Osborne Books Answer Document AS Accounting

answers to selected questions in the textbook
AS Unit 1
Introduction to Financial Accounting

1
What is financial accounting?
Double-entry book-keeping: further transactions
AS Accounting for AQA

second edition
TUTOR SUPPORT MATERIAL:

ANSWERS TO SELECTED QUESTIONS
10
11
12
Double-entry book-keeping: first principles

Business documents
Balancing accounts the trial balance
Division of the ledger the use of subsidiary books

The main cash book
11
Bank reconciliation statements
12
The general journal and correction of errors
15
Introduction to final accounts

Control accounts
Adjustments to final accounts
14
18
19
AS Unit 2
Financial and Management Accounting

13
Business organisations
21
15
Further aspects of final accounts
23
14
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
17
18
19
20
Accounting concepts and inventory valuation

Preparing sole trader final accounts
Financial statements of limited companies

Ratio analysis
Budgeting and budgetary control
The impact of computer technology in accounting
22
25
28
31
34
36
1.7
CHAPTER 1 What is financial accounting?
1.2
1.3
Purposes of accounting:
To quantify items such as sales, expenses and profit
1.
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
1.4
trial balance
extraction of figures from all the double-entry accounts to check their accuracy
overheads and expenses to date
2.1
assets owned
trade receivables total amount owed to the business, and individual trade receivables
liabilities owed
profit during a particular period
trade payables total amount owed by the business, and individual trade payables
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
employees and trade unions, who wish to check on the financial prospects of the business
(a)
(b)
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
Dr
Capital Account
Dr
Computer Account
Cr
Rent Paid Account
Cr
Wages Account
Cr
Dr
Bank Loan Account
Bank
Cr
2,500
Dr
Commission Income Account
Cr
Dr
Drawings Account
Dr
20-1
8 Feb
customers, who wish to ensure that the business has the financial strength to continue selling the
goods and services that they buy
the tax authorities, who will wish to see that tax due by the business on profits and for Value Added
Tax has been paid
Dr
20-1
12 Feb
25 Feb
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
Bank
Bank
Bank
Bank
20-1
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.
assets items owned by a business; liabilities items owed by a 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
20-1
23 Feb
2,000
750
425
380
20-1
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
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
asset of computer increases by 4,000

asset of bank decreases by 4,000
asset 8,000 liability 0 = capital 8,000
20-1
20-1
6 Feb
Other stakeholders any four from
1.6
purchases of goods for resale to date
asset of bank increases by 8,000

capital increases by 8,000
asset 8,000 liability 0 = capital 8,000
CHAPTER 2 Double-entry book-keeping: first principles
final accounts
production of an income statement and a balance sheet
1.5
double-entry accounts system

transfer from subsidiary books into the double-entry book-keeping system of accounts in the ledger
turnover (cash and credit sales) to date
initial recording of transactions

recording accounting transactions in subsidiary books (or books of prime entry)
documents
processing of source documents relating to accounting transactions
Information from the accounting system includes:
Bank
200
20-1
1 Feb
Bank
20-1
20-1
20-1
20 Feb
20-1
7,500
20-1
20-1
14 Feb
Cr
Bank
145
Cr
Dr
20-1
28 Feb
2.3
Dr
20-5
1 Aug
15 Aug
20 Aug
25 Aug
Bank
Van Account
20-1
6,000
Cr
Capital
S Orton: loan
Office fittings
Commission received
Bank Account
20-5
5,000
3 Aug
1,000
7 Aug
250
12 Aug
150
27 Aug
Computer
Rent paid
Office fittings
S Orton: loan
Cr
1,800
100
2,000
150
Bank
Cr
5,000
Capital Account
20-5
1 Aug
Dr
20-5
Dr
20-5
3 Aug
Dr
20-5
7 Aug
Dr
20-5
12 Aug
Dr
20-5
27 Aug
Dr
20-5
17 Aug
Dr
20-7
1 Nov
7 Nov
23 Nov
25 Nov
28 Nov
Dr
20-7
3 Nov
Dr
Bank
Bank
Rent Paid Account
20-5
100
Cr
20-7
10 Nov
Cr
200
150
20-7
12 Nov
Commission received
Cash Account
20-5
200
17 Aug
Drawings
Bank
Cr
250
Bank
Sally Orton: Loan Account
20-5
150
15 Aug Bank
Cr
1,000
Cash
Dr
20-7
14 Nov
Cr
100
Office Fittings Account
20-5
2,000
20 Aug Bank
Drawings Account
20-5
100
Dr
Dr
20-7
15 Nov
Bank
Bank
Bank
Bank
Commission received
20-7
1 Nov
Photocopier
Office premises
Business rates
Office fittings
Wages
Bank
Bank
75,000
Cr
20-7
7 Nov
Bank
70,000
Office Premises Account
Cr
Rates Account
Cr
Office Fittings Account
Cr
130,000
20-7
3,000
20-7
1,500
20-7
25 Nov
Bank
200
300
20-7
18 Nov
23 Nov
Drawings
Bank
125
100
20-7
15 Nov
28 Nov
Cash
Bank
300
200
Cash Account
125
20-7
250
20-7
Wages Account
Drawings Account
Dr
Cr
Bank Loan Account
20-7
Dr
20-7
20 Nov
2,500
130,000
3,000
1,500
250
Cr
2,500
Cash
Cr
Photocopier Account
20-7
18 Nov
20-7
3 Nov
10 Nov
12 Nov
14 Nov
20 Nov
Dr
20-7
Cr
75,000
70,000
100
200
200
20-7
Dr
Bank Account
Capital Account
Dr
Cr
20-5
10 Aug Cash
25 Aug Bank
Capital
Bank loan
Cash
Office fittings
Commission received
20-7
Computer Account
20-5
1,800
Dr
20-5
Dr
20-5
10 Aug
2.5
Cr
Cr
Cr
Cr
2.6
2.7
20-7
1 Nov
3 Nov
7 Nov
10 Nov
12 Nov
14 Nov
20 Nov
23 Nov
25 Nov
28 Nov
Bank Account
Capital
Photocopier
Bank loan
Office premises
Rates
Office fittings
Wages
Cash
Office fittings
Commission received
Debit
75,000
70,000
100
200
200
2,500
130,000
3,000
1,500
250
Balance
75,000
72,500
142,500
12,500
9,500
8,000
7,750
7,850
8,050
8,250
Dr
20-2
1 Oct
4 Oct
8 Oct
12 Oct
18 Oct
30 Oct
Dr
20-2
Dr
20-2
2 Oct
6 Oct
14 Oct
Dr
20-2
Capital
Sales
Sales
K Smithson: loan
Sales
Sales
Bank
Bank
Bank
Bank Account
20-2
2,500
2 Oct
150
6 Oct
125
14 Oct
2,000
22 Oct
155
25 Oct
110
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Capital Account
20-2
1 Oct
Purchases Account
20-2
200
90
250
Sales Account
20-2
4 Oct
8 Oct
18 Oct
30 Oct
Purchases
Purchases
Purchases
Delivery van
Wages
Cr
200
90
250
4,000
375
Bank
Cr
2,500
Dr
20-2
22 Oct
Dr
20-2
25 Oct
Bank
Bank
Bank
Bank
3.5
Dr
20-2
2 Apr
4 Apr
Dr
20-2
9 Apr
20 Apr
Dr
20-2
26 Apr
Dr
20-2
5 Apr
Dr
20-2
7 Apr
12 Apr
22 Apr
Dr
20-2
Cr
2,000
Bank
Delivery Van Account
20-2
4,000
Bank
Wages Account
20-2
375
Cr
Purchases Account
20-2
200
250
Cr
Wyvern Producers Ltd

A Larsen
Purchases returns
Bank
Purchases returns
20-2
50
2 Apr Purchases
150
45
A Larsen
20-2
4 Apr
Sales Account
20-2
5 Apr
7 Apr
12 Apr
28 Apr
Dr
20-2
Cr
Cr
150
125
155
110
J Smithson: Loan Account
20-2
12 Oct Bank
Dr
20-2
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
owners 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
Credit
Sales
Sales
Sales
Pershore Patisserie
Cr
200
Purchases
Cr
250
Pershore Patisserie
Bank
Bank
Cash
Cr
150
175
110
100
Pershore Patisserie
20-2
150
15 Apr Sales returns
22 Apr Bank
Bank Account
20-2
175
20 Apr
110
30 Apr
125
Cr
Cr
25
125

