Note: These revision notes are NOT endorsed by Cambridge International Examinations Introduction to Bookkeeping and Accounting Accounting Explain the difference between book-keeping and accounting. Bookkeeping – detailed recording of all financial transactions of a business (2) Accounting – preparing financial statements at regular intervals from the bookkeeping records (2) State two ways in which Teresa can use her accounting information. To monitor progress (1) using accounting ratios (1) For decision-making (1) for future planning (1) For comparison purposes (1) with previous years or other businesses (1) Explain two advantages of maintaining accounting records using the double entry method. Less risk of errors Less risk of fraud Easier to refer to previous transactions Financial position can be ascertained Easier to prepare financial statements statements Easier to make business decisions Easier to calculate accounting ratios
Complete the following sentences using the word ‘debit’ or ‘credit’. An asset account has a debit (1) balance. A liability account has a credit (1) balance. An expense account has a debit (1) balance. An income account has a credit (1) balance. Complete the following table. Indicate with a tick (√) whether each item is an asset or a liability.
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Books of original entry and ledgers State what is meant by a book of prime (original) entry. The book where transactions (and other entries) are first recorded.
Name two books of prime (original) entry which a trader may keep. In each case name a source document for that book.
State one reason why a trader might use books of prime (original) entry. To avoid multiple entries in the ledger (1) Different books of prime entry can be maintained by different people (1) Acts as an aid for posting to the ledger by analysing a transaction into debit and credit entry (1) Helps to reduce the amount of detail in the ledger l edger as only totals are posted to the ledger (1) Provides evidence of transactions since they are recorded from source source documents (1) Helps in the auditing/tracking process/facilitates cross-referencing (1) (1) Easy reference to source of a transaction (1)
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Helps in gathering and summarising of accounting information (1) Groups together similar types of transactions in one book in date order (1) Reduces number of entries in ledger (1) Complete the table below, naming the book of prime entry which provided the following information.
Yuri is a trader who keeps a full set of accounting records. He divides his ledger into three specialist areas – nominal (general) ledger, purchases (creditors) ledger and sales (debtors) ledger. State one advantage of dividing the ledger into these three areas.
Work can be shared between several people Easier for reference as same type of accounts are kept together Easier to introduce checking procedures
Yuri keeps a full set of accounting records. Name the ledger in which each of the following accounts is found.
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Farhad and Ali are traders. On 1 January 2015 Farhad owed Ali $300. The following transactions took place. 5 January Ali sold goods, $250, to Farhad. 8 January Farhad returned half of the goods bought on 5 January. 19 January Farhad paid the amount owed on 1 January, by cheque, having deducted 3% cash discount.
(a) Complete the following table. Name the document sent by Ali to Farhad on 5 January and on 8 January and state his reason for sending each document.
(b) Complete the following table. Name the book of prime (original) entry in which Ali would record the transactions listed.
What is the name of the document sent to a customer by a supplier at the end of the month showing the amount payable for credit sales? Statement (of account)
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Joolia buys supplies of food from HiClass Foods Ltd. Their account in her ledger for September 2012 was as follows.
REQUIRED State the section of Joolia’s ledger in which the above account would appear. Purchases (Ledger) Explain each entry in the above account. State where the double entry for each transaction would have been made. 1 September Balance b/d Explanation This is the balance owed by Joolia to HiClass Foods Ltd. Double entry: Debit HiClass Foods Ltd (August account). 7 September Bank Explanation: Amount paid to HiClass Foods Ltd for purchases (on credit/amounts due)(1) Double Entry: Credit Bank Account (1) 7 September Discount Explanation: Amount claimed as discount for prompt payment (1) Double Entry: Credit Discount Received Account (1) 12 September Purchases Explanation: Amount bought on credit from HiClass Foods Ltd (1) Double Entry: Debit Purchases Account (1) 15 September Purchase Returns Explanation: Goods returned to HiClass Foods Ltd as unsuitable/not required (1) Double Entry: Credit Purchase Returns Account / Returns Outwards (1) 30 September Balance c/d Explanation: Amount owing to HiClass Foods Ltd at end of month (1) Double Entry: Credit HiClass Foods Ltd (October account) (1)
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Cash Book, Petty Cash Book and Bank Reconciliation. Explain what is meant by the imprest system in relation to petty cash books . The petty cashier starts each period with the same amount of money (the
imprest). At the end of the period the chief cashier will make up the cash remaining so that it is equal to the imprest amount (1) State one advantage of using the imprest system of petty cash. Chief cashier knows exactly how much is spent in each month/can control expenditure of petty cash The cash remaining and the vouchers received should equal the imprest Can help reduce fraud At the end of each month the bookkeeper reconciles the bank columns in his/her main cash book with the statement received from the bank. State two reasons for maintaining a petty cash book.
