answers to selected questions in the textbook AS Unit 1 Introduction to Financial Accounting
AS Accounting for AQA second edition T U TO TO R S U PP PP O RT RT M AT AT E RI RI A L: L: ANSWERS TO SELECTED QUESTIONS
1
What Wh at is fi fina nanc ncia iall ac acco coun unti ting ng? ?
1
2
Double-entry book-keeping: first principles
1
3
Double-entry book-keeping: further transactions
3
4
Business documents
5
5
Balancing accounts – the trial balance
7
6
Division of the ledger – the use of subsidiary books
9
7
The main cash book
11
8
Bank reconciliation statements
12
9
Introduction to final accounts
14
10
The general journal and correction of errors
15
11
C ontrol accounts Co
18
12
Adjustments to final accounts
19
AS Unit 2 Financial and Management Accounting
© Osbo Osborne rne Books Books Limit Limited ed 2010 2010 All answers are the responsibility of the publisher.
13
Business organisations
21
14
Accounting concepts and stock valuation
22
15
Further aspects of final accounts
23
16
Preparing sole trader final accounts
25
17
Financial statements of limited companies
28
18
Ratio analysis
31
19
Budgeting and budgetary control
34
20
The impact of computer technology in accounting
36
Published by Osborne Books Limited Tel 01905 748071 Email
[email protected].
[email protected] uk www.osbornebooks.co.uk
1.7
CHAPTER 1 What is financial accounting? 1 .2 .2
1.3
P ur ur po po se se s o f a cc cc ou ou nt nt in in g: g: 1. To quantif quantify y items items such as sales, sales, expen expenses ses and prof profit it 2. To present present the accounts accounts in a meanin meaningful gful way way so as to measure measure the the success success of the the business business 3. To provide provide informatio information n to the owner owner of the the business business and to other other stakehol stakeholders ders
•
documents processing of source documents relating to accounting transactions
•
initial recording of transactions recording accounting transactions in subsidiary books (or books of prime entry)
•
double-entry accounts system transfer from subsidiary books into the double-entry book-keeping system of accounts in the ledger
•
trial balance extraction of figures from all the double-entry accounts to check their accuracy
•
final accounts production of a trading and profit and loss account and a balance sheet
2.1
1 .4 .4
1.5
1.6
purchases of goods for resale to date
•
assets owned
•
turnover (cash and credit sales) to date
•
li ab abi lities owed
•
overheads an and ex expenses to to da date
•
profit du during a particular pe period
•
debtors debto rs – total total amoun amountt owed owed to the busine business, ss, and individual dual debto debtors rs
•
creditors tors – total total amou amount nt owed owed by the the busine business, ss, and individual dual creditors tors
asse as sett of of ban bank k inc incre reas ases es by £8 £8,0 ,000 00 capital increases by £8,000 asset £8,000 – liability £0 = capital £8,000
•
asse as sett of co comp mput uter er inc incre reas ases es by by £4,0 £4,000 00 asset of bank decreases by £4,000 asset £8,000 – liability £0 = capital £8,000
•
asse as sett of of ban bank k inc incre reas ases es by £3 £3,0 ,000 00 liability of loan increases by £3,000 asset £11,000 – liability £3,000 = capital £8,000
•
asse as sett of of van van in incr crea ease ses s by by £6, £6,00 000 0 asset of bank decreases by £6,000 asset £11,000 – liability £3,000 = capital £8,000
CHAPTER 2 Double-entry book-keeping: book-keeping: first principles
Information from the accounting system includes: •
•
Capital Account
Dr 20-1
£
Cr B ank Ba
Computer Account
Dr 20-1 6 Feb
20-1 1 Feb
Bank
£ 2,000
£ 7,500
Cr
20-1
£
O th th er er s ta ta ke ke ho ho ld ld er er s – a ny ny four from
•
providers ders of of finance, finance, eg the the bank bank manager manager if the the business business wants wants to to borrow borrow from from the bank
•
suppliers, iers, who wish wish to asses assess s the likelih likelihood ood of of receiving receiving payme payment nt from from the the business ness
•
customers,, who wish customers wish to ensure ensure that that the busines business s has the financi financial al strength strength to to continue nue selling ing the goods and services that they buy
•
employees emplo yees and trade trade unions, unions, who wish wish to check on the the financial financial prospe prospects cts of of the busine business ss
•
the tax tax authoritie authorities, s, who who will wish sh to see see that tax tax due by the business business on on profits ts and for for Value Value Added Added Tax has been paid
•
compet com petito itors, rs, who who wish wish to assess assess the the profit profitabi abilit lity y of the busin business ess
•
pote po tent ntia iall inve invest stor ors s in th the e busi busine ness ss
•
the local local communit community y and national national inter interest est groups, groups, who may may be seeking seeking to to influence influence busines business s policy
•
government gover nment and official official bodies bodies,, eg Compan Companies ies House House who who need to to see the the final accou accounts nts of limite limited d companies
(a)
Business entity – the accounts record and report report on the financial transactions of a particular particular business, and not the owner's personal financial transactions.
(b)
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 asset s – items tems owned by a busine business; ss; liabilities ties – items items owed owed by a business business
•
debtors debto rs – individua individuals ls or business businesses es who owe money money in respec respectt of goods goods or servic services es supplied supplied by the business; creditors – individuals or businesses to whom money is owed by the business
•
purchases – goods purchases goods bought, bought, whethe whetherr on credit credit or for for cash, cash, which are intended intended to to be resold resold later; later; sales sales – the sale of goods, whether on credit or for cash, cash, in which the business trades
•
Rent Paid Account
Dr 20-1 8 Feb
Bank
Dr 20-1 12 Feb 25 Feb
Bank Bank
Dr
Wages Account
Cr
£ 425 380
20-1
£
20-1 14 Feb
£ 2,500
Commission Income Account
Cr
20-1 20 Feb
Drawings Account
Bank
Cr Bank
£
Dr
1
£
£
20-1
credit purchases purchases – goods bought bought,, with paym payment ent to be made made at a later ater date; date; cash purcha purchases ses – goods goods bought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer
Cr
20-1
Bank Loan Account
Dr 20-1
20-1 23 Feb
£ 750
£ 200
20-1
Bank Ba
£ 145
Cr £
1.7
CHAPTER 1 What is financial accounting? 1 .2 .2
1.3
P ur ur po po se se s o f a cc cc ou ou nt nt in in g: g: 1. To quantif quantify y items items such as sales, sales, expen expenses ses and prof profit it 2. To present present the accounts accounts in a meanin meaningful gful way way so as to measure measure the the success success of the the business business 3. To provide provide informatio information n to the owner owner of the the business business and to other other stakehol stakeholders ders
•
documents processing of source documents relating to accounting transactions
•
initial recording of transactions recording accounting transactions in subsidiary books (or books of prime entry)
•
double-entry accounts system transfer from subsidiary books into the double-entry book-keeping system of accounts in the ledger
•
trial balance extraction of figures from all the double-entry accounts to check their accuracy
•
final accounts production of a trading and profit and loss account and a balance sheet
2.1
1 .4 .4
1.5
1.6
purchases of goods for resale to date
•
assets owned
•
turnover (cash and credit sales) to date
•
li ab abi lities owed
•
overheads an and ex expenses to to da date
•
profit du during a particular pe period
•
debtors debto rs – total total amoun amountt owed owed to the busine business, ss, and individual dual debto debtors rs
•
creditors tors – total total amou amount nt owed owed by the the busine business, ss, and individual dual creditors tors
asse as sett of of ban bank k inc incre reas ases es by £8 £8,0 ,000 00 capital increases by £8,000 asset £8,000 – liability £0 = capital £8,000
•
asse as sett of co comp mput uter er inc incre reas ases es by by £4,0 £4,000 00 asset of bank decreases by £4,000 asset £8,000 – liability £0 = capital £8,000
•
asse as sett of of ban bank k inc incre reas ases es by £3 £3,0 ,000 00 liability of loan increases by £3,000 asset £11,000 – liability £3,000 = capital £8,000
•
asse as sett of of van van in incr crea ease ses s by by £6, £6,00 000 0 asset of bank decreases by £6,000 asset £11,000 – liability £3,000 = capital £8,000
CHAPTER 2 Double-entry book-keeping: book-keeping: first principles
Information from the accounting system includes: •
•
Capital Account
Dr 20-1
£
Cr B ank Ba
Computer Account
Dr 20-1 6 Feb
20-1 1 Feb
Bank
£ 2,000
£ 7,500
Cr
20-1
£
O th th er er s ta ta ke ke ho ho ld ld er er s – a ny ny four from
•
providers ders of of finance, finance, eg the the bank bank manager manager if the the business business wants wants to to borrow borrow from from the bank
•
suppliers, iers, who wish wish to asses assess s the likelih likelihood ood of of receiving receiving payme payment nt from from the the business ness
•
customers,, who wish customers wish to ensure ensure that that the busines business s has the financi financial al strength strength to to continue nue selling ing the goods and services that they buy
•
employees emplo yees and trade trade unions, unions, who wish wish to check on the the financial financial prospe prospects cts of of the busine business ss
•
the tax tax authoritie authorities, s, who who will wish sh to see see that tax tax due by the business business on on profits ts and for for Value Value Added Added Tax has been paid
•
compet com petito itors, rs, who who wish wish to assess assess the the profit profitabi abilit lity y of the busin business ess
•
pote po tent ntia iall inve invest stor ors s in th the e busi busine ness ss
•
the local local communit community y and national national inter interest est groups, groups, who may may be seeking seeking to to influence influence busines business s policy
•
government gover nment and official official bodies bodies,, eg Compan Companies ies House House who who need to to see the the final accou accounts nts of limite limited d companies
(a)
Business entity – the accounts record and report report on the financial transactions of a particular particular business, and not the owner's personal financial transactions.