Amery Scales Ltd
Cr
150
250
Purchases Returns Account
20-2
9 Apr Wyvern Producers Ltd
26 Apr A Larsen
Cr
50
45
Dr
20-2
15 Apr
Dr
20-2
17 Apr
Dr
20-2
30 Apr
Dr
20-2
28 Apr
Dr
20-2
29 Apr
3.6
Dr
20-3
2 Jun
7 Jun
23 Jun
Dr
20-3
6 Jun
18 Jun
Pershore Patisserie
Amery Scales Ltd
Dr
20-3
5 Jun
20 Jun
Cr
Weighing Machine Account
20-2
250
Cr
Bank
Amery Scales Ltd
20-2
250
17 Apr Weighing machine
Sales
Cash Account
20-2
100
29 Apr
Cash
Wages Account
20-2
90
Cr
Purchases Account
20-3
350
400
285
Cr
Designs Ltd
Mercia Knitwear Ltd
Designs Ltd
Purchases returns
Bank
Designs Ltd
20-3
100
2 Jun
250
23 Jun
Sales Account
20-3
4 Jun
5 Jun
10 Jun
12 Jun
20 Jun
Dr
20-3
Dr
20-3
4 Jun
12 Jun
28 Jun
Sales Returns Account
20-2
25
Sales
Sales
Wyvern Trade Supplies
Sales
Sales
Bank Account
20-3
220
18 Jun
175
300
Cash Account
20-3
115
26 Jun
180
Wages
Dr
20-3
17 Jun
Cr
250
Dr
20-3
10 Jun
Cr
90
Purchases
Purchases
Cr
350
285
Bank
Cash
Bank
Cash
Cr
220
115
350
175
180
Designs Ltd
Cr
250
Rent paid
Cr
125
20-3
6 Jun Designs Ltd
17 Jun Mercia Knitwear Ltd
Dr
20-3
Dr
20-3
15 Jun
Dr
20-3
26 Jun
3.7
3.8
Sales
Cash
Transaction
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Mercia Knitwear Ltd
20-3
80
7 Jun Purchases
Cr
400
20-3
350
15 Jun Sales returns
28 Jun Bank
Cr
50
300
20-3
50
Cr
Rent Paid Account
20-3
125
Cr
Account debited
purchases
bank
purchases
L Harris
Teme Traders
sales returns
bank
cash
Account credited
bank
sales
Teme Traders
sales
purchases returns
L Harris
D Perkins: loan
bank
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.
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
Cr
100
80
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.
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.
4.3
CHAPTER 4 Business documents
4.2
INVOICE
INVOICE
DEANSWAY TRADING COMPANY
JANE SMITH, FASHION WHOLESALER
The Model Office, Deansway, Rowcester, RW1 2EJ
Unit 21, Eastern Industrial Estate, Wyvern, Wyvernshire, WY1 3XJ

invoice to
Excel Fashions
49 Highland Street
Longton
Mercia LT3 2XL
deliver to
as above
product
code
description
Dresses
Suits
Coats
quantity
5
3
4
terms
2.5% cash discount for full settlement
within 14 days
Net 30 days
invoice no
account
your reference
2451
date
today
unit
price
30.00
45.50
51.50
unit
total
each
each
each
150.00
136.50
206.00
TOTAL
trade
discount %
invoice to
The Card Shop

126 The Cornbow
Teamington Spa
Wyvernshire WY33 0EG
deliver to
as above
product
code
net
Assorted rubbers
Shorthand notebooks
Ring Binders
0.00 150.00
0.00 136.50
0.00 206.00
quantity
5
100
250
terms
2.5% cash discount for full settlement
within 14 days
Net 30 days
492.50
Excel Fashions will pay 480.18 (492.50 x 97.5%, rounded down) for settlement in full within 14 days.
description
invoice no
account
your reference
8234
date
today
unit
price
5.00
4.00
0.50
unit
box
10
each
total
trade
discount %
net
25.00
40.00
125.00
0.00
0.00
0.00
25.00
40.00
125.00
TOTAL
The Card Shop will pay 185.25 (190.00 x 97.5%) for settlement in full within 14 days.
190.00
4.4
Dr
20-4
2 Feb
16 Feb
G Lewis
G Lewis
Sales Account
20-4
4 Feb
7 Feb
Dr
20-4
Dr
20-4
10 Feb
10 Feb
24 Feb
24 Feb
Dr
20-4
4 Feb
Dr
20-4
7 Feb
Dr
20-4
12 Feb
20 Feb
Bank
Discount received
Bank
Discount received
Sales
Sales
L Jarvis
G Patel
20-4
12 Feb
20 Feb
190
10
152
8
360
150
150
240
240
G Lewis
20-4
2 Feb
16 Feb
L Jarvis
G Patel
Purchases
Purchases
L Jarvis
G Patel
L Jarvis
20-4
12 Feb
12 Feb
G Patel
20-4
20 Feb
20 Feb
20-4
10 Feb
24 Feb
Bank
Discount allowed
Bank
Discount allowed
G Lewis
G Lewis
20-4
10 Feb
24 Feb
G Lewis
G Lewis
Discount Allowed Account
3
6
Cr
150
240
20-4
(a)
product
code
description
quantity
45B
Trend tops (black)
30
35W
Cr
200
160
360
Bank Account
147
234
4.5
Cr
Discount Received Account
Dr
20-4
Dr
Purchases Account
20-4
200
160
Trend trousers (white)
20
unit
price
unit
12.50
each
25.00
terms
5% cash discount for full settlement within 7 days
Net 30 days
Cr
147
3
150
(b)
234
6
240
trade
net
discount %
375.00
10
each
500.00
TOTAL
10
337.50
450.00
787.50
Trade discount is given, if prearranged:
to businesses, often in the same trade (but not to the general public)
by wholesalers, as a discount off list price to retailers
Cr
total
for buying in bulk (this discount is also known as bulk discount)
Cash discount (also known as settlement discount) is given, for prompt payment, if prearranged, and
indicated on the invoice
Cr
190
152
4.7
Cr
(c)
Fashion Shop will pay 748.12 (787.50 x 95%, rounded down) for settlement in full within 7 days.
(a)
A source document is used to update the book-keeping records.
(b)
(i)
(ii)
10
8
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.
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:
Cr
(c)
the price charged on the invoice was too high
Any three from:
cheque counterfoils
cash receipts
some of the goods delivered were faulty, or incorrectly supplied
paying-in slip counterfoils

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)
CHAPTER 5 Balancing accounts the trial balance
10 office chairs were ordered (not 5 as shown on the invoice)
5.1 (a) and (c)
the unit price of the computer desks is 65.00 each (not 70.00 as shown on the invoice)
Dr
20-9
1 Jan
11 Jan
12 Jan
22 Jan
the net amount for computer desks is 292.50 (not 350.00 as shown on the invoice)
the net amount for office chairs is 180.00 (not 20.00 as shown on the invoice)
the invoice total is 472.50 (not 370.00 as shown on the invoice)
(b)
1 Feb
4 Feb
10 Feb
12 Feb
19 Feb
25 Feb
1 Mar
Capital
Sales
Sales
Sales
Balance b/d
Sales
Sales
Rowcester College
Sales
Sales
Balance b/d
Capital Account
20-9
1 Jan
Dr
20-9
Dr
20-9
4 Jan
2 Feb
1 Mar
Dr
20-9
5 Jan
15 Feb
1 Mar
(c)
Wyvern Products Limited will pay 448.87 (472.50 x 95%) for settlement in full within 14 days.
Rent paid
Shop fittings
Comp Supplies Ltd
Balance c/d
Rent paid
Shop fittings
Comp Supplies Ltd
Balance c/d
Cr
500
1,500
5,000
6,700
13,700
500
850
6,350
5,300
13,000
Bank
Cr
10,000
Bank
Bank
Rent Paid Account
20-9
500
28 Feb Balance c/d
500
1,000
1,000
Cr
1,000
Bank
Bank
Shop Fittings Account
20-9
1,500
28 Feb Balance c/d
850
2,350
2,350
Cr
2,350
Purchases Account
20-9
5,000
31 Jan Balance c/d
6,500
11,500
Cr
11,500
Balance b/d
Balance b/d
Dr
20-9
7 Jan
25 Jan
Comp Supplies Ltd

Comp Supplies Ltd
1 Feb
24 Feb
Balance b/d
Comp Supplies Ltd
1 Mar
Bank Account
20-9
10,000
4 Jan
1,000
5 Jan
1,250
20 Jan
1,450
31 Jan
13,700
6,700
2 Feb
1,550
15 Feb
1,300
27 Feb
750
28 Feb
1,600
1,100
13,000
5,300
Balance b/d
11,500
5,500
17,000
17,000
28 Feb
Balance c/d
1,000
2,350
11,500
17,000
17,000
Dr
20-9
20 Jan
31 Jan
5 Feb
27 Feb
28 Feb
Dr
20-9
31 Jan
28 Feb
Bank
Balance c/d
Purchases returns
Bank
Balance c/d
Balance c/d
Balance c/d
Dr
20-9
16 Jan
Sales
1 Feb
26 Feb
Balance b/d
Sales
1 Mar
Dr
20-9
27 Jan
Dr
20-9
Balance b/d
Rowcester College
Comp Supplies Limited
20-9
5,000
7 Jan Purchases
6,500
25 Jan Purchases
11,500
150
1 Feb Balance b/d
6,350
24 Feb Purchases
5,500
12,000
1 Mar Balance b/d
Sales Account
20-9
4,550
11 Jan
12 Jan
16 Jan
22 Jan
4,550
11,150
1 Feb
4 Feb
10 Feb
19 Feb
25 Feb
26 Feb
11,150
1 Mar
Bank
Bank
Rowcester College
Bank
Balance b/d
Bank
Bank
Bank
Bank
Rowcester College
Balance b/d
Rowcester College
20-9
850
27 Jan Sales returns
31 Jan Balance c/d
850
750
1,050
1,800
1,050
12 Feb
28 Feb
Bank
Balance c/d
20-9
100
20-9
5 Feb Comp Supplies Ltd
Cr
5,000
6,500
11,500
6,500
5,500
(b)
12,000
5,500
Cr
1,000
1,250
850
1,450
4,550
4,550
1,550
1,300
1,600
1,100
1,050
11,150
11,150
(d)
Cr
100
750
850
5.2
Name of Account
Bank
Capital
Rent paid
Shop fittings
Purchases
Sales
Rowcester College
Sales returns
Name of Account
Bank
Capital
Rent paid
Shop fittings
Purchases
Sales
Rowcester College
Sales returns
Purchases returns
Cr
Cr
150
Dr
6,700
500
1,500
11,500
750
100
Trial balance as at 28 February 20-9
Cr
10,000
6,500
4,550
21,050
21,050
Dr
5,300
Cr
1,000
2,350
17,000
1,050
100
26,800
Trial balance of Jane Greenwell as at 28 February 20-1