Reduce the number of entries in the main cash book Removes the small cash payments from the main cash book Reduces the number of entries in the ledger Allows the chief cashier to delegate some of the work Provides training for junior staff members
Grace Ngema wrote up her petty cash book for the month of August 2011. For each of the following items in the petty cash book, state where the double entry was made.
Give two examples of adjustments made in a bank reconciliation statement. Outstanding lodgements uncredited or unpresented cheques Items found in updating cash book, e.g. direct debits, bank interest, charges, dishonoured cheques, bank or cash book errors
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Suggest two items which may appear in the cash book but not on the bank statement. Cheques not presented Amounts not credited Cash book errors Suggest two items which may appear on the bank statement but not in the cash book. Standing orders Direct debits Credit transfers Dishonoured cheques Bank charges/interest Bank errors
State two reasons, other than finding errors, why Jane should reconcile her cash book with the statement received from the bank. Ascertain the true bank balance at a certain date Assist in detecting fraud and embezzlement Identify any “stale” cheques Demonstrate that any differences between the cash book balance and that on the statement are due to genuine reasons such as standing orders, bank charges, credit transfers
Explain why items are recorded on the opposite side of the cash book to that on which they appear on the bank statement. The bank statement is a copy of the account of the business as it appears in the books of the bank. This is from the viewpoint of the bank – the business depositing money is a creditor of the bank. The bank account in the cash book is prepared from the viewpoint of the business – the bank is a debtor of the business which has deposited the money.
Name the two accounts which are posted with the totals from a three column cash book. Discount allowed (totalled on the debit side of the three column cash book and posted on the debit side of the discount allowed account) Discount received (totalled on the credit side of the three column cash book and posted on the credit side of the discount received account)
State what is meant by a dishonoured cheque. The debtor’s bank refused payment
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Verification of accounting records Control accounts State advantages of preparing control accounts.
Assist in the location of errors Provide instant totals of debtors/creditors Proves the arithmetical accuracy of sales/purchases ledgers Enable the Balance Sheet to be prepared quickly Provide a summary of the transactions relating to debtors/creditors Provide an internal check on sales/purchases ledgers – may reduce fraud
State advantages of preparing a sales ledger control account other than the location of errors. Provides instant total of debtors Proves the arithmetical accuracy of sales ledger Enables the Balance Sheet to be prepared quickly Provides a summary of the transactions relating to debtors for the period Provides an internal check on the sales ledger – may reduce fraud
Explain what is meant by a contra entry in connection with control accounts . A contra entry is where a transfer is made from an account of a person/business in the sales ledger to an account of the same person/business in the purchases ledger. This may occur when a person/business is both a customer and a supplier. State two reasons why it is possible to have a debit balance on a purchases ledger control account.
Overpayment of amount due Cash discount not deducted before payment made Returned goods after payment of amount due Payment made to creditor in advance
State one reason why it is possible to have a credit balance brought down on a sales ledger control account.
Overpayment of amount due by debtor Cash discount not deducted by debtor before payment made Goods returned by debtor after payment of amount due Payment made in advance by debtor
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Explain why the information used to write up Susan’s purchases ledger control account is obtained from books of prime (original) entry and not from the purchases ledger. A purchases ledger control account acts as a check on the purchases ledger. If there is an error in the purchases ledger it will not be revealed by a control account prepared from the individual accounts in that ledger.
The trial balance Give one reason for preparing a trial balance. Used to prepare final accounts. Can trace or identify errors. Stella Maris started a business as a bookseller on 1 May 2008 with initial capital of $10 000 which she deposited in a new business bank account. She is not an experienced bookkeeper but has drawn up the following trial balance at 31 October 2008. Stella has put certain balances in the wrong column and may have made other errors.