(b)
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 asset s – items tems owned by a busine business; ss; liabilities ties – items items owed owed by a business business
•
debtors debto rs – individua individuals ls or business businesses es who owe money money in respec respectt of goods goods or servic services es supplied supplied by the business; creditors – individuals or businesses to whom money is owed by the business
•
purchases – goods purchases goods bought, bought, whethe whetherr on credit credit or for for cash, cash, which are intended intended to to be resold resold later; later; sales sales – the sale of goods, whether on credit or for cash, cash, in which the business trades
•
Rent Paid Account
Dr 20-1 8 Feb
Bank
Dr 20-1 12 Feb 25 Feb
Bank Bank
Dr
Wages Account
Cr
£ 425 380
20-1
£
20-1 14 Feb
£ 2,500
Commission Income Account
Cr
20-1 20 Feb
Drawings Account
Bank
Cr Bank
£
Dr
1
£
£
20-1
credit purchases purchases – goods bought bought,, with paym payment ent to be made made at a later ater date; date; cash purcha purchases ses – goods goods bought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer
Cr
20-1
Bank Loan Account
Dr 20-1
20-1 23 Feb
£ 750
£ 200
20-1
Bank Ba
£ 145
Cr £
Dr 20-1 28 Feb
2.3
Dr 20-5 1 Aug 15 Aug 20 Aug 25 Aug
Cr £
B ank Ba
Van Account £ 20-1 6,000
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
Cr £ 1,800 100 2,000 150
Computer Rent paid Office fittings S Orton: loan
Capital Account £ 20-5 1 Aug Ba B ank
Dr 20-5
2.5
Bank Account
Dr 20-7 1 Nov 7 Nov 23 Nov 25 Nov 28 Nov
Capital Bank loan Cash Office fittings Commission received
20-7
£
Bank
Cr £
20-7
Bank
Computer Account £ 20-5 1,800
Cr £
Bank
Rent Paid Account £ 20-5 100
20-7 10 Nov
Cr £ 200 150
20-7 12 Nov
Bank
Dr 20-5 10 Aug
Dr 20-5 12 Aug
Commission received
Bank
Cash Account £ 20-5 200 17 Aug
Drawings
Office Fittings Account £ 20-5 2,000 20 Aug Ba B ank
Bank
Cr £ 100
Bank
Cr £ 250
Commission received
Bank
Sally Orton: Loan Account £ 20-5 150 15 Aug Ba B ank
Cash
Drawings Account £ 20-5 100
20-7 18 Nov Dr 20-7 20 Nov
2
Bank
Cr
Rates Account
Cr
£ 3,000
20-7
£ 1,500
20-7 25 Nov
£ 300
20-7 18 Nov 23 Nov
20-7 15 Nov 28 Nov
Drawings Account
Cash
£ 70,000
£
Cr £ 1,000
Cr £
Bank
20-7
£
Dr Dr 20-5 17 Aug
Cr
Cr
£
B ank Ba
£ 125
Cr £ 200 Cr
Drawings Bank Ba
Commission Income Account
Dr 20-7
Dr 20-5 27 Aug
£ 130,000
£ 75,000
£
Cash Account
Dr 20-7 15 Nov
Bank
20-7
20-7 7 Nov
£ 2,500 130,000 3,000 1,500 250 Cr
Office Fittings Account
Dr 20-7 14 Nov
20-7 1 Nov
Office Premises Account
Dr Commission Income Account £ 20-5 10 Aug Ca Cash 25 Aug Ba Bank
Dr 20-5
£ 2,500
£
Dr Dr 20-5 7 Aug
Photocopier Office premises Business rates Office fittings Wages
Bank Loan Account
Dr Dr 20-5 3 Aug
Cr
Photocopier Account
Dr 20-7 3 Nov
20-7 3 Nov 10 Nov 12 Nov 14 Nov 20 Nov
Capital Account
Dr
Cr £ 5,000
£ 75,000 70,000 100 200 200
Ca C ash Bank Ba
£ 125 100 Cr £ 300 200 Cr
20-7
£
Wages Account
Cr
£ 250
20-7
£
2.6
Bank Account
20-7 1 Nov 3 Nov 7 Nov 10 Nov 12 Nov 14 Nov 20 Nov 23 Nov 25 Nov 28 Nov 2.7
Debit £ 75,000
Capital Photocopier Bank loan Office premises Rates Office fittings Wages Cash Office fittings Commission received
Credit £ 2,500
70,000 130,000 3,000 1,500 250 100 200 200
Balance £ 75,000 72,500 142,500 12,500 9,500 8,000 7,750 7,850 8,050 8,250
Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr
Dr 20-2 22 Oct
Dr 20-2 25 Oct
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 in cluding – capital – the amount of money invested in the busin ess by the owner – fixed assets – items purchased by a business for use on a long-term basis (noting the distinction between capital expenditure and revenue expenditure) – expenses – the day-to-day running expenses (revenue expenditure) of the business – income – amounts of income received by the business – owner’s drawings – where the owner takes money in cash or by cheque (or sometimes goods) from the business for personal use – loans – where a business receives a loan, eg from a relative or the bank
3.5
Dr 20-2 1 Oct 4 Oct 8 Oct 12 Oct 18 Oct 30 Oct
Capital Sales Sales K Smithson: loan Sales Sales
Dr 20-2
Purchases P urchases Purchases Delivery van Wages
Capital Account £ 20-2 1 Oct Bank
Dr 20-2 Dr 20-2 2 Oct 6 Oct 14 Oct
Bank Account £ 20-2 2,500 2 Oct 150 6 Oct 125 14 Oct 2,000 22 Oct 155 25 Oct 110
Bank Bank Bank
Purchases Account £ 20-2 200 90 250 Sales Account £ 20-2 4 Oct 8 Oct 18 Oct 30 Oct
Dr 20-2 26 Apr
£
Dr 20-2 5 Apr
Cr £ 2,500
Dr 20-2 7 Apr 12 Apr 22 Apr
Cr £ 150 125 155 110
Dr 20-2
3
20-2 12 Oct
Bank
Delivery Van Account
Bank
£ 4,000
20-2
Bank
£ 375
20-2
Purchases Account
Wyvern Producers Ltd A Larsen
£ 200 250
Purchases returns Bank
Purchases returns
£ 45
20-2 2 Apr
Purchases
Cr £ 200
Purchases
Cr £ 250
Pershore Patisserie Bank Bank Cash
Cr £ 150 175 110 100
Sales returns Bank
Cr £ 25 125
Wyvern Producers Ltd Amery Scales Ltd
Cr £ 150 250
A Larsen
20-2 4 Apr
Sales Account
£
20-2 5 Apr 7 Apr 12 Apr 28 Apr
Pershore Patisserie
Sales
£ 150
20-2 15 Apr 22 Apr
Bank Account
Sales Sales Pershore Patisserie
£ 175 110 125
20-2 20 Apr 30 Apr
Purchases Returns Account
£
20-2 9 Apr 26 Apr
Cr £
Cr £
20-2
Wyvern Producers Ltd
£ 50 150
Cr £ 2,000
Cr £
Wages Account
Dr 20-2
Cr £ 200 90 250 4,000 375
Cr £
Bank Bank Bank Bank
Dr 20-2 2 Apr 4 Apr
Dr 20-2 9 Apr 20 Apr
CHAPTER 3 Double-entry book-keeping: further transactions 3.1
J Smithson: Loan Account
Dr 20-2
Wyvern Producers Ltd 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
Sales Returns Account
Pershore Patisserie
Dr 20-3 5 Jun 20 Jun
20-2
Weighing Machine Account
Amery Scales Ltd
£ 250
20-2
Amery Scales Ltd
Bank
£ 250
20-2 17 Apr
Weighing machine
Cash Account
Sales
£ 100
20-2 29 Apr
Wages
Wages Account
Cash
£ 90
Designs Ltd Mercia Knitwear Ltd Designs Ltd
£ 350 400 285
Purchases returns Bank
20-3 4 Jun 5 Jun 10 Jun 12 Jun 20 Jun
Bank Cash Wyvern Trade Supplies Bank Cash
Cr £ 220 115 350 175 180
Designs Ltd
Cr £ 250
Bank Account
Sales Sales Wyvern Trade Supplies
£ 220 175 300
20-3 18 Jun
Sales Sales
Dr 20-3 15 Jun
Dr 20-3 26 Jun
3 .8
20-3 6 Jun 17 Jun
Designs Ltd Mercia Knitwear Ltd
Mercia Knitwear Ltd
Purchases returns
£ 80
20-3 7 Jun
Purchases
Wyvern Trade Supplies
Sales
£ 350
20-3 15 Jun 28 Jun
Sales returns Bank
Sales Returns Account
Wyvern Trade Supplies
£ 50
Cash
Transaction (a) (b) (c) (d) (e) (f) (g) (h)
Account debited purchases bank purchases L Harris Teme Traders sales returns bank cash
Cr £ 400
Cr £ 50 300
Cr £
20-3
Rent Paid Account
£ 125
Cr £ 100 80
Cr £
20-3
Account credited bank sales Teme Traders sales purchases returns L Harris D Perkins: loan bank
A ns we rs t o t he t ra in ee :
•
Separate accounts for purchases and sales enable the business to know the amount of goods bought and sold. A combined account for ‘goods’ would not provide this information so readily.
•
Purchases and sales accounts follow the principles of book-keeping in that the debit side of purchases account gains value when the business buys goods for resale, while the credit side of sales account gives value when the business sells goods.
•
The purchase of a new delivery van for use in the business is the purchase of a fixed asset, which will be used on a long-term basis. As such the purchase of the van – which is an example of capital expenditure – is entered on the debit side of van account.
•
Purchases returns (or returns out) is where we return goods to a creditor (supplier). The returns transaction is recorded the opposite way round to a purchases transaction. Sales returns (or returns in) is where a debtor (customer) returns goods to us. The transaction is recorded the opposite way round to a sales transaction.
Cash Account
£ 115 180
Dr 20-3 10 Jun
Cr £ 90
Purchases Purchases
£
Dr 20-3 17 Jun
Cr £ 250
Cr £ 350 285
Sales Account
£
Cr £
3.7
20-3 2 Jun 23 Jun
Purchases Returns Account
Dr 20-3
Cr £
20-3
Designs Ltd
£ 100 250
Cr £
Cr £
20-2
Purchases Account
Dr 20-3
Dr 20-3 4 Jun 12 Jun 28 Jun
£ 25
20-3 26 Jun
Rent paid
Cr £ 125
•
4
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
invoice to
Excel Fashions 49 Highland Street Longton Mercia LT3 2XL deliver to
invoice no account your reference
2451
date
today
The Card Shop 126 The Cornbow Teamington Spa Wyvernshire WY33 0EG deliver to
as above
product code
description
Dresses Suits Coats
invoice no account your reference
8234
date
today
as above
quantity
5 3 4
terms 2.5% cash discount for full settlement within 14 days Net 30 days
unit price £
30.00 45.50 51.50
unit
total
each each each
trade discount %
£
£
150.00 136.50 206.00
0.00 150.00 0.00 136.50 0.00 206.00
TOTAL
product code
net
description
Assorted rubbers Shorthand notebooks Ring Binders
quantity
5 100 250
terms 2.5% cash discount for full settlement within 14 days Net 30 days
492.50
unit price £
5.00 4.00 0.50
unit
total
5
net
£
box 10 each
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.
Excel Fashions will pay £480.18 (£492.50 x 97.5%, rounded down) for settlement in full within 14 days.
trade discount %
£
0.00 0.00 0.00
25.00 40.00 125.00
190.00
4.4
Dr 20-4 2 Feb 16 Feb
G Lewis G Lewis
Dr 20-4
Purchases Account £ 20-4 200 160
Cr £
Sales Account £ 20-4 4 Feb 7 Feb
Cr £ 150 240
20-4 10 Feb 10 Feb 24 Feb 24 Feb
Bank Discount received Bank Discount received
£ 190 10 152 8 360
20-4 2 Feb 16 Feb
(a)
product code
L Jarvis G Patel
G Lewis
Dr
4.5
description
quantity
unit price
unit
total
£
trade net discount %
£
£
45B
Trend tops (black)
30
12.50
each
375.00
10
337.50
35W
Trend trousers (white)
20
25.00
each
500.00
10
450.00
Cr Purchases Purchases
£ 200 160
360 terms L Jarvis
Dr 20-4 4 Feb
Sales
£ 150
20-4 12 Feb 12 Feb
Bank Discount allowed
150 Dr 20-4 7 Feb
G Patel
Sales
£ 240
20-4 20 Feb 20 Feb
Bank Discount allowed
240 Dr 20-4 12 Feb 20 Feb
20-4 10 Feb 24 Feb
G Lewis G Lewis
Discount Received Account
Dr 20-4
£
20-4 10 Feb 24 Feb
G Lewis G Lewis
Discount Allowed Account
Dr 20-4 12 Feb 20 Feb
£ 147 234
L Jarvis G Patel
£ 3 6
20-4
£ 147 3 150
(b)
TOTAL
787.50
Trade discount is given, if prearranged: –
to businesses, often in the same trade (but not to the general public)
Cr
–
for buyin g in bulk (this discount is also known as bulk discount)
£ 234 6 240
–
by wholesalers, as a dis count off list pric e to retail ers
Cash discount (also known as settlement discount) is given, for prompt payment, if prearranged, and indicated on the invoice (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)
An invoice is a source document prepared by the seller and states the value of goods sold and, hence, the amount to be paid by the buyer.