Dr
Name of account
Bank
Purchases
Cash
Sales
Purchases returns
Trade payables
Equipment
Van
Sales returns
Trade receivables
Wages
Capital (missing figure)
750
1,050
1,800
Trial balance as at 31 January 20-9
850
48
2,704
3,200
90
1,174
1,500
9,566
10,000
5,500
11,150
150
26,800
Cr
1,250
730
144
1,442
6,000
9,566
5.5
Four from:
Error of omission
(a)
Date
20-2
1 Feb
2 Feb
15 Feb
19 Feb
28 Feb
Date
20-2
8 Feb
14 Feb
18 Feb
Softseat Ltd
Dr
Business transaction completely omitted from the accounting records. For example, cash sale omitted
from both cash account and sales account.
20-2
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.
Dr
Error of principle
20-2
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.
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.
Details
Invoice
Softseat Ltd
PRK Ltd
Softseat Ltd
High Street Stores
Peter Lounds Ltd
Carpminster College
25 Feb
High Street Stores
28 Feb
Total for month
320
529
160
80
984
Total for month
Amount
961
068
Quality Furnishings
Details
Reference
Sales
Sales
Dr
160
20-2
14 Feb
720
Sales
Dr
Sales Day Book
Invoice
001
002
003
004
Reference
20-2
18 Feb
Amount
Sales
440
120
20-2
28 Feb
200
1,080
Dr
20-2
Purchases
Purchases
PRK Ltd
20-2
2 Feb
20-2
15 Feb
Purchases Day Book
320
160
Cr
Purchases
80
Cr
Purchases
160
High Street Stores
Cr
Peter Lounds Ltd
Cr
Carpminster College
Cr
440
200
120
320
20-2
20-2
20-2
GENERAL LEDGER
Dr
320
Cr
SALES LEDGER
Dr
20-2
8 Feb
25 Feb
20-2
1 Feb
19 Feb
Quality Furnishings
20-2
Compensating error
Purchases Day Book
Dr
CHAPTER 6 Division of the ledger the use of subsidiary books
6.2
PURCHASES LEDGER
Purchases Account
Cr
Sales Account
Cr
720
20-2
20-2
28 Feb
Sales Day Book
1,080
6.3 (a)
Date
20-2
2 May
4 May
10 May
18 May
21 May
25 May
31 May
Date
20-2
18 May
23 May
28 May
31 May
Details
Purchases Day Book
Invoice
Reference
Amount
562
PL 302
190
M Roper & Sons
Wyper Ltd
82
Wyper Ltd
M Roper & Sons
580
M Roper & Sons
589
Wyper Ltd
PL 301
PL 302
91
Total for month
Details
PL 301
86
Purchases Returns Day Book
PL 301
PL 302
200
180
PL 302
30
M Roper & Sons
84
(b) and (c)

Dr
20-2
23 May
31 May
PURCHASES LEDGER
Purchases Returns
Balance c/d
Wyper Ltd (account no 301)
20-2
40
1 May Balance b/d
710
4 May Purchases
10 May Purchases
21 May Purchases
750
1 Jun
Dr
20-2
18 May
28 May
31 May
Purchases Returns
Purchases Returns
Balance c/d
40
38
Cr
Cr
1,118.00
Purchases Day Book
quantity
details
unit price
unit
X24
96
Trend tops
8.50 each
each
20
Jeans
15 each
Cr
100
200
210
240
750
Cr
85
190
180
98
553
20-2
31 May
product
Y36
M Roper & Sons (account no 302)
20-2
30
1 May Balance b/d
38
2 May Purchases
485
18 May Purchases
25 May Purchases
553
20-2
each
trade discount 20%
total
terms
5% cash discount for full settlement within 7 days
Net 30 days
485
10
108.00
(a)
code
108
710
Balance b/d
6.5
Balance b/d
1 Jun
Purchases Account
1,118.00
82
Total for month
20-2
98
M Roper & Sons
PL 301
Purchases Day Book
Dr
240
Amount
PL 302
20-2
31 May
210
Reference
Dr
Credit
Note
Wyper Ltd
GENERAL LEDGER
total amount
816.00
300.00
1,116.00
223.20
892.80
(b)
(c)
(i)
CHAPTER 7 The main cash book
Purchases day book
(ii)
Sales day book
(i)
Trade discount:
7.3
Dr
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
Date
Details
20-7
1 Aug
1 Aug
11 Aug
12 Aug
21 Aug
29 Aug
29 Aug
Balances b/d
Wild & Sons Ltd
Bank
A Lewis Ltd
Harvey & Sons Ltd
Wild & Sons Ltd
Bank
Ref
Disc
allwd
20
15
Cash
Cash Book
Bank Date
276 4,928
398
500
1,755
261
595
275
6.8
Source
Document
Invoice for goods sold on
credit to V Singh
(a)
Invoice received for
Book
Subsidiary
be debited
Account to
Account to
Sales day book
V Singh
Sales
Purchases day
Purchases
Okaro Limited
(b)
Credit note issued to
Sales returns
Sales returns
S Johnson
(c)
Credit note received
Purchases returns
Roper &
Purchases
from Okara Limited

S Johnson
from Roper & Company
book
day book
day book
Company
1 Sep Balances b/d
be credited
goods bought on credit
35 1,051 7,937
361 3,217
7.4
Dr
Date
20-5
1 Mar
3 Mar
8 Mar
11 Mar
13 Mar
22 Mar
25 Mar
29 Mar
31 Mar
31 Mar
returns
11
Details
Balances b/d
Sales*
Sales
Bank
Sales
Bank
Sales
Sales*
Hobbs Ltd
Pratley & Co
1 Apr Balances b/d
Ref Discount
allowed
C
C
30
50
80
Cash
20-7
5 Aug
8 Aug
11 Aug
18 Aug
22 Aug
25 Aug
27 Aug
28 Aug
29 Aug
31 Aug
Cash Book
Bank Date
106 3,214
100
950
1,680
150
1,800
150
2,108
200 2,000
720
1,160
706 13,632
423 8,259
20-5
2 Mar
5 Mar
9 Mar
11 Mar
16 Mar
18 Mar
20 Mar
22 Mar
26 Mar
27 Mar
30 Mar
31 Mar
31 Mar
31 Mar
Details
T Hall Ltd
Wages
Cash
F Jarvis
Wages
J Jones
Salaries
Telephone
Cash
Balances c/d
Ref
Disc
recd
24
C
33
C
57
Cr
Cash
Bank
541
254
436
361
1,051
500
457
628
2,043
276
275
3,217
7,937
Cr
Ref Discount Cash Bank
received
Rent
10674
250
Cleaning expenses
35
Purchases 10675
1,200
Cash
10676
C
150
Postages
50
Telephone 10677
168
Stationery
128
Cash
10678
C
150
Misc expenses
70
Wages
10679
2,000
Electricity 10680
106
Evans & Co 10681
45
855
A Bennett
10682
26
494
Balances c/d
423 8,259
71 706 13,632
Details
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
Standing order
Money paid out of the bank directly, at regular intervals, on the businesss order.
Usually for the same fixed amount for goods and services supplied
(i)
DR Supplier/Trade payable
DR Bank
Dr
CR Bank
CR Customer/Trade receivable
(a) and (b)
Date
20-6
8.2
Credit transfer for payment by a customer

Amounts paid directly into the bank by a trade receivable, who has the necessary
bank code information.
(ii)
7.8
CHAPTER 8 Bank reconciliation statements
Details
Disc
1 Jan Balance b/d
6 Jan R Reed
13 Jan B Brown
14 Jan Sales
28 Jan Sales
50
752
642
24 Jan C Denton & Co Ltd C/T
31 Jan Cash
Cash
Bank
567
366
248
1,319
4
1 Feb Balance b/d
Cash Book
1,444
50
2,500
Date
20-6
Details
Disc
1 Jan Balance b/d
2 Jan Bilton Office Supplies
11 Jan Rent
27 Jan Wages
20 Jan British Gas
S/O
31 Jan Bank
21 Jan Bank interest
31 Jan Balances c/d
Cash
1,319
3
50
1,444
Bank
20-6
31 Jan
Dr
20-6
Cash book
20-6
Discounts Received Account
20-6
31 Jan
Cash book
P GERRARD
BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7
Balance at bank as per cash book

Add: unpresented cheques
1,236
Bryant & Sons

P Reid
450
cheque no. 001354
176.50
422
8.3
Cr
(a)
Dr
20-7
1 May
7 May
16 May
23 May
30 May
Balance b/d
Cash
C Brewster
Cash
Cash
1 Jun
Balance b/d
1,076.45
Cash Book (bank columns)
300
162
89
60
40
651
20-7
2 May
14 May
29 May
16 May
31 May
31 May
P Stone
867714
Alpha Ltd
867715
E Deakin
867716
Standing order: A-Z Insurance
Bank charges
Balance c/d
428
JANE DOYLE
(b)
BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7