REQUIRED (a) State which accounting principle Stella was following when she deposited her initial capital into a new business bank account. (a) Business entity or ownership [1]
(b) Name the account in which an unexplained difference on a trial balance should be entered. Suspense account (1)
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(c) Prepare a corrected trial balance at 31 October 2008.
Name and explain two errors which do not affect the balancing of a trial balance. Any two of: Omission (1) transaction totally omitted from the books (1) Commission (1) transaction posted to wrong account of right class (1) Principle (1) transaction posted to account of wrong class (1) Original entry (1) transaction incorrectly recorded in book of prime entry (1) Reversal (1) debit entry posted on credit side and vice versa (1) Compensating (1) errors cancel one another out (1) Complete the following table. State in which ledger each account would appear and on which side of the trial balance the account would be shown.
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Accounting procedures Capital and revenue expenditure and receipts Explain the difference between capital expenditure and revenue expenditure . Capital expenditure is money spent on acquiring, improving and installing fixed assets/Noncurrent assets. Revenue expenditure is money spend on running a business on a day-to-day basis. Explain the difference between capital receipts and revenue receipts. Capital receipts are amounts received from the sale of fixed assets/Noncurrent assets Revenue receipts are sales and other items of income which are recorded in the trading and profit and loss account. Nesbit Limited bought some new machinery. The invoice total included a number of different costs. REQUIRED Complete the following table indicating with a tick (✓) which costs are capital expenditure and which are revenue expenditure. The first has been completed as an example.
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Depreciation and application of matching and prudence concept. (i) Describe the straight line method of depreciation. The straight line method of depreciation uses the same amount of depreciation each year.[1] (ii) State the circumstances when this method of depreciation may be used. This method is used where each year is expected to benefit equally from the use of the asset [1] (iii) Describe the reducing (diminishing) balance method of depreciation. The reducing balance method of depreciation uses the same percentage rate of depreciation each year, but it is calculated on the book value at the end of each year. [1] (iv) State the circumstances when this method of depreciation may be used. This method is used where the greater benefits from the use of the asset will be gained in the early years of its life.[1] (v) State which of the above methods of depreciation would be most appropriateto use for each of the following non-current assets. Computer equipment– reducing balance method (1) Buildings– straight line method (1) Motor vehicle – reducing balance method (1)
(vi) Describe the revaluation method of depreciation. Fixed assets are valued at the end of each financial year. This value is compared with the previous valuation (or the cost if it is the first year of ownership) and the amount by which the asset has fallen in value is the depreciation for the year.
(vii) State the circumstances when this method of depreciation may be used. This method is used where it is impractical or difficult to maintain detailed records of the asset. [1] (viii) Suggest one non-current asset which may be depreciated using this method. Loose tools, packing cases, small items of equipment [1]
Name one accounting principle which is applied when fixed assets are depreciated. Matching or Prudence
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Explain why the accounting principle named above is applied when providing for depreciation of fixed assets. Matching To ensure that the loss in value of fixed assets is spread over the period in which they are earning revenue. OR Prudence To ensure that the profit is not overstated and the value of the fixed assets is not overstated. Tahir Ali has been advised that he should depreciate her non- current (fixed) assets each year and should apply the accounting principle of consistency. State two reasons why Tahir Ali should depreciate her non- current (fixed) assets. • •
• •
•
To spread the cost of fixed assets over their useful lives. To apply the accruals principle – recognising the time difference between payment for the fixed asset and its loss in value. To provide a more realistic view of the fixed assets. To record the loss in value of fixed assets – the part of the cost of the fixed asset consumed during the period of use. The annual depreciation charge represents the cost of using the fixed asset to earn revenue.
Tahir Ali decided that depreciation should be calculated on motor vehicles owned at 31 December each year at the rate of 20 % per annum, using the reducing (diminishing) balance method. A full year’s depreciation should be provided in the year of purchase, but no depreciation should be provided in the year of disposal. Explain how Tahir Ali is applying the matching principle when he depreciates his motor vehicles. Ensures that the loss in value of motor vehicles is spread over the period in which they are earning revenue.