(ii)
A credit note is a source document which shows that the buyer is entitled to a reduction in the amount charged by the seller; it is used i f:
Cr
Bank Account
L Jarvis G Patel
5% cash discount for full settlement within 7 days Net 30 days
Cr
£ 190 152
4.7
Cr £ 10 8
Cr
( c)
£
6
–
some of the goods delivered were faulty, or incorrectly supplied
–
the price charged on the invoice was too high
A ny th re e f ro m: –
cheque counterfoils
–
paying-in slip counterfoils
–
c ash re ce ip ts
–
till rolls
–
information from bank statements, such as standing orders, direct debits, BACS, credit transfers, bank charges
4.8
(a)
•
5 computer desks were ordered (not 10 as shown on the invoice)
•
10 offic e chairs were ordered (not 5 as shown on the invoice)
•
the unit price of the computer desks is £65.00 each (not £70.00 as shown on the invoice)
•
the net amount for computer desks is £292.50 (not £350.00 as shown on the invoice)
•
the net amount for office chairs is £180.00 (not £20.00 as shown on the invoice)
•
the in voice total is £472.50 (not £370.00 as shown on the invoice)
CHAPTER 5 Balancing accounts – the trial balance 5.1 (a) and (c)
(b)
Bank Account
Dr 20-9 1 Jan 11 Jan 12 Jan 22 Jan
Capital Sales Sales Sales
1 Feb 4 Feb 10 Feb 12 Feb 19 Feb 25 Feb
Balance b/d Sales Sales Rowcester College Sales Sales
1 Mar
Balance b/d
20-9
£
Bank Bank Balance b/d
1 Mar
Bank Bank Balance b/d
1 Feb 24 Feb (c)
Wyvern Products Limited will pay £448.87 (£472.50 x 95%) for settlement in full within 14 days.
1 Mar
7
Rent paid Shop fittings Comp Supplies Ltd Balance c/d
£ 500 500 1,000 1,000
£ 1,500 850 2,350 2,350
Comp Supplies Ltd Comp Supplies Ltd
Balance b/d Comp Supplies Ltd Balance b/d
Cr £ 500 1,500 5,000 6,700 13,700 500 850 6,350 5,300
13,000
20-9 1 Jan
Cr Bank
20-9 28 Feb
£ 10,000
Cr Balance c/d
£ 1,000 1,000
20-9 28 Feb
Balance c/d
Cr £ 2,350 2,350
Purchases Account
Dr 20-9 7 Jan 25 Jan
2 Feb 15 Feb 27 Feb 28 Feb
Shop Fittings Account
Dr 20-9 5 Jan 15 Feb
Rent paid Shop fittings Comp Supplies Ltd Balance c/d
Rent Paid Account
Dr
1 Mar
20-9 4 Jan 5 Jan 20 Jan 31 Jan
Capital Account
Dr
20-9 4 Jan 2 Feb
£ 10,000 1,000 1,250 1,450 13,700 6,700 1,550 1,300 750 1,600 1,100 13,000 5,300
£ 5,000 6,500 11,500
20-9 31 Jan
11,500 5,500 17,000 17,000
28 Feb
Cr Balance c/d
£ 11,500 11,500
Balance c/d
17,000 17,000
Dr
Comp Supplies Limited
20-9 20 Jan 31 Jan
Bank Balance c/d
5 Feb 27 Feb 28 Feb
Purchases returns Bank Balance c/d
£ 5,000 6,500 11,500 150 6,350 5,500 12,000
20-9 31 Jan
28 Feb
Purchases Purchases
1 Feb 24 Feb
Balance b/d Purchases
£ 5,000 6,500 11,500 6,500 5,500
1 Mar
Balance b/d
12,000 5,500
Sales Account
Dr Balance c/d
Balance c/d
£ 4,550
4,550 11,150
Cr
20-9 7 Jan 25 Jan
Bank Bank Rowcester College Bank
1 Feb 4 Feb 10 Feb 19 Feb 25 Feb 26 Feb
Balance b/d Bank Bank Bank Bank Rowcester College
11,150 1 Mar
Balance b/d
Dr £ 6,700
Name of Account Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns
Cr
20-9 11 Jan 12 Jan 16 Jan 22 Jan
Trial balance as at 31 January 20-9
(b)
£ 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
20-9 16 Jan
10,000
6,500 4,550 750 100 21,050
21,050
Dr £ 5,300
Cr £
Trial balance as at 28 February 20-9
(d) Name of Account Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns Purchases returns
Sales
20-9 27 Jan 31 Jan
Sales returns Balance c/d
850 1 Feb 26 Feb 1 Mar
Balance b/d Sales Balance b/d
Dr 20-9
12 Feb 28 Feb
Bank Balance c/d
Sales Returns Account
Dr 20-9 27 Jan
750 1,050 1,800 1,050
Rowcester College
£ 100
20-9
20-9 5 Feb
£ 100 750 850
5.2
750 1,050 1,800
10,000 1,000 2,350 17,000 5,500 11,150 1,050 100 150
Comp Supplies Ltd
Trial balance of Jane Greenwell as at 28 February 20-1 Dr £
Name of account Bank Purchases Cash Sales Purchases returns Creditors Equipment Van Sales returns Debtors Wages Capital (missing figure)
Cr £
Purchases Returns Account
£
26,800
Cr
Rowcester College
£ 850
500 1,500 11,500
26,800 Dr
Cr £
Cr
1,250 850 48 730 144 1,442 2,704 3,200 90 1,174 1,500 6,000 9,566
£ 150
8
Cr £
9,566
5.5
PURCHASES LEDGER
Four from: •
Error of omission
Business transaction completely omitted from the accounting records. For example, cash sale omitted from both cash account and sales account. •
Dr
Softseat Ltd
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. •
•
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
Purchases Purchases
£ 320 160
PRK Ltd
£
20-2 2 Feb
Cr Purchases
£ 80
Error of original entry (or transcription)
Amount entered incorrectly in both accounts. For example, sale of £45 entered in both sales account and the debtor's account as £54. •
Cr
Mispost/error of commission
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. •
20-2 1 Feb 19 Feb
Dr
Cr
Quality Furnishings
20-2
Compensating error
£
Two errors cancel each other out. For example, balance of purchases account calculated wrongly at £10 too much, compensated by the same error in sales account.
20-2 15 Feb
Purchases
£ 160
SALES LEDGER CHAPTER 6 Division of the ledger – the use of subsidiary books 6.2
Date
Details
Invoice
Reference
20-2
20-2 8 Feb 25 Feb
Amount £
1 Feb
Softseat Ltd
961
2 Feb
High Street Stores
Dr
Purchases Day Book
(a)
Sales Sales
PRK Ltd
068
80
Quality Furnishings
529
160
19 Feb
Softseat Ltd
984
160
28 Feb
Total for month
720
Dr
Peter Lounds Ltd
20-2 14 Feb
£ 120
Sales
20-2 18 Feb
Sales Day Book
Details
Invoice
8 Feb
£
Reference
Cr
20-2
£
Carpminster College
Dr
20-2
Cr
20-2
320
15 Feb
Date
£ 440 200
Sales
£ 320
20-2
Cr £
Amount £
GENERAL LEDGER
High Street Stores
001
440
14 Feb
Peter Lounds Ltd
002
120
Dr
18 Feb
Carpminster College
003
320
25 Feb
High Street Stores
004
200
20-2 28 Feb
28 Feb
Total for month
Cr
Purchases Account
Purchases Day Book
£ 720
20-2
£
Sales Account
Cr
1,080 Dr 20-2
9
£
20-2 28 Feb
Sales Day Book
£ 1,080
6.3 (a)
Date
Purchases Day Book
Details
GENERAL LEDGER
Invoice
Reference
20-2 2 May
Amount
20-2 31 May
£ M Roper & Sons
562
PL 302
190 200
Purchases Account
Dr
4 May
Wyper Ltd
82
PL 301
10 May
Wyper Ltd
86
PL 301
210
18 May
M Roper & Sons
580
PL 302
180
Dr
21 May
Wyper Ltd
91
PL 301
240
20-2
25 May
M Roper & Sons
589
PL 302
98
31 May
Total for month
Purchases Day Book
£ 1,118.00
Cr
20-2
£
Purchases Returns Account
£
20-2 31 May
Purchases Day Book
Cr £ 108.00
1,118.00
Purchases Returns Day Book
Date
Details
Credit Note
Reference
Amount
82
PL 302
30
20-2
6.5
(a)
£
18 May
M Roper & Sons
23 May
Wyper Ltd
28 May
M Roper & Sons
31 May
Total for month
6
PL 301
40
84
PL 302
38
product
quantity
details
unit price
unit
X24
96
Trend tops
£8.50 each
each
Y36
20
Jeans
£15 each
each
total amount
code
108
(b) and (c)
816.00 300.00
PURCHASES LEDGER
Dr 20-2 23 May 31 May
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
Cr £ 100 200 210 240 750
Balance b/d
710
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
Cr £ 85 190 180 98 553
1 Jun
Balance b/d
1,116.00
terms
5% cash discount for full settlement within 7 days Net 30 days
485
10
trade discount 20%
223.20
total
892.80
(b)
(i)
Purchases day book
(ii)
Sales day book
(i)
Trade discount:
CHAPTER 7 The main cash book 7.3
Dr (c)
– 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
Details
20-7 1 Aug 1 Aug 11 Aug 12 Aug 21 Aug 29 Aug 29 Aug
Balances b/d Wild & Sons Ltd Bank ALewis Ltd Harvey & Sons Ltd Wild & Sons Ltd Bank
6.8
Source
Subsidiary
Account to
Account to
Document
Book
be debited
be credited
Sales day book
V Singh
Sales
Cr
Cash Book
Date
1 Sep Balances b/d
Ref
Disc Cash Bank Date allwd £ £ £ 20-7 276 4,928 5 Aug 398 8 Aug C 500 11 Aug 20 1,755 18 Aug 261 22 Aug 15 595 25 Aug C 275 27 Aug 28 Aug 29 Aug 31 Aug 35 1,051 7,937 361 3,217
Details
T Hall Ltd Wages Cash F Jarvis Wages J Jones Salaries Telephone Cash Balances c/d
Ref Disc Cash recd £ £ 24 254 C
Bank £ 541 500 457
436 33
C 361 57 1,051
628 2,043 276 275 3,217 7,937
7.4
Invoice for goods sold on
Dr Date
Cr Cash Book Ref Discount Cash Bank Date Details Ref Discount Cash Bank allowed received 20-5 £ £ £ 20-5 £ £ £ 1 Mar Balances b/d 106 3,214 2 Mar Rent 10674 250 3 Mar Sales* 100 950 5 Mar Cleaning expenses 35 8 Mar Sales 1,680 9 Mar Purchases 10675 1,200 11 Mar Bank C 150 11 Mar Cash 10676 C 150 13 Mar Sales 1,800 16 Mar Postages 50 22 Mar Bank C 150 18 Mar Telephone 10677 168 25 Mar Sales 2,108 20 Mar Stationery 128 29 Mar Sales* 200 2,000 22 Mar Cash 10678 C 150 31 Mar Hobbs Ltd 30 720 26 Mar Misc expenses 70 31 Mar Pratley & Co 50 1,160 27 Mar Wages 10679 2,000 30 Mar Electricity 10680 106 31 Mar Evans & Co 10681 45 855 31 Mar A Bennett 10682 26 494 31 Mar Balances c/d 423 8,259 80 706 13,632 71 706 13,632 1 Apr Balances b/d 423 8,259 * An alternative way of showing the transactions of 3 March and 29 March is to record the full amount of sales in the debit cash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.