Add:
Cr
Less:
12
488.50
335.75
2,500
923.70
1,412.20
G Shotton Limited
28
Cr
p
207.95
923.70
1,131.65
312.00
cheque no. 001355
Less: outstanding lodgement
200
422
Discounts Allowed Account
Cash Book (bank columns)

p
20-7
Balance b/d
415.15
23 Jan Direct debit: Omni Finance
BACS credit: T K Supplies
716.50
31 Jan Balance c/d
1,131.65
Balance b/d
923.70
(b)
Cr
(c)
Dr
Dr
20-7
1 Jan
13 Jan
1 Feb
164
75
(a)
unpresented cheque
E Deakin cheque no. 867716

outstanding lodgement
cash banked
Balance at bank as per bank statement
428
110
538
40
498
Cr
28
50
110
25
10
428
651
8.5
(a)
(i)
(ii)
(iii)
8.7
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.
Dr
Date
2003
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.
Debit or Credit
Credit transfer
Balance c/d
Cash Book Bank Account
540
Balance b/d
534
Standing order
Direct debit
Bank charges
1,074
Balance b/d
2,459.35
5 Nov B J Patel
3,219.00
234.00
1,142.00
560.00
26 Nov Cash banked
340.00
7,954.35
30 Nov Balance b/d
9 Nov J Black Ltd
C/T
534
2,027.23
246.98
2,274.21
1 Dec Balance b/d
(c)
Date
2003
1 Nov Balance b/d
23 Nov J A Smith Ltd
Cr
378
230
420
46
1,074
Cash Book
Bank
p
5 Nov Dolls and Things
Receipts from customers paid directly into the bank of the payee. Payments to suppliers or
wages into the bank of the payee.
Dr
Details
3 Nov Toys for You
Credit transfers
(b)
(a)
1 Nov
1 Nov
10 Nov
12 Nov
23 Nov
25 Nov
25 Nov
30 Nov
12 Nov
18 Nov
23 Nov
30 Nov
Details
Cheque
number
Banks Ltd
11346
Books & Paints
Wages
Jones and Son
HGF Finance
Business rates
Bank charges
11349
3,781.95
11351
11352
Balance c/d
Proper Ins Co
276.89
11350
Toy Designs
134.37
11347
11348
Smith and Son
Bank
p
92.50
139.43
256.00
Cr
1,245.98
2,027.23
7,954.35
S/O
547.90
S/O
145.65
45.89
Balance c/d
1,534.77
2,274.21
1,534.77
A SMITH AND CO
BANK RECONCILIATION STATEMENT AS AT 31 MARCH 2001

Add:
Less:
unpresented cheques
outstanding lodgement (uncleared bankings)
cheque query
Tutorial note: brackets indicate an overdraft
(534)
(b)
469
270
265
(65)
JAMES JOLLY AND CO
BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 2003

Add:
535
(600)
unpresented cheques
HGF Finance
Toy Designs
Less:
11351
11352
outstanding lodgement
cash banked
13
1,534.77
256.00
1,245.98
1,501.98
3,036.75
340.00
2,696.75
CHAPTER 9 Introduction to final accounts
9.2
TRIAL BALANCE
(a) Salaries
(b) Purchases
(d) Sales returns
(f) Vehicle
(c) Trade receivables
(e) Discount received
9.5
Debit
(g) Capital
Credit
INCOME
FINAL ACCOUNTS
STATEMENT
Debit
Credit
9.7
Debit
Credit
BALANCE SHEET AS AT 31 DECEMBER 20-4
Current Assets
Inventory
Trade receivables
Less Current Liabilities

Trade payables
Bank overdraft
Net Current Assets or Working Capital

NET ASSETS
FINANCED BY
Capital
Opening capital
Add Profit for the year
Less Drawings
13,735
32,335
5,820
(ii)
(b)
9.9
9,820
5,500
15,320
(a)
Dr
2002
31 Mar
31 Mar
Dr
2001
Details
Balance b/d
Monthly total
2001
1 Dec
31 Dec
Details
Balance b/d
Monthly total
Dr
2001
14
Details
2001
1 Dec
31 Dec
Dr
14,375
29,695
Capital Account
2002
12,500
31 Mar
48,341
31 Mar
60,841
1 Apr
Two from:
increased by profit
more capital introduced
reduced by losses
reduced by drawings
Dr
18,600
Details
Drawings
Balance c/d
Details
56,231
350
56,581
23,980
3,600
4,500
450
Profit for the year
25,250
17,756
43,006
13,311
29,695
Less expenses:
Wages
Carriage outwards
Motor expenses
Bank charges
12,140
17,960
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2002
Gross profit
Add Discount received
R MASTERS
(i)
BALANCE SHEET
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
Non-current Assets
Vehicles
Office equipment
(a)
Sales Account
2001
1 Dec
31 Dec
Returns Inwards Account

p
1,269.43
236.91
2001
p
10,276.41
2,769.56
2001
Purchases Account
Returns Outwards Account
2001
1 Dec
31 Dec
32,530
24,051
Details
Balance b/d
Profit for the year
Balance b/d
Details
Balance b/d
Monthly total
Cr
36,790
24,051
60,841
48,341
Cr
p
16,493.27
4,560.30
Details
Details
Details
Balance b/d
Monthly total
Cr
p
Cr
p
Cr
p
1,039.41
127.50
AMARYLLIS TRADING
(b)
INCOME STATEMENT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001
Revenue
Less Returns inwards
Less Cost of sales:
Opening inventory
Add Purchases
Less Returns out
13,045.97
1,166.91
Add Carriage in

Gross profit
(c)
9.10
(i)
(ii)
(iii)
Cost of sales
Goods available for sale
Net revenue
Date
Today
2,560.87
11,879.06
871.26
15,311.19
2,640.96
Subject
Balance sheet queries
1.
Reason:
4.
12,670.23
6,877.00
Date
Details
31 Dec
Inventory
20-8
Capital/Financed by/Represented by
It is cash or goods taken out of the business by the owner,

therefore it reduces the capital invested in the business.
Income statement
Inventory valuation at 31 December 20-8

transferred to income statement
Financial Accounting Student
Reference
GL
GL
Dr
22,600
Cr
22,600
(b)
Non-current assets
Date
Details
31 Dec
Income statement
20-8
An asset purchased for use in the business
not for resale
Telephone expenses
Transfer to income statement

of expenditure for the year
is a tangible asset
Reference
GL
GL
Dr
890
Cr
890
(c)
Inventory of dolls for resale

Current assets
Date
Details
31 Dec
Drawings
20-8
An asset remaining in the business for the short-term
less than one year
the business is expected to sell them shortly
Section:
(a)
will help generate profits
Reason:
an amount owed by the business
CHAPTER 10 The general journal and correction of errors
10.2
will depreciate with use
Section:
Short-term liability
Drawings for the year

Reason:
used over a long period/more than one year
2.
Current liabilities
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
Cost of new delivery van
Section:
Section:
which needs to be paid within the next 12 months
MEMORANDUM
Mary Arbuthnot, proprietor of Marys Doll Shop
Telephone bill due to be paid in one months time

Reason:
12,670.23
15,311.19
19,547.23
To
From
3.
21,053.57
1,506.34
19,547.23
Motoring expenses
Transfer of private motoring to

drawings account
continued
15
Reference
GL
GL
Dr
200
Cr
200
(d)
(c)
Date
Details
31 Dec
Drawings
20-8
Purchases
Goods taken for own use
by the owner
Reference
GL
GL
Dr
175
Cr
Date
Date
31 Dec
Details
Bad debts written off
N Marshall
Account of NMarshall written off as a
175
Vehicle expenses
Correction of error vehicle no ............
(a)
Date
Reference
GL
SL
Dr
125
Cr
(d)
Date
125
J Rigby
Sales
Sales invoice no ............. omitted from
Date
H Price Limited
H Prince
Correction of mispost cheque no .....:
GL
10,000
Reference
SL
GL
Dr
150
(e)
Cr
Date
150
GL
55
Postages
GL
55
GL
GL
on ...................
Reference
Dr
Postages
Correction of reversal of entries
Cr
10,000
Cr
55
55
110
110
Dr
Cr
compensating error
Details
Purchases
Purchases returns
Correction of under-cast on purchases
Reference
GL
GL
100
100
account and purchases returns account

on .......(date).......
(f)
mispost/error of commission
Details
Details
Bank
the accounts.
(b)
GL
Dr
reversal of entries
Bank
error of omission
Details
Reference
invoice no ...............
bad debt - see memo dated ...................
10.4
Details
Delivery van
(e)
20-8
error of principle
Reference
PL
PL
Dr
125
Date
Cr
error of original entry

Details
L Johnson
125
16
GL
89
L Johnson
SL
received on ....(date)....
98
GL
Correction of error cheque for 89
Dr
SL
Bank
Bank
to H Price Limited
Reference
187
Cr
98
89
187
10.6
(a)
(b)
Two from:
trial balance
bank reconciliation statement

control accounts (see Chapter 11)
(c)
An error of principle has occurred.
JOURNAL
Account
Dr
(1)
Sales
270
(2)
Returns inwards
500
Returns inwards
300
Suspense
400
Suspense
Suspense
Suspense
(3)
(4)
Yes
Error
Discount received
J Jones
350
A Jones
The sales account has been totalled incorrectly.
Cr
An invoice has been completely omitted from the books.
A cheque has been debited in the cash book as 150

but credited in the customers account as 105.
270
500
10.10
300
(a)
Dr
Date
2004
30 Apr
400
Details
Balance per T/B
Suspense Account
450
450
Date
2004
30 Apr
30 Apr
No
3
3
Details
Sales
Rent paid
Cr
200
250
450
350
Tutorial note: The mispost between J Jones and A Jones needs to be corrected in the sales ledger,
10.8
(a) and (b)
but has no effect on suspense account.
Account
H G PATEL: TRIAL BALANCE AS AT 30 APRIL 2003
Wages
Administration costs
Capital
Property
Motor vehicles
Motor expenses
Purchases
Revenue (Sales)
Returns outwards
Carriage inwards
Carriage outwards
Discount received
Drawings
Suspense
TOTAL
Dr
23,890
6,000
65,000
5,000
1,650
38,900
367
450
6,900
15,676
163,833
Tutorial notes:
Cr
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
60,000
(b)
98,000
3,698
(c)
163,833
17
credit 650 (to enter the correct amount in rent paid account)
Error of commission (or mispost):
2,135
debit 400 (to take out the old amount in rent paid account)
example payment to A Brown entered to B Browns account
explanation although the entry has been misposted to the wrong persons account, the trial
balance will still balance because the entry has been made on the correct side of the account.
Sales ledger control account (see Chapter 11)
10.11
Jonathon Smith
Corrected Profit for the year ended 30 November 2004
1.
Profit calculated by Jonathon
Sales undercast
2.
Discount allowed (2 x 140)
4.
Non-current asset
6.
Closing inventory (reduction in cost of sales)
3.
5.
Wages
Error of commission no effect on profit