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Bad debts ,Provision for doubtful debts and application of matching and prudence concept. Explain how accounting for bad debts and providing for doubtful debts applies the following accounting principles. (i) Accruals (matching) Any expense/loss for the financial year (1) is matched /set against the revenue for that same period (1) (ii) Prudence Ensures that the profit for the year is not overstated (1) Ensures that the trade receivables/ current assets are not overstated (1)
Mohammed is a trader. His financial year ends on 31 January. Miriam employs a bookkeeper to maintain her financial records. The following account appears in Mohammed’s ledger:
Date
Provision for doubtful debts account Details Amount Date Details ($)
2008 31-Jan Profit & loss Balance c/d
Amount ($)
2007 50
01-Feb
Balance b/d
600 650
650 650
2008 01-Feb
Balance b/d
600
State one reason why Mohammed should maintain a provision for doubtful debts.
Ensures that profits are not overstated (prudence) Ensures that debtors are shown in balance sheet at more realistic amount (prudence) Application of matching principle as the amount of sales unlikely to be paid for are treated as an expense of that particular year
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Explain each entry in the provision for doubtful debts account as it appears in Mohammed’s ledger. 2007 February 1 Balance The provision for doubtful debts in existence at that date brought down from the previous financial year. (2) 2008 January 31 Profit and loss The amount transferred to the profit and loss account representing the surplus/decrease in provision no longer required. (2) Explain the significance of the $600 shown at the end of the account. The new provision for doubtful debts carried forward to the next financial year. (2) State four ways in which Mohammed could reduce the risk of bad debts.
Obtain references from new credit customers Fix a credit limit for each customer Issue invoices and statements promptly Follow up overdue accounts promptly Supply goods on a cash basis only Refuse further supplies until outstanding account is paid
State two possible advantages to Mohammed of paying his creditors before the due date. May be able to take advantage of cash discounts Improve the relationship with suppliers
State one possible disadvantage to Mohammed of paying creditors before the due date. The business is deprived of the use of the money earlier than necessary
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John Chan’s financial year ends on 30 April. The following account appears in his nominal (general) ledger: Date
Provision for doubtful debts account Amount Date Details Details ($)
2006 30-Apr Profit & loss Balance c/d
80 420
2005 01-May
Balance b/d
500
Amount ($)
500 500
2006 01-May
Balance b/d
420
Explain why $80 is transferred from John Chan’s provision for doubtful debts account into his Profit and Loss Account for the year ended 30 April 2006. The $80 transferred to the Profit and Loss Account is the difference between the provision for doubtful debts at the start of the year and the provision required to carry forward to next year. In this case it is the amount of surplus/decrease in provision not required. (2) State whether the $80 will appear as a debit or a credit item in John Chan’s Profit and Loss Account for the year ended 30 April 2006. This amount will be credited to the Profit and Loss Account. John Chan is rather disappointed with the collection period for debtors. Explain three ways in which the collection period for debtors may be improved.
Offer cash discount for prompt payment Charge interest on overdue accounts Improve credit control Refuse further supplies on credit until any outstanding balance is paid
Ahmed is a trader who sells goods on credit. He offers his credit customers a cash discount of 3 % provided the account is paid within 30 days. He has applied the accounting principle of prudence and maintains a provision for doubtful debts. This provision amounted to $150 on 1 February 2006. State two effects on his final accounts of applying the principle of prudence. So that the profits for the year are not over-stated [1] So that the debtors in the Balance Sheet are shown at a realistic amount [1]
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Name one other accounting principle which Ahmed is applying by maintaining a provision for doubtful debts. Matching principle Nangolo is a trader. His financial year ends on 31 December. State, giving a reason, what entries (if any) Nangolo should make in his accounting records in each of the following situations. On 31 December 2003 Zanetti, a debtor, owes $24 for goods purchased on creditin 2002. Nangolo has been unable to find Zanetti. • •
Write Zanetti’s account off as a bad debt (1) Explanation: Amount now outstanding for over 1 year with little hope of recovery (1)
On 31 December 2003 Lim, a debtor, owes $390 for goods purchased on credit in November 2003. The period of credit allowed is 1 month. Lim has informed Nangolo that he is unlikely to pay the amount due before February 2004. No entries in accounting records are necessary (1) Explanation: Account is still likely to be paid, there is no evidence yet that it will not be paid by Lim (1) • •
On 31 December 2003 Nangolo examines his sales ledger and decides that he is unlikely to receive $280 of the total amount owing to him . Create a provision for doubtful debts of $280 (1) Explanation:Must ensure that he does not overstate his net profit for the year(1) • •
Other payables and other receivables Asif Malik is a trader. His financial year ends on 31 March. He employs a bookkeeper to maintain his financial records. The following account appeared in Asif Malik’s ledger.
