 31 Dec Income statement 1,000 20-0 20-0 1 Jan Balance b/d 1,000 (c) Income statement (expenses) debit bad debts written off 420 debit provision for doubtful debts 1,000 Explanation: profit for the year is reduced by 1,420 Balance sheet Trade receivables 39,000 Workings: 40,420 420 bad debts = 40,000 1,000 provision for doubtful debts = 39,000 net trade receivables Explanation: current assets are reduced by 420 + 1,000 = 1,420 Year Income statement Balance sheet Dr Rent Income Account Cr 20-7 20-7 31 Dec Income statement 19,260 31 Dec Balance b/d 850 (prepayment of income) 31 Dec Bank/Cash 18,290 (receipts for year) 31 Dec Balance c/d 120 (accrual of income) 19,260 19,260 20-8 20-8 1 Jan Balance b/d 120 (accrual of income) Expense Income Trade Less prov for Net receivables doubtful debts trade Bad Increase in Bad Decrease in (after bad receivables debts provision for debts provision for debts written off doubtful debts recovered doubtful debts written off) 20-5 1,800 2,585 103,400 2,585 100,815 20-6 2,400 245 113,200 2,830 110,370 20-7 1,400 150 110 108,800 2,720 106,080 15.4 (a) Dr Bad Debts Written Off Account Cr 20-9 20-9 31 Dec Webster Limited 110 31 Dec Income statement 420 31 Dec T Smith 210 31 Dec Khan and Company 100 420 420 Workings for doubtful debts provision: 20-5 ( 105,200 1,800) x 2.5% = 2,585 creation of provision 20-6 ( 115,600 2,400) x 2.5% = 2,830 2,585 = 245 increase in provision 20-7 ( 110,200 1,400) x 2.5% = 2,720 2,830 = 110 decrease in provision 23

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) Depreciation is a non-cash expense It is an accounting adjustment Depreciation is not a method of providing a fund of cash which can be used to replace the asset at the end of its life Profits are lower after depreciation has been deducted this may discourage drawings from the business 15.11 (a) Dr Vehicles Account Cr 20-8 20-8 1 Jan Balance b/d 12,000 1 Oct Disposals 12,000 1 Oct Disposals 5,500 31 Dec Balance c/d 15,000 (part-exchange allowance) 1 Oct Bank 9,500 (balance paid by cheque) 27,000 27,000 15.12 (a) 20,000 12,500 4,000 = loss of 3,500 BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-9 Non-current 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 the cost price is 25,000. 15.13 (a) Profit on disposal of old machine = 2,000 Workings 24,000 18,000 depreciation = 6,000 net book value Trade-in value 8,000 Net book value at date of trade-in 6,000 Profit on disposal 2,000 20-9 20-9 1 Jan Balance b/d 15,000 Dr Provision for Depreciation Account Vehicles Cr 20-8 20-8 1 Oct Disposals 7,200 1 Jan Balance b/d 7,200 31 Dec Balance c/d 3,000 31 Dec Income statement 3,000 10,200 10,200 20-9 20-9 (c) 1 Jan Balance b/d 3,000 Dr Disposals Account Vehicles Cr 20-8 20-8 1 Oct Vehicles 12,000 1 Oct Vehicles 5,500 31 Dec Income statement 700 (part-exchange allowance) (profit on sale) 1 Oct Prov for depreciation 7,200 12,700 12,700 GORG HAMMAN BALANCE SHEET AS AT 31 DECEMBER 2003 Non-current Assets Machinery at cost 176,000 ( 170,000 24,000 + 30,000) Less prov for depreciation 123,500 ( 105,000 18,000 + 36,500) Net book value 52,500 Current Liabilities Trade payable instalment due on machine (11,000) Tutorial notes: depreciation for 2003 is calculated at 25% straight-line method (being the rate applied to the old machine) therefore depreciation on remaining machinery is 170,000 24,000 = 146,000 x 25% = 36,500 (d) BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-8 Cost Prov for dep n Net book value Non-current assets Vehicles 15,000 3,000 12,000 24