Corrected profit
CHAPTER 11 Control accounts
11.3
(a)
Dr
20-8
1 Feb
3 Feb
Balance b/d
Sales
1 Mar
Balance b/d
Dr
20-8
1 Feb
Dr
20-8
1 Feb
3 Feb
Balance b/d
Balance b/d
Sales
Dr
20-8
1 Feb
17 Feb
Balance b/d
Sales
1 Mar
Balance b/d
Dr
20-8
1 Feb
17 Feb
Balance b/d
Sales
1 Mar
Balance b/d
add
20-8
1 Feb
26,790
28 Feb
450
less
280
less
Balances b/d
Credit sales
2,012.43
1,288.76
3,301.19
34,060
338.59
1 Mar
B Brick (Builders) Limited

p
20-8
59.28
28 Feb Bad debts written off
Cr
p
59.28
Mereford Manufacturing Company

p
20-8
293.49
24 Feb Sales returns
127.48
28 Feb Set-off: purchases ledger
420.97
Cr
p
56.29
364.68
420.97
Redgrove Restorations
p
20-8
724.86
7 Feb Sales returns
394.78
28 Feb Balance c/d
1,119.64
954.26
Wyvern Warehouse Limited

p
20-8
108.40
15 Feb Bank
427.91
15 Feb Discount allowed
28 Feb Balance c/d
536.31
(c)
Cr
p
805.74
20.66
338.59
1,164.99
Balances b/d
Sales returns
28 Feb
Cash discount allowed
28 Feb
Cr
p
165.38
954.26
1,119.64
Dr
2001
1 Mar
31 Mar
Set-off: purchases ledger

Balances c/d
221.67
911.43
23.37
364.68
59.28
1,720.76
3,301.19
Reconciliation of sales ledger control account with trade receivable balances
Balance b/d
Returns
Set-off: sales ledger
Discounts
Cash paid
Balance c/d
Balance b/d
Cr
p
105.69
2.71
427.91
536.31
28 Feb
Cheques received
from trade receivables
1,720.76
1 February 20-8
p
826.40
59.28
293.49
724.86
108.40
2,012.43
Arrow Valley Retailers

B Brick (Builders) Limited
Mereford Manufacturing Company
Redgrove Restorations
Wyvern Warehouse Limited
Sales ledger control account
11.5
Cr
28 Feb
28 Feb
100
Arrow Valley Retailers

p
20-8
826.40
20 Feb Bank
338.59
20 Feb Discount allowed
28 Feb Balance c/d
1,164.99
20-8
28 Feb
9,500
SALES LEDGER
427.91
Sales Ledger Control Account
2,500
add
add
(b)
Dr
Purchase Ledger Control Account
465
4,679
475
3,674
236,498
24,742
270,533
749
2001
1 Mar
31 Mar
Balance b/d
Purchases
Cash refunds
Balance c/d
Balance b/d
28 February 20-8
p
338.59
954.26
427.91
1,720.76
Cr
23,437
245,897
450
749
270,533
24,742
Tutorial note: The cash purchases figure of 25,679 is not shown in the control account because it does not
involve the accounts of trade payables it is a cash purchase (ie debit purchases; credit bank/cash)
18
11.6
Dr
20-5
1 Jan
31 Jan
31 Jan
Balance b/d
Sales
Returned cheque
1 Feb
Balance b/d
44,359
27,632
275
72,266
20-5
31 Jan
31 Jan
31 Jan
31 Jan
31 Jan
Bank
Discount allowed
Sales returns
Balance c/d
44,884
CHAPTER 12 Adjustments to final accounts
Cr
23,045
1,126
2,964
247
44,884
72,266
12.1
12.2
Tutorial note: The mispost of 685 between J Hampton and Hampton Limited needs to be corrected in the
sales ledger, but has no effect on the control account.
11.7
(a)
Dr
2003
1 Nov
30 Nov
1 Dec
Dr
2003
30 Nov
30 Nov
30 Nov
30 Nov
(b)
(c)
Details
Balance b/d
Sales
Balance b/d
Details
Returns outwards
Bank (payments to
suppliers)
Set-off: sales ledger
Balance c/d
5,476
26,500
31,976
2003 Details
30
30
30
30
Nov
Nov
Nov
Nov
Returns inwards
Bank (receipts from customers)
Balance c/d
12,086
Purchases Ledger Control Account
450
16,300
400
5,410
22,560
2003 Details
1 Nov Balance b/d

30 Nov Purchases
1 Dec Balance b/d
12.7
2,960
19,600
The balances of the individual accounts of trade receivables in the sales ledger are totalled.
Less expenses:
Insurances
Vehicle expenses
Wages and salaries 86,060 + 3,180
Discount allowed
Rates and insurance 6,070 450
General expenses
Depreciation:
vehicles 12,000 x 20%
furniture and fittings 25,000 x 10%
The balances of the individual accounts of trade payables in the purchases ledger are totalled.
19
70,000
280,000
350,000
60,000
9,700
3,100
1,820
36,050
13,750
HAZEL HARRIS

Cost of sales
Gross profit
Add Discount received
5,410
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
Revenue
Opening inventory
Purchases
22,560
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.
Expense in income statement of 1,800; balance sheet shows computer rental prepaid (current asset)
of 150.
Expense in income statement of 2,852; balance sheet shows rates prepaid (current asset) of 713.
Profit for the year
Cr
(c)
(b)

Cost of sales
Gross profit
Less expenses:
Rent and rates 10,250 550
Electricity
Telephone
Salaries 35,600 + 450
Vehicle expenses
590
18,900
400
12,086
31,976
These totals should agree with the balances of sales ledger control account and purchases ledger
control account respectively.
Expense in income statement of 56,760; balance sheet shows wages and salaries accrued (current
liability) of 1,120.
Revenue
Opening inventory
Purchases
Cr
(a)
Profit for the year
63,000
465,000
528,000
88,000
8,480
2,680
89,240
10,610
5,620
15,860
2,400
2,500
420,000
290,000
130,000
64,420
65,580
614,000
440,000
174,000
8,140
182,140
137,390
44,750
Non-current Assets
Freehold land
Vehicles
Furniture and fittings
Current Assets
Inventory
Trade receivables
Prepayment of expenses
Cost
Prov for dep'n
100,000
12,000
4,800
25,000
5,000
137,000
9,800

Trade payables
Accrual of expenses
Bank
41,850
3,180
2,000
47,030

Trade payables
Bank
Accrual of expenses
12.10
Dr
Date
BETH DAVIS
Profit for the year
(a)
2007
55,217
1,864
4,963
2,246
395
868
2,400
28,176
3,641
163
310
32,290
13,459
31 May
31 May
1 Jun
67,953
27,421
20
Details
Cash/bank
Balance c/d
Balance b/d
12,000
4,800
7,200
18,831
26,031
20,806
27,421
48,227
22,196
26,031
Less Drawings
95,374
Gross profit
Less expenses:
Wages and salaries
Heating and lighting
Rent and rates 5,273 310
Advertising
General expenses 783 + 85
Depreciation of shop fittings 12,000 x 20%
FINANCED BY
Capital
125,000
44,750
169,750
24,000
145,750
Less Drawings
10,290
3,084
85

NET ASSETS
93,550
220,750
75,000
145,750
FINANCED BY
Capital
Opening capital
Non-current Assets
Shop fittings at cost
Less provision for depreciation 2,400 + 2,400
Net book value
Current Assets
Inventory
Trade receivables
Cash
88,000
52,130
450
140,580
Less non-current Liabilities

Bank loan
NET ASSETS
12.9
Net book value

100,000
7,200
20,000
127,200
Telephone Account
2,400
130
2,530
210
Date Details
2007
31 May Income statement

31 May Balance c/d
1 Jun Balance b/d
Cr
2,320
210
2,530
130
(b)
CHAPTER 13 Business organisations
13.2
MEMORANDUM
The final accounts of a sole trader comprise:
income statement
balance sheet
The income statement shows:
income minus expenses equals profit (or loss)
To:
The Owner, Beta Batteries
The balance sheet shows:
Date:
Today
Assets are items owned by the business; liabilities are amounts owed by the business; capital is the
amount of the owners investment.
(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.
From:
Subject:
Student Accountant
Account of J Booth
13.3
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.
(b)
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:
assets minus liabilities equals capital
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
partners are not entitled to receive interest on their capital
debit bad debts written off account
credit J Booths 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:
no partner is entitled to a salary
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.
debit income statement
13.5
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.
Points to cover include:

*
Definition of a limited company
separate legal entity
managed by directors
Types of companies
public limited company
company limited by guarantee
private limited company
Advantages of forming a limited company
limited liability
ability to raise finance
21
owned by shareholders
separate legal entity

membership
other factors
(d)
CHAPTER 14 Accounting concepts and inventory valuation
14.1
Going concern concept
14.2
Accruals concept
14.5
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:
14.8
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.
(a)
The concept of prudence means
(b)
(c)
not anticipating profit until it is reasonably certain that it will be realised
provision for doubtful debts (see Chapter 15)
(a)
The kettle should be valued at 16.
(b)
Inventory should be valued at the lower of cost or net realisable value whichever is the lower.
Workings: 31 15 = 16 net realisable value (which is lower than the cost of 18)
This is an example of using the prudence concept.
Gross
Profit
Profit
for the year
Current
Assets
Current
Liabilities
Capital
increase
4,000
decrease
4,000
1.
Accruals
2.
Consistency
no
change
decrease
15,000
no
change
no
change
decrease
15,000
3.
Prudence or
Consistency
decrease
18,000
decrease
18,000
decrease
18,000
no
change
decrease
18,000
4.
Business
entity
no
change
increase
13,000
no
change
no
change
no
change
14.10
providing for all known liabilities
(a)
no
change
decrease
4,000
no
change
jacket, 40 (note: replacement cost is not applicable here)

shirt, 25
suit, 80
not giving an over-optimistic presentation of the business
trousers, 25 10 = 15
not overstating the value of assets
electric trouser press, 80
valuation of inventory, at the lower of cost and net realisable value
(b)
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
The concept of consistency means that, when a business adopts particular accounting policies, it
should continue to use such policies consistently
bad debts written off
depreciation of non-current assets
Concept
Examples (question asks for one example):
By applying the consistency concept, direct comparison between the final accounts of different years
can be made.
This means that expenses and income for goods and services are matched to the same time period.
valuation of inventory
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).
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.
Examples (question asks for one example)
22
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.
(b)
CHAPTER 15 Further aspects of final accounts
15.2
Dr
20-7
31 Dec
31 Dec
Dr
20-7
31 Dec
31 Dec
20-8
1 Jan
Dr
20-7
31 Dec
20-8
1 Jan
15.4
Balance b/d
(accrual of income)
Income statement
Balance b/d
(accrual of income)
Income statement
Balance b/d
(accrual of income)
Income statement
Balance b/d
(accrual of income)
Advertising Income Account
20-7
150
31 Dec Bank/Cash
(receipts for year)
2,820
31 Dec Balance c/d
(accrual of income)
2,970
250
20-8
Rent Income Account
20-7
19,260
31 Dec Balance b/d
(prepayment of income)
31 Dec Bank/Cash
(receipts for year)
31 Dec Balance c/d
(accrual of income)
19,260
120
20-8
Cr
1,250
20-0
1,250
(c)
Provision for Doubtful Debts Account
20-9
1,000
31 Dec Income statement
Balance c/d
20-0
1 Jan
Cr
1,000
Balance b/d
1,000
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
Cr
2,720
250
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
2,970
Explanation: current assets are reduced by 420 + 1,000 = 1,420
15.6
Year
Cr
850
Income statement
Bad
debts
written off
18,290
120
19,260
20-5
1,800
20-7
1,400
20-6
2,400
Expense
Increase in
provision for
doubtful debts
Income
Bad
debts
recovered
2,585
245
150
Decrease in
provision for
doubtful debts
110
Trade
receivables
(after bad
debts
written off)
Balance sheet
Less prov for

doubtful debts
Webster Limited
T Smith
Khan and Company
Bad Debts Written Off Account
20-9
110
31 Dec Income statement
210
100
420
Cr
420
420
23
2,585
100,815
108,800
2,720
106,080
113,200
2,830
20-5
(105,200 1,800) x 2.5% = 2,585 creation of provision
20-7
(110,200 1,400) x 2.5% = 2,720 2,830 = 110 decrease in provision
20-6
Net
trade
receivables
103,400
Workings for doubtful debts provision:
(a)
Dr
20-9
31 Dec
31 Dec
31 Dec
20-7
100
31 Dec Bank/Cash
(receipts for year)
1,150
1,250
Dr
20-9
31 Dec
(115,600 2,400) x 2.5% = 2,830 2,585 = 245 increase in provision
110,370
15.8
(a)
Straight-line method
3,000
Year 1
Year 2
(b)
20-8
1 Jan
1 Oct
1 Oct
20-9
1 Jan
3,000
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
Balance b/d
Disposals
(part-exchange allowance)
Bank
(balance paid by cheque)
27,000
Disposals
Balance c/d
7,200
3,000
10,200
12,000
15,000
Disposals
Balance c/d
20-9
1 Jan
Balance b/d
Income statement
Balance b/d
Vehicles
Income statement
(profit on sale)
(d)
Non-current assets
Vehicles
12,000
700
20-8
1 Oct
1 Oct
12,700
Cost
15,000
Prov for depn

3,000
Net book value
21,875
7,200
3,000
10,200
Workings
Trade-in value
8,000
Profit on disposal
2,000
Non-current Assets
Machinery at cost
Less prov for depreciation
Net book value
6,000
GORG HAMMAN
BALANCE SHEET AS AT 31 DECEMBER 2003
Current Liabilities
Trade payable instalment due on machine
5,500
176,000
123,500
52,500
(170,000 24,000 + 30,000)

(105,000 18,000 + 36,500)
(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
7,200
12,700
Net book value

12,000
3,125
Profit on disposal of old machine = 2,000
(b)
Cr
Cr
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-8
25,000
Net book value at date of trade-in
3,000
Vehicles
(part-exchange allowance)
Prov for depreciation
Vehicle at cost
24,000 18,000 depreciation = 6,000 net book value
Disposals Account Vehicles
Dr
(a)
27,000
20-9
20-8
1 Jan
31 Dec
15.13
Cr
Provision for Depreciation Account Vehicles
(c)
20-8
1 Oct
31 Dec
9,500
20-8
1 Oct
31 Dec
15,000
Balance b/d
Dr
20-9
12,000
5,500
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-9
Non-current Assets
Tutorial note: Do not deduct the trade in allowance from the cost price of the new vehicle the
cost price is 25,000.
It is an accounting adjustment
Vehicles Account
20,000 12,500 4,000 = loss of 3,500
Less provision for depreciation
(b)
20-8
1 Oct
31 Dec
1,440 (60%)
or
2,400 (to disposal)
Depreciation is a non-cash expense
(a)
(b)
15.11 (a)
Dr
15.12
Reducing balance method
3,600
24
15.16
16.4
THOMAS SALMON
INCOME STATEMENT FOR THE YEAR ENDED 30 NOVEMBER 2004

Gross profit
Discount received
119
Rent receivable
Wages
Bad debts
Rent and rates
Other expenses
Discount allowed
Income in provision for doubtful debts

Depreciation of fixed assets
Loss on sale of van
720
69,611
26,320
340
4,630
21,435
286
*230
**
***
***100
7,270
(b)
(a)
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)
Capital expenditure
cost of van
air conditioning
fitted shelving
total
(b)
Revenue expenditure
tax disc
16.5
2,000
1,900
100
11,650
550
350
165
450
total
Depreciation, using the straight-line method, at present is 15,000 (see above)
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.
Reducing balance depreciation will be 20% (150,000 90,000) = 20% x 60,000 = 12,000
JOHN HENSON
Less expenses:
Vehicle running expenses 1,480 + 230
Rent and rates
Office expenses 2,220 120
Wages and salaries
Depreciation: office equipment
vehicle
12,550
insurance premium
tank of fuel
Rent 2,500 220 prepaid
Workings:

Cost of sales
Gross profit
Add income:
Discounts received
220
40
875
117,800
8,100
Wages 74,750 + 650 owing
Revenue
Opening inventory
Purchases
cost of extended warranty
152,500
125,900
New profit: 11,100
CHAPTER 16 Preparing sole trader final accounts

16.1
278,400
Depreciation 150,000 x 10%
62,341
1,120 890 = 230
Net book value (8,000 6,000)

Sale price
Loss on sale
ABEL BROWN
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001
Revenue
Less Cost of sales:
Opening inventory
12,700
Purchases
153,900
166,600
14,100
Gross profit
Less expenses:
Wages
75,400
Rent
2,280
Other expenses
25,120
Depreciation
15,000
Profit for the year
Workings:
**9,000
Profit for the year

*
68,772
Add income:
Less expenses:
(a)
25
Profit for the year
6,250
71,600
77,850
8,500
1,710
5,650
2,100
18,950
1,000
3,000
122,000
69,350
52,650
285
52,935
32,410
20,525

Non-current Assets
Office equipment
Vehicle
Net book value
12,000
3,000
9,000
10,000
22,000
9,000
Net revenue
18,000
Opening inventory
Purchases 280,797 2,170 goods for own use

Cost of sales
Less expenses:
725
Wages 128,528 + 1,383
Motor expenses 47,870 18,500

Rates
Insurances 7,780 286
4,910
5,140

General expenses
Provision for depreciation:
9,430
property
27,430
equipment
motor vehicles
FINANCED BY
Capital
Opening capital

Less Drawings
39,771
586,624
278,627
318,398
40,135
278,263
308,361
129,911
29,370
7,810
7,494
1,368
33,713
2,900
1,140
13,448
Profit for the year
20,000
587,461
837
Gross profit
14,570
230
Less Returns inwards
120
Bank
NET ASSETS
Revenue
5,225
4,000
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2006
8,500
Trade receivables
Accrual of expenses
1,000
KEN TUCKY
(a)
Prov for dep'n
Current Assets
Trade payables
Cost
Inventory
16.6
227,154
81,207
Depreciation calculations
20,525
40,525
Property: 145,000 x 2% = 2,900
Motor vehicles 42,000 + 18,500 acquisition = 60,500 26,880 depreciation to date =

33,620 x 40% = 13,448
13,095
27,430
(b)
Additional information 4
This is a prepayment of expenses.
The amount will be shown as a current asset in the balance sheet.
26
Equipment: 11,400 x 10% = 1,140
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 286 will be included in the cost for insurances charged to next years 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.
(b)
Additional information 5
(c)
16.8
(a)
Workings:
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 owners drawings
(which will be deducted from capital in the balance sheet).
The accounting concept is prudence.
SIOBHAN HUGGETT
Cost of sales
Reduction in provision for doubtful debts
Wages and general expenses
Business rates

fixtures and fittings
vehicles
Loss for the year
16.9
122,500
170,600
Add income:
Less expenses:
293,100
131,200
Gross profit
(b)
Example of capital expenditure: purchase of fixtures
(c)
Capital expenditure is expenditure incurred on the purchase, alteration or improvement of fixed

assets.
Example of revenue expenditure: wages and general expenses
WULLIE McDUFF
(a)
INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2005
Gross profit
Add income:
Bad debts recovered
40
Less expenses:
117,800
Wages
13,330
Rent and rates
750
General expenses
10,800
Loss on sale of vehicle

property
174,520
vehicles
3,880
27
Loss for the year
807,850
100
Reduction in provision for doubtful debts
170,640
31,840
Provision for depreciation of vehicles: 160,000 80,400 depreciation to date = 79,600 x 40%
= 31,840
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.
123,400
8,700
Provision for depreciation of fixtures and fittings: 85,000 + 23,000 acquisition =