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REQUIRED (a) Explain each entry in the above account. State where the double entry for each transaction would have been made. Balance 1 April 2009 Explanation – This is the amount of rates (property tax) prepaid during the previous financial year which related to the current financial year. (2) Double entry – credit rates (property tax) account for year ended 31 March 2009. (1) Bank 1 July 2010 Explanation – This is the total amount of rates (property tax) paid by cheque. (2) Double entry – credit bank column in cash book. (1) Income statement (profit and loss) 31 March 2010 Explanation – This is the rates (property tax) relating to the current financial year transferred to the income statement (profit and loss). (2) Double entry – debit income statement (profit and loss). (1)
(b) Explain the significance of the $180 shown at the end of the account. The balance represents the amount of rates (property tax) still outstanding for the financial year ended 31 March 2010. [2]2] (c) (i) Explain the accruals (matching) principle. The accruals (matching) principle requires the revenue of the accounting period to be matched against the costs of the same period. [2] (ii) Explain how the bookkeeper applied this principle when he prepared the rates (property tax) account. The total rates relating to the financial year ended 31 March 2010 were transferred to the income statement. [2] Asif Malik paid $1000 for insurance. This was for $750 insurance premium on his business premises and $250 insurance premium on his house. The bookkeeper credited the bank with $1000, debited the insurance account with $750 and debited the drawings account with $250. REQUIRED (d) Name the accounting principle the bookkeeper has applied. Business entity (e) The bookkeeper did not make any entries in the accounting records for orders received for goods to be supplied in the following financial year. Name the accounting principle the bookkeeper has applied. Realisation
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Valuation of inventory and application of prudence concept State the basis on which Mohammed should value his closing stocks. Stocks are valued at the lower of cost and net realisable value. Name one accounting principle Mohammed is applying by valuing his closing stocks on this basis. Prudence Explain how the following accounting principles are applied to the valuation of inventory. Prudence – a business should not overstate profits/assets (1) and so should value inventory at the lower of cost and net realisable value (1) Realisation – a business should not account for profit until it is realised (1) and should use cost price rather than selling price for inventory valuation (1) Tania Yousaf sells office equipment. She values her inventory at the lower of c ost and net realisable value. REQUIRED (a) Explain the meaning of the term “cost”. The cost of inventory is the actual purchase price of the goods (1) plus any additional costs incurred in bringing the goods to their present position and condition. (1) (b) Explain the meaning of the term “net realisable value”. The net realisable value is the estimated receipts from selling the goods (1) less any costs of completing the goods or costs of selling. (1) (c) Explain how valuing inventory at the lower of cost and net realisable value is an application of the principle of prudence. This ensures that the profit is not overstated (1) This ensures that the inventory is not overstated (1)
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Preparation of financial statements Businesses may be divided into trading businesses, manufacturing and service businesses. REQUIRED In the table below place a tick (✓) under the correct heading to show whether each of the following businesses is a trading business or a service business. Business (i) (ii) (iii) (iv)
Accountant Supermarket Travel agent Computer component manufacturer
Trading business
Manufacturing business
Service business √
√ √ √
Complete the table below to indicate in which financial statement each item would appear. State to which type of business each item relates.
State the purpose of preparing an income statement. To calculate the [net] profit [or loss] [for the year] – not gross profit.
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Partnerships accounts Ann and Fay are in partnership They invited Kim to join the partnership; State one disadvantage to Ann and Fay of Kim joining the partnership.
Ann and Fay lose a degree of control Ann and Fay will have to share any future profits with Kim The risk of conflict of opinion is increased May involve extra costs (accommodation/staff support etc.)
Explain to Kim two advantages of joining the partnership. Will have a share in the profits Can take part in decision-making Prospects for the future Explain to Kim two disadvantages of joining the partnership.
Will be personally liable for the debts of the firm Will have greater responsibility Will probably have to invest capital
Explain why, in addition to agreeing the profit-sharing ratio, Ann, Fay and Kim should draw up a partnership agreement. To avoid disagreements/misunderstandings later [2] Interest on capital [1] Partner’s salary Explain why the partnership agreement of Ann, Fay and Kim included clauses on each of the following: (i) Interest on drawings To discourage the partners from making excessive drawings. [2] (ii) Partner’s salary for Jane To compensate for an unequal work-load. OR In recognition of work done in the business. [2]
Explain why Ann and Fay should value the Goodwill of the business before admitting Kim to the partnership. A new partner joining an existing partnership will benefit from the Goodwill built up by the existing partners, who must be compensated for this.