15.16 THOMAS SALMON INCOME STATEMENT 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 Profit for the year 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 income statement) *** Net book value ( 8,000 6,000) 2,000 Sale price 1,900 Loss on sale 100 CHAPTER 16 Preparing sole trader final accounts 16.1 (a) Capital expenditure cost of van 11,650 air conditioning 550 fitted shelving 350 total 12,550 Revenue expenditure tax disc 165 cost of extended warranty 220 tank of fuel 40 insurance premium 450 total 875 25 16.4 (a) ABEL BROWN INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 Revenue 278,400 Less Cost of sales: Opening inventory 12,700 Purchases 153,900 166,600 Less Closing inventory 14,100 152,500 Gross profit 125,900 Less expenses: Wages 75,400 Rent 2,280 Other expenses 25,120 Depreciation 15,000 117,800 Profit for the year 8,100 Workings: Wages 74,750 + 650 owing Rent 2,500 220 prepaid Depreciation 150,000 x 10% New profit: 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, so profit will increase from 8,100 (see above) to 11,100. 16.5 JOHN HENSON INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20-8 Revenue 122,000 Opening inventory 6,250 Purchases 71,600 77,850 Less Closing inventory 8,500 Cost of sales 69,350 Gross profit 52,650 Add income: Discounts received 285 52,935 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 Profit for the year 20,525

BALANCE SHEET AS AT 31 DECEMBER 20-8 Non-current Assets Cost Prov for 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 Inventory 8,500 Trade receivables 5,225 Prepayment of expenses 120 Bank 725 14,570 Less Current Liabilities Trade payables 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 Profit for the year 20,525 40,525 Less Drawings 13,095 27,430 16.6 (a) KEN TUCKY INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2006 Revenue 587,461 Less Returns inwards 837 Net revenue 586,624 Opening inventory 39,771 Purchases 280,797 2,170 goods for own use 278,627 318,398 Less Closing inventory 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: property 2,900 equipment 1,140 motor vehicles 13,448 227,154 Profit for the year 81,207 Depreciation calculations Property: 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 Additional information 4 This is a prepayment of expenses. The amount is deducted from the expense to be shown in income statement, ie 7,780 expense 286 prepayment = 7,494 to income statement. 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 income statement. The accounting concept is accruals (or matching) expenses and revenues for goods and services are matched to the same time period, here the year ended 31 March 2006. 26

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 business are recorded, which are then matched to the sales derived from them. The accounting concept is business entity which keeps separate from the business the personal assets and liabilities of the owner. (c) A provision for doubtful debts should be created so that the balance sheet figure of net trade receivables is 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 income statement, and deducted from trade receivables in the balance sheet. The accounting concept is prudence. Workings: Purchases: 149,400 3,000 goods for own use 23,000 fixtures = 123,400 Closing inventory: valued at the lower of cost, 8,700, and net realisable value, 11,500 Provision for doubtful debts: 9,000 trade receivables x 3% provision = 270, which is deducted from 310 existing 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 Example of capital expenditure: purchase of fixtures Example of revenue expenditure: wages and general expenses 16.8 (a) SIOBHAN HUGGETT INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 2004 Revenue 293,100 Opening inventory 7,800 Purchases 123,400 131,200 Less Closing inventory 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 Loss for the year 3,880 (c) Capital expenditure is expenditure incurred on the purchase, alteration or improvement of fixed assets. 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 income statement. It is important to classify these items of expenditure correctly in the accounting system so that the final accounts report reliably on the 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 INCOME STATEMENT 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 12,140 General expenses 37,898 Bad debts written off 760 Loss on sale of vehicle 200 Provision for depreciation: property 2,400 vehicles 7,500 809,330 Loss for the year 1,315 27