108,000 x 10% = 10,800
Revenue expenditure is expenditure incurred on running expenses.
INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 2004
Business rates: 13,510 180 prepayment = 13,330
If a provision is not made, then profits will be overstated by the amount of doubtful debts.
Purchases
Wages and general expenses: 116,200 + 1,600 accrual = 117,800
Creation of a provision for doubtful debts is shown as an expense in income statement, and
deducted from trade receivables in the balance sheet.
7,800
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
Closing inventory: valued at the lower of cost, 8,700, and net realisable value, 11,500
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.
Revenue
The accounting concept is business entity which keeps separate from the business the personal
assets and liabilities of the owner.
Opening inventory
Purchases: 149,400 3,000 goods for own use 23,000 fixtures = 123,400
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.
65
808,015
748,432
12,140
37,898
760
200
2,400
7,500
809,330
1,315
Workings:
(b)
CHAPTER 17 Financial statements of limited companies
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.
17.1
Rent and rates: 12,460 320 prepayment = 12,140
(a)
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.
(b)
(c)
(d)
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 companys trade payables
17.2
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
17.4
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
Market value is the price at which issued shares are traded, ie bought and sold.
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.
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.
corporation tax is shown in the income statement, and any amount not yet paid is shown as a
current liability on the balance sheet
(a)
directors' remuneration is shown as an expense in the income statement

dividends paid are shown in the statement of changes in equity
revaluation reserve is shown as a capital reserve as a part of the equity section of the balance sheet
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
MASON MOTORS LTD

INCOME STATEMENT (EXTRACT) FOR THE YEAR ENDED 31 DECEMBER 20-1
Profit from operations
Finance costs
Profit before tax
Conclusion
Nominal value is the face value of a share which is entered in the accounts, eg 5p, 10p, 25p, 50p
or 1.
(c)
(f)
membership all ordinary shareholders have voting rights, so Wullie may lose some control of
the business
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.
debenture interest is shown as an expense in the income statement
(b)
(e)
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
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.
(a)
(d)
Disadvantages include
Tax
Profit for the year
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.
28
75,000
(5,500)
69,500
(20,050)
49,450
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-1
(b)
Retained earnings
Balance at 1 January 20-1
49,450
Dividends paid
(10,000)
Balance at 31 December 20-1
119,450
Balance at 1 June 20-2
Profit for the year

Dividends paid
Transfer to general reserve
Balance at 31 May 20-3
(b)
(20,000)
Debt
Equity
20,000,000
55,000,000*
50,000,000*
25,000,000
(2,000,000)
4,600,000
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.
the new shareholders will have voting rights
the power of the existing shareholders will be diluted because there will be more shares in issue
the companys gearing ratio will be improved
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
= 2:1 or 200%
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.
(2,800,000)
Issue of debentures
0.36:1 or 36%
* 6% debentures 20,000,000 + 30,000,000
9,400,000
not essential to pay dividends every year, although a failure to do so might cause difficulties with
future share issues
If debentures are issued, the gearing ratio becomes:
Issue of ordinary shares
= 0.8:1 or 80%
This is a much improved gearing ratio.
6,000,000
25,000,000
* ordinary shares 25,000,000 + 20,000,000 and share premium account 10,000,000
3,400,000
ordinary shares are not normally repayable, so the company will have the finance for the
foreseeable future
20,000,000
If ordinary shares are issued to raise the money for expansion, the gearing ratio (including share
premium account) becomes:
This is already a high gearing ratio which investors will not wish to see going above 1:1 or 100%.
SRIAN PLC
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MAY 20-3
Retained earnings
the companys gearing ratio will be worsened
Without having information on the companys revenue reserves (retained earnings and general reserve),
the gearing ratio is currently:
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.
(a)
if repayment not made at due date, debenture holders can realise assets to obtain repayment
Gearing ratio
149,450
17.7
100,000
Profit for the year
(c)
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
Inventories
1,060,000
877,000
TOTAL EQUITY AT 31 DECEMBER 2006
Issued share capital
4,000,000 ordinary shares of 50p each
Share premium account
General reserve
877,000
TOTAL EQUITY
(d)
(e)
17.10
(37,000)
Net Assets
840,000
700,000 ordinary shares of 50p each, fully paid

Revenue Reserves
Retained earnings
1,297,000
General reserve
TOTAL EQUITY
* Cash and cash equivalents:
Revenue reserves are profits from trading activities which have been retained in the company to help
build the company for the future
balance at start
share issue
Retained earnings or general reserve
dividend paid
Revenue reserves can be used to fund dividend payments or to provide bonus shares to shareholders
closing balance
(a)
DAVID MARK LIMITED
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20-2
Balances at 1 January 20-2
Profit for the year
Dividend paid
Issue of shares
Balances at 31 December 20-2
250,000
Share
premium
100,000
350,000
General
reserve
**(35,000)
(35,000)
150,000
45,000
50,000
120,000
* 400,000 150,000 profit for the year
Total
*250,000
50,000
Retained
earnings
(c)
75,000
350,000
Capital Reserve
3,797,000
Issued
share capital
240,000
EQUITY
* general reserve: 300,000 + 120,000 transfer

(c)
Trade and other payables
Issued Share Capital
*420,000
Retained earnings
277,000
Net Current Assets
500,000
Revenue Reserves
*132,000
Current liabilities
2,000,000
Capital Reserve
60,000
Cash and cash equivalents
(120,000)
600,000
85,000
Trade and other receivables
(63,000)
Balance at 31 December 2006
Current assets
650,000
Dividend paid
DAVID MARK LIMITED
SUMMARISED BALANCE SHEET AS AT 31 DECEMBER 20-2
Non-current assets
410,000
Profit for the year
(b)
(b)
150,000
(45,000)
320,000
** 500,000 shares x 7p
575,000
150,000
840,000
30
50,000
320,000
120,000
440,000
840,000
17,000
150,000
(35,000)
132,000
Limited company, or
Private Limited Company
(d)
The term Ltd means that the shareholders of David Mark Limited have limited liability.
Thus the risk taken by shareholders is limited.
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).
CHAPTER 18 Ratio analysis
18.3
Exton
gross profit margin
13.4%
gross profit mark-up
15.5%
overheads in relation to revenue
12.0%
net profit margin (profit in relation to revenue)
1.4%
rate of inventory turnover
33 days or
10.9 times per year
net current asset (current) ratio
1.3:1
liquid capital (acid test) ratio
0.05:1
trade receivable days
1 day*
return on capital employed
11%
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
profit
Frimley
44.0%
78.7%
39.8%
4.2%
95 days or
3.8 times per year
2.4:1
1.3:1
60 days
8.1%
(d)
Frimley
18.4
(a)
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.
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
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
18.6
gross profit margin

Gross profit
Revenue
This ratio expresses, as a percentage, the gross profit in relation to revenue.
(c)
(d)
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.
(e)
liquid capital
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
Trade receivables x 365 days

Revenues
Trade payables
Purchases
x 365 days
trade receivable days
This is the actual amount of money held in the bank or as cash.
trade payable days
20-1
20-2
43,000 x 365 days

680,000
32,550 x 365 days

660,000
20-1
20-2
= 23.08 days
28,500 x 365 days

520,000
= 20 days
= 18 days
38,500 x 365 days

540,000
= 26.02 days
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.
(Current assets Inventories) Current liabilities
(c)
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.
x 100
1
This ratio expresses, as a percentage, the gross profit in relation to cost of sales; often used by
businesses to establish selling price.
(b)
(a)
(b)
x 100
1
gross profit mark-up

Gross profit
Cost of sales
Profit for the year x 100

Capital employed*
1
sole traders: the amount of the owners capital in the business
Exton is the supermarket; Frimley is the engineering company

Exton
return on capital employed
* limited companies: ordinary share capital + reserves + preference share capital + loan capital
* revenue figure used for this calculation; this is unrealistic because most supermarket sales will be for cash
rather than on credit
Reasons:
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.
31
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)
(b)
Net current assets (current) ratio
Net profit margin (profit in relation

to revenue)
Liquid capital (acid test) ratio
Rate of inventory turnover
Return on capital employed
or
Proposal 2
Current assets
Current liabilities
30,000
**540,000
(Current assets inventories)

Current liabilities
Average inventories x 365 days
Cost of sales
Profit for the year

Capital employed
Tutorial note: bank overdraft is a current liability and is not included in the figure of capital employed.
= number of times per year
(c)
x 100
1
To:
From:
Date:
Subject:
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.
18.10
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.
Any surplus non-current assets could be sold to improve liquidity ratios.
(b)
Ratio calculation
Return on capital employed
Proposal 1
30,000
*600,000
x 100
1
Profit for the year

Capital employed
Ordinary shareholder
Student Accountant
Today
Proposals to raise finance
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 companys 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
Inventory levels could be reduced, so improving the net current asset ratio.
Formula
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).
(a)
Report
Proposal 1
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)
= 5.56%
** 380,000 equity (ordinary shares + capital and revenue reserves)

160,000 long-term bank loan
Profit for the year x 100

Revenue
1
Cost of sales
Average inventories
x 100
1
x 100
1
= 5%
300,000 ordinary shares (200,000 + 100,000)

160,000 share premium (140,000 + 120,000)
140,000 retained earnings
32
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 companys 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 companys 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.
18.11
(a)
FALCON LIMITED
BALANCE SHEET AS AT 31 MARCH 2007
Non-Current Assets
(b)
Net book value