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State and explain one advantage of maintaining both a capital and a current account for each partner.
Easier to see profit retained by each partner Easier to calculate interest on capital (if allowed) Easier to see salary earned by partner(s) Easier to see drawings made by a partner Easier to calculate interest on drawing (if charged)
Limited liability companies Explain the meaning of the term ‘limited liability’ . The liability of the members (shareholders) of a company for the debts of the company is limited to the amount they agree to pay the company for their shares. [2] Explain the meaning of each of the following terms. (i) Authorised capital Authorised capital is the maximum amount of share capital a company is allowed to issue. (2) (ii) Called-up capital Called-up capital is the total amount of capital a company has requested from its shareholders. (2) (iii) Paid-up capital Paid-up capital is that part of the called up capital for which a company has actually received the money from its shareholders. (2) The company’s statement of financial position contains entries for ordinary share capital, preference share capital, debentures and a bank loan. Explain one difference (i) Between ordinary shares and preference shares
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(ii) Between ordinary shares and debentures.
Manufacturing accounts Explain why it is necessary for Ahmed Zaki to prepare a manufacturing account at the end of his financial year. To calculate how much it has cost the business to manufacture the goods produced in the financial year. [2] During the year ended 30 April 2010 Ahmed Zaki purchased some finished goods from another manufacturer. Suggest two reasons why Ahmed Zaki purchased these goods rather than manufacturing them himself. (b) Production did not meet demand. It was cheaper to buy the goods rather than make them. Those particular items could not be made by the business. Name three types of inventory found in a manufacturing business Raw materials Work in progress Finished goods
State what is meant by the term work in progress. Units of production which have been started but which have not been completed
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Complete the following table, indicating with a tick ( ) where each item appears in the financial statements of a manufacturing business.
Complete the following table indicating with a tick ( in their financial statements.
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) where each item would appear
Income and expenditure accounts (Non Profit making entities) The first column in the table below gives a term used in the financial statements of a sole trader. Complete the table by entering in the second column the equivalent term in the financial statements of a club or society.
Following terms are used in connection with non-trading organisations such as clubs. Explain each of the following terms. Income and Expenditure Account The Income and Expenditure Account is equivalent to a Profit and Loss Account of a trading organisation. (1) It is used to calculate the annual surplus or deficit. (1) Accumulated Fund The accumulated fund is equivalent to the capital of a trading organisation, the difference between the assets and the liabilities. (1) The annual surpluses (less any deficits) accumulate within a non-trading organisation to form the accumulated fund.(1) State one of the items appearing in the summary of the cash book which should not be included in the income and expenditure account and explain why it does not appear. Opening bank balance (1 ) This is neither income nor expenditure for the year as it represents the bank overdraft on1 October 2006/ it represents the amount of money in the bank on that particular date. Or Opening balance or closing balance (1) Opening/closing bank balance is neither income nor expenditure for the year Purchase of new instruments/equipment (1) This is not regarded as revenue expenditure as it is the purchase of a fixed asset. (1) [2] Or Transfer to bank deposit account (1) Transferring money from one bank account to another is neither income nor expenditure. (1)
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Select one of the items appearing in the income and expenditure account which does not appear in the receipts and payments account and explain why it does not appear.