Workings: Provision for doubtful debts: 35,000 trade receivables 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 at date of sale 4,800 sale proceeds = 200 loss on sale. Provision for depreciation of property: 120,000 x 2% = 2,400 Provision for depreciation of vehicles: 60,000 30,000 depreciation to date = 30,000 x 25% = 7,500 The private limited company is the most common form of limited company and is defined as any company that is not a public company (Companies Act 2006). Many private limited companies are small companies, often in family ownership and it would seem appropriate for Wullie McDuff to consider this form 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 are not available to the company s trade payables 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 and investors a limited company may have a higher standing and status in the business community, allowing it to benefit from economies of scale, and making it of sufficient size to employ specialists CHAPTER 17 Financial statements of limited companies 17.1 (a) Ordinary shares are the most commonly issued class of share. They take a share of the profits which remain after all other expenses of the business. The main risk of ordinary shares is that part or 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 of ordinary shareholders. In the event of the company ceasing to trade, the preference shareholders will also receive repayment of capital before the ordinary shareholders. Nominal value is the face value of a share which is entered in the accounts, eg 5p, 10p, 25p, 50p or 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 income statement; examples include retained earnings, general reserve. (d) A bonus issue is the capitalisation of reserves either capital or revenue in the form of free shares issued 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 their holdings, at a favourable price. 17.2 (a) debenture interest is shown as an expense in the income statement directors' remuneration is shown as an expense in the income statement (c) corporation tax is shown in the income statement, and any amount not yet paid is shown as a current liability on the balance sheet (d) dividends paid are shown in the statement of changes in equity (e) revaluation reserve is shown as a capital reserve as a part of the equity section of the balance sheet (f) goodwill is shown as an intangible asset in the non-current assets section of the balance sheet; it is amortised in the same way as tangible non-current assets are depreciated Disadvantages include membership all ordinary shareholders have voting rights, so Wullie may lose some control of the 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 company are 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 sensible to consider this option. At the same time he would gain the benefit of limited liability. 17.4 (a) MASON MOTORS LTD INCOME STATEMENT (EXTRACT) FOR THE YEAR ENDED 31 DECEMBER 20-1 Profit from operations 75,000 Finance costs (5,500) Profit before tax 69,500 Tax (20,050) Profit for the year 49,450 28

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-1 Retained earnings Balance at 1 January 20-1 100,000 Profit for the year 49,450 149,450 Dividends paid (10,000) Transfer to general reserve (20,000) Balance at 31 December 20-1 119,450 (c) General reserve is created from profit which has been kept in the company. It belongs to the shareholders, but is represented by assets in the balance sheet and is not a bank balance available to rebuild the garage forecourt. 17.7 (a) SRIAN PLC STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MAY 20-3 Retained earnings Balance at 1 June 20-2 3,400,000 Profit for the year 6,000,000 9,400,000 Dividends paid (2,800,000) Transfer to general reserve (2,000,000) Balance at 31 May 20-3 4,600,000 Issue of ordinary shares ordinary shares are not normally repayable, so the company will have the finance for the foreseeable future the new shareholders will have voting rights not essential to pay dividends every year, although a failure to do so might cause difficulties with future 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 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 earnings and general reserve), the gearing ratio is currently: Debt = 20,000,000 = 0.8:1 or 80% Equity 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 share premium 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 to investors. 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 in the future meeting the extra annual interest cost of 1,800,000. 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 company assets; this may restrict the use the company can make of the assets 29

17.9 (a) STOULBY LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 Retained earnings Balance at 1 January 2006 410,000 Profit for the year 650,000 1,060,000 Dividend paid (63,000) Transfer to general reserve (120,000) Balance at 31 December 2006 877,000 TOTAL EQUITY 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 Retained earnings 877,000 1,297,000 TOTAL EQUITY 3,797,000 * general reserve: 300,000 + 120,000 transfer DAVID MARK LIMITED SUMMARISED BALANCE SHEET AS AT 31 DECEMBER 20-2 Non-current assets 600,000 Current assets Inventories 85,000 Trade and other receivables 60,000 Cash and cash equivalents *132,000 277,000 Current liabilities Trade and other payables (37,000) Net Current Assets 240,000 Net Assets 840,000 EQUITY Issued Share Capital 700,000 ordinary shares of 50p each, fully paid 350,000 Capital Reserve Share premium account 50,000 Revenue Reserves Retained earnings 320,000 General reserve 120,000 440,000 TOTAL EQUITY 840,000 (c) (d) (e) Revenue reserves are profits from trading activities which have been retained in the company to help build the company for the future Retained earnings or general reserve Revenue reserves can be used to fund dividend payments or to provide bonus shares to shareholders * Cash and cash equivalents: balance at start 17,000 share issue 150,000 dividend paid (35,000) closing balance 132,000 17.10 (a) DAVID MARK LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-2 Issued Share General Retained Total share capital premium reserve earnings Balances at 1 January 20-2 250,000 75,000 *250,000 575,000 Profit for the year 150,000 150,000 Dividend paid **(35,000) (35,000) Transfer to general reserve 45,000 (45,000) Issue of shares 100,000 50,000 150,000 Balances at 31 December 20-2 350,000 50,000 120,000 320,000 840,000 (c) Limited company, or 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 the case of liquidation (unless the shares are not fully paid). Thus the risk taken by shareholders is limited. * 400,000 150,000 profit for the year ** 500,000 shares x 7p 30