200,000
Property
Fixtures and fittings
217,500
Inventories
14,560
Cash and cash equivalents
31,058
Trade receivables
51,074
Trade payables
(c)
(7,842)
Tax liabilities
(7,900)
(15,742)
Net Current Assets
252,832
Debentures (2011-2013)
= 12.45%
Issued Share Capital
75,000 ordinary shares of 1 each
18.12
75,000
Capital Reserves
10,000
120,000
Revenue Reserve
Retained earnings
TOTAL EQUITY
130,000
28,000
*224,832
The level of debt has remained at 28,000.
224,832
33
profit is a calculated figure which shows the surplus of income over expenditure for the year.
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):
share premium 5,000 + 5,000 premium on rights issue = 10,000
A lower gearing ratio reduces the level of risk to the company and enables it to borrow further
funds in the future if required.
(b)
revaluation reserve 200,000 revaluation 80,000 net book value = 120,000
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.
bank 1,058 + 30,000 (25,000 + 5,000 premium) rights issue = 31,058
Revaluation of the property has added 120,000 (200,000 80,000) to total equity.
(a)
19,832
Tutorial notes:
The rights issue has added 30,000 (25,000 + 5,000 premium) to total equity.
Debt
Equity
224,832
EQUITY
After adjustments
(28,000)
NET ASSETS
= 37.42%
35,332
Non-Current Liabilities
Before adjustments = 28,000

*74,832
or
* total equity from balance sheet
5,456
Current Liabilities
Debt (loan capital + preference shares, if any)

Equity (ordinary shares + reserves)
* 50,000 + 19,832 + 5,000
17,500
Current Assets
Revaluation reserve
Gearing ratio =
cash is the actual amount of money held in the bank or as cash
purchase of non-current assets cash decreases; no effect on profit (but there is likely to be an
amount for provision for depreciation in the income statement
repayment of a loan cash decreases; no effect on profit
payment of drawings/dividends cash decreases; no effect on profit
an increase in trade receivables cash decreases; no effect on profit

a decrease in trade payables cash decreases; no effect on profit
an increase in inventory cash decreases; profit increases
19.3
CHAPTER 19 Budgeting and budgetary control
19.1
(a)
Benefits of budgetary control
(b)
Cash budget for four months ending 31 October 2002
Sales
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
Net inflow/outflow
sales (revenue) budget
labour budget
trade payable budget
(b)
(i)
trade receivable budget

cash budget
(c)
12.0
15.6
16.8
14.4
20.4
25.2
26.8
24.0
8.0
8.0
8.0
4.0
5.2
5.6
3.2
(10.8)
costs and benefits benefits must exceed the cost
accuracy of information used
(ii)
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
5.2
18.0
14.0
4.0
5.6
12.0
26.0
22.0
16.0
(10.8)
(11.6)
(6.8)
(0.8)
4.8
(11.6)
(6.8)
8.0
1.2
At 31 October 2002, the bank balance is budgeted to be 1,200.
The company sells beach buckets and spades, so the seasonal effect is over quickly.
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.
Expected amounts due from trade receivables in November are:
12,000
4,800
16,800
It is likely that the company will go into overdraft again quite quickly, from November
onwards.
The company needs to make arrangements for an overdraft facility for July, August and
September, with a limit of approximately 12,000.
disfunctional management ensure that the budgets co-ordinate
4.8
4.0
1 month 20,000 x 60%

2 months 24,000 x 20%
Relevant factors when implementing budgetary control
000
(7.2)
The most likely three budgets for a small business such as Classic Furniture would be cash, sales
and production
000
(3.6)
Closing balance
Oct
000
24.0
Opening balance
Sept
000
16.0
Overheads
motivation a budget can be part of the techniques for motivating managers and other
staff to achieve the objectives of the business
production budget
1 month
Purchases
control action can be taken to modify the operation of the business
cash
2 months
monitoring management is able to monitor and compare the actual results against the
budget
purchases budget
Aug
July
communication because a budget is agreed by the business, all the relevant managers
and staff will be working towards the same end
Sunshine Ltd
planning by formalising objectives through a budget, a business can ensure that its plans
are achievable
Any three budgets
(a)
Other measures to improve the companys cash position include:

offering discounts to encourage increased sales
allowing one months credit only, so receiving payment from sales quicker
set too easy ensure that budgets are set at realistic levels to enable the business to use
its resources to best advantage
encouraging cash sales
reducing purchases as the summer season draws to a close
34
reducing overheads
19.5
(a)
July
Income
Cash from trade receivables

Expenditure
Payments to trade payables
Operating expenses
Purchase of non-current assets
Repayment of loan
August
September
October
November
December
24,000
28,500
32,500
38,500
*47,760
10,000
11,000
14,000
18,000
24,500
12,500
12,000
12,000
8,500
12,000
12,000
30,000
36,500
64,010
Net cash flow
(2,000)
(7,500)
2,500
2,500
2,000
(16,250)
Closing balance
(1,020)
(1,520)
(17,770)
Opening balance
980
(1,020)
(8,520)
cash from December sales: 60,000 x 20% x 98%
cash from November sales: 50,000 x 60%
cash from October sales: 30,000 x 20%
(b)
(8,520)
(6,020)
=
(6,020)
(3,520)
(3,520)
(d)
(1,520)
19.7
11,760
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
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.
(a)
JIM SMITH
47,760
Jan
Receipts
Memorandum
May
Jun
1,250
3,000
4,000
4,000
4,500
4,500
4,500
3,500
3,500
3,500
6,750
5,100
5,100
4,150
4,150
4,200
10,000
Trade payables
Expenses
Total payments for month
Net cash flow
Add bank balance (overdraft)

at beginning of month
Bank balance (overdraft) at end

of month
35
Apr
Total receipts for month

Van
purchase of non-current assets
Mar
10,000
Payments
the application of the realisation concept timing of receipts and payments
Feb
Capital introduced
Trade receivables
The Directors of Hawk Limited

Student Accountant
Today
Making profits whilst having a bank overdraft
repayment of loans
the sales of 60,000 forecast to be made in December are higher than each of October and
November; the cash received from Decembers 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
CASH BUDGET FOR THE SIX MONTHS ENDING 30 JUNE 20...
a company can make a profit but have a bank overdraft for a number of reasons, including:
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
6,000
Reasons
30,000
= 18,750 total net cash outflow
To:
From:
Date:
Subject:
the purchase of non-current assets affects cash but has no effect on profit
980 (opening balance 1 July) + 17,770 overdraft (closing balance 31 December)
(c)
repayment of loans affects cash but has no effect on profits
20,000
26,000
19,510
31,500
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
Hawk Limited
12,000
22,000
20,000
12,000
Explanation
6,000
750
1,250
600
3,000
600
4,000
650
4,000
650
4,500
700
(3,850)
(2,100)
(600)
(2,700)
(2,850)
(3,000)
3,250
(600)
(2,700)
(2,850)
(3,000)
(2,700)
3,250
(150)
3,250
(150)
300
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
(b) The cash budget shows the maximum bank overdraft to be 3,000 in May.
Jim Smith could avoid the need for a bank overdraft in one or more of the following ways (the question
asks for two ways):
by commencing his business with a higher initial capital, eg 13,000
by buying the van on hire purchase or leasing instead of outright purchase
by reducing his purchases to 3,000 for each of January and February
by asking his suppliers for two months credit for the initial purchases of 4,500 made in January
by asking his customers to pay more quickly
CHAPTER 20 The impact of computer technology in accounting

20.6
Two from each of:
(a)
(b)
(c)
single entry system which automatically makes entries in all relevant accounts
all arithmetic in account entries is performed automatically
accounts are normally already set up in the system
provided that the original figure entered is correct, all account entries will be correct
all calculations are automatic and therefore accurate
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 persons account)
36

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answers to selected questions in the textbook

Introduction to Financial Accounting

What is financial accounting?

Double-entry book-keeping: further transactions

AS Accounting for AQA

TUTOR SUPPORT MATERIAL:

Double-entry book-keeping: first principles

Balancing accounts the trial balance

Division of the ledger the use of subsidiary books

Bank reconciliation statements

The general journal and correction of errors

Introduction to final accounts

Adjustments to final accounts

Financial and Management Accounting

Further aspects of final accounts

Osborne Books Limited 2012

Tel 01905 748071

Accounting concepts and inventory valuation

Financial statements of limited companies

Budgeting and budgetary control

The impact of computer technology in accounting

CHAPTER 1 What is financial accounting?

overheads and expenses to date

profit during a particular period

asset of bank increases by 3,000

asset of van increases by 6,000

Rent Paid Account

Bank Loan Account

Commission Income Account

competitors, who wish to assess the profitability of the business

potential investors in the business

assets items owned by a business; liabilities items owed by a business

asset of computer increases by 4,000

Other stakeholders any four from

purchases of goods for resale to date

asset of bank increases by 8,000

CHAPTER 2 Double-entry book-keeping: first principles

double-entry accounts system

turnover (cash and credit sales) to date

initial recording of transactions

Information from the accounting system includes:

Rent Paid Account

Sally Orton: Loan Account

Office Fittings Account

Office Premises Account

Office Fittings Account

Bank Loan Account

Commission Income Account

Commission Income Account

Delivery Van Account

Wyvern Producers Ltd

Wyvern Producers Ltd

J Smithson: Loan Account

Guidance to the trainee to include:

the use of accounts to record different types of transactions

an explanation of various accounts including

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

expenses the day-to-day running expenses (revenue expenditure) of the business

income amounts of income received by the business

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

CHAPTER 3 Double-entry book-keeping: further transactions

Wyvern Producers Ltd

Purchases Returns Account

Amery Scales Ltd