credit to V Singh
(a)
(b)
(c)
Invoice received for goods bought on credit
Purchases day
from Okara Limited
book
Purchases
Okaro Limited
Credit note issued to
Sales returns
S Johnson
day book
Sales returns
S Johnson
Credit note received from Roper & Company
Purchases returns
Roper &
Purchases
day book
Company
returns
11
Details
(i)
7.6
DR Supplier/Creditor (ii)
8.2
(a) Dr 20-7 1 Jan 13 Jan
CR Bank
Credit transfer for payment by a customer Amounts paid directly into the bank by a debtor, who has the necessary bank code information. DR Bank
7.8
CHAPTER 8 Bank reconciliation statements
Standing order Money paid out of the bank directly, at regular intervals, on the business’s order. Usually for the same fixed amount for goods and services supplied
1 Feb
CR Customer/Debtor
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
Cr £ p 207.95 923.70 1,131.65
(a) and (b) P GERRARD BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7
(b) Cash Book
Dr
Date 20-6 1 Jan 6 Jan 13 Jan 14 Jan 28 Jan 24 Jan 31 Jan
Details
Disc £
Balance b/d R Reed B Brown Sales Sales C Denton & Co Ltd C/T Cash C
Bank £ 567 366
4 752 642
248 1,319 4
1 Feb Balance b/d
Cash £ 50
1,444 50
Date 20-6 1 Jan 2 Jan 11 Jan 27 Jan 20 Jan 21 Jan 31 Jan 31 Jan
Cr
Details Balance b/d Bilton Office Supplies Rent Wages British Gas S/O Bank interest Bank C Balances c/d
2,500
Disc £
Cash £
3
£
Bank £ 1,236 164 450
Balance at bank as per cash book Add: unpresented cheques cheque no. 001354
312.00
P Reid
cheque no. 001355
176.50 488.50
Less: outstanding lodgement
200 28
3
Bryant & Sons
1,412.20
75
1,319 50 1,444
G Shotton Limited
20-6 31 Jan
335.75
Balance at bank as per cash book
422 2,500
8.3
Cash Book (bank columns)
Dr
422
1,076.45
(a) 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
£ 300 162 89 60 40
(c)
20-7 2 May 14 May 29 May 16 May 31 May 31 May
Cr
P Stone 867714 Alpha Ltd 867715 E Deakin 867716 Standing order: A-Z Insurance Bank charges Balance c/d
651 Discounts Allowed Account
Dr Cash book
£ 4
20-6
428
Cr £ JANE DOYLE
(b)
BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7
£ Balance at bank as per cash book Dr 20-6
Discounts Received Account
£
20-6 31 Jan
Cash book
£ 923.70
Add:
Cr
unpresented cheque E Deakin cheque no. 867716
£ 3
428 110 538
Less:
outstanding lodgement cash banked
Balance at bank as per bank statement
12
40 498
£ 28 50 110 25 10 428 651
8.5
(a)
(i)
8.7
Standing orders
(a)
Credit Regular payments of the same amount made directly from the bank on behalf of the company on the order of the company. (ii)
Direct debits Credit Payments made from the bank for the customer collected by the payee on the order of the customer usually for changing amounts.
(iii)
Cash Book
Dr
Date 2003 1 Nov 3 Nov 5 Nov 5 Nov 23 Nov 26 Nov
Credit transfers Debit or Credit Receipts from customers paid directly into the bank of the payee. Payments to suppliers or wages into the bank of the payee.
Details
Bank £ p 2,459.35 234.00 3,219.00 1,142.00 560.00 340.00
Balance b/d Toys for You B J Patel Dolls and Things J A Smith Ltd Cash banked
(b) Dr Credit transfer Balance c/d
Cash Book – Bank Account £ 540 Balance b/d 534 Standing order Direct debit Bank charges 1,074
Banks Ltd Books & Paints Wages Jones and Son Smith and Son HGF Finance Toy Designs Balance c/d
12 Nov 18 Nov 23 Nov 30 Nov
Business rates Proper Ins Co Bank charges Balance c/d
Cr
Details
Cheque number 11346 11347 11348 11349 11350 11351 11352
7,954.35
Cr £ 378 230 420 46 1,074
Balance b/d
√ √ √ √
Date 2003 1 Nov 1 Nov 10 Nov 12 Nov 23 Nov 25 Nov 25 Nov 30 Nov
30 Nov Balance b/d 9 Nov J Black Ltd
C/T
534
2,027.23 246.98
S/O S/O
√ √ √ √ √
547.90 145.65 45.89 1,534.77 2,274.21
2,274.21 1 Dec Balance b/d
Bank £ p 134.37 276.89 92.50 3,781.95 139.43 256.00 1,245.98 2,027.23 7,954.35
1,534.77
A SMITH AND CO
(c)
BANK RECONCILIATION STATEMENT AS AT 31 MARCH 2001
£ Balance at bank as per cash book
£ (534)
Add:
unpresented cheques
Less:
o ut st an di ng lo dg em en t ( un cl ea re d b an ki ng s)
2 70
cheque query
265
JAMES JOLLY AND CO
(b)
469
BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 2003
(65) £ Balance at bank as per cash book 535 Balance at bank as per bank statement
Add:
(600)
£ 1,534.77
unpresented cheques HGF Finance
11351
256.00
Toy Designs
11352
1,245.98
Tutorial note: brackets indicate an overdraft
1,501.98 3,036.75 Less:
outstanding lodgement cash banked
Balance at bank as per bank statement
13
340.00 2,696.75
9.7
CHAPTER 9 Introduction to final accounts
(a)
R MASTERS
(i)
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2002
9.2
£
£ 56,231 350 56,581
Gross profit Add discount received
Less expenses: Wages Carriage outwards Motor expenses Bank charges
23,980 3,600 4,500 450 32,530 24,051
Net profit
9.5
CLARE LEWIS TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-4
£ Sales Opening stock Purchases
(ii) Dr 2002 31 Mar 31 Mar
£ 144,810
16,010 96,318 112,328 13,735
Less Closing stock Cost of sales Gross profit Less expenses: Salaries Heating and lighting Rent and rates Sundry expenses Vehicle expenses
18,465 1,820 5,647 845 1,684
(b)
28,461 17,756 BALANCE SHEET AS AT 31 DECEMBER 20-4 £ £
Fixed Assets Vehicles Office equipment
Details Balance b/d Net profit
Cr £ 36,790 24,051 60,841
1 Apr
Balance b/d
48,341
Less Current Liabilities Creditors Bank overdraft
9.9
£
Sales Account
Dr 2001
Details
£
p
2001 1 Dec 31 Dec
12,140 5,820
Details Balance b/d Monthly total
2001 1 Dec 31 Dec
Details Balance b/d Monthly total
2001
14
£ p 1,269.43 236.91
2001
£ p 16,493.27 4,560.30 Cr
Details
£
£ p 10,276.41 2,769.56
2001
Details
£
Details
£
p
2001 1 Dec 31 Dec
p
Cr
Returns Outwards Account
Dr
25,250 17,756 43,006 13,311 29,695
Details Balance b/d Monthly total
Purchases Account
Dr 14,375 29,695
Cr
2001 1 Dec 31 Dec
Returns Inwards Account
Dr
13,735 18,600 32,335
17,960 Net Current Assets or Working Capital NET ASSETS
(a)
Two from: – i nc re as ed by ne t p ro fi t – mo re ca pi ta l in tro du ce d – reduced by losses – reduced by drawings
9,820 5,500 15,320
Current Assets Stock Debtors
Less Drawings
Capital Account £ 2002 12,500 31 Mar 48,341 31 Mar 60,841
98,593 46,217
Net profit
FINANCED BY Capital Opening capital Add Net profit
Details Drawings Balance c/d
p
Cr Details Balance b/d Monthly total
£ p 1,039.41 127.50
AMARYLLIS TRADING
(b)
TRADING ACCOUNT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001
£
£
Sales Less Returns inwards Less Cost of sales: Opening stock Add Purchases Less Returns out
Reason:
Short-term liability – which needs to be paid within the next 12 months
Tutorial note: the accounting treatment for a bill which has not been paid at the balance sheet date – called an accrual of expenses – is covered in detail in Chapter 12 11,879.06 871.26 15,311.19 2,640.96
4.
D ra wi ng s f or t he y ea r Section:
Capital/Financed by/Represented by
Reason:
It is cash or goods taken out of the business by the owner, therefore it reduces the capital invested in the business.
12,670.23 6,877.00
Gross profit
Cost of sales Goods available for sale Turnover
£12,670.23 £15,311.19 £19,547.23
CHAPTER 10 The general journal and correction of errors 10.2
(a) Date
9.10
Current liabilities – an amount owed by the business
13,045.97 1,166.91
Less Closing stock
(i) (ii) (iii)
Telephone bill due to be paid in one month’s time Section:
2,560.87
Add Carriage in
(c)
3.
£ 21,053.57 1,506.34 19,547.23
Details
Reference
20-8
MEMORANDUM
31 Dec
Stock
GL GL
Date
Today
Trading
To
Mary Arbuthnot, proprietor of Mary’s Doll Shop
Stock valuation at 31 December 20-8
From
Financial Accounting Student
transferred to trading account
Subject
Balance sheet queries
Dr
Cr
£
£
22,600 22,600
(b) 1.
C os t o f n ew de li ve ry va n
Date
Section:
Fixed assets
20-8
Reason:
An asset purchased for use in the business
31 Dec
Details
Reference
Profit and loss
GL
– n ot f or r es al e
Telephone expenses
GL
– used over a long period/more than one year
Transfer to profit and loss account
– will help generate profits
of expenditure for the year
Dr
Cr
£
£
890 890
– will depreciate with use – is a tangible asset 2.
(c)
S to ck of do ll s f or re sa le
Date
Section:
Current assets
20-8
Reason:
An asset remaining in the business for the short-term
31 Dec
– less than one year – the business is expected to sell them shortly
Details Drawings
GL
Motoring expenses
GL
Transfer of private motoring to drawings account
continued
15
Reference
Dr
Cr
£
£
200 200
(d) Date
(c) Details
Reference
20-8 31 Dec
Drawings
GL
Purchases
GL
Dr
Cr
£
£
Date
175 175
error of principle Details
Reference
Delivery van
GL
Vehicle expenses
GL
Dr
Cr
£
£
10,000 10,000
Goods taken for own use by the owner
Correction of error – vehicle no ............ invoice no ...............
(e) Date
Details
Reference
20-8 31 Dec
Bad debts written off
GL
N Marshall
SL
Dr
Cr
£
£
(d)
125
Date
reversal of entries Details
Reference
125 Postages
GL
Account of N Marshall written off as a
Bank
GL
bad debt - see memo dated ...................
Postages
GL
Bank
GL
Dr
Cr
£
£
55 55 55 55 110
110
Dr
Cr
£
£
Correction of reversal of entries on ................... 10.4
(a)
error of omission (e)
Date
Details
Reference
J Rigby
SL
Sales
GL
Dr
Cr
£
£
Date
compensating error Details
Reference
150 150
Purchases
GL
Purchases returns
GL
100 100
Sales invoice no ............. omitted from the accounts.
Correction of under-cast on purchases account and purchases returns account on .......(date).......
(b) Date
(f)
mispost/error of commission Details
Reference
H Price Limited
PL
H Prince
PL
Dr
Cr
£
£
Date
125 125
Correction of mispost – cheque no .....:
error of original entry Details
Reference
L Johnson
SL
Bank
GL
Bank
GL
L Johnson
SL
Dr
Cr
£
£
98 98 89 89 187
to H Price Limited Correction of error – cheque for £89 received on ....(date)....
16
187
10.6
(a)
Two from: – trial balance – b an k re co nc il ia ti on s ta te me nt – control accounts (see Chapter 11)
(c) Error
(1)
Sales
Dr
Cr
£
£
A cheque has been debited in the cash book as £150
3
but credited in the customer’s account as £105. 270
Returns inwards
500
Suspense
500
Returns inwards
10.10
300
Suspense
(3)
3
An invoice has been completely omitted from the books.
270
Suspense
(2)
3
The sales account has been totalled incorrectly.
Account
(a)
Suspense
Suspense Account
Dr 300
Date 2004
400
Discount received
30 Apr
400
Details
Balance per T/B
£
Date 2004
450
30 Apr 30 Apr
Cr Details
Sales Rent paid
450 (4)
No
3
An error of principle has occurred.