CHAPTER 18 Ratio analysis 18.3 Exton Frimley (a) gross profit margin 13.4% 44.0% 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. (c) 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) as payments 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. cash This is the actual amount of money held in the bank or as cash. 31 (d) 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 debts. return on capital employed Profit for the year 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 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) 20-1 Trade 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 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?

18.7 (a) Net current assets (current) ratio = Current assets Current liabilities Liquid capital (acid test) ratio = (Current assets inventories) Current liabilities Net profit margin (profit in relation = Profit for the year x 100 to revenue) Revenue 1 Rate of inventory turnover = Average inventories x 365 days Cost of sales or Cost of sales = number of times per year Average inventories Return on capital employed = Profit for the year x 100 Capital employed 1 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 capital employed. 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 = Profit for the year x 100 Capital employed 1 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 (c) 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. To: From: Date: Subject: Proposal 1 Ordinary shareholder Student Accountant Today Proposals to raise finance Report 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. 32

18.11 (a) FALCON LIMITED BALANCE SHEET AS AT 31 MARCH 2007 Gearing ratio = Debt (loan capital + preference shares, if any) or Debt Equity (ordinary shares + reserves) Equity Non-Current Assets Net book value Property 200,000 Fixtures and fittings 17,500 217,500 Current Assets Inventories 14,560 Trade 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 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 property 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 property 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. 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 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 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 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 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 33

CHAPTER 19 Budgeting and budgetary control 19.3 (a) 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 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 (c) Any three budgets purchases budget sales (revenue) budget production budget labour budget trade receivable budget trade payable budget cash budget The most likely three budgets for a small business such as Classic Furniture would be cash, sales and production Relevant factors when implementing budgetary control costs and benefits benefits must exceed the cost accuracy of information 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 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 (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 trade receivables 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 34

19.5 (a) July August September October November December Income Cash from trade receivables 20,000 24,000 28,500 32,500 38,500 *47,760 Expenditure Payments to trade payables 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 non-current 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) Explanation receipts from trade receivables and payments to trade payables are likely to occur some weeks after the sales and purchases have been recorded in the income statement the purchase of non-current 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 in January and 12,000 in February thus, at the end of December, 36,000 is outstanding in December, the company plans to buy new non-current 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) cash from December sales: 60,000 x 20% x 98% = 11,760 cash from November sales: 50,000 x 60% = 30,000 cash from October sales: 30,000 x 20% = 6,000 47,760 980 (opening balance 1 July) + 17,770 overdraft (closing balance 31 December) = 18,750 total net cash outflow (c) JIM SMITH CASH BUDGET FOR THE SIX MONTHS ENDING 30 JUNE 20... Jan Feb Mar Apr May Jun Receipts Capital introduced 10,000 Trade receivables 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 To: From: Date: Subject: Memorandum The Directors of Hawk Limited Student Accountant Today Making profits whilst having a bank overdraft Payments Van 6,000 Trade payables 4,500 4,500 3,500 3,500 3,500 Expenses 750 600 600 650 650 700 Total payments for month 6,750 5,100 5,100 4,150 4,150 4,200 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 non-current assets repayment of loans 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) 35

Notes: no depreciation a non-cash expense is shown in the cash budget customers pay one month after sale, ie trade receivables from January settle in February suppliers are paid one month after purchase, ie trade payables from January are paid in February 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 CHAPTER 20 The impact of computer technology in accounting 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 - 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) 36