Either Subscriptions prepaid (1) This item represents an amount received during the previous financial year which relates to the current financial year. Application of matching principle. (1) Or Subscriptions owed by member at the end (1) This item represents an amount relating to the current financial year which has not yet been received. Application of matching principle. (1) Or Rent accrued (1) this item represents an amount relating to the current financial year which has not yet been received. Application of matching principle. (1) Or Depreciation of equipment (1) this is a non-monetary expense but must be taken into account in calculating the surplus/deficit. Application of matching principle. (1) Or Deficit for the year (1) this is the difference between the income and expenditure and is the “loss” for the year and does not represent money paid/received. (1)Alternatively surplus with a suitable comment if a surplus is shown in the answer
State what is meant by the term ‘subscription’ in a club’s accounts . [1] An amount paid by a member for the right to use the facilities of a club (1) [1] Speedy Runner Sports Club maintains a subscriptions account. Explain why this account can have two opening balances. b) Some members of the club may be in arrears with their subscriptions (1) and other members may have prepaid their subscriptions (1)
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Explain each of the following entries in the subscriptions account as it appears in the ledger of El Nil Sailing Club. State where the double entry for each transaction would be made. 2005, Aug 1 Balance $750 Explanation this represents the amount of subscriptions still outstanding from members for the financial year ended 31 July 2005 Double entry Credit subscriptions account for the year ended 31 July 2005 (1) 2006, July 31 Bank $5850 Explanation: this is the total amount of subscriptions received from members during the financial year ended 31 July 2006 Double entry Debit bank account (1) 2006, July 31 Income and Expenditure Account Explanation this is the total subscriptions which relate to the financial year ended 31 July 2006(1) Double entry Credit Income and Expenditure Account (1) The significance of the $900 shown at the end of the account This represents the amount paid by members during the financial year ended 31 July 2006 but which relates to the following financial year. It will appear as a current liability in the Balance Sheet as at 31 July 2006.
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Suggest two reasons why a Sports Club’s bank balance is not equal to the surplus for the year.
The income and expenditure account includes only revenue items The income and expenditure account includes non-monetary items The income and expenditure account adjusts figures for accruals and prepayments The receipts and payments account shows total money paid and received
Complete the table below. Put two ticks (√) in each row to indicate whether the item would appear on the debit side or credit side of the receipts and payments account or the income and expenditure account.
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Analysis and interpretation
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Interpretation of accounting ratios Explain why the quick ratio more reliable than the current ratio as an indicator of liquidity. Does not include stock in the calculation Either Stock is not regarded as a liquid asset – a buyer has to be found and then the money collected. Some stock may prove to be unsaleable.
Or
The quick ratio shows whether the business would have any surplus liquid funds if all the current liabilities were paid immediately from the liquid assets.
State two ways in which the rate of stock turnover of finished goods may be improved. Reduce stock levels Generate more sales activity Explain the difference between mark-up and margin.
Mark-up is when the gross profit is measured as a percentage of the cost price of the goods (1) Margin is when the gross profit is measured as a percentage of the selling price of the goods
State two ways in which the percentage of gross profit to sales could be improved.
Look for cheaper supplies Increase selling prices Change proportions of different types of goods sold
State two ways in which the percentage of net profit to sales could be improved.
Increase gross profit e.g. increase profit margin, increase selling prices etc. Increase sales Reduce expenses e.g. reduce staffing levels, reduce advertising etc. Increase other income e.g. rent out part of premises, earn more discount
State two possible advantages to Mohammed of paying his creditors before the due date. May be able to take advantage of cash discounts Improve the relationship with suppliers State one possible disadvantage to Mohammed of paying creditors before the due date. The business is deprived of the use of the money earlier than necessary
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Working Capital Management. State what is meant by working capital. Current assets less current liabilities Explain why it is important for a business to have an adequate amount of working capital. • • • •
To be able to meet debts when they fall due To be able to take advantage of cash discounts To be able to take advantage of business opportunities as they arise To ensure that there is no difficulty in obtaining further supplies
State and explain two disadvantages to a business of having insufficient working capital. May have problems paying debts as they fall due May not be able to take advantage of cash discounts Cannot make the most of opportunities as they occur Difficulties in obtaining further supplies Or other suitable points
State two ways in which a business could increase its working capital.
Injection of more capital Long-term loans Sale of surplus fixed assets Reduce drawings
On 31 December 2008 Morag MacDonald had money in the bank but her working capital was lower than it was at the start of the year. State and explain the effect of each of the following transactions on Morag MacDonald’s working capital. Office equipment, $10 000, was purchased by cheque . Effect working capital decreases by $10 000 Explanation The current assets decrease by $10 000 as the bank balance decreases. There is no change in the current liabilities.
An increase in the provision for doubtful debts of $50.
Effect Working capital decreases by $40 (1) Explanation Current assets decrease by $50 as net debtors decreases. There is no change in the current liabilities. (1)
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Payment of $200 by a debtor in cash.