JOURNAL
(b)
Yes
J Jones
£
200 250 450
350
A Jones
350
Tutorial note: The mispost between J Jones and A Jones needs to be corrected in the sales ledger, but has no effect on suspense account. Tutorial notes: 10.8
(a) and (b) H G PATEL: TRIAL BALANCE AS AT 30 APRIL 2003 Account
Wages Administration costs Capital Premises Motor vehicles Motor expenses Purchases Sales Returns outwards Carriage inwards Carriage outwards Discount received Drawings Suspense TOTAL
Dr
Cr
£ 23,890 6,000
£
•
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 65,000 5,000 1,650 38,900
(b) 98,000 3,698
367 450 2,135 6,900 15,676 163,833
(c)
163,833
17
–
debit £400 (to take out the old amount in rent paid account)
–
credit £650 (to enter the correct amount in rent paid account)
Error of commission (or mispost): •
example – payment to ABrown entered to BBrown’s account
•
explanation – although the entry has been misposted to the wrong person’s account, the trial balance will still balance because the entry has been made on the correct side of the account.
Sales ledger control account (see Chapter 11)
10.11
Jonathon Smith Corrected Profit for the year ended 30 November 2004
(b) Dr
Sales Ledger Control Account
20-8
£
Cr
20-8
£ p
Balances b/d
2,012.43
28 Feb
Sales returns
221.67
Credit sales
1,288.76
28 Feb
Cheques received from debtors
911.43
280
28 Feb
Cash discount allowed
less
2,500
28 F eb
Set-off: purchases l edger
add
9,500
28 Feb
Bad debts written off
28 Feb
Balances c/d
Profit calculated by Jonathon
1 Feb
£ p
26,790
1.
Sales undercast
add
450
2.
Discount allowed (2 x £140)
less
3.
Wages
4.
Fixed asset
5.
Error of commission – no effect on profit
6.
Closing stock (reduction in cost of sales)
add
Corrected profit
28 Feb
34,060
1 Mar
Balances b/d
59.28 1,720.76
3,301.19
100
23.37 364.68
3,301.19
1,720.76
CHAPTER 11 Control accounts 11.3
SALES LEDGER
(a)
(c) 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
Dr 20-8 1 Feb 17 Feb 1 Mar
Balance b/d
Balance b/d Sales
Balance b/d Sales Balance b/d
Dr 20-8 1 Feb 17 Feb
Balance b/d Sales
1 Mar
Balance b/d
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
Cr £ p 805.74 20.66 338.59 1,164.99
Mereford Manufacturing Company £ p 20-8 293.49 24 Feb Sales returns 127.48 28 Feb Set-off: purchases ledger 420.97
Redgrove Restorations £ p 20-8 724.86 7 Feb Sales returns 394.78 28 Feb Balance c/d 1,119.64
Cr £ p 59.28 Cr £ p 56.29 364.68 420.97
11.5
Cr £ p 165.38 954.26 1,119.64
Purchase Ledger Control Account
Dr 2001 1 Mar 31 Mar
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
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
338.59 B Brick (Builders) Limited £ p 20-8 59.28 28 Feb Bad debts written off
Reconciliation of sales ledger control account with debtor 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
£ 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
28 February 20-8 £ p 338.59 – – 954.26 427.91 1,720.76
Cr £ 23,437 245,897 450 749
270,533 Balance b/d
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 creditors – it is a cash purchase (ie debit purchases; credit bank/cash)
427.91
18
11.6
Sales Ledger Control Account
Dr 20-5 1 Jan 31 Jan 31 Jan
£ 44,359 27,632 275
Balance b/d Sales Returned cheque
20-5 31 Jan 31 Jan 31 Jan 31 Jan 31 Jan
Bank Discount allowed Sales returns Set-off: purchases ledger Balance c/d
72,266 1 Feb
Balance b/d
CHAPTER 12 Adjustments to final accounts
Cr £ 23,045 1,126 2,964 247 44,884 72,266
12.1
44,884
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
Sales Ledger Control Account
Dr
1 Nov 30 Nov
Details
£
Balance b/d Sales
5,476 26,500
30 Nov 30 Nov 30 Nov 30 Nov
Returns inwards Bank (receipts from customers) Set-off: purchases ledger Balance c/d
31,976 1 Dec
Balance b/d
30 Nov 30 Nov 30 Nov 30 Nov
(c)
590 18,900 400 12,086 31,976
12,086
Details Returns outwards Bank (payments to suppliers) Set-off: sales ledger Balance c/d
£ 450
1 Nov Balance b/d 30 Nov Purchases
16,300 400 5,410 22,560
(b)
Expense in profit and loss account of £2,852; balance sheet shows rates prepaid (current asset) of £713.
(c)
Expense in profit and loss account of £1,800; balance sheet shows computer rental prepaid (current asset) of £150. SOUTHTOWN SUPPLIES
Cr
2003 Details
£ 12.7
2,960 19,600
22,560 1 Dec Balance b/d
(b)
£
Purchases Ledger Control Account
Dr 2003
Cr
2003 Details
Expense in profit and loss account of £56,760; balance sheet shows wages and salaries accrued (current liability) of £1,120.
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-9 £ £ Sales 420,000 Opening stock 70,000 Purchases 280,000 350,000 Less Closing stock 60,000 Cost of sales 290,000 Gross profit 130,000 Less expenses: Rent and rates 10,250 – 550 9,700 Electricity 3,100 Telephone 1,820 Salaries 35,600 + 450 36,050 Vehicle expenses 13,750 64,420 Net profit 65,580
(a) 2003
(a)
5,410
•
The balances of the individual accounts of debtors in the sales ledger are totalled.
•
The balances of the individual accounts of creditors in the purchases ledger are totalled.
•
These totals should agree with the balances of sales ledger control account and purchases ledger control account respectively.
•
Some types of errors (such as a mispost/error of commission) will not be revealed by the control account. Thus the accounts will be thought to be correct when they are not.
•
A control account may indicate that there is an error within a ledger section but it will not pinpoint where the error has occurred.
19
HAZELHARRIS TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-4 £ £ Sales 614,000 Opening stock 63,000 Purchases 465,000 528,000 Less Closing stock 88,000 Cost of sales 440,000 Gross profit 174,000 Add Discount received 8,140 182,140 Less expenses: Building repairs 8,480 Vehicle expenses 2,680 Wages and salaries 86,060 + 3,180 89,240 Discount allowed 10,610 Rates and insurance 6,070 – 450 5,620 General expenses 15,860 Depreciation: vehicles 12,000 x 20% 2,400 furniture and fittings 2 5,000 x 10% 2,500 137,390 Net profit 44,750
BALANCE SHEET AS AT 31 DECEMBER 20-4
£ Cost 100,000 12,000 25,000 137,000
Fixed Assets
Freehold land Vehicles Furniture and fittings
BALANCE SHEET AS AT 31 DECEMBER 20-8
£ Prov for dep'n – 4,800 5,000 9,800
£ Net book val ue 100,000 7,200 20,000 127,200
£ Shop fittings at cost Less provision for depreciation 2,400 + 2,400 Net book value Current Assets Stock Debtors Cash Prepayment of expenses
Current Assets
Stock Debtors Prepayment of expenses
£
£
Fixed Assets
88,000 52,130 450 140,580
12,000 4,800 7,200 28,176 3,641 163 310 32,290
Less Current Liabilities
Less Current Liabilities
Creditors Accrual of expenses Bank
Creditors Bank Accrual of expenses
41,850 3,180 2,000
10,290 3,084 85 13,459
47,030 Net Current Assets or Working Capital
93,550 220,750
Net Current Assets or Working Capital
75,000 145,750
FINANCED BY
18,831 26,031
NET ASSETS
Less Long-term Liabilities
Bank loan NET ASSETS
Capital Add Net profit
FINANCED BY Capital
20,806 27,421 48,227 22,196 26,031
Less Drawings
Opening capital Add Net profit
125,000 44,750 169,750 24,000 145,750
Less Drawings
12.10
(a) Telephone Account
Dr Date
Details
£
2007 12.9
Date Details
Cr £
2007
BETH DAVIS PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-8
£ Gross profit
Less expenses: Wages and salaries Heating and lighting Rent and rates 5,273 – 310 Advertising Bad debts written off General expenses 783 + 85 Depreciation of shop fittings 12,000 x 20% Net profit
£ 95,374
31 May
Cash/bank
31 May
Balance c/d
2,400 130
31 May Profit and loss account 31 May Balance c/d
2,530
55,217 1,864 4,963 2,246 395 868 2,400
1 Jun
67,953 27,421
20
Balance b/d
210
2,320 210 2,530
1 Jun Balance b/d
130
(b)
CHAPTER 13 Business organisations 13.2
MEMORANDUM
•
The final accounts of a sole trader comprise: –
trading and profit and loss account
–
balance sheet
•
The trading and profit and loss account shows: income minue expenses equals net profit (or loss)
To:
The Owner, Beta Batteries
•
The trading account shows gross profit, while the profit and loss account shows net profit (or loss)
From:
Student Accountant
•
The balance shows shows:
Date:
Today
Subject:
Account of J Booth
•
Assets are items owned by the business; liabilities are amounts owed by the business; capital is the amount of the owner’s 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”.
(b)
Where no partnership agreement exists, then the following accounting rules from the Partnership Act 1890 must be followed:
assets minus liabilities equals capital
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.
13.3
The accounting treatment is that the amount of £350 should be treated as a bad debt written off. To do this you will need to: – debit bad debts written off account – credit J Booth’s account in your sales ledger If you use a sales ledger control account you should also credit this memorandum account with the amount. For the year end accounts, you will need to transfer the amount of the bad debt to profit and loss account as an expense:
•
profits and losses are to be shared equally between the partners
•
no partner is entitled to a salary
•
partners are not entitled to receive interest on their capital
•
interest is not to be charged on partners’ drawings
•
when a partner contributes more capital than agreed, he or she is entitled to receive interest at five per cent per annum on the excess
Note: the question asks for any three provisions.
– debit profit and loss account – credit bad debts written off account
13.5
Points to cover include: *
The effect of writing offthis bad debt will be to reduce your net profit by £350 and, at the same time, the debtors’ figure in your balance sheet will be reduced by the amount, so reducing the net assets of the business.
•
•
21
Definition of a li mited company –
s ep ar at e le ga l en ti ty
–
owned by shareholders
–
m an ag ed b y di re ct or s
Typ es of co mp ani es –
public limited company
–
private li mited company
–
company limited by guarantee
Advantages of forming a lim ited company –
l im it ed l ia bi li ty
–
s ep ar at e le ga l en ti ty
–
ability to raise finance
–
membership
–
other factors
(d)
CHAPTER 14 Accounting concepts and stock valuation 14.1
•
Examples (question asks for one example) –
valuation of stock
Going concern concept
–
depreciation of fix ed assets
This presumes that the business to which the final accounts relate will continue to trade in the foreseeable future. The trading and profit and loss account 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.
–
bad debts written off
–
provision for doubtful debts (see Chapter 15)
By applying the consistency concept, direct comparison between the final accounts of different years can be made.
Example: As a going concern, fixed assets are valued at cost, less accumulated depreciation to date; stock is valued at cost (unless net realisable value is lower). •
Accruals concept
14.5
(a)
The kettle should be valued at £16.
(b)
Stock should be valued at the lower of cost or net realisable value whichever is the lower.
This means that expenses and income for goods and services are matched to the same time period.
Workings: £31 – £15 = £16 net realisable value (which is lower than the cost of £18)
Examples: The accrual of an expense in profit and loss account 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 stocks in the trading account. The use of debtors' and creditors' accounts to record amounts owing to the business, or owed by the business. •
This is an example of using the prudence concept.
Materiality concept
14.8
This means that some items in accounts have such a low monetary (money) value that it is not worthwhile recording them separately. Examples include: –
small expense items which may not justify their own separate expense account and are, instead, grouped together in a sundry expenses account
–
end-of-year stocks 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 fixed assets are often charged as an expense in profit and loss account because, while strictly these should be treated as fixed assets and depreciated each year, in practice they are treated as profit and loss account 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. •
Gross Profit
Net Profit
Current Assets
Current Liabilities
Capital
1.
Accruals
no change
decrease £4,000
no change
increase £4,000
decrease £4,000
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
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.
14.2
Concept
(a)
(b)
(c)
The concept of prudence means
14.10
(a)
jacket, £40 (note: replacement cost is not applicable here)
–
not anticipating profit until it is reasonably certain that it will be realised
–
providing for all known liabilities
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
shirt, £25
Examples (question asks for one example): –
valuation of stock, at the lower of cost and net realisable value
–
depreciation of fixed assets, to measure the amount of the fall in value of fixed assets over time
–
bad debts written off, to reduce the debtors’ figure to give a realistic view of the amount that the business can expect to receive
–
provision for doubtful debts (see Chapter 15), to reduce the debtors’ figure
(b)
The concept of consistency means that, when a business adopts particular accounting policies, it should continue to use such policies consistently
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 stock 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 stock into a saleable condition.)
•
A lower closing stock 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
Provision for Doubtful Debts Account
Dr
15.2
Dr 20-7 31 Dec 31 Dec
Commission Income Account
Balance b/d (accrual of income) Profit and loss account
£ 100
20-7 31 Dec
Bank/Cash (receipts for year)
1,150 1,250
20-9 31 Dec
Cr £ 1,250
£ 1,000
Balance c/d
20-0
20-9 31 Dec 20-0 1 Jan
Cr
Profit and loss account
£ 1,000
Balance b/d
1,000
1,250 (c)
•
Profit and loss account (expenses) debit bad debts written off £420 debit provision for doubtful debts £1,000
Advertising Income Account
Dr 20-7 31 Dec 31 Dec
Balance b/d (accrual of income) Profit and loss account
£ 150
20-7 31 Dec
2,820
31 Dec
Bank/Cash (receipts for year) Balance c/d (accrual of income)
2,970 20-8 1 Jan
Explanation: profit for the year is reduced by £1,420
Cr £ 2,720
•
Balance sheet debtors £39,000
250
Workings: £40,420 – £420 bad debts = £40,000 – £1,000 provision for doubtful debts = £39,000 net debtors
2,970
Explanation: current assets are reduced by £420 + £1,000 = £1,420
20-8 Balance b/d (accrual of income)
250
15.6 Year
Dr
Rent Income Account
20-7 31 Dec
£ 19,260
Profit and loss account
20-7 31 Dec 31 Dec 31 Dec
Balance b/d (prepayment of income) Bank/Cash (receipts for year) Balance c/d (accrual of income)
19,260 20-8 1 Jan
Expense
Cr £ 850
Balance sheet
Income
Bad debts written off
Increase in provision for doubtful debts
£
£
20-5
1,800
2,585
20-6
2,400
245
20-7
1,400
18,290
Bad Decrease in debts provision for recovered doubtful debts £
Debtors (a fte r b ad debts written off)
Less prov for d ou btf ul de bt s
£
£
£
103,400
2,585
100,815
113,200
2,830
110,370
108,800
2,720
106,080
£
19,260
120
150
110
Workings for doubtful debts provision: 15.4
(a) Bad Debts Written Off Account
Dr 20-9 31 Dec 31 Dec 31 Dec
Webster Limited T Smith Khan and Company
£ 110 210 100 420
20-9 31 Dec
Profit and loss account
Net d ebt ors
120
20-8 Balance b/d (accrual of income)
Profit and loss account
Cr £ 420
420
23
20-5
(£105,200 – £1,800) x 2.5% = £2,585 creation of provision
20-6
(£115,600 – £2,400) x 2.5% = £2,830 – £2,585 = £245 increase in provision
20-7
(£110,200 – £1,400) x 2.5% = £2,720 – £2,830 = £110 decrease in provision
15.12 15.8
(a) Year 1
Straight-line method £ 3,000
Year 2
3,000
Reducing balance method £ 3,600
(a)
£20,000 – £12,500 – £4,000 = loss of £3,500
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-9
(b)
Fixed Assets
1,440 (60%) or 2,400 (to disposal)
£
Vehicle at cost
25,000
Less provision for depreciation
3,125
Net book value (b )
•
De pre ci at io n i s a no n- ca sh exp en se
•
It is an accounting adjustment
•
Depreciation is not a method of providing a fund of cash which can be used to replace the asset at the end of its life
•
Profits are lower after depreciation has been deducted – this may discourage drawings from the business
20-8 1 Jan 1 Oct 1 Oct
Vehicles Account
Balance b/d Disposals (part-exchange allowance) Bank (balance paid by cheque)
£ 12,000 5,500
20-8 1 Oct 31 Dec
£ 12,000 15,000
Disposals Balance c/d
£24,000 – £18,000 depreciation = £6,000 net book value £
9,500 27,000 20-9
Net book value at date of trade-in
6,000
Profit on disposal
2,000
(b) Provision for Depreciation Account – Vehicles
Dr Disposals Balance c/d
20-9
£ 7,200 3,000 10,200 £
20-8 1 Jan 31 Dec
Cr £ 7,200 3,000 10,200 £
Balance b/d Profit and loss account
20-9 1 Jan
Balance b/d
GORG HAMMAN BALANCE SHEET AS AT 31 DECEMBER 2003
£ Fixed Assets
Machinery at cost Less prov for depreciation Net book value
176,000 123,500 52,500
(£170,000 – £24,000 + £30,000) (£105,000 – £18,000 + £36,500)
3,000
(c)
Current Liabilities Disposals Account – Vehicles
Dr 20-8 1 O ct 31 Dec
8,000
£
(b)
20-8 1 Oct 31 Dec
Profit on disposal of old machine = £2,000 Workings
Trade-in value
£ 15,000
Balance b/d
(a)
Cr
27,000 20-9 1 Jan
Tutorial note: Do not deduct the trade in allowance from the cost price of the new vehicle – the cost price is £25,000.
15.13
15.11 (a) Dr
21,875
Vehicles Profit and loss account (profit on sale)
£ 12,000 700
20-8 1 Oct 1 Oct
Vehicles (part-exchange allowance) Prov for depreciation
12,700 (d)
Fixed assets Vehicles
Cr ed ito r – in st al me nt due on ma ch in e
Cr £ 5,500
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
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-8
£ Cost
£ Prov for dep’n
£ Net book value
15,000
3,000
12,000
( 11, 00 0)
24
15.16
THOMAS SALMON
16.4
£
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 £ £ Sales 278,400 Less Cost of sales: Opening stock 12,700 Purchases 153,900 166,600 Less Closing stock 14,100 152,500 Gross profit 125,900 Less expenses: Wages 75,400 Rent 2,280 Other expenses 25,120 Depreciation 15,000 117,800 Net profit 8,100
£
Gross profit
68,772
Add income: Discount received
119
Rent receivable
720 69,611
Less expenses: Wages Bad debts
26,320 340
Rent and rates
4,630
Other expenses
21,435
Discount allowed Income in provision for doubtful debts Depreciation of fixed assets Loss on sale of van
ABEL BROWN
(a)
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 NOVEMBER 2004
286 *230
Workings:
**9,000
• Wages £74,750 + £650 owing • Rent £2,500 – £220 prepaid
***100
• Depreciation £150,000 x 10%
62,341 Net profit
7,270
(b )
New n et pr ofi t: £ 11 ,1 00 Workings:
* **
£1,120 – £890 = £230 £27,000 provision for depreciation at start of year – £6,000 depreciation on van sold = £21,000, which is deducted from £30,000 provision for depreciation at end of year = £9,000 depreciation for year (as shown in profit and loss account)
*** Net book value (£8,000 – £6,000) Sale price Loss on sale
16.5
£ 2,000 1,900 100
•
Depreciation, using the straight-line method, at present is £15,000 (see above)
•
Reducing balance depreciation will be 20% (£150,000 – £90,000) = 20% x £60,000 = £12,000
•
Therefore reducing balance depreciation is £3,000 less this year than straight-line method, so profits will increase from £8,100 (see above) to £11,100.
JOHN HENSON TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-8
£ Sales Opening stock Purchases
CHAPTER 16 Preparing sole trader final accounts 16.1
(a)
Capital expenditure cost of van
(b)
11,650
air conditioning
550
fitted shelving
350
total
Less Closing stock Cost of sales Gross profit Add income: Discounts received
£
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
Revenue expenditure tax disc
165
cost of extended warranty
220
tank of fuel
40
insurance premium
450
total
875
Net profit
25
£ 122,000
6,250 71,600 77,850 8,500 69,350 52,650 285 52,935 1,710 5,650 2,100 18,950 1,000 3,000 32,410 20,525
16.6
KEN TUCKY
(a)
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2006
BALANCE SHEET AS AT 31 DECEMBER 20-8
Fixed Assets
£
£
£
Co st
Pr ov fo r d ep 'n
Ne t bo ok v al ue
Office equipment
10,000
1,000
9,000
Vehicle
12,000
3,000
9,000
22,000
4,000
18,000
£ Sales
£ 587,461
Less Returns inwards
837 586,624
Opening stock Purchases 280,797 – 2,170 goods for own use
39,771 278,627 318,398
Current Assets
Stock
8,500
Less Closing stock
Debtors
5,225
Cost of sales
278,263
Prepayment of expenses
120
Gross profit
308,361
Bank
725
Less expenses: Wages 128,528 + 1,383
14,570
Motor expenses 47,870 – 18,500 Rates
Less Current Liabilities
Creditors Accrual of expenses
4,910 230
NET ASSETS
129,911 29,370 7,810
Insurances 7,780 – 286
7,494
Bad debts written off
1,368
General expenses 5,140
Net Current Assets or Working Capital
40,135
33,713
Provision for depreciation: 9,430
premises
27,430
equipment motor vehicles
2,900 1,140 13,448 227,154
FINANCED BY Net profit
Capital
Opening capital
20,000
Add Net profit
20,525
Depreciation calculations
40,525 Less Drawings
81,207
13,095 27,430
(b)
26
•
Premises: £145,000 x 2% = £2,900
•
Equipment: £11,400 x 10% = £1,140
•
Motor vehicles £42,000 + £18,500 acquisition = £60,500 – £26,880 depreciation to date = £33,620 x 40% = £13,448
Additional information 4 •
This is a prepayment of expenses.
•
The amount is deducted from the expense to be shown in profit and loss account, ie £7,780 expense – £286 prepayment = £7,494 to profit and loss account.
•
The amount will be shown as a current asset in the balance sheet.
•
The £286 will be included in the cost for insurances charged to next year’s profit and loss account.
•
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)
(c)
Additional information 5
Workings:
•
The owner has taken some of the goods in which the business trades for his own use.
•
Purchases: £149,400 – £3,000 goods for own use – £23,000 fixtures = £123,400
•
The amount, here £2,170, is deducted from purchases and added to the owner’s drawings (which will be deducted from capital in the balance sheet).
•
Closing stock: valued at the lower of cost, £8,700, and net realisable value, £11,500
•
Provision for doubtful debts: £9,000 debtors x 3% provision = £270, which is deducted from £310 existing provision = £40 reduction in provision for doubtful debts
•
Wages and general expenses: £116,200 + £1,600 accrual = £117,800
•
Business rates: £13,510 – £180 prepayment = £13,330
•
Provision for depreciation of fixtures and fittings: £85,000 + £23,000 acquisition = £108,000 x 10% = £10,800
•
Provision for depreciation of vehicles: £160,000 – £80,400 depreciation to date = £79,600 x 40% = £31,840
•
The reason for reducing purchases is to ensure that only those purchases used in the business are recorded, which are then matched to the sales derived from them.