Effect Working capital does not change (1) Explanation The current assets do not change as the cash increases and the debtors decrease by $200. There is no change in the current liabilities. (1)
Payment of $96 by cheque to a creditor in full settlement of $100 owing. Effect Working capital increases by $4 (1) Explanation Current assets decrease by $96 and the current liabilities decrease by $100. (1) In the table below place a tick ( ) under the correct heading to show how each of the following transactions would affect Helmut Lang’s working capital.
effect on working capital transaction (i) (ii) (iii)
introduction of further capital payment of creditor in cash repayment of long term loan
increase √
decrease
no effect
√ √
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Users of accounting information List three business people (excluding the owner) who would be interested in a business’ final accounts. In each case state one reason why the person would be interested in the accounts. Bank manager Assessment of prospects of any requested loan/overdraft repaid when due Assessment of prospects of any interest on loan/overdraft being paid when due Assessment of the security available to cover any loan/overdraft Lenders Assessment of prospects of any requested loan when due Assessment of prospects of any interest on loan being paid when due Assessment of the security available to cover any loan Creditor for goods Assessment of the liquidity position Identifying how long the business takes to pay creditors Identifying future prospects of the business Identifying what credit limit is reasonable Managers (if any) Assessment of past performance Basis of future planning Control the activities of the business Identifying areas where corrective action is required
Or other suitable interested persons e.g. trades unions/employees/ government bodies/take-over-bidders/competitors etc
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Accounting principles and policies Explain the principle of consistency. Where a choice of method is available, the one with the most realistic outcome should be selected and used consistently from one accounting period to the next.
Accounting policies/Qualitative characteristics of accounting information List four objectives which Ahmed must consider when selecting accounting policies.(Qualitative features of accounting information) Relevance Reliability Comparability Understandability Explain to Ahmed what is meant by the term “relevance”. Financial information is only relevant if it can be used – To confirm or correct prior expectations about past events To assist in forming, revising or confirming expectations about the future As the basis for financial decisions
Explain the meaning of the accounting term “comparability” “It must be recognised that a financial report can only be compared with reports for other periods if similarities and differences can be identified.”
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Explain the meaning of the accounting term “reliability”. Information provided in financial statements must be reliable (1) Either It must be capable of being depended upon as a faithful representation of the underlying transactions and events it represents (1) Or It must be capable of being independently verified (1) Or It must be free from bias (1) Or It must be free from significant errors (1) Or It must be prepared with suitable caution being applied to any judgmentsand estimates (1)
Limitation of accounting statements. Mohammed’s accountant informed him that the accounting statements prepared at the end of the financial year provide only a limited amount of information about the business. State how each of the following may be regarded as a limitation of accounting statements. Historic cost All transactions are recorded at the actual cost price. It is difficult to compare transactions taking place at different times.
Money measurement Accounts only record information which can be expressed in monetary terms. This means that many factors which affect the performance of a business will not appear in the accounting records. (1) Time factor Accounting statements are a record of what has happened in the past. Either They are not necessarily a guide to future performance (1) Or significant events can occur between the end of the financial period and the time when the accounting statements are available.
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Inter-firm comparison Limitations in comparisons of financial information. Maria is interested in comparing her results with those of another business and has obtained the final accounts of some other businesses in the same city. Explain three factors which Maria should bear in mind when attempting to compare her results with the accounts she has obtained relating to other businesses. Should compare with a business in same trade Should compare with a business of approximately the same size Should compare with a business of the same type (sole trader/partnership etc) The accounts may be for 1 year only which will not show trends and may not be a typical year The financial year may end on different dates and the period of time covered may be different The businesses may operate different accounting policies There may be differences which affect profitability and the items on the Balance Sheet The accounts do not show non-monetary items, but these are important in the success of a business It is not always possible to obtain all the information about a business in order to make a true comparison
Ahmed would like to compare his results with those of other businesses. He is aware that even comparing with a business of a similar size dealing in similar goods can produce misleading results. List four things Ahmed should consider when comparing his results with those of a similar business.
There may be differences that affect profitability e.g. one business may rent premises and the other business may own premises. The accounts may be for 1 year only and not show trends The accounts may not be for a typical year The financial year may end at a different point in the trading cycle The businesses may operate different accounting policies e.g. depreciation The accounts do not show non-monetary items but these are important in the success of a business It is not always possible to obtain all the information about a business in order to make a true comparison
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