•
The accounting concept is business entity which keeps separate from the business the personal assets and liabilities of the owner.
•
A provision for doubtful debts should be created so that the balance sheet figure of net debtors is a reliable estimate of the amount that will be received.
•
If a provision is not made, then profits will be overstated by the amount of doubtful debts.
•
Creation of a provision for doubtful debts is shown as an expense in profit and loss account, and deducted from debtors in the balance sheet.
•
The accounting concept is prudence.
(b)
Example of revenue expenditure: wages and general expenses
(c) 16.8
(a)
SIOBHAN HUGGETT
£ Sales
Capital expenditure is shown on the balance sheet (subject to the accounting concept of materiality), while revenue expenditure is an expense in the profit and loss account. It is important to classify 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.
£ 293,100
Purchases
7,800 123,400 131,200
Less Closing stock
Capital expenditure is expenditure incurred on the purchase, alteration or improvement of fixed assets. Revenue expenditure is expenditure incurred on running expenses.
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2004
Opening stock
Example of capital expenditure: purchase of fixtures
16.9
8,700
WULLIE McDUFF
(a)
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 2005
Cost of sales
122,500
Gross profit
170,600
£ Gross profit
Add income:
Add income:
Reduction in provision for doubtful debts
Bad debts recovered
40
100
Reduction in provision for doubtful debts
170,640
65 808,015
Less expenses: Wages and general expenses Business rates Bad debts written off
Less expenses:
117,800
Wages
13,330 750
Provision for depreciation:
748,432
Rent and rates
12,140
General expenses
37,898
Bad debts written off
760 200
fixtures and fittings
10,800
Loss on sale of vehicle
vehicles
31,840
Provision for depreciation: 174,520
Net loss
£ 807,850
3,880
premises
2,400
vehicles
7,500 809,330
Net loss
27
1,315
Workings:
(b)
•
Provision for doubtful debts: £35,000 debtors x 2.5% provision = £875, which is deducted from £940 existing provision = £65 reduction in provision for doubtfut debts.
•
Rent and rates: £12,460 – £320 prepayment = £12,140
•
General expenses: £36,980 + £918 accrual = £37,898
•
Loss on sale of vehicle: £20,000 cost – £15,000 depreciation to date = £5,000 net book value at date of sale – £4,800 sale proceeds = £200 loss on sale.
•
Provision for depreciation of premises: £120,000 x 2% = £2,400
•
Provision for depreciation of vehicles: £60,000 – £30,000 depreciation to date = £30,000 x 25% = £7,500
CHAPTER 17 Financial statements of limited companies
17.1
The private limited 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.
(a)
•
Ordinary shares are the most commonly issued class of share. They take a share of the profits which remain after all other expenses of the business. The main risk of ordinary shares is that part or all of the value of the shares will be lost if the company loses money or becomes insolvent.
•
Preference shares usually carry a fixed rate of dividend which is paid in preference to that of ordinary shareholders. In the event of the company ceasing to trade, the preference shareholders will also receive repayment of capital before the ordinary shareholders.
(b)
•
Nominal value is the face value of a share which is entered in the accounts, eg 5p, 10p, 25p, 50p or £1.
•
Market value is the price at which issued shares are traded, ie bought and sold.
(c)
•
Capital reserves are created as a result of a non-trading profit; examples include revaluation reserve, share premium account.
•
Revenue reserves are retained profits from the profit and loss account; examples include profit and loss account, retained profits, general reserve.
•
Abonus 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.
(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 company’s creditors
•
separate legal entity – a limited company is separate from the owners
•
ability to raise finance – the smaller company can raise funds from venture capital companies, relatives and friends; debentures can be issued to raise long-term finance from lenders and investors
•
17.2
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
(a)
debenture interest is shown as an expense in profit and loss account
(b)
directors' remuneration is shown as an expense in profit and loss account
(c)
corporation tax is shown in the appropriation section of the profit and loss account, and any amount not yet paid is shown as a current liability on the balance sheet
(d)
dividends proposed are shown in the appropriation section of profit and loss account and as a current liability on the balance sheet
(e)
revaluation reserve is shown as a capital reserve as a part of the shareholders' funds section of the balance sheet
(f)
goodwill is shown as an intangible asset in the fixed assets section of the balance sheet; it is amortised in the same way as tangible fixed assets are depreciated
Disadvantages include •
membership – all ordinary shareholders have voting rights, so Wullie may lose some control of the business
•
documentation – there is more documentation – eg the preparation of formal annual accounts – for a company to produce than for a sole trader business; the costs of administering a company are higher than for a sole trader
17.4
(a)
MASON MOTORS LTD PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-1
£ Net profit before taxation
Conclusion •
Wullie must consider the advantages and disadvantages of changing his business into a private limited company. If he is seeking to expand the business and raise finance, it would be sensible to consider this option. At the same time he would gain the benefit of limited liability.
75,000
Less corporation tax
20,050
Profit for year after taxation
54,950
Less final ordinary dividend proposed
10,000 44,950
28
Less transfer to general reserve
20,000
Retained profit for year
24,950
Ad d b al an ce o f re ta in ed p ro fi ts a t b eg in ni ng o f ye ar
1 00, 000
Balance of retained profits at end of year
124,950
(b)
17.7
(a)
Gearing ratio
Retained profits is 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.
Without having information on the company’s revenue reserves (retained profit and general reserve), the gearing ratio is currently: Loan capital = Sha re c ap ita l
SRIAN PLC PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 MAY 2003
£ Net profit before taxation
2,600,000 6,700,000
Less ordinary dividends
If ordinary shares are issued to raise the money for expansion, the gearing ratio (including share premium account) becomes:
*9,300,000
Profit for year after taxation –
paid
–
proposed
= 0.8:1 or 80%
This is already a high gearing ratio which investors will not wish to see going above 1:1 or 100%.
£
Less corporation tax
£20,000,000 £ 25 ,0 00 ,0 00
£20,000,000 = £55,000,000*
800,000
0.36:1 or 36%
* ordinary shares £25,000,000 + £20,000,000 and share premium account £10,000,000
1,300,000
This is a much improved gearing ratio.
2,100,000
If debentures are issued, the gearing ratio becomes:
4,600,000 Less transfer to general reserve
1,000,000
Retained profit for year
3,600,000
£50,000,000* £25,000,000
= 2:1 or 200%
* 6% debentures £20,000,000 + £30,000,000 *
Draft profit Less: directors’ f ees debenture interest Net profit
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.
12,000,000 1,500,000 1,200,000 9,300,000
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. (b)
Issue of ordinary shares
–
ordinary shares are not normally repayable, so the company will have the finance for the foreseeable future
–
the new shareholders will have voting rights
–
not essential to pay dividends every year, although a failure to do so might cause difficulties with future share issues
–
the power of the existing shareholders will be diluted because there will be more shares in issue
Net profit before taxation
–
the company’s gearing ratio will be improved
Less corporation tax
155,000
Profit for year after taxation
495,000
17.9
(a)
STOULBY LIMITED PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2006
£
Issue of debentures
£ 650,000
Less ordinary dividends – paid
63,000
–
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
Less transfer to general reserve
120,000
–
no voting rights, so no dilution of shareholders’ power
Retained profit for year
212,000
–
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
–
if repayment not made at due date, debenture holders can realise assets to obtain repayment
–
the company’s gearing ratio will be worsened
– proposed
*100,000 163,000 332,000
Add balance of retained profits (profit and loss account) at beginning of year
410,000
Balance of retained profits at end of year
622,000
* 4,000,000 ordinary shares x 2.5 pence per share
29
(b)
SHARE CAPITAL AND RESERVES AT 31 DECEMBER 2006
£
DAVID MARK LIMITED
(b)
SUMMARISED BALANCE SHEET AS AT 31 DECEMBER 2002
£
£
Issued Share capital
4,000,000 ordinary shares of 50p each
£ 700,000
Current Assets
Capital Reserve
Share premium account
Stock
500,000
85,000
Debtors
Revenue Reserves
General reserve
£
Fixed Assets
2,000,000
60,000
Bank balance
167,000
*420,000
Profit and loss account
SHAREHOLDERS’FUNDS
312,000
622,000
Less Current Liabilities
1,042,000
Trade creditors
3,542,000
Proposed dividends
37,000 *39,000 76,000
* £300,000 + £120,000 transfer
(c)
Net Current Assets or Working Capital
236,000
NET ASSETS
936,000
FINANCED BY
Revenue reserves are profits from trading activities which have been retained in the company to help build the company for the future.
Ordinary shares
350,000
8% Preference shares
100,000
Share premium account
(d)
Profit and loss account or general reserve
(e)
Revenue reserves can be used to fund dividend payments or to provide bonus shares to shareholders.
General reserve
50,000 120,000
Profit and loss account
316,000
SHAREHOLDERS’FUNDS
936,000
* £35,000 + £4,000
17.10
(a) £ Retained profit for year as per draft fi nal accounts
45,000
Less ordinary dividend
35,000
Less preference dividend Corrected retained profit for year
• •
Li mi te d c om pan y, o r Private Limited Company
(d)
• •
The term ‘Ltd’means that the shareholders of David Mark Limited have limited liability. This means that they could lose their investment but cannot be asked to contribute further in the case of liquidation (unless the shares are not fully paid). Thus the risk taken by shareholders is limited.
•
150,000
Less transfer to general reserve
(c )
4,000 66,000
30
profit
CHAPTER 18 Ratio analysis
Exton
18.3
This is a calculated figure which shows the surplus of income over expenditure for the year. It takes note of adjustments for accruals and prepayments and non-cash items such as depreciation and provision for doubtful receivables.
Frimley
(a)
gross profit margin
13.4%
44.0%
(b)
gross profit mark-up
15.5%
78.7%
(c)
overheads in relation to revenue
12.0%
39.8%
(d) (e)
net profit margin (profit in relation to revenue) rate of inventory turnover
1.4% 33 days or
4.2% 95 days or
10.9 times per year
3.8 times per year
(d)
Net profit Capital e mployed*
x 100 1
* limited companies: ordinary share capital + reserves + preference share capital + loan capital
(f)
net current asset (current) ratio
1.3:1
2.4:1
sole traders: the amount of the owner’s capital in the business
(g)
liquid capital (acid test) ratio
0.05:1
1.3:1
(h)
trade receivable days
1 day*
60 days
Return on capital employed (ROCE) expresses the profit of a business in relation to the amount of capital in the business by the owner.
(i)
return on capital employed
11%
8.1%
gearing Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves)
* revenue figure used for this calculation; this is unrealistic because most supermarket sales will be for cash rather than on credit
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.
Exton is the supermarket; Frimley is the engineering company Reasons:
18.4
return on capital employed
Exton
low overheads/revenue and net profit margin; high inventory turnover; quick trade receivable days, low net current asset and liquid capital ratios; few trade receivables
Frimley
higher overheads/revenue and net profit margin and low inventory turnover; slow trade receivable days; good net current asset and liquid capital ratios; high figures for non-current assets and trade receivables
(a)
In general terms, investors and lenders would not wish to see debt exceeding equity; thus a gearing ratio of greater than 1:1 is undesirable. 18.6
gross profit margin Gross profit Revenue
x 100 1
This ratio expresses, as a percentage, the gross profit in relation to revenue.
(a)
Trade receivables x 365 days Revenues
( b)
T ra de p ay ab le s Purchases
(c)
trade receivable days
x 3 65 d ay s
gross profit mark-up Gross profit Cost of sales
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)
(d)
net current assets
trade payable days
20-1
20-2
£43,000 x 365 days £680,000
£32,550 x 365 days £660,000
= 23.08 days
= 18 days
20-1
20-2
£28,500 x 365 days £520,000
£38,500 x 365 days £540,000
= 20 days
= 26.02 days
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
20-2 Trade payables are paid more slowly than trade receivables are paying, which aids cash management.
(Current assets – Inventories) – Current liabilities Liquid capital is calculated in the same way as net current assets, except that inventories are omitted. This is because inventories are the most illiquid current asset. Liquid capital provides a direct comparison between the short-term assets of trade receivables and cash and short-term liabilities. (c)
20-1 Trade payables are paid more quickly than trade receivables are paying, which will cause cash management problems.
Note: The figure for trade receivables has fallen during the period, while the figure for trade payables has increased. The reasons for the changes need to be investigated to include: – has sales revenue reduced, or is collection from trade receivables more efficient? – does the company have the money to pay trade payables, or have generous credit terms been offered by a supplier?
cash This is the actual amount of money held in the bank or as cash.
31
18.7
(a )
•
Ne t c urre nt a sse ts (c ur re nt) r at io
=
Cu rre nt a ss ets Current liabilities
•
L iq ui d ca pi ta l ( ac id tes t) ra ti o
=
( Cu rr ent as se ts – in ve nt or ie s) Current liabilities
•
Ne t p ro fi t ma rg in (p rof it i n re la ti on to revenue)
=
•
Rate of inventory turnover
=
•
(b)
Return on capital employed
Ne t p ro fi t Revenue
Proposal 2 £30,000 **£540,000
Average inventories x 365 d ays Cost of sales Cost of sales Average inventories
= number of times per year
=
Net profit Capital employed
x 100 1
Tutorial note: bank overdraft is a current liability and is not included in the figure of capital employed.
(c) Report 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
(a)
•
If inventory turnover could be increased above 20 times per year, this would generate more cash and improve the liquidity ratios of the business (provided that selling prices do not have to be cut to encourage sales).
•
If expenses could be reduced, the net profit margin would improve, and also return on capital employed.
•
A review of buying prices and selling prices may reveal opportunities for increasing profits and return on capital employed.
•
Advertising could increase sales, but only if the extra revenue generated covers the cost of advertising.
•
Inventory levels could be reduced, so improving the net current asset ratio.
•
Any surplus non-current assets could be sold to improve liquidity ratios.
(b)
•
This proposal to issue more ordinary shares means that ownership of the company will be diluted.
•
Unless the amount paid out by the company in dividends is increased, then your dividend per share will fall.
•
Return on capital employed will be reduced from 7.89% (£30,000 ÷ £380,000) to 5%.
•
The company’s gearing ratio is lowered (because equity has increased from £380,000 to £600,000); no interest to pay on the share issue.
•
Reserves will increase to £300,000, ie £160,000 share premium and £140,000 retained earnings. the company may decide to make a bonus issue of shares in the future.
Proposal 2
•
The proposal is to fund the expansion entirely from external borrowing – your ownership of the company will not be diluted.
•
Your dividend per share should remain the same and, if profits are increased after paying interest on the loans, will increase.
•
The company’s gearing ratio is increased by the borrowing, and the company must pay interest on the borrowing.
•
The overdraft is a current liability which will have the effect of reducing the company’s net current asset (current) ratio and liquid capital (acid test) ratio.
•
Return on capital employed will be reduced from 7.89% to 5.56% (a smaller reduction than proposal 1).
•
The company will need a repayment scheme for the external borrowing – this could cause liquidity and cash flow problems in the future.
Formula Return on capital employed
=
Net profit Capital employed
x 100 1
Ratio calculation Proposal 1 £30,000 *£600,000 *
x 100 1
Ordinary shareholder Student Accountant Today Proposals to raise finance
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
x 1 00 1
or
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
18.11
(a)
(b)
Gearing ratio =
FALCON LIMITED BALANCE SHEET AS AT 31 MARCH 2007
£ Non-Current Assets
£
Before adjustments = £28,000 *£74,832
Net book value
Premises
200,000
Fixtures and fittings
Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves)
or
Debt Equity
= 37.42%
* £50,000 + £19,832 + £5,000
17,500 217,500 Aft er a dj ust me nts
Current Assets
Inventories
14,560
Trade receivables
=
£ 28 ,0 00 *£224,832
= 1 2.4 5%
* total equity from balance sheet
5,456
Cash and cash equivalents
31,058 51,074 (c)
Current Liabilities
Trade payables
•
The rights issue has added £30,000 (£25,000 + £5,000 premium) to total equity.
•
Revaluation of the premises has added £120,000 (£200,000 – £80,000) to total equity.
•
The level of debt has remained at £28,000.
•
The impact of the rights issue and the revaluation of the premises has been to reduce considerably the gearing ratio from 37.42% to 12.45%. Even before the adjustments, the company was relatively low-geared; the ratio is much lower after the adjustments.
•
A lower gearing ratio reduces the level of risk to the company and enables it to borrow further funds in the future if required.
•
profit is a calculated figure which shows the surplus of income over expenditure for the year.
•
cash is the actual amount of money held in the bank or as cash
(7,842)
Tax liabilities
(7,900) (15,742)
Net Current Assets
35,332 252,832
Non-Current Liabilities
Debentures (2011-2013)
(28,000)
NET ASSETS
224,832
EQUITY Issued Share Capital
18.12
75,000 ordinary shares of £1 each
(a)
75,000
Capital Reserves
Share premium account Revaluation reserve
10,000 120,000
(b) 130,000
Revenue Reserve
Retained earnings TOTAL EQUITY
19,832 224,832
Tutorial notes:
Example of how a business can make a good profit during a year when the bank balance reduces or the bank overdraft increases (the question asks for two examples): •
purchase of non-current assets – cash decreases; no effect on profit (but there is likely to be an amount for provision for depreciation in the income statement
•
repayment of a loan – cash decreases; no effect on profit
•
payment of drawings/dividends – cash decreases; no effect on profit
•
an increase in trade receivables – cash decreases; no effect on profit a decrease in trade payables – cash decreases; no effect on profit an increase in inventory – cash decreases; profit increases
•
bank £1,058 + £30,000 (£25,000 + £5,000 premium) rights issue = £31,058
•
•
share premium £5,000 + £5,000 premium on rights issue = £10,000
•
•
revaluation reserve £200,000 revaluation – £80,000 net book value = £120,000
33
19.3
CHAPTER 19 Budgeting and budgetary control 19.1
(a)
(b)
(a) Sunshine Ltd
Benefits of budgetary control •
planning – by formalising objectives through a budget, a business can ensure that its pla ns are achievable
•
communication – because a budget is agreed by the business, all the relevant managers and staff will be working towards the same end
•
co-ordination – when a budget is being set, any anticipated problems should be resolved
•
decision-making – by planning ahead through budgets, a business can make decisions on how much output can be achieved
•
monitoring – management is able to monitor and compare the actual results against the budget
•
control – action can be taken to modify the operatio n of the business
•
motivation – a budget can be part of the techniques for motivating managers and other staff to achieve the objectives of the business
Cash budget for four months ending 31 October 2002
Sales
– 2 months
Purchases Overheads
Any three budgets •
purchases budget
•
sales budget
•
production budget
•
labour budget
•
debtor budget
• •
– cash – 1 month
July
Aug
Sept
Oct
£000
£000
£000
£000
5.2
5.6
4.8
4.0
12.0
15.6
16.8
14.4
3.2
4.0
5.2
5.6
20.4
25.2
26.8
24.0
16.0
18.0
14.0
12.0
8.0
8.0
8.0
4.0
24.0
26.0
22.0
16.0
Net inflow/outflow
(3.6)
(0.8)
4.8
8.0
Opening balance
(7.2)
(10.8)
(11.6)
(6.8)
Closing balance
(10.8)
(11.6)
(6.8)
1.2
(b )
(i )
•
At 31 Oc tob er 20 02, th e b an k b al anc e i s b ud ge te d to be £1 ,2 00 .
•
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.
creditor budget
•
The company sells beach buckets and spades, so the seasonal effect is over quickly.
cash budget
•
Expected amounts due from debtors in November are:
The most likely three budgets for a small business such as Classic Furniture would be cash, sales and production
£ 1 month £20,000 x 60% 2 months £24,000 x 20%
12,000 4,800 16,800
(c)
Relevant factors when implementing budgetary control
•
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.
•
costs and benefits – benefits must exceed the cost
•
a cc ur acy – o f i nfo rma ti on use d
•
demotivation – of staff may occur if they have not been involved in planning the budget and/or where budgets are set at too high a level
•
disfunctional management – ensure that the budgets co-ordinate
– offering discounts to encourage increased sales
•
set too easy – ensure that budgets are set at realistic le vels to enable the business to use its resources to best advantage
– allowing one month’s credit only,so receiving payment from sales quicker
(ii)
•
Other measures to improve the company’s cash position include:
– encouraging cash sales – reducing purchases as the summer season draws to a close – reducing overheads
34
19.5
(a)
Explanation July
August
September
October
November
December
£
£
£
£
£
£
Income
Cash from debtors
20,000
24,000
28,500
32,500
38,500
*47,760
•
receipts from debtors and payments to creditors are likely to occur some weeks after the sales and purchases have been recorded in the trading account
•
the purchase of fixed assets affects cash but has no effect on profit
•
repayment of loans affects cash but has no effect on profits
Hawk Limited •
20% of cash from sales is received in the month of sale; then 60% is paid in the next month, with 20% two months after sale
•
the sales of £60,000 forecast to be made in December are higher than each of October and November; the cash received from December’s sales will be £11,760 in December, £24,000 in January and £12,000 in February – thus, at the end of December, £36,000 is outstanding
•
in December, the company plans to buy new fixed assets at a cost of £19,510
•
in December, the company plans to make a repayment on the loan of £20,000
Expenditure
Payments to creditors
10,000
11,000
14,000
18,000
24,500
Operating expenses
12,000
12,000
12,000
12,000
12,000
Purchase of fixed assets
8,500
12,500 12,000 19,510
Repayment of loan
20,000 22,000
31,500
26,000
30,000
36,500
64,010 ( d)
Net cash flow
(2,000)
(7,500)
2,500
2,500
2,000
(16,250)
980
(1,020)
(8,520)
(6,020)
(3,520)
(1,520)
(1,020)
(8,520)
(6,020)
(3,520)
(1,520)
(17,770)
Opening balance Closing balance
19.7
S ee C ha pe r 2 0. •
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)
cash from December sales: £60,000 x 20% x 98%
=
£11,760
cash from November sal es: £50,000 x 60%
=
£30,000
JIM SMITH
cash from October sales: £30,000 x 20%
=
£6,000
CASH BUDGET FOR THE SIX MONTHS ENDING 30 JUNE 20...
£47,760
(b)
£980 (opening balance 1 July) + £17,770 overdraft (closing balance 31 December)
Capital introduced Debtors
(c)
Total receipts for month Memorandum
Van Creditors Expenses Total payments for month
Reasons
Net cash flow
a company can make a profit but have a bank overdraft for a number of reasons, including:
Add bank balance (overdraft) at beginning of month
the application of the realisation concept – timing of receipts and payments
•
purchase of fixed assets
•
repayment of loans
Mar
Apr
May
Jun
£
£
£
£
£
–
1,250
3,000
4,000
4,000
4,500
10,000
1,250
3,000
4,000
4,000
4,500
3,500
10,000
Payments
The Directors of Hawk Limited Student Accountant Today Making profits whilst having a bank overdraft
•
Feb
£ Receipts
= £18,750 total net cash outflow
To: From: Date: Subject:
Jan
Bank balance (overdraft) at end of month
35
6,000 –
4,500
4,500
3,500
3,500
750
600
600
650
650
700
6,750
5,100
5,100
4,150
4,150
4,200
3,250
(3,850)
(2,100)
(150)
(150)
300
–
3,250
(600)
(2,700)
(2,850)
(3,000)
3,250
(600)
(2,700)
(2,850)
(3,000)
(2,700)
